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To carry out NNSA's nuclear weapons and nonproliferation missions, contractors at the eight NNSA sites conduct research, manufacturing, testing at facilities located at those sites. (See fig. 1.) DOE establishes safety or security requirements based on a categorization of site-specific risks, including hazardous operations and the presence of special nuclear material--material which can be used in producing nuclear weapons. Federal regulations define three categories of nuclear facilities based on the potential significance of radiological consequences in the event of a nuclear accident. These categories range from Hazard category 1 nuclear facilities with the potential for off-site radiological consequences, to Hazard category 2 nuclear facilities with the potential for significant on-site radiological consequences beyond the facility but which would be contained within the site, to Hazard category 3 nuclear facilities with the potential for significant radiological consequences at only the immediate area of the facility. In terms of security, DOE's security orders establish levels of security protection according to a site's types and quantities of special nuclear material. Special nuclear material is classified according to 4 levels--Category I Accordingly, DOE's sites with (highest risk) to Category IV (lowest risk).Category I nuclear materials--including specified quantities and forms of special nuclear material such as nuclear weapons and nuclear weapons components--require the highest level of security since the risks may include the theft of a nuclear weapon or creation of an improvised nuclear device capable of producing a nuclear explosion. As discussed earlier, work activities to support NNSA's national security missions are largely carried out by M&O contractors. This arrangement has historical roots. Since the Manhattan Project produced the first atomic bomb during World War II, DOE, NNSA, and predecessor agencies have depended on the expertise of private firms, universities, and others to carry out research and development work and operate the facilities necessary for the nation's nuclear defense. Currently, DOE spends 90 percent of its annual budget on M&O contracts, making it the largest non- Department of Defense contracting agency in the government. NNSA's M&O contractors are largely limited liability companies consisting of multiple member companies. Contractors at only two NNSA sites--the KCP and Sandia National Laboratories--are owned by a sole parent corporation. NNSA requires its contractors to adhere to federal laws, departmental regulations, and DOE and NNSA requirements that are provided in the department's system of directives, including policies, orders, guides, and manuals. The agency incorporates directives into contracts and holds contractors accountable for meeting the associated requirements. Contractors, NNSA, DOE, and other organizations manage and oversee operations through a multitiered approach. First, contractors manage operations, conduct self-assessments, and perform corrective actions to maintain compliance with government expectations. Second, NNSA headquarters organizations (1) set processes and corporate expectations for contractors managing the sites, (2) have primary responsibility for ensuring contractors are performing and adhering to contract requirements, and (3) evaluate contractor performance. Third, NNSA's field offices oversee the contractors on a daily basis. This includes on-site monitoring and evaluating contractor work activities. Fourth, entities outside of NNSA provide independent oversight of contractor performance. In particular, DOE's Office of Health, Safety, and Security (HSS), is responsible for, among other things, developing the department's safety and security policy, providing independent oversight of contractor compliance with DOE's safety and security regulations and directives, and conducting enforcement activities. The Defense Nuclear Facilities Safety Board also provides oversight of nuclear safety that is independent of NNSA and DOE. In implementing its new management and oversight approach in 2007, KCP implemented reforms that sought to (1) streamline operating requirements, (2) refocus federal oversight, and (3) provide clear contractor goals and meaningful incentives. KCP reported that these actions produced a number of benefits, including cost reductions at the site. According to the KCP Field Office and contractor, KCP under took the following actions: Streamlined operating requirements. The KCP Field Office sought to streamline operating requirements and limit the imposition of new DOE requirements in the future. These changes included eliminating, where possible, some DOE directives and replacing others with industry or site-specific standards, such as quality assurance requirements and emergency management requirements. The contractor remained obligated to meet all applicable federal laws and regulations. According to the contractor, by 2009, the site had reduced 160 operating requirements from specific DOE orders, regulations, and other standards to 71 site operating requirements. For example, the site replaced requirements from DOE's quality assurance order with quality assurance processes outlined in the International Standards Organization's Standard 9001-2008, an international standard used in private industry to ensure that quality and continuous improvement are built into all work processes. KCP was also able to eliminate its on-site fire department by relying on municipal firefighting services to fulfill a DOE requirement for site fire protection capability. To help limit future growth of requirements, KCP implemented a directives change control board. This group, with joint federal Field Office and contractor staff membership, reviews new or revised directives to determine their applicability to the contract, rejecting those requirements not deemed to be relevant. According to a KCP Field Office official, since 2007, the board has rejected 235 of 370 new directives issued by DOE and other sources. The KCP Field Office official noted that reasons for rejecting directives include their inapplicability to a nonnuclear site or because the new directive requirements were already covered in KCP's site-specific standards. Refocused federal oversight. The KCP Field Office sought to refocus federal oversight by (1) changing its approach from reviewing compliance with requirements to monitoring contractor assurance systems for lower-risk activities; (2) exerting greater control over audit findings at the field office level; and (3) increasing its use of external reviewers. First, the field office changed its oversight approach from reviewing compliance of all contractor activities to allowing the contractor to assume responsibility for ensuring performance in lower- risk activities, allowing federal staff to concentrate resources on monitoring high-risk activities such as safety and security. In this approach, the field office moved from a traditional "transactional" oversight--in which performance is determined by federal oversight staff checking compliance against requirements--to a "systems- based" oversight--in which performance on lower-risk activities is ensured by monitoring the contractor's systems, processes, and data, including its systems of self-assessment and actions to correct problems. According to KCP Field Office officials, federal oversight staff assumed the role of reviewing the contractor's management and oversight systems, as well as reviewing selected data provided by these systems, to ensure adequate processes were in place to identify and correct problems. Second, the field office exerted greater control over audit findings from external reviews, by determining which findings would need to be addressed by the contractor. According to KCP Field Office and contractor officials, this ability to accept or reject audit findings from external reviews enabled the field office to prevent implementation of new requirements that would not be applicable at the site. According to another KCP Field Office official, although the field office had this authority under the reforms, it had not rejected any audit findings. Finally, to revise its oversight approach, the KCP Field Office relied more on third-party assessments or certifications of contractor performance in place of federal oversight reviews, according to a field office official. Such assessments included those by the contractor's parent corporation, as well as external groups, such as the Excellence in Missouri Foundation, which administers the Missouri Quality Award to promote quality in business in the state. Clear contractor goals and meaningful incentives. KCP Field Office officials noted that, under the reforms, the Field Office and the contractor agreed on five outcome areas for contractor performance, and performance award fees were linked to these outcome areas. This differed from the previous approach under which performance award fees were linked to meeting headquarters expectations and directive requirements. KCP Field Office officials noted this allowed them to focus performance award fee on "what" a contractor does, rather than on "how" it meets requirements. Under the reforms, the five outcome areas on which performance would be evaluated included: (1) meeting product schedule; (2) meeting product specification; (3) managing cost; (4) managing assets and resources, including facilities, inventory, and staff; and (5) meeting contract standards. Under the reforms, each year, the KCP Field Office highlighted performance areas of major importance to encourage the contractor to focus resources on those areas, rather than expending resources on what the field office and contractor agrees are less important goals and requirements. In this framework, the contractor is eligible to earn the majority of associated fees as long as adequate performance was achieved. According to the KCP Field Office implementing plan, this differed from the previous approach, under which the contractor needed to exceed performance expectations to earn more than 60 percent of an award fee. KCP Field Office officials noted a key to effective contract management under the reforms was the ability of the field office to hold the contractor accountable by focusing fee on desired outcomes. In implementing the reforms, the site reported it was able to reduce costs in its initial year of implementation, some of which was achieved by decreasing oversight staff. A January 2008 review commissioned by the KCP Field Office to assess cost savings resulting from implementing the reforms reported the Field Office achieved a cost reduction of $936,000 in fiscal year 2007 by eliminating, through attrition, eight full-time staff positions. The total savings this review reported was nearly $14 million (fiscal year 2006 dollars) which comprised cost reductions that had been achieved in fiscal 2007 directly or indirectly by implementing the KCP reforms. This reported $14 million in cost reductions was about 3 percent of the site's overall fiscal year 2007 budget of about $434 million. According to a KCP Field Office official, no further analyses of cost savings has been conducted since that time. Reviews of the reforms, as well as NNSA and KCP Field Office and contractor officials, cited several important factors that assisted with implementation of the reforms at the site. Key factors included having (1) high-level support from leadership for reforms, (2) site specific conditions and operations, and (3) a cooperative federal-contractor partnership. High-level support from NNSA and field office leadership and key stakeholders. According to a 2008 KCP Field Office review of lessons learned from implementing the reforms, gaining and maintaining the support of the NNSA Administrator and buy-in from some of the KCP federal staff for changes was critical to their implementation. With the support of the NNSA Administrator, the KCP Field Office Manager was given clear authority and responsibility to make the changes necessary to implement the reforms. According to the 2008 review, implementation required getting support from federal staff at the site, whose oversight activities were likely to change because of the reforms. The KCP Field Office Assistant Manager told us field office staff involved in oversight at the site were initially reluctant to make the necessary changes to their oversight activities--such as moving away from a compliance-type oversight approach to relying on reviews of contractor assurance systems--but they ultimately agreed to the changes. The 2008 KCP Field Office review of lessons learned noted that acceptance by stakeholders was more easily obtained for reforms such as applying industry standards because of the unique operations at KCP, which included lower risk, nonnuclear activities. These stakeholders included program offices within NNSA. Other stakeholders were more qualified in their support. For example, DOE's HSS reported in a March 2008 review of the KCP reforms that, overall, the reform framework had the potential for providing sufficient federal oversight at reduced cost for the site. The report also found, however, that some weaknesses existed in implementing the reforms, such as the field office not being able to complete a significant percentage of scheduled security oversight reviews and observations in fiscal year 2007 due to staffing shortages and not having adequate reviews of site-specific standards for safeguards and security. Unique site conditions and operations. In selecting KCP to implement the reforms in 2006, the NNSA Administrator noted that, in comparison to NNSA's other sites, unique conditions existed at the site that enabled implementation of the proposed reforms. These conditions included (1) KCP operations, which are largely manufacturing, were comparable to those of commercial industry, most notably the aerospace industry; (2) activities at the site were largely lower-risk, nonnuclear, and generally did not involve or potentially affect nuclear safety and security; and (3) the site contractor was owned by a single corporate parent--Honeywell--that has, according to a Field Office official, well-developed corporate management systems and a commitment to quality. In addition, the implementation of reforms at KCP was undertaken at a time of broader operational changes at KCP. More specifically, NNSA was in the process of modernizing KCP operations to lower operations and maintenance costs. This included building and relocating to a new modernized production facility and increasing the use of external suppliers for nonnuclear components rather than producing the components in-house. According to a KCP Field Office official, as of April 2014, more than 70 percent of operations had been moved to the new facility. A cooperative federal-contractor partnership. The KCP Field Office noted in its April 2008 review of lessons learned from implementing the reforms that development of the reforms was enabled because of a cooperative relationship between the field office and the contractor. According to the review, a steering committee with members from both the KCP Field Office and the contractor managed the implementation of the reforms. These members agreed to the overall objectives and key elements of the reforms early in the process and worked together to develop those key reforms. According to this field office review, this cooperative relationship not only eased implementation of the reforms but assisted in gaining approval for the reforms from NNSA and DOE headquarters officials. The January 2008 study assessing cost reductions resulting from implementing the reforms found that this cooperation between site federal and contractor officials had developed over a period of years. In addition, KCP Field Office officials told us that having the leadership and involvement by the contractor's parent corporation resulted in greater accountability. According to a 2009 review commissioned by NNSA to assess the reforms, the parent corporation was responsible for setting core processes and policies, determining best practices to be implemented, and ensuring the field office maintained transparency in how the site was managed. This was a change from the previous approach, whereby the contractor adhered to NNSA-set expectations and requirements. In addition, under the reforms, the contractor was allowed to leverage corporate management systems, in place of DOE-required systems to manage work and performance. KCP Field Office officials noted that, although the contractor was held responsible for the agreed-upon mission performance outcomes, it fell to both the contractor and the parent company to fix any problems. According to the 2009 review, allowing the contractor to use corporate management systems resulted in encouraging the parent company to take a more active part in providing oversight. Since the 2007 implementation of reforms at KCP, NNSA has taken steps to extend some elements of the site's reforms at other NNSA sites and to integrate the reforms into subsequent agency-wide initiatives to improve contractor performance and accountability. However, NNSA is revisiting the reforms following a July 2012 security breach at one of its sites, and NNSA's future plans to continue extending KCP-like reforms at its other sites are currently uncertain. After KCP undertook implementation of its reforms in 2007, NNSA began to implement similar reforms at selected sites and subsequently, incorporated elements of the reforms into agency-wide initiatives to improve oversight and management of M&O contractors. At the site level, in 2009, the NNSA Administrator formed an internal team to look at ways of accelerating efforts to implement KCP-like reforms at other NNSA sites, where appropriate. In addition, in February 2010, the NNSA Administrator tasked officials at the Sandia National Laboratories and Nevada Test Site with implementing reforms similar to those implemented at KCP for nonnuclear activities. These two sites were to, among other things, (1) streamline operating requirements by identifying opportunities to eliminate some agency requirements and make greater use of industry standards; (2) refocus federal oversight by, among other things, making greater use of the contractor's management system; and (3) set clear contractor goals and meaningful incentives following the KCP approach. The two sites were tasked with identifying cost efficiencies associated with implementing these reforms. In 2010, NNSA issued two Policy Letters that sought to streamline security requirements for the control of classified information, such as classified documents and electronic media, and on the physical protection of facilities, property, personnel, and national security interests, such as special nuclear material. These two policy letters were included in NNSA's M&O contracts in place of the corresponding DOE directives. Subsequently, in 2011, NNSA issued a new policy for all of its sites that outlined basic requirements for a new oversight and management approach that had roots in the KCP reforms. This new policy--called "transformational governance"--directed, for example, site oversight staff to focus greater efforts on assessing contractor performance in higher- risk activities, such as security, and for lower-risk activities, rely more heavily on monitoring contractor assurance systems. More broadly, DOE was undertaking similar reforms during this period. Specifically, in March 2010, the Deputy Secretary of Energy announced an initiative to revise DOE's safety and security directives by streamlining or eliminating duplicative requirements, revising federal oversight and encouraging greater use of industry standards. As we reported in 2012, DOE's effort resulted in reducing the overall number of directives. For example, DOE reduced its number of safety directives from 80 to 42. However, according to NNSA officials, since the July 2012 security breach at NNSA's Y-12 National Security Complex in Oak Ridge, Tennessee, some of NNSA's efforts to extend KCP-like reforms to other sites have been placed on hold or are being revised, and NNSA's plans on how to further implement KCP-like reforms are still being determined. DOE and NNSA reviews of the security breach indicated that its underlying causes may have been related to implementation of reforms similar to some of those implemented at KCP. For example, a 2012 review of the security breach by the DOE's Office of Inspector General noted that a breakdown in oversight, specifically one based on monitoring the contractor's systems instead of compliance with requirements, did not alert site officials to conditions that led to the breach. In the aftermath of the security breach, NNSA and DOE have moved cautiously to reevaluate or revise reforms, and agency officials told us it is still determining how reforms will be implemented in the future. NNSA is currently reevaluating how to implement some of the principal aspects of the KCP reforms identified earlier in this report--streamlining requirements, refocusing federal oversight, and establishing clear contractor goals, including: Streamlining operating requirements. Since the July 2012 Y-12 security breach, NNSA has been reassessing the need for some NNSA-specific policies. For example, NNSA initiated actions to rescind certain NNSA security policies and reinstate DOE's security directives. NNSA initiated these actions in response to a recommendation made in 2012 by the NNSA Security Task Force--a task force established by the NNSA Administrator in August 2012 to assess NNSA's security organization and oversight in the wake of the Y-12 security breach. As of March 2014, according to NNSA officials, NNSA sites were in varying stages of incorporating the DOE directives into their contracts and implementing the associated requirements. Refocusing federal oversight. Since the July 2012 Y-12 security breach, NNSA has been reviewing the use of contractor assurance systems in its oversight model and for evaluating contractor performance. According to a February 2013 report by the Office of Inspector General, the July 2012 Y-12 security breach highlighted the negative outcomes that may result when contractor assurance systems are too heavily relied on for federal oversight. The February 2013 report noted that the Y-12 contractor's assurance system did not identify or correct major security problems that led to the security breach, and that while federal oversight staff knew of some security problems, they believed that the agency's oversight approach of relying on the contractor assurance system prevented them from intervening in contractor activities to correct problems. In reevaluating NNSA's oversight approaches, according to the Associate Principal Deputy Administrator, the agency is continuing to work on establishing contractor assurance systems but is moving toward using these systems to enable, rather than replace, federal oversight. In addition, according to the official, NNSA has recommitted to strengthening oversight, both by working to ensure sufficient oversight staff are in place in field offices and by leveraging independent oversight by DOE's HSS. According to NNSA's Acting Assistant Administrator for Infrastructure and Operations, as of February 2014, the agency was looking at opportunities to evaluate how best to use contractor assurance systems and data in federal oversight of contractor performance and was currently revising its oversight policy. Setting clear contractor goals and meaningful incentives. Prior to the July 2012 Y-12 security breach, NNSA had been reassessing how it evaluated contractor performance and held contractors responsible for meeting agency goals. In fiscal year 2013, NNSA introduced its Strategic Performance Evaluation Plan, which lays out broad, common goals to which each site must contribute to achieve the overall agency mission. According an NNSA headquarters official, the plan streamlines NNSA evaluation of contractor performance by focusing on each site's contribution to the common set of desired agency outcomes--such as its nuclear weapons mission, and science and technology objectives. The official indicated that NNSA will evaluate each site using a standardized set of ratings as defined in regulation to replace the previous system of unique site-office- developed and site-office-evaluated performance ratings. According to the NNSA official, the Strategic Performance Evaluation Plan should help ensure consistent performance evaluation across the enterprise. Although some opportunities may exist for implementing KCP-like reforms at other NNSA sites, since the Y-12 security breach, NNSA officials and studies we reviewed noted that key factors enabling implementation of the reforms at KCP may not be present across the nuclear security enterprise. As noted above, these factors include having (1) high-level support for such reforms at NNSA headquarters; (2) specific site conditions to enable implementation, such as having a contractor with a single parent corporation and work activities that are solely nonnuclear in nature; and (3) a cooperative federal-contractor relationship. First, regarding high-level headquarters support for extending the KCP reforms, NNSA's Acting Assistant Administrator for Infrastructure and Operations told us, in February 2014, that critical organizational issues, such as clarifying headquarters' organization and establishing field office roles and responsibilities for overseeing contractors, were still being discussed within NNSA and need to be settled before moving forward on KCP-like reforms. Second, most NNSA sites differ considerably from KCP (see table 1). For example, reports we reviewed noted that, because most NNSA sites are managed and operated by limited-liability companies made up of multiple member companies, instead of by a single parent corporation, adopting the reforms elsewhere would be challenging. According to the January 2008 study commissioned by the KCP to assess cost reductions from implementing the reforms, having multiple corporate partners could limit successful implementation of KCP-like reforms at other NNSA sites. Specifically, the study notes that a single corporate parent can more easily use existing corporate systems to oversee and manage its subsidiary M&O entity, whereas this model may not work with an M&O having multiple member organizations. In addition, as noted above, the KCP M&O contractor's parent company was a Fortune 100 company with, according to a KCP Field Office official, a strong commitment to quality. In addition, an April 2008 KCP Field Office review of the reforms noted that implementation was enabled at KCP because the site activities were considered low-risk and nonnuclear. The review stated that it was not clear how to apply similar reforms to other NNSA sites, most of which have some nuclear operations, nuclear or other high-risk materials, or nuclear waste requiring disposition. Further, the March 2008 review by the department's HSS noted that KCP is a unique operation within NNSA and that careful analysis would need to be done if consideration will be given to applying the reforms to other sites, particularly where hazards are more complex or where the contractor's ability to self-identify and correct program weaknesses is not mature. Third, the January 2008 cost reductions study noted that having a single parent company governing the KCP M&O contractor for decades resulted in establishing a cooperative relationship between the federal government and its contractor. More specifically the study noted that successful implementation of reforms at KCP resulted, in part, from the mutual trust built between the field office and contractor staff. However, a February 2012 National Research Council report that examined NNSA's management of its three national security laboratories found there had been an erosion of trust between NNSA and its laboratories, and it recommended the agency work toward rebuilding positive relationships with its laboratories. Diminished trust between NNSA and its sites was also highlighted in a recently issued report by a congressional advisory panel, which described the relationship as "dysfunctional." During the course of our work, in December 2013, the National Defense Authorization Act for Fiscal Year 2014 was enacted. act required the NNSA Administrator to develop a feasibility study and plan for implementing the principles of the KCP pilot to additional facilities in the national security enterprise by June 2014. We agree that further study of the applicability, costs, and benefits of the KCP reforms is warranted, and, in light of the congressional direction to NNSA, we are not making recommendations at this time. We provided a draft of this report to NNSA for its review and comment. In written comments, reproduced in appendix I, NNSA generally concurred with the overall findings of the report. The agency noted that it continues to study the appropriateness of further expansion of the Kansas City Pilot oversight reforms to other sites and implementation of NNSA's governance policy. NNSA also provided technical comments that we incorporated, as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Energy, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. Pub. L. No. 113-66, 127 Stat. 672. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II. In addition to the individual named above, Jonathan Gill, Assistant Director; Nancy Kintner-Meyer; Cynthia Norris; and Kiki Theodoropoulos made key contributions to this report.	NNSA, a separately organized agency within DOE, has had long-standing problems managing its contracts and projects, which GAO has identified as being at high risk for fraud, waste, abuse, and mismanagement. Both DOE and, specifically, NNSA, undertook initiatives in 2002 and 2003 to improve contractor performance through revised federal oversight and greater contractor accountability. In 2006, concerned that efforts were moving too slowly, the NNSA Administrator tasked its KCP Field Office and contractor with implementing reforms at that site. House Report 113-102, accompanying H.R. 1960, an early version of the National Defense Authorization Act for Fiscal Year 2014 mandated GAO to review the KCP reforms and issues with extending them to other NNSA sites. This report, among other things, (1) identifies key reforms implemented at KCP and reported benefits; (2) describes key factors NNSA and others identified as helping the site implement reforms; and (3) provides information on how NNSA has implemented and plans to implement similar reforms at other sites. GAO reviewed relevant documents prepared by NNSA, DOE, contractors, and others; visited KCP; and discussed the reforms with cognizant federal officials and contractor staff. During GAO's review, Congress required NNSA to develop a study and plan for implementing the principles of the Kansas City reforms at its other sites. In light of the congressional requirement, GAO is not making additional recommendations at this time. NNSA generally agreed with the findings of this report. Key reforms at the National Nuclear Security Administration's (NNSA) Kansas City Plant (KCP)--a site in Missouri that manufactures electronic and other nonnuclear components of nuclear weapons--included (1) streamlining operating requirements by replacing Department of Energy (DOE) requirements with industry standards, where appropriate; (2) refocusing federal oversight to rely on contractor performance data for lower-risk activities; and (3) establishing clear contractor goals and incentives. A 2008 review of the reforms reported nearly $14 million in cost reductions were achieved at the site by implementing these reforms. NNSA and KCP federal and contractor staff identified key factors that facilitated implementation of reforms at KCP, including the following: High-level support from NNSA and field office leadership . Gaining and maintaining the support of the NNSA Administrator and buy-in of some KCP Field Office staff for changes from the reforms was critical. Unique site conditions and operations . Conditions at KCP enabled implementation of the proposed reforms, including (1) the comparability of the site's activities and operations to those of commercial industry; (2) the site's relatively low-risk, nonnuclear activities generally did not involve or potentially affect nuclear safety and security; and (3) the site was managed by a contractor owned by a single corporate parent with a reputation for quality. A cooperative federal-contractor partnership . A cooperative relationship between the KCP Field Office and the contractor facilitated implementation of the reforms. NNSA has extended to other sites some elements of the reforms, including (1) encouraging greater use of industry standards, where appropriate; (2) directing field office oversight staff to rely more on contractor self-assessment of performance for lower-risk activities; and (3) setting clearer contractor goals by revising how the agency evaluates annual contractor performance. However, NNSA and DOE are re-evaluating implementation of some of these reforms after a July 2012 security breach at an NNSA site, where overreliance on contractor self-assessments was identified by reviews of the event as a contributing factor. Moreover, NNSA officials and other studies noted that key factors enabling implementation of reforms at KCP may not exist at NNSA's other sites. For example, most NNSA sites conduct high-hazard activities, which may involve nuclear materials and require higher safety and security standards than KCP. NNSA is evaluating further implementation of such reforms and expects to report to Congress its findings later in 2014.	5,867	849
In 2006, the Deputy Secretary of Defense created the Task Force for Business and Stability Operations. Its initial focus was to improve DOD's contracting processes as a means to increase the number of DOD contracts awarded to Iraqi firms and therefore help to develop businesses and create jobs. Soon thereafter, the Task Force's scope of operations expanded to include efforts intended to restart Iraqi state-owned factories, attract foreign investment, improve private banking, and revitalize Iraq's agriculture and energy sectors. For Iraqi state-owned factories, the Task Force procured spare parts, production equipment, and raw materials and provided training to employees. Additionally, the Task Force reported that it established temporary office space to provide accommodation for companies seeking to invest and establish a permanent presence in Iraq. To improve banking in Iraq, the Task Force reported that it helped establish capacity to transfer funds electronically. In July 2009, the Task Force began shifting its focus to Afghanistan at the request of the International Security Assistance Force, U.S. Central Command, and the U.S. Embassy in Kabul. Task Force officials and subject matter experts conducted a 3-month assessment to develop a strategy and plan for activities in Afghanistan. As a result, they identified several areas of the Afghan economy that they believed were viable for investment, such as minerals, indigenous industries, and agriculture. According to Task Force documentation, the Task Force completed a project in December 2010 with the Afghanistan government to rehabilitate an oil well to demonstrate the commercial feasibility of oil production in Afghanistan. It also has several activities ongoing in other areas, such as assisting the Afghan Ministry of Mines with collecting and collating geological data with the U.S. Geological Survey to complete tender packages for investment, building carpet finishing facilities to allow domestically finished carpets to be sold through an international outlet, and planning to construct agricultural colleges at Afghan universities that will serve farmers and agribusiness. In addition, the Task Force has ongoing activities in banking and finance, energy, software industry development, and information and communication technology development in Afghanistan. The Task Force uses a variety of approaches to conduct its work, including arranging visits for U.S. and non-U.S. investors to meet with business leaders and undertaking specific development projects that could involve building facilities or conducting assessments to identify potential opportunities. To implement its projects, the Task Force may use contractors to build facilities or provide assistance to host government ministries or organizations. While the Task Force undertakes some projects by itself, in other cases it works with other organizations, for example USAID, State, or other DOD organizations. In these cases, the Task Force may provide support to other agencies or complete a portion of a project. For example, the Task Force has worked with USAID on the rehabilitation and electrification of a cement plant in Parwan. As of June 2011, the Task Force consists of 51 government employees and 28 subject matter experts from private firms. Since its inception, the Task Force has received funds from a variety of sources, including the Army's Operations and Maintenance appropriation account, the Iraq Freedom Fund, and the Office of the Secretary of Defense's Emergency and Extraordinary Expense Fund. In January 2011, Congress passed the NDAA for Fiscal Year 2011, which authorized the Task Force to use up to $150 million of operations and maintenance funds available to the Army for overseas contingency operations for its activities in Afghanistan. Table 1 shows the funding available for the Task Force from fiscal year 2007 through fiscal year 2011. The NDAA for fiscal year 2011 required that State, DOD, and USAID jointly develop a plan to transition the activities of the Task Force to State, with a focus on potentially transitioning activities to USAID. The plan, which was to be submitted to Congress at the same time as the President's fiscal year 2012 budget, was to describe (1) the Task Force's activities in Afghanistan in fiscal year 2011; (2) the Task Force's activities in fiscal year 2011 that USAID will continue in fiscal year 2012, including those activities that may be merged with similar USAID efforts; (3) any of the Task Force's fiscal year 2011 activities that USAID will not continue and the reasons; and (4) those actions that may be necessary to transition Task Force activities that will be continued by USAID in fiscal year 2012. The NDAA also required the President, acting through the Secretary of Defense and the Secretary of State, to submit a report on an economic strategy for Afghanistan by July 6, 2011. Furthermore, the NDAA required the Secretary of Defense to submit a report describing the Task Force's activities and how these activities support the long-term stabilization of Afghanistan by October 31, 2011. The fiscal year 2011 NDAA required that State, DOD, and USAID jointly develop a plan to transition the activities of the Task Force in Afghanistan to State. As of June 2011, the plan had not been submitted. Officials from DOD, State, and USAID told us that they are continuing to discuss the options for and timing of any transition and developing a response to satisfy the requirement for a plan in the fiscal year 2011 NDAA. According to USAID officials, to plan for any transition, they would need detailed information about the Task Force activities, such as project objectives, timelines, costs, contracting, and actual results. To identify factors to consider in planning for any transition of Task Force capabilities from DOD to USAID, we interviewed DOD, State, and USAID senior-level policy officials in Afghanistan and Washington, D.C. We obtained their views on the respective capabilities and operational approaches of the Task Force and USAID and reviewed relevant and available documentation. As a result, we identified five factors to consider in planning for any transition, which generally relate to how these agencies conduct their respective activities. Approaches to economic development. Although we identified some overlap in the roles of the Task Force and USAID, since both entities work to promote economic development in Afghanistan, they generally take different approaches to achieve their goals. In particular, USAID officials noted that in addition to other activities, USAID focuses more broadly on efforts to improve the environment for investments whereas the Task Force focuses on brokering specific investment deals. Specifically, the Task Force was designed to be a small, flat, flexible organization that generally conducts short-term initiatives in various sectors of the Afghan economy. For example, the Task Force is building a raisin processing facility in Kandahar to process raisins for export. It also facilitated meetings for Sweet Dried Fruit, the largest U.S. importer of raisins, to purchase Afghan raisins for the U.S. market. USAID is a larger development agency operating in many sectors ranging from infrastructure construction to capacity building as well as promotion of private sector development, both in the short and long term. For example, USAID worked with ministries to develop public administration and management capacity to foster government reform and establish the conditions for economic development. In addition, USAID generally focuses on both small and large infrastructure projects, ranging from small health clinics to agricultural colleges to roads and power plants. Furthermore, in some cases, USAID and the Task Force work in the same sectors of Afghanistan, but U.S. development officials in Afghanistan do not consider Task Force projects to be duplicative of USAID efforts. For example, USAID officials noted that USAID and the Task Force are both involved in the Afghan mining sector. USAID is focused on improving the regulatory policies to promote mining sector development and attract private sector investment through conferences, while the Task Force is focused on collecting and collating mining data with the U.S. Geological Survey, developing detailed investment proposals, and identifying and attracting investors. Freedom of movement. According to USAID, State, and DOD officials, Task Force employees have greater freedom of movement than USAID employees because the Task Force employees operate outside of Chief of Mission authority and therefore are not required to follow the security protocols of the U.S. Embassy in Kabul's Regional Security Officer. In addition, the Task Force maintains its own security detail and is a DOD entity. As a result, Task Force employees have an increased ability to directly implement and oversee its projects, greater access to military assets, and flexibility to host potential investors. USAID employees operate under Chief of Mission authority and are subject to more restrictions on their movements. As GAO has previously reported, movement restrictions affect the ability of USAID employees to directly implement and oversee USAID's projects. USAID headquarters officials noted that USAID uses implementing partners to carry out some of its projects and that they operate outside Chief of Mission authority. Senior State headquarters and USAID and State embassy officials said that lessening restrictions on USAID movement would require an exemption from the Regional Security Officer's policy by the Ambassador and State's Under Secretary for Management and would be challenging in the current security environment in Afghanistan. Furthermore, given the location and security requirements related to some of the Task Force's work, such as mining, a memorandum of understanding between USAID and DOD might be necessary to provide USAID employees greater access to military security and transportation assets if Task Force activities are transitioned to USAID. USAID funding and staffing. USAID's fiscal year 2011 budget and fiscal year 2012 budget request did not take into account any needs to support Task Force activities. However, USAID headquarters officials noted that if a transition were to occur they have flexibility to reprogram funds to accommodate the Task Force projects selected for transition. To continue Task Force activities, senior-level embassy and USAID officials in Afghanistan also identified potential staffing challenges. For example, the Task Force consists of individuals with private sector expertise and business contacts who have agreed to live and work under the Task Force's current security arrangement in Afghanistan (e.g., outside Chief of Mission authority) and are comfortable with the way the Task Force operates. According to USAID officials, many of its employees also have private sector experience and business contacts, but they live and work under a different security arrangement (e.g., under Chief of Mission authority). Embassy personnel stated that because of differences in the way the two agencies approach their activities, it may prove challenging for USAID to attract employees with the same expertise to broker investment deals as currently exists within the Task Force. Facilitating private investment in Afghanistan. While both USAID and the Task Force facilitate private investment, the nature and focus of their interactions with investors differ. For example, the Task Force identifies and provides direct logistical and consultative support to U.S. and non- U.S. potential investors. Such support includes advising companies on investment opportunities, arranging access to Afghan business leaders and officials, and providing temporary housing, transportation, and office space while investors evaluate opportunities and set up their own operations. The Task Force has hosted major international corporations and investors in Afghanistan, including Citibank, IBM, JP Morgan, Sweet Dried Fruit, Case New Holland, and Harrods of London. With respect to facilitating private investment, USAID typically hosts conferences that are designed to attract businesses or share information. Given their differences in approach, interaction with investors, and flexibility to move around, as previously discussed, senior USAID and State officials in Afghanistan agreed that these investment activities currently conducted by the Task Force may not continue if a transition to USAID occurs. Timing of transition and linkage to U.S. objectives in Afghanistan. Task Force activities in Afghanistan are intended to support objectives associated with the revised U.S Integrated Civilian-Military Campaign Plan for Support to Afghanistan. The plan has several objectives associated with U.S. goals and with the International Security Assistance Force's lines of operations, including "Advancing Livelihoods and Sustainable Jobs." Under this objective, the United States seeks to increase the productivity of small and medium-sized enterprises and promote domestic and foreign private sector investment in Afghanistan into 2012. Because the Task Force is involved in various efforts to spur private investment, senior-level DOD, State, and USAID officials in Afghanistan have stated that a transition in the near term may negatively impact these efforts, which are deemed essential for the transition of U.S. forces out of Afghanistan. To guide Task Force activities, DOD's senior leadership and the Task Force Director have provided high-level, general direction to Task Force activities; however, the Task Force has not developed written guidance to be used by its personnel in managing Task Force projects. In addition, while interagency information-sharing mechanisms exist in Afghanistan, the Task Force does not routinely participate in these mechanisms, nor have DOD, State, and USAID determined how to integrate the Task Force into these information-sharing efforts. DOD's senior leadership and the Task Force Director have provided high- level, general direction for Task Force activities, such as broad goals, an operating philosophy, and management practices. However, the Task Force has not developed written guidance to be used by its personnel in managing Task Force projects. Such guidance could include elements such as project selection criteria, requirements to establish project metrics, monitoring and evaluation processes, and the type of project information that should be collected and documented. DOD and the Task Force have issued various memorandums that have broadly guided the Task Force's activities. For example, the Task Force's mission and goals were established through three memorandums issued by the Deputy Secretary of Defense and Secretary of Defense over the time period from 2006 to 2010. The June 2006 memorandum stated, for example, that the Task Force was to accelerate DOD's stabilization and reconstruction operations through economic development activities in Iraq and Afghanistan. Additionally, in December 2009, the Director of the Task Force issued a management memorandum outlining the Task Force's operational model, which mentioned that the Task Force has been successful because it is designed to flexibly respond to the dynamic operating environments of Iraq and Afghanistan while combat operations were ongoing and emphasized the necessity of field-based project management. Task Force officials stated that they use various practices to manage activities, such as holding periodic internal management meetings to review plans and monitor project implementation. In addition, we found that Task Force officials also maintain some project information. Based on our discussion with Task Force officials and our review of Task Force documentation, we confirmed that some of the information contained in the project files included project descriptions, goals, objectives and metrics, contract information, and financial information. We found that the level of detail on the project information maintained by the Task Force varied, such as for data on cost, status, and metrics. For example, the Task Force's project files on its factory restart efforts in Iraq included detailed information such as cost and project status, and such data were updated periodically. In contrast, project files on the Task Force's project documentation on its agricultural assessment activities contained related final reports, but the documentation did not contain information on cost and only one report contained schedule information. Furthermore, the Task Force's electronic fund transfer assistance center in Iraq tracked metrics such as the number of problems reported and the causes of the problems. In contrast, Task Force project documentation on its private investment facilitation efforts in Iraq did not have clearly defined metrics. Neither DOD memorandums nor the Director's memorandum describing the Task Force's operational model outline specific guidelines for project management, such as project selection criteria, requirements to establish project metrics, monitoring and evaluation processes, or how program managers should maintain project information. Standards for Internal Control in the Federal Government requires agencies to document guidance to help manage agency activities but allows agencies to tailor control activities. According to the standards, written guidance that directs project management is an integral part of an agency's planning, implementing, reviewing, and accountability for stewardship of government resources and achieving effective results. We also note that two assessments of the Task Force's activities have identified a need for project guidance. First, in 2009, the Task Force appointed an assessment team to evaluate its activities to restart state-owned factories in Iraq. This assessment team stated, among other things, that the lack of project documentation made it difficult to gain a clear understanding of the Task Force's operating environment. In addition, the assessment team noted that the Task Force should consider developing standard processes and procedures for internal controls and a standard repository for project reporting. Second, the Task Force conducted an internal assessment and released the findings in February 2009, which noted that basic managerial structure and processes were lacking to ensure continuity of operations and that it would issue new guidelines for operational management. According to Task Force officials, the December 2009 memorandum outlining the Task Force's operational philosophy was issued in response to this internal review. However, it did not contain specific management guidelines, and no other guidance has been issued. Senior Task Force officials told us that they have recognized the need to establish project management guidance; however, they stated that taking this action was not a priority because at times the future of the Task Force was uncertain. For example, from late 2008 through March 2009, it was unclear whether the Task Force would be reauthorized by the Secretary of Defense to continue activities in Iraq. As a result, a large number of Task Force staff left the organization, and when the Task Force was reauthorized in March 2009, senior Task Force officials stated that it only had three permanent staff members and had to recruit additional staff. During the time of organizational uncertainty, members of the Task Force were focused on completing projects in Iraq and were not, according to Task Force officials, focused on developing and documenting guidance and policies. DOD Instruction 3000.05 states that integrated civilian and military efforts are essential to conducting successful stability operations and requires DOD and its components to collaborate with other U.S. government agencies, among other organizations, involved with the planning, preparation, and conduct of stability operations. The 2010 DOD Task Force memorandum also requires it to coordinate with relevant U.S. government agencies for executing assignments in theater, as appropriate. In addition, according to the DOD Joint Publication on counterinsurgency operations, coordination and/or integration of military efforts with other governmental or nongovernmental efforts to achieve a whole of government approach is essential for successful counterinsurgency operations, which include stabilization efforts to foster economic stability and development. The Task Force has generally focused its information-sharing efforts on the senior U.S. official level in Afghanistan. According to Task Force officials, they regularly brief senior-level U.S. military and civilian officials, such as the Commander of the International Security Assistance Force and U.S. Forces-Afghanistan, the Ambassador to Afghanistan, and the Special Representative for Afghanistan and Pakistan, on the activities and projects of the Task Force in Afghanistan. Senior Task Force officials stated that they have also shared information on their activities and projects with the USAID Mission Director and the Coordinating Director of Development and Economic Affairs at the U.S. Embassy in Kabul, Afghanistan. While the Task Force regularly shares information with senior leaders, its information sharing at the project management level in Afghanistan has been more ad hoc. Several civilian development officials in Afghanistan expressed concerns about the inconsistency of information sharing by the Task Force. For example, according to USAID officials in Afghanistan information sharing between USAID and the Task Force has generally been limited and irregular. However, development officials also stated that coordination with the Task Force was generally better on joint projects, such as on a cement factory revitalization project in Parwan province. Task Force officials agreed that information sharing below the senior level is on an ad hoc basis and noted that they expected senior leaders they briefed to share information from the Task Force with appropriate staff within their own organizations. Task Force officials believe that they have interacted frequently below the senior level but acknowledged that there have been gaps in the Task Force's information sharing and improvements could be made. While mechanisms such as interagency working groups exist in Afghanistan for agencies involved in development activities to share information, the Task Force does not routinely participate in these mechanisms nor have DOD, State, and USAID determined how to integrate the Task Force into these information-sharing efforts. The Task Force has been required to more formally share information on its projects and activities through other processes in the past, but these processes were either onetime requirements or are no longer applicable. For example, the NDAA for fiscal year 2011 required the Task Force to obtain the concurrence of the Secretary of State for its planned fiscal year 2011 projects in Afghanistan. State officials said that the concurrence process generally improved the visibility of Task Force activities in Afghanistan. The Task Force was also required to share information on its activities and projects in Afghanistan as part of the Commander's Emergency Response Program (CERP). The Task Force used the program to implement some of its fiscal year 2010 projects in Afghanistan and had to meet the program's requirements, which included a review process that involved USAID and U.S. military officials. However, pursuant to the NDAA for fiscal year 2011, the Task Force is no longer able to use CERP to implement its projects. Currently, a number of interagency working groups have been established to share information regarding various aspects of development. For example, there are interagency working groups directed by the Coordinating Director of Development and Economic Affairs at the U.S. Embassy in Kabul that are involved with development in Afghanistan. For example, the Economic and Financial Policy Working Group is responsible for implementing the U.S. economic growth strategy for Afghanistan. Embassy, USAID, and Task Force officials have stated that the Task Force does not regularly attend the working group's biweekly meetings. Another mechanism mentioned in our prior work is the Combined Information Data Network Exchange used by the U.S. military to track CERP projects. This database included information on CERP projects; an unclassified version of the database is accessible by USAID and other organizations. However, agency officials have not agreed on the most appropriate mechanisms to use and the level of participation for the Task Force. Senior embassy officials stated that improved information sharing by the Task Force would help with unity of effort and that a mechanism to facilitate information sharing would be useful. Development officials have also noted the importance of improving information sharing by the Task Force to ensure that all U.S. government development projects in Afghanistan are coordinated to support the U.S. economic strategy. Furthermore, our prior work has highlighted the need to improve information sharing between agencies working on development in Afghanistan, particularly USAID and DOD, to improve coordination. Strengthening the Afghan economy through stabilization and development assistance efforts is critical to the counterinsurgency strategy and a key part of the U.S. Integrated Civilian-Military Campaign Plan for Support to Afghanistan. To support U.S. goals in Afghanistan, DOD's Task Force and USAID both undertake efforts that promote economic development, including facilitating private sector investment. While the two organizations are similarly focused on stabilizing and developing Afghanistan's economy, some differences exist in the way they carry out their projects and activities. Therefore, factors such as their respective approaches to economic development, ability to move around, and the types of activities they undertake to identify investment opportunities and interact with potential U.S. and non-U.S. investors are important considerations in planning for any transition. Written guidance is a key element that can help agencies manage their activities and establish internal controls. Without formally defined project management guidance, the Task Force does not have the framework needed to ensure a standard operating approach and consistent project management. In addition, the absence of such guidance makes it more difficult to ensure accountability among its employees, minimize the potential for waste and abuse, monitor and evaluate project effectiveness, and ensure a smooth transition as personnel join or leave the Task Force. Finally, whereas the Task Force, like other agencies operating in Afghanistan, has projects and activities that focus on economic development, improving efforts to share information could identify opportunities for synergy and to avoid duplication. Without an agreed- upon approach to more fully integrate the Task Force into existing information-sharing mechanisms in Afghanistan, DOD, State, USAID, and other agencies will not be in a position to fully leverage and coordinate their respective capabilities and efforts in support of achieving U.S. economic development goals. To ensure effective project management, oversight, and accountability, we recommend that the Secretary of Defense direct the Task Force to develop written guidance that documents, as appropriate, its management processes and practices, including elements such as criteria for project selection, requirements for establishing metrics and project documentation, and project monitoring and evaluation processes. To improve information sharing among the Task Force and other federal agencies involved with stabilization and economic development efforts in Afghanistan, we recommend that the Secretary of Defense in consultation with the Secretary of State and the Administrator of USAID determine the most appropriate mechanism for integrating Task Force participation. Such mechanisms could include formalizing the process previously used to obtain State concurrence on Task Force projects, participating in appropriate working groups in Afghanistan, and/or including Task Force project and activity information in existing databases. We provided a draft of this report to the DOD, State, and USAID. DOD and USAID provided written comments, which are reprinted in appendixes II and III, respectively. State provided oral comments on the draft. DOD and USAID also provided technical comments, which we incorporated where appropriate. In its comments, DOD partially concurred with our recommendation that the Secretary of Defense direct the Task Force to develop written guidance that documents, as appropriate, its management processes and practices. DOD stated that it encourages this practice and noted that the Secretary of Defense has issued the necessary directives and instructions to DOD components, including the Task Force, on the development of project management guidelines. DOD further stated that the Task Force is reviewing its program management processes and will consider how to implement our recommendation, to the extent practicable. Both DOD and State concurred with our recommendation that the Secretary of Defense in consultation with the Secretary of State and the Administrator of USAID determine the most appropriate mechanism for integrating Task Force participation in information-sharing efforts in Afghanistan. DOD stated that it has reached agreement with the senior leadership of State and USAID to enhance coordination and information sharing of Task Force activities. According to a Task Force official, the details of this agreement are being finalized and will be discussed in the forthcoming response to the fiscal year 2011 NDAA requirements. State noted that we had adequately captured the need for increased coordination, communication, and information sharing. In its comments, USAID expressed its view that overall the report contained inaccuracies and misrepresentations that need to be corrected. USAID also made several statements regarding the objectives of our report. Specifically, USAID asserted that our report addressed the issue of whether Task Force activities should continue to reside in DOD or be transferred to another agency. USAID further noted that the report makes no recommendation as to a transfer of activities, but believed our recommendation to strengthen internal Task Force procedures and processes seemed to acknowledge the continued existence of the Task Force, and our reluctance to recommend consolidation of Task Force activities stems from a lack of understanding of how USAID operates. It believed this lack of understanding was reflected in our discussion of the five factors to be considered in planning for any transition. Specifically, USAID cited our discussion of the differing approaches of the Task Force and USAID to economic development, stating that our report describes USAID as focusing on improving the environment for investments while the Task Force focuses on brokering specific investment deals. USAID stated that it does not focus only on improving the environment for investments, noting that it has one project with this goal and several projects that focus on other areas of investment, including brokering specific deals. In addition, USAID stated that our report notes that the Task Force has an advantage over USAID because it has greater flexibility to visit project sites and access to the military. USAID noted that both USAID and the Task Force use contractors to implement projects, who have different and fewer security and movement restrictions than U.S. government employees. It specifically stated that USAID-employed Afghans and contractors can access all areas. We disagree that our report contains inaccuracies and misrepresentations, and believe that USAID has mischaracterized the intent of our work. Our objectives, as stated in the report, were to identify factors that should be considered in planning for any potential transition of Task Force capabilities to USAID. We did not evaluate whether such a transfer should occur, and therefore make no recommendation to that effect. We disagree that our recommendation regarding the need for the Task Force to develop project management guidelines suggests the continued existence of the Task Force. Rather, such a framework will be necessary regardless of whether the Task Force continues to reside in DOD or transfers to another agency. We also disagree with USAID's description of certain information in our report. Specifically, with respect to USAID's approach to economic development, our report does not state that USAID only focuses on improving the environment for investment. Rather, we specifically discuss that USAID operates in many sectors in Afghanistan ranging from infrastructure construction to capacity building as well as promotion of private sector development, both in the short and long term. In particular, we note that USAID activities include sponsoring conferences where prospective investors have the opportunity to gather information about potential investment opportunities. Finally, we do not pass judgment on whether the Task Force has an advantage over USAID with respect to freedom of movement, but rather point out the conditions under which employees of the two agencies conduct their activities, such as whether they are subject to Chief of Mission authority. We also specifically discuss that USAID uses contractors to help implement its projects, and that these contractors have access to project sites. In light of USAID's comments, we have clarified the report text to more clearly identify the instances in which we are referring to direct employees compared to contractors. USAID also commented on our recommendation that the Secretary of Defense in consultation with the Secretary of State and the Administrator of USAID determine the most appropriate mechanism for integrating Task Force participation in information-sharing efforts in Afghanistan. Specifically, it agreed with the need for more and more effective information sharing but believed that our recommendation fell short of addressing the need for full integration of stabilization and development activities across the federal government. USAID noted that information sharing is not enough if the U.S. government is to efficiently plan, manage, and integrate multiple development projects from different agencies in overlapping sectors or ministries. It emphasized that active senior management direction and support from the Task Force, along with State and USAID, are required for effective integration of planning and project execution, and that consolidation of Task Force and USAID activities would go even further to ensure that activities are fully integrated and that gaps or duplication do not occur. In particular, USAID proposed that we expand our recommendation on information sharing to require that the Task Force's project portfolio management become more institutionalized and integrated into State and USAID planning and project reporting processes. We agree with USAID's comments regarding the need for greater integration of U.S. activities, and believe that our recommendation supported by other information contained in our report specifically conveys this intent. In particular, our conclusions state that without an agreed-upon approach to more fully integrate the Task Force into existing information-sharing mechanisms in Afghanistan, DOD, State, USAID, and other agencies will not be in a position to fully leverage and coordinate their respective capabilities and efforts in support of achieving U.S. economic development goals. We also note that in presenting our recommendation, we identify various options for DOD, State, and USAID to consider for achieving better information sharing and integration, including formalizing the process used to obtain State concurrence on Task Force activities. We note that this process, when used in the past, has involved both State and USAID review of Task Force activities. We are sending copies of this report to the Secretary of Defense, the Secretary of State, and the Administrator of the U.S. Agency for International Development. 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) 512-9619 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. We began our review of the Department of Defense's (DOD) Task Force for Business and Stability Operations (Task Force) under the authority of the Comptroller General of the United States to conduct work on his own initiative. The Joint Explanatory Statement accompanying the Ike Skelton National Defense Authorization Act for Fiscal Year 2011 recognized GAO's ongoing review and directed GAO to include some additional information in its report. This report (1) identifies factors to consider in planning any transition of Task Force capabilities to the U.S. Agency for International Development (USAID) and (2) evaluates the extent to which the Task Force had established guidance to manage its activities and shared information with other U.S. civilian agencies. In our discussion of factors, we included information on the relationship between Task Force activities and the U.S. Integrated Civilian-Military Campaign Plan for Support to Afghanistan. To identify factors to consider in planning any transfer of Task Force capabilities to USAID, we interviewed cognizant DOD, Department of State (State), and USAID senior-level policy officials, including officials at the U.S. Embassy in Kabul. At the U.S. Embassy in Kabul, we interviewed the Coordinating Director for Development and Economic Affairs and officials in the Economic Section, including the Economic Counselor; the Interagency Agriculture Team; and the Civilian-Military Plans and Assessments Team. We also interviewed USAID officials in Afghanistan, including the Mission Director in Afghanistan and officials in the Office of Economic Growth and Governance; the Office of Infrastructure, Engineering, and Energy; and the Stabilization Unit. During our interviews, we specifically obtained these officials' views on the respective capabilities and operational approaches of the Task Force and USAID and reviewed relevant and available documentation. To determine how the Task Force activities support the U.S. Integrated Civilian-Military Campaign Plan for Support to Afghanistan, we reviewed the 2009 and 2011 versions of the plan, as appropriate, to determine what campaign objectives Task Force activities support and interviewed relevant agency officials in both Washington, D.C., and Afghanistan. To evaluate the extent to which the Task Force has established guidance to manage its activities, we reviewed documentation describing the Task Force's operating approach, projects and activities, performance goals and measures, and budget submissions and security protocols. We compared this information to requirements for documentation contained in our internal control standards and prior work related to management and evaluation. To evaluate the extent to which the Task Force shared information on its activities with other civilian agencies involved with economic stabilization efforts in Afghanistan, we reviewed DOD guidance, such as DOD Instruction 3000.05, and National Security Presidential Direction 44, to determine coordination requirements. We also interviewed officials from DOD, State, USAID, and the U.S. embassies in Baghdad and Kabul to identify the types of information shared and any processes used to share information. We focused this portion of our review on the information-sharing activities and practices in Afghanistan because the Task Force ceased its operations in Iraq in January 2011. We conducted this performance audit from August 2010 through July 2011 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Carole Coffey, Assistant Director; Johana Ayers; Carolynn Cavanaugh; Burns Chamberlain; Nicole Harms; Mae Jones; Anne McDonough-Hughes; Jamilah Moon; Marcus Oliver; Michael Pose; and Michael Rohrback made key contributions to this report.	The Departments of Defense (DOD) and State (State) and the U.S. Agency for International Development (USAID) and others are involved in economic development activities in Iraq and Afghanistan. In June 2006, DOD established the Task Force for Business and Stability Operations (Task Force) to support its related efforts. The National Defense Authorization Act (NDAA) for Fiscal Year 2011 required that DOD, State, and USAID jointly develop a plan to transition Task Force activities to State, with a focus on potentially transitioning activities to USAID. Under the authority of the Comptroller General of the United States to conduct work on his own initiative and with additional congressional direction, GAO identified (1) factors to consider in planning any transition of Task Force activities and (2) the extent to which the Task Force established guidance to manage its activities and has shared information with other federal agencies. GAO analyzed documents and interviewed multiple agency officials in Washington, D.C., Iraq, and Afghanistan. As of June 2011, DOD, State, and USAID officials were discussing options for transitioning Task Force activities and preparing a response to the fiscal year 2011 NDAA requirements. Based on interviews with senior officials and a review of available data, GAO identified five factors to consider in planning for any transition of Task Force activities to USAID, which generally relate to how these agencies conduct their respective activities. First, although both the Task Force and USAID work to promote economic development, they generally take different approaches. The Task Force is a small, flat, flexible organization that generally conducts short-term initiatives, while USAID is a large agency that conducts short- and long-term projects. USAID officials noted that in addition to other activities, it focuses on efforts to improve the environment for investments whereas the Task Force focuses on brokering specific investment deals. Second, as part of DOD, Task Force employees are not subject to the same movement restrictions as USAID employees and have greater flexibility to visit project sites and access to military assets. Third, funding and staffing plans would need to be developed. For example, USAID's fiscal year 2011 budget and 2012 budget request did not take into account any needs to support Task Force activities. Fourth, while both agencies facilitate private sector investment, the nature and focus of their interactions with investors differ. For example, the Task Force actively identifies potential U.S. and non-U.S. investors and arranges meetings and provides logistical support for them, whereas USAID typically sponsors conferences to provide opportunities for prospective investors to share information. Given these differences, State and USAID officials agreed that the same type of private investment activities conducted by the Task Force may not continue at USAID. Last, the timing of a transition and impact on U.S. objectives will need to be considered. DOD, State, and USAID officials noted that because Task Force activities are important to supporting the U.S. goal of attracting investors, a transition in the near term may negatively impact these efforts. While DOD and the Task Force have provided high-level direction for Task Force activities, the Task Force has not developed written project management guidance to be used by its personnel in managing Task Force projects. Such guidance could include important elements, such as project selection criteria, requirements to establish metrics, and monitoring and evaluation processes. As a result, the Task Force does not have the framework needed to ensure a standard operating approach, accountability, and consistent project management. The Task Force has generally focused its information-sharing efforts on senior officials in Afghanistan whereas efforts at the project management level have been more ad hoc. Mechanisms such as working groups exist for agencies involved in development activities to share information. However, the Task Force does not routinely participate, and DOD, State, and USAID have not identified how best to integrate the Task Force to share information on its activities. As a result, the U.S. government may not be positioned to fully leverage and coordinate its respective capabilities and efforts in support of achieving U.S. goals. GAO recommends that the Task Force develop written project management guidance and that DOD, State, and USAID develop an approach to integrate the Task Force into information-sharing mechanisms. DOD partially concurred with the first recommendation. The three agencies generally concurred with the second.	7,643	913
Projects funded under the military construction appropriation generally cost over $300,000 and produce complete and usable new facilities or improvements to existing facilities. The Army Corps of Engineers and the Naval Facilities Engineering Command manage the design of all service construction projects; each service verifies that the project designs are at least 35 percent complete when submitted to Congress for funding. Congress appropriates 5-year funds for construction projects. The Office of the Secretary of Defense issues planning guidance to identify, prioritize, and fund construction projects. The military services and the Defense Logistics Agency (DLA) justify selected construction projects based on the need to comply with environmental laws and regulations. Although environmental military construction projects compete with other military construction projects for funding, DOD gives additional priority to those environmental projects that are to correct problems that do or will soon result in noncompliance with the requirements. Between fiscal years 1994 and 1996, DOD will have funded $689 million in environmental compliance construction projects. Figure 1 shows the funding and the types of construction projects executed during that time, and appendix I provides details on projects and their costs for the services, including the Air National Guard and the Air Force Reserve. In November 1993, we reported that the services' processes for identifying, classifying, and funding environmental compliance projects varied. We stated that more consistent processes would help ensure that needs and costs were identified and ranked so that DOD and Congress could oversee trade-offs in funding and minimize inequities among the services' projects. We recommended that DOD guidance specify how the services should report costs related to environmental compliance construction and determine which appropriation would provide funds. The services have taken initiatives to improve their programming and oversight of environmental construction projects. The Army is moving toward more centralization in the management of its military construction priorities to promote oversight of construction-related environmental issues on an Army-wide basis. The Air Force now requires its commands to prioritize and consolidate environmental compliance construction projects with other military construction projects, and has instituted an integrated process team at the Air Staff level to review military construction requirements during the budgeting and programming process. The Marine Corps is updating its environmental compliance tracking system to more easily identify environmental compliance and other environmental projects, and the Navy created a single-source headquarters sponsor for construction projects. In addition, the Naval Audit Service annually reviews the Navy's and the Marine Corps' proposed military construction projects. At the installation level, each of the services has formed working groups and committees to work with Environmental Protection Agency (EPA) and state and local representatives to better identify project requirements. Despite these actions, DOD still has not issued specific guidance on how the services should program and report costs related to environmental compliance construction projects and how they should determine which appropriations should be used to fund the projects. Consequently, the services continue to inconsistently program and report environmental compliance construction projects. One inconsistency is the manner in which the services justify projects that are to be funded within the military construction appropriation. In fiscal years 1994 and 1995, the Air Force funded about $10 million for hydrant fuel systems improvements with environmental compliance as justification for priority. Hydrant fuel systems consist of pressurized underground piping used to fuel various-sized aircraft. A 1995 Kelly Air Force Base, Texas, project was funded to comply with a state enforcement order to install leak detection and prevention equipment. On the other hand, DLA justifies its hydrant fueling systems based on mission-related requirements, but notes that the systems have environmental compliance aspects. DLA plans to spend $48 million in fiscal year 1996 military construction funds for these systems and $75 million in fiscal year 1997 funds for similar projects. This inconsistency may be minimized in the future because DLA's Defense Fuel Supply Center is now responsible for sponsoring all fuel-related military construction. The Navy classified the construction of a Patuxent River, Maryland, hazardous material storehouse as an environmental compliance project and spent $3 million in fiscal year 1994 for the facility. Such storehouses are generally required for the safe storage and efficient processing of hazardous materials used by base and tenant activities. Under Air Force policy similar projects should not be funded as environmental compliance projects. The Army's hazardous material storage projects, as we discussed in our 1993 report, are managed by its logistics experts rather than by environmental engineers who manage most environmental functions and are not justified or prioritized as compliance projects. The services justify as mission-related other projects that must comply with regulatory requirements. For example, the Marine Corps is requesting $13 million in fiscal year 1997 military construction funds for the construction of a mission-related corrosion control facility at New River, North Carolina. Such facilities are constructed to allow functional and environmentally safe paint stripping and application to control corrosion on various aircraft. The Marine Corps is constructing the facility to reduce air pollution and provide work areas that comply with requirements of the Clean Air Act and Occupational Safety and Health regulations. A Marine Corps official told us the project could be justified as either mission-related or environmental compliance. Another official told us that safety is the driving factor. Supporting documentation for the project shows both safety and environmental compliance requirements. The Air Force is funding similar projects as either environmental or mission-related. The Air Force was appropriated military construction funds for a fiscal year 1996 corrosion control facility at Davis-Monthan Air Force Base, Arizona, which it justified as environmental compliance. At Tinker Air Force Base, Oklahoma, a similar project is being requested as mission-related, although supporting documentation indicates the project is also required to comply with regulatory requirements. Tinker officials had proposed the project to be justified as environmental compliance to meet Clean Air Act requirements, but Air Force Materiel Command officials believed the existing facility could be modified to meet emissions requirements, and that the project was justified based on Tinker's large paint workload. In discussing this issue, Air Force officials emphasized that while the project had environmental compliance aspects, the increased stripping and painting requirements drove the need to classify the project as mission-related. Another inconsistency among the services involves how the projects are designed, which in turn affects whether projects are funded with military construction funds or from the operations and maintenance appropriation. In this regard, while large projects are funded from the military construction appropriation, smaller scope minor construction (less than $300,000) projects can be funded with operation and maintenance funds or with minor construction funds that are managed by the installation. We found that the services sometimes design seemingly similar projects differently, resulting in different prioritization and funding of the projects. The Air Force obligated over $47 million in fiscal years 1994 and 1995 military construction funds for 34 underground fuel storage tank projects.Environmentally safe storage tanks are required to ensure continued operating storage of petroleum products and other environmentally controlled substances used to support the operation of such things as depot and base shops, electric generators, and gas stations. Air Force installations bundled together a number of individual tank projects to create single projects that would meet the $300,000 minimum for construction funding. For example, Tinker Air Force Base alone bundled together 78 individual tank upgrades to create a single construction project. During fiscal years 1994 and 1995, the Army obligated $80 million in operation and maintenance funds to upgrade and construct underground storage tanks similar to those of the Air Force to comply with environmental laws and regulations. For example, Fort Bliss obligated $1.4 million in fiscal year 1995 operation and maintenance funds to replace a number of underground storage tanks; it plans to spend $1.2 million in fiscal year 1996 operation and maintenance funds to replace and upgrade additional tanks. The Army plans to spend an additional $61 million in fiscal year 1996 operation and maintenance funds and $47 million in fiscal year 1997 operation and maintenance funds for the construction of tanks. We also found another example of project design and funding flexibility at Tinker Air Force Base. The Air Force eliminated a fiscal year 1996 storm drainage project at Tinker from its environmental compliance construction estimate. Officials determined the project would not receive a high enough priority if funded with military construction funds. Instead, Tinker officials told us they plan to divide the project into smaller units and fund them from the operation and maintenance appropriation. Services also fund projects in phases using the same appropriation. Officials believe this funding method helps ensure the funding of costlier projects. Such funding methods can minimize the apparent total cost of the project when supporting documentation for each phase does not identify the total project cost. The Marine Corps is funding a $77-million military construction wastewater treatment plant upgrade at Camp LeJeune, North Carolina, in three distinct phases in fiscal years 1994, 1996, and 1997. Officials stated they selected this funding method because they believed the project would more likely receive funding if it was submitted in complete and usable increments, rather than as a total package. The Marine Corps could not afford to fund such a large project in a single year because of fiscal constraints. Supporting budget documentation submitted to Congress identified each phase of the wastewater project but did not include the total cost of all project phases. The Navy is funding a $24-million military construction oily waste collection system at the Norfolk Naval Station, Virginia, in two distinct phases beginning with fiscal year 1996. The project is being constructed under a consent agreement with the local community. The Navy requires $12.2 million in fiscal year 1996 funds and is planning to request an additional $11.5 million in future year funds. Officials at the Naval Facilities Engineering Command, Atlantic Division, told us phase II of the fiscal year 1997 project has been delayed, and is currently being considered for fiscal year 1998. Officials are considering the impact of other related projects, such as the installation of oil/water separators on aircraft carriers. Supporting budget documentation submitted to Congress identified phases but not total project costs for all phases. These inconsistencies and funding practices have continued to occur because DOD has not clarified its guidance to provide better definitions for the classification and prioritization of compliance projects. Stating the need for more consistency, DOD officials, as part of a 1995 environmental quality initiative, have issued fiscal years 1998-2003 annual programming guidance that is designed to better identify compliance costs. Officials believe the guidance will capture recurring costs associated with managing environmental programs such as manpower, training, and maintenance of environmental equipment. However, the guidance does not specify how the services will program and report compliance costs. Also, the guidance merges into one category projects that address existing noncompliance with projects that address future noncompliance. Such merging of previously distinct compliance categories would result in inconsistency with EPA definitions for compliance projects and would limit DOD's ability to rank projects. Our 1993 report stemmed in part from congressional concern that the Air Force's fiscal year 1993 budget request for environmental military construction was about twice as large as the other services' requests combined. However, we found, during that review, that the Air Force funds most of its environmental compliance construction projects using military construction appropriations. The Army funds most of its environmental compliance construction projects with operation and maintenance appropriations. The Navy funds these projects using defense business operating funds and the Navy could not identify the source of appropriated funding used to reimburse the fund. Because of the variances in project definitions and funding sources, neither we nor DOD could compare the individual service programs. DOD's data shows that the Air Force's total environmental compliance cost was actually less than either the Army's or the Navy's. Figure 2 shows a decrease from 1993 to 1997 in DOD's military construction funding to comply with environmental construction requirements. However, as we found in 1993, the costs are not representative of all environmental construction, since similar construction projects are also funded from other valid appropriations such as operation and maintenance and minor construction. DOD-wide estimates of fiscal year 1997 environmental compliance requirements to be funded under the military construction appropriation fell from $257 million in February 1995--when they were submitted to Congress as part of the fiscal year 1996/1997 biennial budget estimates--to $84 million in April 1996. However, neither we nor DOD could determine the extent of the reduction in the program from prior years because of continued inconsistencies in project definition (environmental or mission-related) and design (see pp. 4-8). Some reductions resulted from a lack of support for projects proposed in 1995 or decisions to fund at a later time. For example, the Air Force eliminated over $14 million of industrial wastewater pretreatment facilities at various installations because subsequent review at the major command level determined that support for the projects was inadequate. Officials at Langley Air Force Base, Virginia, also told us that they decided to reduce the generation of hazardous waste at the source. Air Force officials deferred two other military construction projects at Beale Air Force Base, California, and Dyess Air Force Base, Texas, to the future fiscal years' environmental compliance program. Air Force data shows that the Air National Guard has removed a fiscal year 1997 underground storage replacement project from its military construction budget estimates, and the project may be funded with operation and maintenance funds. Other reductions can be attributed to reduced project scope resulting in lower estimates for individual projects. For example, the Navy reduced its $25.4 million estimate for an oily waste collection facility in San Diego, California, to $7.2 million based on a November 1994 Naval Audit Service report recommendation. Navy officials told us they are using a more effective, less costly method to treat the oily waste. In January 1996, the Naval Audit Service reported that the revised $7.2 million estimate was appropriate. However, in reviewing cost data provided by the Navy, we noted that the Navy's current estimate for the project is still $24 million. Figure 3 shows a breakout of the $84 million estimate by service as of April 1996. DOD cannot adequately determine its environmental compliance construction needs and project priorities. The continuing lack of guidance and inconsistencies in the way DOD programs and funds projects inhibit DOD's and Congress' ability to provide overall management and effective program oversight. Given DOD's response to our 1993 report that it believed more consistent guidance is unnecessary, the Subcommittee may wish to direct DOD to act now to ensure that projects are consistently funded and reported for the fiscal year 1998 budget submission to Congress or to no longer use environmental compliance to justify higher priority for military construction funding. In oral comments on a draft of this report, DOD officials generally agreed with our description of project funding and reporting. However, they did not agree with our findings and conclusion that more consistent guidance is needed to ensure that projects are consistently funded and reported, or with our related matter for congressional consideration. DOD officials stated that the environmental program, like other DOD programs, is integrated into the appropriations process in accordance with applicable law and guidance, and that commanders need the flexibility that the current congressional and DOD guidance provide in determining when it is appropriate to use operation and maintenance funds versus military construction funds for smaller projects. Officials suggested that the location and type of facilities frequently impact how the DOD components fund projects. For example, underground storage tanks collocated in a fuel farm or around an airfield may be more appropriately addressed as an entire area at one time, whereas tanks at a number of different sites could logically and legally be done with smaller projects, under either the military construction or operation and maintenance appropriation. Officials stated that while inappropriate classification of environmental projects is possible, it has not been a problem. We recognize the flexiability inherent in existing guidance concerning project design and funding. As stated in our 1993 report, however, our position is that DOD's guidance is not comprehensive and does not ensure consistency in implementation. These inconsistencies, which are demonstrated in the examples cited throughout our report, inhibit analyzing DOD-wide data and estimating future requirements. Also, officials stated that the slight change in EPA category definitions (discussed on pp. 7 and 8) more clearly demonstrates the funding priorities than treating all future requirements in a single category regardless of their immediacy. Officials stated that EPA staff have accepted DOD's changes. With regard to compliance category definitions, we believe the changes are substantive and not slight as characterized by DOD. EPA's category definitions distinguished among projects to address situations (1) already out of compliance, (2) to be out of compliance by the end of the current year, and (3) to be out of compliance in future years' budgets. We agree that EPA has accepted DOD's definition to include all three in one category for the purposes of DOD's report to Congress. However, it obtained DOD agreement to provide additional supporting information on individual projects. That information would allow EPA to categorize DOD's projects under EPA definitions. We are monitoring DOD's implementation of its revised definitions for the requester of this report and other requesters. Technical corrections have been incorporated where appropriate. To obtain information on DOD's and the military services' programming processes, we held discussions and obtained information from officials in EPA and in headquarters and field offices of DOD, the Army, Navy, Air Force, Marine Corps, and DLA. We also reviewed pertinent documents, laws, and regulations. To obtain information on DOD's and the military services' environmental requirements and costs, we reviewed budget reports and submissions for fiscal years 1994 through 1997 and service cost data. We compared the fiscal year 1997 biennial estimates with DOD's estimates as of February 1996, and updated the 1997 estimates as of April 1996. We relied on the accuracy of DOD's data in conducting our analysis and selectively verified data for certain projects. We visited and obtained information at the following military installations and major commands: Fort Sill, Oklahoma; Training and Doctrine Command, Virginia; Naval Facilities Engineering Command, Atlantic Division, Virginia; Norfolk Naval Base, Virginia; Commander in Chief, Atlantic Fleet, Virginia; Commander in Chief, Pacific Fleet, Hawaii; San Diego Naval Station, California; Edwards Air Force Base, California; Air Combat Command and Langley Air Force Base, Virginia; Tinker Air Force Base, Oklahoma; and Marine Corps bases at Camp LeJeune, North Carolina; Quantico, Virginia; and Camp Pendleton, California. We obtained additional information from the Air Force Materiel Command at Wright-Patterson Air Force Base, Dayton, Ohio; Kelly Air Force Base, Texas; and headquarters offices of the Air Force Reserve and the Air National Guard. We conducted our review between October 1995 and February 1996 in accordance with generally accepted government auditing standards. We are sending copies of this report to appropriate House and Senate committees; the Secretaries of Defense, the Army, the Navy, and the Air Force; the Commandant of the Marine Corps; and the Director, Defense Logistics Agency. Please contact me on (202) 512-8412 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix II. Table I.1 summarizes the services' estimated funding by project type during fiscal years 1994-96. Includes upgrades to and construction of wastewater and industrial wastewater facilities and sanitary and storm sewer systems. Includes de-icing facilities and upgrades to aircraft fuel and vehicle maintenance facilities. Excludes $3.5 million funded through the Defense Business Operating Fund. Includes upgrades to heating plants and corrosion control and blast/paint facilities. Includes the construction or upgrade of such projects as engine test facilities, above-ground fuel storage tanks, tank trail erosion, fuel containment dikes, consolidated fuel facilities, potable water facilities and pipelines, and other projects under $2 million each. Table I.2 summarizes projects for fiscal year 1997. Wastewater collection and treatment is estimated to be the most costly effort during this period. Includes upgrades to and construction of wastewater and industrial wastewater facilities and sanitary and storm sewer systems. Includes upgrades to heating plants and corrosion control and blast/paint facilities. Includes de-icing facilities and upgrades to aircraft fuel and vehicle maintenance facilities. Edwin J. Soniat Raul Cajulis The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.	Pursuant to a legislative requirement, GAO reviewed the Department of Defense's (DOD) prioritization of environmental compliance construction projects, focusing on: (1) the DOD construction program process; and (2) DOD cost estimates for future projects. GAO found that: (1) since GAO's November 1993 report, the services have initiated actions intended to improve their processes for programming and prioritizing environmental compliance construction projects; (2) however, neither the current nor proposed DOD policy specifies how the services should report costs related to environmental compliance construction projects and how they should determine which appropriation account should provide the funds; (3) consequently, the services and DLA continue to vary the manner in which they classify and prioritize the projects and determine the source of funds for them; (4) the continuing lack of such guidance and the inconsistencies inhibit congressional oversight and DOD's program management; (5) DOD-wide estimates for fiscal year 1997 environmental compliance construction requirements fell from $257 million in February 1995 to $84 million in April 1996; (6) due to the lack of a uniform approach to categorizing such projects, GAO cannot determine whether this drop in funding is a result of a reduction in the need for such projects or simply a reflection of differing procedures for categorization; (7) the reasons for reductions fell into several different categories, for example, lack of documentation, decisions to fund in later years, or decreased project costs.	4,469	307
With a cost of about $12.3 billion, the 2010 Census was the most expensive population count in U.S. history, costing about 31 percent more than the $9.4 billion 2000 Census (in constant 2020 dollars). Some cost growth is to be expected because the population is growing and becoming more complex and difficult to count, which increases the Bureau's workload. However, the cost of counting each housing unit has escalated from about $16 in 1970 to $92 in 2010 (in constant 2020 dollars), according to the Bureau. For the 2020 Census, the Bureau intends to limit its per-household cost to not more than that of the 2010 Census, adjusted for inflation. To achieve this goal, the Bureau is significantly changing how it conducts the census, in part by re-engineering key census-taking methods and infrastructure. The Bureau's innovations include (1) using the Internet as a self-response option; (2) verifying most addresses using "in-office" procedures rather than costly field canvassing; (3) re-engineering data collection methods; and (4) in certain instances, replacing enumerator-collected data with administrative records (information already provided to federal and state governments as they administer other programs). The Bureau's various initiatives have the potential to reduce costs. In October 2015, the Bureau estimated that with its new approach it can conduct the 2020 Census for a life-cycle cost of $12.5 billion, $5.2 billion less than if it were to repeat the design and methods of the 2010 Census (both in constant 2020 dollars). However, in June 2016, we reported that this $12.5 billion cost estimate was not reliable and did not adequately account for risk. Table 1 below shows the Bureau's estimated cost savings it hopes to achieve in the following four innovation areas. The 2016 test was the latest major test of NRFU in the Bureau's testing program. In 2014, the Bureau tested new methods for conducting NRFU in the Maryland and Washington, D.C., area. In 2015, the Bureau assessed NRFU operations, in Maricopa County, Arizona. In 2018, the Bureau plans to conduct a final "End-to-End" test which is essentially a dress rehearsal for the actual decennial. The Bureau needs to finalize the census design by the end of fiscal year 2017 so that key activities can be included in the End-to-End Test. The Bureau plans to conduct additional research through 2018 in order to further refine the design of the 2020 Census, but recently had to alter its approach. On October 18, 2016, the Bureau decided to stop two field test operations planned for fiscal year 2017 in order to mitigate risks from funding uncertainty. Specifically, the Bureau said it would stop all planned field activity, including local outreach and hiring, at its test sites in Puerto Rico, North and South Dakota, and Washington State. The Bureau will not carry out planned field tests of its mail-out strategy and follow up for non-response in Puerto Rico, or its door-to-door enumeration. The Bureau also cancelled plans to update its address list in the Indian lands and surrounding areas in the three states. However, the Bureau will continue with other planned testing in fiscal year 2017, such as those focusing on systems readiness and internet response. Further, the Bureau said it would consider incorporating the cancelled field activities elements within the 2018 End-to-End Test. The Bureau maintains that stopping the 2017 Field Test will help prioritize readiness for the 2018 End-to-End Test, and mitigate risk. Nevertheless it also represents a lost opportunity to test, refine, and integrate operations and systems, and puts more pressure on the 2018 Test to demonstrate that enumeration activities will function as needed for 2020. NRFU generally proceeded according to the Bureau's operational plans. However, our observations and the Bureau's preliminary data at both test sites found that (1) there were a large number of non-interviews, and (2) enumerators had difficulty implementing new census-taking procedures. The Bureau's 2016 Census Test included a new field management structure that, among other things, included an enhanced operations control system supporting daily assignments of cases. A cornerstone of the Bureau's efforts to reduce the cost of NRFU is the automation of decision-making on how to manage the follow-up caseload. Unlike previous censuses and one prior test, enumerators in the 2016 Census Test did not have an assigned set of cases that they alone would work until completion. Instead, the Bureau relied on an enhanced operational control system that was designed to provide daily assignments and street routing of non-response follow-up cases to enumerators in the most optimal and efficient way. The Bureau first tested this system in the 2015 Census Test. The test also included streamlined procedures for making contact at large apartment buildings. This was intended to reduce repeated attempts to contact property managers. A key objective of the 2016 Census Test was to refine procedures for collecting NRFU data from households using mobile devices leased from a contractor. In prior decennials, enumerators collected NRFU information using paper and pencil. The Bureau believes that replacing paper-based operations with automated case management and mobile devices for collecting interview data will provide a faster, more accurate, and more secure means of data collection in the 2020 Census (see figure 1). Some test activities that we observed at both test sites included streamlined multi-unit contact procedures and interviews with a proxy respondent. A proxy is someone who is a non-household member, at least 15 years old, and knowledgeable about the NRFU address. At multi- unit structures such as apartment buildings, the enumerator is trained to first interview the property manager to find out which units were occupied and which were vacant on Census Day. Such interviews help to streamline NRFU by removing vacant units from an enumerator's workload. They also help build a rapport with property managers by ensuring they know when enumerators are working in their building and can also help them gain access to locked buildings. Preliminary data at both test sites indicate that the Bureau experienced a large number of non-interviews. According to the Bureau, non-interviews are cases where either no data or insufficient data were collected, in part because the cases reached the maximum number of six attempted visits without success or were not completed due to, for example, language barriers or dangerous situations. While not necessarily a precursor to the 2020 non-interview rate, because of its relationship to the cost and quality of the count, it will be important for the Bureau to better understand the factors contributing to it. According to preliminary 2016 Census Test data, there were 19,721 NRFU cases coded as non-interviews in Harris County, Texas and 14,026 in Los Angeles County, California, or about 30 and 20 percent of the test workload respectively. In such cases, the Bureau may have to impute attributes of the household based on the demographic characteristics of surrounding housing units as well as administrative records. Bureau officials expect higher numbers of non-interviews during tests in part because, compared to the actual enumeration, the Bureau conducts less outreach and promotion. Bureau officials hypothesized that another contributing factor could be related to NRFU methods used in the 2016 test compared to earlier decennials. For the 2010 and earlier decennials, enumerators collected information during NRFU using pencil and paper. Enumerators may have visited a housing unit more than the 6 maximum allowable visits to obtain an interview but did not record all of their attempts, thus enabling them to achieve a higher completion rate. For the 2020 Census, and as tested in 2016, the Bureau plans to collect data using mobile devices leased from a contractor, and an automated case management system to manage each household visit. The Bureau believes that this approach will provide a faster, more accurate, and more secure means of data collection. At the same time, the mobile device and automated case management system did not allow an enumerator to attempt to visit a housing unit more than once per day, reopen a closed case, or exceed the maximum allowable six attempts. One factor we observed that may have contributed to the non-interview rate was that enumerators did not seem to uniformly understand nor follow procedures for completing interviews with proxy respondents. According to the 2016 Census Test enumerator training manual, when an eligible respondent at the address cannot be located, the automated case management system on the mobile device will prompt the enumerator when to find a proxy to interview, such as when no one is home or the housing unit appears vacant. In such circumstances, enumerators are to find a neighbor or landlord to interview. However, in the course of our site visits, we observed that enumerators did not always follow these procedures. For example, one enumerator, when prompted to find a proxy, looked to the left and then right and, finding no one, closed the case. Similarly, another enumerator ignored the prompt to find a proxy and explained that neighbors are usually not responsive or willing to provide information about the neighbor, and did not seek to find a proxy. Enumerators we interviewed did not seem to understand the importance of obtaining a successful proxy interview, and many appeared to have received little encouragement during training to put in the effort to find a proxy. Proxy data for occupied households are important to the success of the census as the alternative is a non-interview. In 2010, about one-fourth of the NRFU interviews for occupied housing units were conducted using proxy data. We shared our observations with Bureau officials who told us that they are aware that enumerator training for proxies needs to be revised to convey the importance of collecting proxy data when necessary. Converting non-interviews by collecting respondent or proxy data can improve interview completion rates, and ultimately the quality of census data. The Bureau told us it will continue to refine procedures for 2020. According to the Bureau, its plans to automate the assignment of NRFU cases have the potential to deliver significant efficiency gains. At the same time, refinements to certain enumeration procedures and better communication could produce additional efficiencies by enabling the Bureau to be more responsive to situations enumerators encounter in the course of their follow-up work. Enumerators were unable to access recently closed incomplete cases. Under current procedures, if an enumerator is unable to make contact with a household member, the case management system closes that case and it is to be reattempted at a later date, perhaps by a different enumerator, assuming the enumerator has not exceeded six attempts. Decisions on when reattempts will be made--and by whom--are automated and not designed to be responsive to the immediate circumstances on the ground. This is in contrast to earlier decennials when enumerators, using paper-based data collection procedures, had discretion and control over when to re-attempt cases in the area where they were working. According to the Bureau, leaving cases open for re- attempts can undermine the efficiency gains of automation when enumerators depart significantly from their optimized route, circling back needlessly to previously attempted cases rather than progressing through their scheduled workload. During our test site observations, however, we preliminarily found how this approach could lead to inefficiencies in certain circumstances. For example, we observed enumerators start their NRFU visits in the early afternoon as scheduled, when many people are out working or are otherwise away. If no one answered the door, those cases were closed for the day and reassigned later. However, if a household member returned while the enumerator was still around, the enumerator could not reopen the case and attempt an interview. We saw this at both test site locations, typically in apartment buildings or at apartment-style gated communities, where enumerators had clear visibility to a large number of housing units and could easily see people arriving home. Bureau officials acknowledged that closing cases in this fashion represented a missed opportunity and plan to test greater flexibilities as part of the 2018 End-to-End Test. Programming some flexibility into the mobile device--if accompanied with adequate training on how and when to use it--should permit completion of some interviews without having to deploy staff to the same case on subsequent days. This in turn could reduce the cost of follow-up attempts and improve interview completion rates. Enumerators did not understand procedures for visits to property managers. Property managers are a key source of information on non- respondents when enumerators cannot find people at home. They can also facilitate access to locked buildings. Further, developing a rapport with property managers has helped the NRFU process, such as when repeated access to a secured building or residential complex is needed on subsequent days by different enumerators. In response to problems observed during the Bureau's 2014 and 2015 Census tests and complaints from property managers about multiple uncoordinated visits by enumerators, the Bureau's 2016 Census Test introduced specific procedures to conduct initial visits to property managers in large multi-unit apartment buildings. The procedures sought to identify up front which, if any, units needing follow-up at the location were vacant, eliminating the need for enumerators to collect this information from property managers with subsequent visits on a case-by- case basis. According to Bureau officials, the automated case management system was designed to allow for an enumerator to make up to three visits to property managers to remove vacant units. According to the Bureau, the 2016 Census Test demonstrated that vacant units could quickly be removed from the NRFU workload using these procedures in cases where a property manager was readily available; however, in other cases the procedures caused confusion. For example, whenever an initial visit was unsuccessful, all of the cases at that location--up until then collated into only one summary row of the enumerator's on-screen case list--would suddenly expand and appear as individual cases to be worked, sometimes adding several screens and dozens of cases to the length of the list, which enumerators we spoke with found confusing. Furthermore, without the knowledge of which units were vacant, enumerators may have unnecessarily made visits to these units and increased the cost and the time required to complete NRFU . During debriefing sessions the Bureau held, Bureau enumerators and their supervisors identified training in these procedures as an area they felt needed greater attention in the future. Indeed, while training classes included a case study exercise on interviewing a property manager, this exercise in the enumerators training manual gives no warning to enumerators and does not refer to the procedures. Bureau officials said that they are pleased with the progress the test demonstrates they have made in automating case management at multi-unit locations a priority. They added that they recognize the need to better integrate procedures in the training moving forward. Timing of return visits did not leverage information on respondent availability. During our field visits, we encountered several instances where enumerators had been told by a respondent or otherwise learned that returning at a specific time on a later date would improve their chance of obtaining an interview from either a household respondent or a property manager. But the Bureau's 2016 Census Test and automated case management did not have an efficient way to leverage that information. Attempting contact at non-responding households at times respondents are expected to be available can increase the completion rate and reduce the need to return at a later date or rely on proxy interviews as a source of information. The Bureau's automated case management system assigned cases to 6- hour time windows after estimating hour-by-hour probabilities of when best to contact people. The estimation relied on various administrative records, information from other Bureau surveys that had successful contacts in the past, as well as area characteristics. The 2016 Census Test did not have a way to change or update these estimates when cases were subsequently reassigned. The goals of assigned time windows were intended to result in more productive visits and reduce costs. When enumerators identified potentially better times to attempt a contact, they were instructed to key in this information into their mobile devices. For example, one enumerator keyed in a mother's request to come back on Thursday afternoon when her kids were in camp, while others keyed-in information like office hours and telephone contact numbers obtained from signs on the property they had seen for property managers. However, according to the Bureau, this updated information went unused, and we met enumerators who had been assigned to enumerate addresses at the same unproductive time after they had written notes documenting other better times to visit. Another enumerator reported visiting a property manager who complained that the enumerator was not honoring the manager's earlier request made during a prior enumeration attempt that an enumerator return during a specified time window. Such repeat visits can waste enumerator time (and miles driven), and contribute to respondent burden or reduced data quality when respondents become annoyed and may become less cooperative. We discussed our preliminary observation with managers at the test sites, who expressed frustration that the automated case management system did not allow them to record the locally-obtained data on when to contact people whom they found in enumerator notes in a way to affect future case assignment. Headquarters staff told us that while they have not fully evaluated this yet, they are concerned that providing local managers with too much flexibility to override the results of optimized case and time assignments would undermine the efficiency gains achievable by the automation. They also explained that enumerators were to have been provided capability to record what day or what time of day for follow-up. This information could have been used by the automated case management to better target the timing of future assignments. However, they acknowledged that this procedure may not have been either fully implemented or explained during enumerator training. Bureau officials have said that this is another area they are planning to address. The Bureau has reengineered its approach to building its master address list for 2020. Specifically, by relying on multiple sources of imagery and administrative data, the Bureau anticipates constructing its address list with far less door-to-door field canvassing compared to previous censuses. One major change the Bureau is making consists of using in-office address canvassing-a two-phase process that systematically reviews small geographic areas nationwide, known as census blocks, to identify those that will not need to be canvassed in the field, as shown in figure 2. The Bureau estimates that the two phases of in-office canvassing will result in roughly 25 percent of housing units requiring in-field canvassing, instead of canvassing nearly all housing units in the field as done previously. With in-office address canvassing clerks compare current aerial imagery for a given block with imagery for that block dating to the time of the last decennial census in 2010. During this first phase, called Interactive Review, specially trained clerks identify whether a block appears to have experienced change in the number of housing units, flagging each block either as stable--free of population growth, decline, or uncertainty in what is happening in the imagery over time--or "active," in which case it moves to the next phase. Addresses in stable blocks are not marked for in-field canvassing. For blocks where change is detected or suspected, the Bureau uses a second phase of in-office canvassing, known as Active Block Resolution, to attempt to resolve the status of each address and housing unit in question within that block. During this phase, clerks use aerial imagery, street imagery, and data from the U.S. Postal Service, as well as from state, local, and tribal partners when reviewing blocks. If a block can be fully resolved during this phase of in-office canvassing, the changes are recorded in the Bureau's master address file. If a block cannot be fully resolved during the second phase of in-office canvassing, then the entire block, or some portion of the block, is flagged for inclusion in the in-field canvassing operation. In-office address canvassing began in September 2015 with plans for a first pass of the entire country to be completed by the end of fiscal year 2018. In-field canvassing for the 2020 Census is scheduled to begin in August 2019. Another major change the Bureau is making for its re-engineered address canvassing is significantly expanding the role that state, local, and tribal partners can play throughout the decade in contributing to an accurate, more up-to-date address list. Through the Geographic Support Systems Initiative, begun in fiscal year 2011, partner jurisdictions have been providing address and spatial data to the Bureau to help validate and supplement the Bureau's address list. As of October 2016, the Bureau reported that it had received partner data covering 73 percent of all known housing units nationwide. It added that the vast majority of the addresses in the files that the Bureau had processed as of July 2015 have either been matched with existing addresses in its database, or added to the address list. As with previous decennial censuses, as directed by Congress, the Bureau will also engage with state, local, and tribal partners through its Local Update of Census Addresses program in fiscal years 2018 and 2019 in order to ensure that jurisdictions have the ability to comment on the address list prior to enumeration. The Bureau plans to rely on the in-office part of address canvassing to validate a large part of the addresses added to the list during that program where data are available to permit it. The Bureau is testing its re-engineered address canvassing operation in two sites through December 2016--in Buncombe County, North Carolina, and St. Louis, Missouri. In-office canvassing for the test sites began at the Bureau's National Processing Center in Jeffersonville, Indiana, in August 2016. The exercise will test the Bureau's assumptions about the cost and effectiveness of the re-engineered approach, as well as the quality of in- office canvassing, field staff training, and the use of new collection geography in the field. In addition to the 100 percent in-office canvassing the Bureau plans for 2020, the Bureau will also canvass 100 percent of the test areas in the field so that it can compare results it obtains for blocks where it would not otherwise have gone door to door. The Bureau hired 262 in-field listers across both sites to conduct the door-to-door canvassing, also beginning in October with a relisting operation commencing in November. Although the innovations the Bureau is planning with its reengineered address canvassing have the potential to reduce costs, they entail some risks that could affect the cost or quality of the address canvassing operation. According to the Bureau, these risks include: Locating Hidden Housing Units. The Bureau recognizes that certain kinds of dwellings are hard to identify and may not have been marked as housing units at the time of address list development and not included in any databases. This could lead to their being missed and occupants not being counted in the census. These units are referred to as hidden housing units and include such living arrangements as attics, basements, or garages converted into housing units. According to the Bureau, while in-field canvassing also has similar risks for missing these types of housing units, solely relying on the use of imagery to identify these units could lead to an incomplete address list. Monitoring Change in the Housing Stock. When the Bureau determines during the first phase of in-office canvassing that a block has not experienced population change, the Bureau plans to subject the block to later monitoring so that if later change is detected, the block can be reassigned for further review. The Bureau has developed the conditions or "triggers" for subjecting blocks to later monitoring, but has not yet determined how it will operationalize them. According to the Bureau, if the triggers that the Bureau is developing for this process do not adequately detect recent change, then housing unit growth may be missed, and the resulting address list may not be up-to-date. Obtaining Quality Data. For the Bureau to adequately review enough blocks in-office-and therefore reduce field costs of door-to-door canvassing-the Bureau needs to have data of sufficient quality to make reliable determinations about changes in housing units within those blocks. According to the Bureau, if it does not obtain sufficient satellite imagery (covering areas with both current and prior census imagery) or address and spatial data from state/local/tribal partners, then it may be forced to send more blocks than planned to in-field canvassing. We have ongoing audit work examining the Bureau's re-engineered address canvassing approach. The justification of key cost and data quality assumptions, the approaches to mitigating key risks, and the Bureau's adherence to timelines and canvassing schedules are all subjects of our ongoing work, which we plan to report on early next year. The Bureau goes to great lengths each decade to improve specific census-taking activities. But these incremental modifications have not kept pace with societal changes that make the population increasingly difficult to locate and cost-effectively count. This increasing difficulty and escalating costs led the Bureau to re-engineer its approach for the 2020 Census. While preparations for 2020 are still underway, and with testing still occurring, the Bureau's experience in planning for 2010 can enhance its readiness for 2020. For example, as the Bureau continues its planning efforts for 2020, our prior work indicates that it will be essential for it to address the following three lessons learned: Ensure key census-taking activities are fully tested Develop and manage on the basis of reliable cost estimates Sustain workforce planning Ensure key census-taking activities are fully tested. The census is a large, complex operation comprised of thousands of moving parts, all of which must function in concert with one another to secure a cost-effective count. While the census is under way, the tolerance for any breakdowns is quite small. Given this difficult operating environment, rigorous testing is a critical risk mitigation strategy because it provides information on the feasibility and performance of individual census-taking activities, their potential for achieving desired results, and the extent to which they are able to function together under full operational conditions. Given the new four innovation areas for the 2020 Census, it will be imperative that the Bureau have systems and operations in place for the 2018 End-to-End Test that will take place in three locations, covering more than 700,000 housing units in total. The 2018 test locations are: Pierce County, Washington; Providence County, Rhode Island; and the Bluefield- Beckley-Oak Hill area of West Virginia. In our prior work on testing done for the 2010 Census, we noted that a sound study design should include such components as: clearly stated objectives with accompanying performance measures; research questions linked to test objectives and, as appropriate, a clear rationale for why sites were selected for field tests; a thoroughly documented data collection strategy; input from stakeholders and lessons learned considered in developing test objectives; and a data analysis plan including, as appropriate, methods for determining the extent to which specific activities contribute to controlling costs and enhancing quality. Develop and manage on the basis of reliable cost estimates. Reliable cost estimates that appropriately account for risks facing an agency can help an agency manage large complex activities like the 2020 Census, as well as help Congress make funding decisions and provide oversight. Cost estimates are also necessary to inform decisions to fund one program over another, to develop annual budget requests, to determine what resources are needed, and to develop baselines for measuring performance. The Bureau has a history of unreliable cost estimation and resultant overruns. For example, we placed the Decennial Census on our High Risk list in 2008 in part due to weaknesses in the Bureau's estimation of its 2010 Census life-cycle cost. Recently, we reported in our review of the Bureau's October 2015 life- cycle cost estimate that in order for the Bureau to improve its ability to control the cost of the 2020 Census, it will be critical for it to have better control over its cost estimation process. While we found that the Bureau has taken significant steps toward improving its capacity to produce reliable cost estimates, those efforts had not yet resulted in a reliable decennial cost estimate. Among the four broad characteristics of a reliable cost estimate--none of which the Bureau fully met--the Bureau reported it was focusing its attention on improving the documentation of the cost estimate, in order to help improve other characteristics as well. While poor documentation affected our ability to assess the reliability of the Bureau's cost estimate's other characteristics, we believe the problems we observed related to an absence of internal control procedures over the cost estimation process, which resulted in poor documentation. Furthermore, we found the Bureau lacked guidance to control the cost estimation process. Investment in the planning documents to help control and support cost estimation early in the estimation cycle, such as with an operational plan, guidance on key steps and process flows, assignment of responsibilities, and job aids for staff can help institutionalize practices and ensure that otherwise disparate parties in the process operate consistently. As we reported, taking steps to ensure its cost estimate is reliable would help improve decision-making, budget formulation, progress measurement, course correction when warranted, and accountability for results. We made three recommendations including that the Bureau take specific steps to ensure its cost estimate meets the characteristics of a high- quality estimate and improve control over how risk and uncertainty are accounted for in cost estimation, with which the Department of Commerce agreed. Bureau officials have stated that they plan to address the recommendations with their update of the 2020 Census Lifecycle Cost Estimate in December 2016. We plan to assess this cost estimate as soon as it is available. Sustain attention to workforce planning. Strategic workforce planning encourages agency managers and stakeholders to systematically consider what is to be done, when and how it will be done, what skills will be needed, and how to gauge progress and results. Sustained workforce planning can help the Bureau stay on track for the 2020 Census and help avoid past staffing problems. For example, a Bureau assessment of its experience with the 2010 Census observed that areas such as the management of large programs and projects, cost estimation, and information technology (IT) lacked staff with core skills and experience. Moreover, the Bureau's experience with the 2010 Census and prior enumerations has shown that not following leading practices in workforce planning can increase the risks of subsequent downstream operations, such as cost estimation. In 2012 we reported that while the Bureau's workforce planning efforts were generally consistent with such key leading practices as identifying current and future critical occupations, the Bureau had not coordinated workforce planning efforts across its directorates for key occupations. Without a Bureau-wide competency assessment, for instance, the Bureau risked not having the necessary workforce in place to manage the multimillion dollar IT investments for its 2020 operations. We found the Bureau also needed to address having inadequately trained cost estimating staff so that it could produce credible, comprehensive, and accurate cost estimates. Moreover, the Bureau needed to devote greater attention to setting goals and monitoring progress for skills gaps--as well as engaging stakeholders in developing, communicating, and implementing its workforce plan--so that the Bureau could identify and avoid possible workforce plan implementation barriers. Since that time, the Bureau has taken actions in response to our recommendations to coordinate and set goals for its workforce planning. For example, in September 2014, the Bureau drafted action plans to address the skills gaps that had been identified as part of a Bureau-wide competency assessment. The Bureau has indicated that a 2020 directorate-wide workforce assessment report is in its final review stages and will include a comprehensive succession planning strategy. These actions taken by the Bureau to incorporate key leading workforce planning practices will help the Bureau meet its objective of having a workforce matched with the demands of the 2020 Census. Going forward, a sustained focus on workforce planning will be necessary to ensure the Bureau will be in a position to hire the optimal mix of managers and technical experts to carry out a cost-effective census. In summary, the key innovations the Bureau plans for 2020 show promise for controlling costs and maintaining accuracy, although there are significant risks involved. The Bureau is aware of these risks, and robust testing can help manage them by assessing the feasibility of key activities, their capacity to deliver desired outcomes, and their ability to work in concert with one another under operational conditions. While the Bureau decided to stop key field testing planned for fiscal year 2017 in order to mitigate a funding risk, this decision may have consequences for elements of field operations not getting tested as a result, and, ultimately, for the 2020 Census. Going forward, once the Bureau has the test results, past experience has also shown the importance of refining operations as needed based on the results of the tests, incorporating lessons learned from 2010 as appropriate, and making needed changes to its design in time to be included in the Bureau's End-to-End Test scheduled for 2018. Chairman Meadows, Ranking Member Connolly, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you may have. If you have any questions on matters discussed in this statement, please contact Robert Goldenkoff at (202) 512-2757 or by e-mail at [email protected]. Other key contributors to this testimony include Lisa Pearson, Assistant Director; Mark Abraham, Peter Beck; Devin Braun; Jeff DeMarco; Robert Gebhart; Emily Hutz; Richard Hung; Donna Miller; Ty Mitchell; Kayla Robinson; Kathleen Padulchick; Robert Robinson, and Timothy Wexler. 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.	With a life-cycle cost of about $12.3 billion, the 2010 Census was the most expensive U.S. census in history. To help control costs and maintain accuracy, the 2020 Census design includes new procedures and technology that have not been used extensively in earlier decennials, if at all. While these innovations show promise for a more cost-effective head count, they also introduce risks. As a result, it is important to thoroughly test the operations planned for 2020.This testimony focuses on (1) the preliminary results to date of the Bureau's 2016 Census Test in Los Angeles County, California, and Harris County, Texas; (2) the Bureau's plans for the upcoming test of address canvassing procedures in Buncombe County, North Carolina, and St. Louis, Missouri; and (3) the lessons learned from the 2010 Census that can be applied to preparations for 2020. This testimony is based on GAO's ongoing reviews of the 2016 Census Test and Address Canvassing Test. For these studies, GAO reviewed Bureau documents and preliminary data, interviewed Bureau officials, and made site visits to observe census operations. This testimony is also based on prior GAO work on lessons learned from the 2010 Census. GAO preliminarily found that during the 2016 Census Test, nonresponse follow-up (NRFU), where enumerators visit households that did not respond to the census, generally proceeded according to the Census Bureau's (Bureau) operational plans. However, data at both test sites indicate that the Bureau experienced a large number of non-interviews. The Bureau considers non-interviews to be cases where either no data or insufficient data are collected. Bureau officials are not certain why there were so many non-interviews for the test and are researching potential causes. In addition, the Bureau's plan to automate the assignment of NRFU cases to enumerators has the potential to deliver significant efficiency gains as compared to paper-based operations conducted in previous decennial censuses, according to the Bureau. GAO preliminarily found that improvements to certain enumeration procedures and better training could produce additional efficiencies by enabling the Bureau to be more responsive to situations enumerators encounter on the ground. These improvements include providing more flexible access to recently closed, incomplete cases; enumerator interview training with multi-unit property managers; and operational procedures to make use of local data on the best time to attempt interviews. The Bureau has reengineered its approach to building its master address list for 2020 in part by introducing a two-phase "in-office" process that systematically reviews small geographic areas nationwide. The goal is to limit the more expensive and traditional door-to-door canvassing to those areas most in need of updating, such as areas with recent housing growth. The in-office phases rely on aerial imagery, street imagery, geographic information systems and address file data from state, local, and tribal partners. The Bureau estimates that the new process will result in about 25 percent of housing units requiring field canvassing compared to the traditional process where all housing units were canvassed. The Bureau has identified a series of risks that could affect the cost or quality of the address canvassing operation, including locating hidden housing units such as converted garages, monitoring change in housing stock, and obtaining quality data. The Bureau is testing its reengineered address canvassing operation in two sites through December 2016--in Buncombe County, North Carolina, and St. Louis. The Bureau's experience in planning for the 2010 decennial can enhance its readiness for 2020. Going forward, GAO's prior work indicates it will be important for the Bureau to address several key lessons learned, including: (1) ensuring key census-taking activities are fully tested, (2) developing and managing on the basis of reliable cost estimates, and (3) sustaining workforce planning efforts to ensure it has the optimal mix of skills to cost-effectively conduct the enumeration. GAO has made several recommendations to the Census Bureau in prior reports on cost estimation and workforce planning. The Bureau has implemented the workforce planning recommendations, and agreed with and plans to implement the cost estimation recommendations.	7,422	904
Cellular telephones, first marketed in 1983, have become one of the fastest selling consumer electronic products. By the end of 1993, over 16 million Americans were using cellular telephones, and the industry estimates that in less than a decade, over 60 million Americans will be using a cellular communications device. About one-third of all cellular telephones currently in use are hand-held portable models, which are growing in popularity. Industry forecasters predict a high demand for a new generation of personal communications devices that will offer a greater range of uses. Technology enthusiasts envision a future in which nearly all Americans will have a wireless portable communications device. Cellular telephones come in a variety of styles, but all fall into the following three general categories: car telephones, in which the telephone is installed in the vehicle and the antenna is mounted on the roof, trunk, or rear window; transportable telephones, in which the telephone body, antenna, and handset are carried in a briefcase or bag, but the handset is separated from the body and antenna for use; and portable telephones, in which a self-contained handset houses a battery and an antenna in a unit generally small enough to fit in a purse or pocket. Portable cellular telephones are the subject of this report because--unlike with car telephones and transportable telephones--their antenna is very close to the user's head when the telephone is in use. Figure 1.1 shows some typical models of portable cellular telephones and the proximity of the antenna to the user's head. (From left to right) Telephone A is an example of the first style of hand-held portable cellular telephone; it is characterized by a bulky body and a nonretractable antenna. It is heavier than most of the newer portable cellular telephones. Telephone B is an example of the "flip-style" cellular telephone; it features a mouthpiece that can be folded over the keypad and a retractable antenna for storage while not in use. Telephone C is an example of a nonflip-style telephone; it has a shorter nonretractable antenna. Telephone D is the newest style of portable cellular telephone; it is designed to transmit and receive digital signals. All devices that transmit radio signals--such as radio broadcast towers and cellular telephones--emit radio-frequency radiation. Radio-frequency radiation is electromagnetic energy emitted in the form of waves. Cellular telephones transmit voice messages by sending electronic signals from an antenna over radio waves at frequencies between 824 and 894 megahertz (MHz). These signals are a form of radio-frequency radiation. At sufficient power levels, radio-frequency radiation can heat body tissue and cause biological damage such as burns. These effects of exposure to radio-frequency radiation, called thermal effects, are immediately observable. According to the 1982 American National Standards Institute's (ANSI) standard for radiation exposure, a nongovernment standard that some federal agencies use, devices operating on 7 or less watts of power at frequencies below 1,000 MHz will not produce immediate thermal effects.Portable cellular telephones operate on well below 7 watts of power. They use up to a maximum of 0.6 watts of power--less than the amount of power required to light a flashlight bulb. However, questions have been raised about whether long-term or frequent exposures to low levels of radio-frequency radiation have other biological effects that are delayed or not immediately observed in human cells and animals. Portable cellular telephones transmit messages to a cellular transmitter tower. More power is required to transmit a signal when the telephone is farther away from a tower. For example, if a caller is located at a great distance from the tower, the telephone may use the full 0.6 watts of power to transmit the signal. However, if the caller is near the tower, the telephone may only need to use about 0.2 watts of power to transmit the signal. Cellular telephones transmit either analog or digitized voice messages, depending on the type of cellular telephone used and the service available. In analog radio communication systems, messages are transmitted by modulating, or varying, either the amplitude (height) or the frequency (number of wave crests) of the radio wave. In digital communication systems, messages are transmitted as a series of digits in rapid bursts, or pulses. These are sometimes referred to as pulse-modulated signals. An advantage of digital transmission is that it increases channel capacity by allowing several users to transmit messages over the same radio wave simultaneously. As figure 1.2 shows, analog signals are continuous radio waves, while digital signals are binary--usually represented by ones and zeroes. (See app. I for additional information on these two technologies.) The next generation of cellular communications is called personal communications services. In this system, inexpensive, pocket-sized communications devices that use digital technology will deliver voice, data, and images. They will operate at higher radio frequencies (between 1,850 and 2,200 MHz) and will likely use less power to operate than the current generation of portable cellular telephones. A personal communications device carried from place to place will enable the person to be reached at any location by dialing a single telephone number. Because personal communications services devices are still under development, it is not clear whether the antenna will be in close proximity to the user's head when the device is in use. Three federal agencies play a role in ensuring the safety of cellular telephones by sharing responsibility for regulating devices that emit radio-frequency radiation and protecting the public from exposure to radiation: the Food and Drug Administration (FDA), the Environmental Protection Agency (EPA), and the Federal Communications Commission (FCC). Under the Radiation Control for Health and Safety Act of 1968, as amended, FDA is responsible for establishing and carrying out a program, designed to protect public health and safety, to control radiation from electronic products. These responsibilities include (1) developing and administering performance standards for electronic products; (2) planning, conducting, coordinating, and supporting research, development, training, and operational activities to minimize the emissions of, and exposure of people to, unnecessary radiation from electronic products; and (3) developing, testing, and evaluating the effectiveness of procedures and techniques for minimizing exposure to electronic product radiation. FDA has the authority to set performance standards for electronic products if it determines that such standards are necessary for the public health and safety. In carrying out its responsibilities, FDA reviews and comments on industry research and also works with electronic product manufacturers when it receives complaints or has some concerns about a product but lacks sufficient scientific evidence to determine if a performance standard is necessary. Consistent with the principle of keeping exposure "as low as reasonably achievable," FDA has worked with a variety of manufacturers to reduce radiation emissions. For example, FDA has worked with manufacturers of video display terminals and police radar devices to address concerns about excessive exposure to radiation and with manufacturers of electric blankets to redesign the blankets to reduce electric and magnetic fields. Under the Federal Radiation Council Authority, transferred to EPA by Reorganization Plan No. 3 of 1970, EPA is responsible for, among other things, advising the President on radiation matters, including providing guidance for all federal agencies on formulating protective standards on radiation exposure. Upon presidential approval of EPA's recommendation on formulating standards, the pertinent federal agencies would be responsible for implementing the guidance. Under the National Environmental Policy Act of 1969 (NEPA), FCC is required to consider whether its actions--including actions that may lead to human exposure to radio-frequency radiation--in authorizing communications equipment significantly affect the quality of the human environment. The Chairman of the Subcommittee on Telecommunications and Finance, House Committee on Energy and Commerce, requested that we review (1) the status of scientific knowledge on the potential health risks of radio-frequency radiation emitted by portable cellular telephones and federal involvement in any related research and (2) the actions of the responsible federal agencies to ensure the safety of portable cellular telephones and similar communications devices. To assess the status of scientific knowledge on the health risks of portable cellular telephone use, we met with scientists who have conducted research on cellular telephones and visited industry, university, and government laboratories where research is taking place. We met with scientists and researchers in the field of electromagnetic radiation at the Department of Defense, EPA, FCC, FDA, and the National Academy of Sciences. (See app. II for a list of the researchers and scientists we consulted for this report.) We also obtained the opinions of many federal agencies with representation on the Committee on Interagency Radiation Research and Policy Coordination within the Executive Office of the President. We discussed the safety of portable cellular telephones with the president of the Bioelectromagnetics Society; the co-chairs of a subcommittee established by the Institute of Electrical and Electronics Engineers, Inc., which set the latest exposure standard for radio-frequency radiation exposure; and a vice-president of Motorola, Inc., a leader in cellular telephone research. In addition, we met with officials from the National Council on Radiation Protection and Measurements and the Cellular Telecommunications Industry Association. We collected information on regulatory actions regarding the safety of portable cellular telephones from the responsible federal agencies. We discussed with FCC officials the actions they have taken to ensure the safe use of cellular telephones. We examined FCC's records and rulemakings on the agency's process for authorizing portable cellular telephones and FCC's implementation of requirements under NEPA. We discussed with FDA officials their procedures for setting performance standards for electronic products and their plans for cellular telephones. Finally, we discussed with EPA officials, and reviewed documents on, EPA's efforts to develop federal guidance for setting standards for human exposure to radio-frequency radiation. We conducted our review between March 1993 and October 1994 in accordance with generally accepted government auditing standards. To date, neither the federal government nor the telecommunications industry has completed any studies to determine specifically if the use of portable cellular telephones poses health risks. While a few recent studies suggest that long-term exposure to low levels of radio-frequency radiation (similar to that emitted by portable cellular telephones) may prompt interactions within and among cells and organs that could possibly lead to adverse effects, other studies do not. FDA and EPA agree that the research completed to date is insufficient to determine whether using portable cellular telephones presents risks to human health. The two basic sources of evidence of the relationship between a potential risk factor, such as exposure to radio-frequency radiation, and a disease are epidemiological studies (statistical studies that relate the occurrence of a disease to the characteristics of people and their environment) and laboratory studies on animals and biological tissue samples. According to FDA and the National Science Foundation, both types of research are needed to determine whether cellular telephone use poses any health risks. To date, no epidemiological studies have been conducted of human exposure to radio-frequency radiation as a result of using cellular telephones. Some recent biological and behavioral laboratory studies on animals and cell samples have provided information on the potential health effects posed by low-level exposure to radio-frequency radiation, although none has examined radiation exposure specifically from cellular telephones. FDA has questioned the interpretation, significance, or applicability of the studies' findings to cellular telephones. According to EPA, the significance of recent research suggesting a potential for adverse health effects cannot be determined until these studies have been independently confirmed. Because of the limitations of the research, FDA and EPA agree that more research would be necessary to determine whether portable cellular telephones pose a human health risk. The following are examples of some research results that scientists say have raised questions about exposure to low-level radiation similar to that emitted by portable cellular telephones, especially pulse-modulated radiation, which is comparable to digital signals. (See app. III for more information about some of these studies and app. IV for a list of other relevant studies.) A University of Washington study found that rats had difficulty learning a maze exercise after 45 minutes of exposure to low-level, pulsed radio-frequency radiation near the frequencies that personal communications devices will use. The researchers concluded that exposure to low-power radio-frequency radiation appears to decrease certain chemical agents in the rodents' central nervous system essential for spatial learning. In a 1983 study of cells from the immune system, the researchers found that the effectiveness of certain immune system cells in fighting off tumor cells was temporarily diminished after only 4 hours of exposure to low-power, pulsed radio-frequency radio signals. The researchers found that the effectiveness of the immune system cells was diminished most when the radio-frequency radiation was pulse-modulated 60 times per second, slightly more than the 50 times per second that digital cellular telephone signals "pulse." (See app. I for information on digital signals.) In a 1991 study, the researchers found that low-power radio-frequency radiation may facilitate the development of cancer in the presence of other substances known to cause cancer. They found that when cells were exposed for 24 hours to low-level, pulsed radio-frequency radiation alone, there was no effect on the cells' survival or transformation into tumor cells. However, when the cells were treated with a tumor-promoting chemical, exposure to radio-frequency radiation significantly enhanced the transformation of the cells into tumor cells. Although these and a few other studies suggest that exposure to low levels of radio-frequency radiation may cause effects in animals and certain cell systems, other studies do not. For example, in a 1993 study, researchers injected brain tumor cells into rats and exposed them to low levels of radio-frequency radiation--near the frequency that cellular telephones use--that was either continuous (as in analog technology) or pulsed 50 times per second (as in digital technology). The rats were exposed for 5 days a week until clinical signs of tumor development occurred. Researchers found no evidence that radio-frequency radiation treatment altered the course of tumor development in the rats. Several federal agencies sponsor radiation research, but none has sponsored or performed any studies on portable cellular telephones. Of 15 federal departments and agencies we contacted, only 4 had conducted, funded, or planned research on radio-frequency radiation that these agencies said may be relevant to questions about the safety of cellular telephones. These four were FDA, the National Institutes of Health's National Cancer Institute (NCI), the Department of Commerce's National Institute of Standards and Technology, and the Department of Defense. Only NCI has planned research that specifically focuses on portable cellular telephone use. FDA is not performing or contracting for research specifically addressing the power levels or frequencies of cellular telephones. However, FDA officials said that some research the agency supports may be relevant to safety questions about these telephones. According to officials, FDA-supported research at the Johns Hopkins Applied Physics Laboratory found that permanent damage occurred to the eyes of test animals when the animals were exposed to low-level microwave radiation. According to one of the researchers, this effect was enhanced when the test animals were treated with drugs commonly used in glaucoma treatment and exposed to radio-frequency radiation at power levels several times lower than those typically emitted by portable cellular telephones. In 1993, NCI launched an epidemiological study to assess the relationship between the use of cellular telephones, among other variables, and the brain cancer newly diagnosed in 800 patients. An NCI official expects this study to be completed between 1998 and 1999. In addition, NCI has planned other epidemiological studies to determine whether (1) exposure to radio-frequency radiation, among other possible risk factors, is associated with an increased risk of brain tumors, and (2) the incidence of cancer can possibly be linked with the use of portable cellular telephones. These studies involve comparing the names on lists of cellular telephone users in New York State with the names on New York's statewide cancer registry. According to NCI, these studies should be initiated during 1995. However, it is important to note that epidemiological studies do not prove causality between two factors; they merely show that two factors, such as exposure to radio-frequency radiation and a disease such as cancer, tend to occur together. In 1990, NIST measured the amount of radiation emitted by portable police radios operated at frequencies near those used by portable cellular telephones. NIST researchers found that the strength of the electric fields emanating from the police radios exceeded the exposure levels recommended as safe under the 1982 ANSI standard. However, this study did not attempt to assess whether exposure to these electric field emissions could present risks to human health. DOD is sponsoring research into the biological effects of radio-frequency radiation but not radiation from portable cellular telephones. However, with the anticipated proliferation of new telecommunications devices, DOD supports continued work to characterize and measure the absorption and distribution of radio-frequency energy in the human body. The Department's official position is that harmful effects will not occur as a result of exposure to portable cellular telephones as long as the amount of radio-frequency energy absorbed by the human body is maintained at or below permissible levels. DOD relies on the "permissible levels" recommended by the 1982 ANSI standard, which states that devices operating on 7 watts of power or less, like portable cellular telephones, are not likely to exceed permissible levels. We identified two major efforts by the cellular telephone industry to specifically address the safety of portable cellular telephones: one sponsored by Motorola, Inc., and one proposed by the Cellular Telecommunications Industry Association (CTIA), a cellular telephone industry association. In 1991, Motorola, Inc., entered into a multiyear contract with a researcher--considered by many in the scientific community to be the most eminent U.S. researcher in this area--to conduct a series of laboratory studies on radio-frequency radiation from portable cellular telephones. These studies are examining the effects of analog and digital signals from these telephones on animals and cells but do not include studies of effects on humans. Results from the animal studies are anticipated within the year. In January 1993, in response to public concern that portable cellular telephones may cause health risks, including brain cancer, CTIA announced an initiative to spend from $15 million to $25 million over the next 3 to 5 years to fund studies addressing the safety of portable cellular telephones. In May 1993, CTIA, along with other members of the cellular telephone industry, established a Science Advisory Group on Cellular Telephone Safety. The science advisory group's planned research agenda includes multidisciplinary studies involving epidemiology, cell cultures, test animals, and genetic research. The research will examine the effects of exposure to analog and digital radio-frequency radiation at the power levels and frequencies that cellular telephones use and that personal communications devices will use. The research agenda also includes scientific peer review of proposed research projects by a separate board coordinated through the Harvard University Center for Risk Analysis. The chairman of the science advisory group also informed us that CTIA funds the group's activities on a monthly basis; each month the chairman submits an estimate of costs for the coming month, and CTIA provides money for that month's research activities. The chairman explained that the peer review board will evaluate and recommend research proposals for funding. According to the chairman, payment for peer review activities will be provided through a blind trust established by the advisory group. The chairman stated that the purpose of creating the blind trust for peer review was to provide independence. However, the science advisory group does not enjoy similar financial independence. The direct funding of the research by CTIA raises questions about the objectivity and credibility of the research effort. In September 1994, the chairman of the science advisory group told us that CTIA would consider giving up direct financial control by putting the research funds into a blind trust fund. In September 1993, FDA told the chairman of the science advisory group that the agency would like to provide appropriate support within its means to assist in ensuring that the industry-sponsored research program was successful and credible. As a regulatory agency, FDA considers that reviewing research data and commenting on it is part of its job. However, the agency is reluctant to endorse research that is not yet completed resulting from programs it has not helped direct. Although the science advisory group has sought input from federal agencies and has had informal discussions with officials at FDA and EPA, no mechanism has been established for federal participation in or comments on the research program. However, in September 1994 the advisory group's chairman told us that he was open to any role for federal agencies to increase the acceptance and usefulness of the research program. FDA and EPA believe that there is insufficient evidence to determine whether exposure to low-level radio-frequency radiation presents a human health risk. Some recent studies have found that this radiation can produce biological effects. However, because none of these studies examined radio-frequency radiation specifically from portable cellular telephones, FDA and EPA agree that the value of the studies' findings is limited in determining whether using portable cellular telephones poses risks to human health. FDA and National Science Foundation officials said that both epidemiological and laboratory research are needed to determine whether portable cellular telephones present risks to users. The federal government and private industry are beginning to undertake some of this needed research. NCI (the only federal agency performing research on the safety of cellular telephones) has started an epidemiological study to determine if there is a relationship between cellular telephone use and cancer. But epidemiological studies alone cannot conclusively establish whether using portable cellular telephones poses health risks. Motorola is funding a series of laboratory studies on the effects of radiation from portable cellular telephones on animals and cells but no epidemiological studies observing the effects on humans. The cellular telephone industry is sponsoring a research initiative through a science advisory board that includes both types of research that federal officials say is needed. However, direct funding of this research by CTIA--an industry association--raises questions about the independence and objectivity of the science advisory group's planned research program. The chairman of the science advisory group has had informal discussions with federal agencies and has expressed a willingness to accept a greater federal role to increase the independence and objectivity of the research. Such a role could also increase the usefulness of the research results to federal regulators. To date, neither the science advisory group nor any of the federal agencies have attempted to define what this role might entail. Given the current state of scientific knowledge, FDA and EPA have not had a basis for taking regulatory actions on portable cellular telephones. However, FDA, EPA, and FCC are undertaking or considering limited activities that could affect the use of such telephones. FDA is working with cellular telephone manufacturers on possible design changes for these telephones and improved instructions for use. EPA is sponsoring a study on the status of research on the effects of exposure to low levels of radio-frequency radiation to determine if protective guidance is needed on exposure to radiation from devices such as cellular telephones. FCC has proposed adopting the revised ANSI standard in its environmental rules and, as a result, may no longer exempt portable cellular telephones from routine radiation evaluation. An FDA official told us that FDA has primary responsibility for responding if communications devices, such as portable cellular telephones, pose a health risk. Although FDA says there is no evidence that cellular telephones are harmful, an FDA official stated that recent research on exposure to low-level radio-frequency radiation from other sources has the agency concerned about the possible adverse health effects of this type of radiation. In carrying out its responsibility for controlling public exposure to radiation from electronic products, FDA follows the principle that exposure to radiation should be kept to a level as low as can reasonably be achieved. In early 1993, following allegations about the safety of portable cellular telephones, FDA met with the cellular telephone industry, including industry associations and cellular telephone manufacturers. The purpose of these meetings was to discuss potential problems and their solutions. As a result of these meetings, cellular telephone manufacturers agreed to examine all practical routes to reduce exposure, including possibly redesigning the telephones and providing users with adequate instructions for proper use. The goal of redesigning these telephones would be to change the placement of the antenna so that this source of radiation is farther from the user's head. According to an FDA official, instructions for use should include practical information on how users can limit their exposure. Although the industry representatives who met with FDA agreed to set up committees to work on these topics, as of October 1994, they had not reported back to FDA on the status of their efforts. Meanwhile, FDA says that if individuals are concerned about avoiding even potential risks, they could consider holding lengthy conversations on conventional telephones and reserving the hand-held cellular telephones for shorter conversations or for situations in which conventional telephones are not available. FDA does not believe it is justified in setting performance standards for cellular telephones at this time. The formal process for setting performance standards for electronic products is time-consuming and expensive, and FDA will not set them without clear scientific evidence that an electronic product poses a hazard to human health. FDA does not have such evidence for portable cellular telephones. In addition, an FDA official stated that the agency has received no reports through its complaint process of radiation injuries resulting from the use of cellular telephones. FDA officials said that the agency has invested its limited research resources into higher-priority work, such as medical devices that expose individuals to much higher levels of radio-frequency radiation than cellular telephones. EPA is responsible for advising the President on radiation matters, including developing federal guidance on radiation protection that can be used by other federal regulatory agencies. For example, FCC could use such guidance in approving communications equipment and FDA in determining if performance standards are needed for devices like portable cellular telephones. EPA officials told us that the agency expects to issue, by the end of 1994, recommended maximum permissible levels of exposure to radio-frequency radiation to protect people from immediate thermal effects. However, EPA officials also told us that because research on exposure to lower levels of radio-frequency radiation is inconclusive, the agency cannot issue any guidance for these exposures. To gain a better understanding of the status of research on the effects of long-term exposure to low levels of radiation and future research needs, EPA has funded a 2-year study by the National Council on Radiation Protection and Measurements, a nonprofit corporation chartered by the Congress. EPA officials expect this work to provide information that will be helpful for understanding whether the agency needs to provide protective guidance on exposure to low levels of radiation. EPA's recent activities on radiation guidance followed a 1992 report by the agency's Science Advisory Board. The board recommended that EPA complete a process to provide guidance that it began in the late 1970s. As part of this process, EPA requested comments on four alternative approaches for controlling public exposure to radio-frequency radiation.However, EPA discontinued its efforts to issue guidance in 1988 when it did not obtain agreement from federal agencies on which approach it should take. FCC is responsible for regulating cellular telephone service and authorizing the equipment used in providing that service. NEPA requires all federal agencies to consider whether their actions significantly affect the human environment. In carrying out its responsibilities under NEPA, FCC formulated environmental rules that require the Commission to consider whether its actions--including actions that may lead to human exposure to radio-frequency radiation--significantly affect the quality of the human environment. FCC does not consider itself a health agency with the expertise to determine what levels of radiation exposure are unsafe. Instead, it relies on health and radiation expertise found in other federal agencies, such as FDA and EPA. According to an FCC official, FCC considers FDA the principle agency responsible for determining the health implications of using specific devices such as cellular telephones and for issuing performance standards. Similarly, FCC would prefer to rely on EPA for information on exposure to radio-frequency radiation. Because there are no federal guidelines on radiation exposure, in 1985 FCC incorporated the 1982 ANSI exposure standard into its environmental rules. This standard applies to higher-powered transmitting equipment, such as radio and television broadcast towers, but excludes devices that operate on or below 7 watts of power at frequencies below 1,000 MHz. FCC does not require routine environmental evaluation of portable cellular telephones in authorizing their use because they operate on less than 1 watt of power. However, as a safeguard, FCC's rules permit any interested party, including FCC, to move that the exempted equipment be required to undergo environmental evaluation. Thus far, no such motion has been made about portable cellular telephones. In addition, the Commission considers portable cellular telephones safe under this standard. (See app. V for more information on the evolution of FCC's environmental rules and rules on cellular telephone service.) In 1993, FCC proposed adopting the revised version of the ANSI standard to update its environmental rules. According to an FCC official, the revised version is more stringent than the older version, and, for the first time since FCC began regulating cellular telephone service, portable cellular telephones could be subject to environmental evaluation. Until this new standard is adopted, cellular telephones will continue to be excluded from routine environmental evaluation for public exposure to radiation. In contrast, FCC has already decided that it will require certain emerging hand-held personal communications services devices to comply with the revised ANSI standard, pending its adoption of this standard in its environmental rules. FDA, EPA, and FCC are undertaking limited activities that may affect the use of portable cellular telephones. Without additional scientific information, FDA and EPA have no basis for taking regulatory actions. The federal and industry research discussed in chapter 2 could provide information that would help these agencies determine whether any regulatory actions are needed. We recommend that the Commissioner of the Food and Drug Administration and the Administrator of the Environmental Protection Agency, in coordination with the Chairman of the Federal Communications Commission, work with the industry's Science Advisory Group on Cellular Telephone Safety to maximize the usefulness, independence, and objectivity of its planned research initiative. This effort could include participating in the selection of research proposals to determine whether they meet federal research standards and reviewing research results. This effort would be in addition to ongoing and planned federal research. As requested, we did not obtain written agency comments on a draft of this report. However, we discussed the information in the report with officials from FDA's Office of Science and Technology, including the Chief of the Radiation Biology Branch; EPA's Office of Radiation and Indoor Air, including the Electromagnetic Fields Team Leader in the Radiation Studies Division; and FCC's Office of Engineering and Technology, including the Chief Engineer. These officials generally agreed that the information was accurate. The FDA and EPA officials agreed that the current state of scientific knowledge is insufficient to determine whether cellular telephones pose health risks. The agencies assisted us in characterizing the scientific studies and brought us up to date on their most recent activities related to radio-frequency radiation exposure and cellular telephones. The FDA and EPA officials said they plan to review the industry's completed research. We also asked officials from the National Cancer Institute's Division of Cancer Etiology, the National Institute on Standards and Technology's Management and Organization Division, and the Department of Defense's Office of the Undersecretary of Defense for Acquisitions and Technology to review the information in the sections of this report pertaining to their agency. These officials generally agreed that the information provided in this report was accurate, and we incorporated their comments where appropriate.	Pursuant to a congressional request, GAO reviewed the biological effects of radio-frequency radiation emitted by portable cellular telephones and the federal government's regulatory actions to ensure the safety of these telephones. GAO found that: (1) no research has been completed on long-term human exposure to low levels of radiation from portable cellular telephones, and research findings on exposure to other sources of low-level radio-frequency radiation are inconclusive; (2) existing research does not provide enough evidence to determine whether portable cellular telephones pose a risk to human health; (3) although the cellular telecommunications industry is planning to carry out both epidemiological and laboratory studies on the effects of portable cellular telephone use on human health, federal regulators need to ensure that these studies are carried out objectively; (4) the Food and Drug Administration (FDA) is working with cellular telephone manufacturers to minimize cellular telephone users' exposure to radiation; (5) the Environmental Protection Agency (EPA) is assessing the status of scientific knowledge on prolonged exposure to radio-frequency radiation; and (6) the Federal Communications Commission (FCC) has relied on a 1982 American National Standards Institute (ANSI) safety standard to regulate cellular telephones, but is considering adopting the revised version of the ANSI standard for equipment it approves for use.	6,817	285
Established in 1956, DI is an insurance program that provides benefits to workers who are unable to work because of severe long-term disability. In 2001, DI provided $54.2 billion in cash benefits to 6.1 million disabled workers. Workers who have worked long enough and recently enough are insured for coverage under the DI program. DI beneficiaries receive cash assistance and, after a 24-month waiting period, Medicare coverage. Once found eligible for benefits, disabled workers continue to receive benefits until they die, return to work and earn more than allowed by program rules, are found to have medically improved to the point of having the ability to work, or reach full retirement age (when disability benefits convert to retirement benefits). To help ensure that only eligible beneficiaries remain on the rolls, SSA is required by law to conduct continuing disability reviews for all DI beneficiaries to determine whether they continue to meet the disability requirements of the law. SSI, created in 1972, is an income assistance program that provides cash benefits for disabled, blind, or aged individuals who have low income and limited resources. In 2001, SSI provided $19 billion in federal cash benefits to 3.8 million disabled and blind individuals age 18-64. Unlike the DI program, SSI has no prior work requirement. In most cases, SSI eligibility makes recipients eligible for Medicaid benefits. SSI benefits terminate for the same reasons as DI benefits, although SSI benefits also terminate when a recipient no longer meets SSI income and resource requirements (SSI benefits do not convert to retirement benefits when the individual reaches full retirement age). The law requires that continuing disability reviews be conducted for some SSI recipients for continuing eligibility. The Social Security Act's definition of disability for adults under DI and SSI is the same: an individual must have a medically determinable physical or mental impairment that (1) has lasted or is expected to last at least 1 year or to result in death and (2) prevents the individual from engaging in substantial gainful activity. Moreover, the definition specifies that for a person to be determined to be disabled, the impairment must be of such severity that the person not only is unable to do his or her previous work but, considering his or her age, education, and work experience, is unable to do any other kind of substantial work that exists in the national economy. SSA regulations and guidelines provide further specificity in determining eligibility for DI and SSI benefits. For instance, SSA has developed the Listing of Impairments (the Medical Listings) to describe medical conditions that SSA has determined are severe enough ordinarily to prevent an individual from engaging in substantial gainful activity. SSA has also developed a procedure to assess applicants who do not have an impairment that meets or equals the severity of the Medical Listings. The procedure helps determine whether an applicant can still perform work done in the past or other work that exists in the national economy. While not expressly required by law to update the criteria used in the disability determination process, SSA has stated that it would update them to reflect current medical criteria and terminology. Over the years, SSA has periodically taken steps to update its Medical Listing. The last general update to the Medical Listing occurred in 1985. In 2000, the most common impairments among DI's disabled workers were mental disorders and musculoskeletal conditions (see fig.1). These two conditions also were the fastest growing conditions since 1986, increasing by 7 and 5 percentage points, respectively. In 2000, the most common impairments among the group of SSI blind and disabled adults age 18-64 were mental disorders and mental retardation (see fig. 2). Mental disorders was the fastest growing condition among this population since 1986, increasing by 9 percentage points. Scientific advances, changes in the nature of work, and social changes have generally enhanced the potential for people with disabilities to work. Medical advancements and assistive technologies have given more independence to some individuals. Moreover, the economy has become more service- and knowledge-based, presenting both opportunities and some new challenges for people with disabilities. Finally, social changes have altered expectations for people with disabilities. For instance, the Americans with Disabilities Act fosters the expectation that people with disabilities can work and have the right to work. Recent scientific advances in medicine and assistive technology and changes in the nature of work and the types of jobs in our national economy have generally enhanced the potential for people with disabilities to perform work-related activities. Advances in medicine have led to a deeper understanding of and ability to treat disease and injury. Medical advancements in treatment (such as organ transplantations), therapy, and rehabilitation have reduced the functional limitations of some medical conditions and have allowed individuals to live and work with greater independence. Also, assistive technologies--such as advanced wheelchair design, a new generation of prosthetic devices, and voice recognition systems--afford greater capabilities for some people with disabilities than were available in the past. At the same time, the nature of work has changed in recent decades as the national economy has moved away from manufacturing-based jobs to service- and knowledge-based employment. In the 1960s, earning capacity became more related to a worker's skills and training than to his or her ability to perform physical labor. Following World War II and the Korean Conflict, advancements in technology, including computers and automated equipment, reduced the need for physical labor. The goods-producing sector's share of the economy--mining, construction, and manufacturing--declined from about 44 percent in 1945 to about 18 percent in 2000. The service-producing industry's share, on the other hand--such areas as wholesale and retail trade; transportation and public utilities; federal, state and local government; and finance, insurance, and real estate--increased from about 57 percent in 1945 to about 72 percent in 2000. Although there may be more an individual with a disability can do in today's world of work than was available when the DI and SSI programs were first designed, today's work world is not without demands. Some jobs require standing for long hours, and other jobs, such as office work, require social abilities. These characteristics can pose particular challenges for some persons with certain physical or mental impairments. Moreover, other trends--such as downsizing and the growth in contingent workers--can limit job security and benefits, like health insurance, that most persons with disabilities require for participation in the labor force. Whether these changes make it easier or more difficult for a person with a disability to work appears to depend very much on the individual's impairment and other characteristics, according to experts. Social change has promoted the goals of greater inclusion of and participation by people with disabilities in the mainstream of society, including adults at work. For instance, over the past 2 decades, people with disabilities have sought to remove environmental barriers that impede them from fully participating in their communities. Moreover, the Americans with Disabilities Act supports the full participation of people with disabilities in society and fosters the expectation that people with disabilities can work and have the right to work. The Americans with Disabilities Act prohibits employers from discriminating against qualified individuals with disabilities and requires employers to make reasonable workplace accommodations unless it would impose an undue hardship on the business. The disability criteria used in the DI and SSI disability programs to help determine who is qualified to receive benefits have not been fully updated to reflect these advances and changes. SSA is currently in the midst of a process that began around the early 1990s to update the medical criteria they use to make eligibility decisions, but the progress is slow. Moreover, some changes resulting from treatment advances and assistive technologies are not fully incorporated into the decision-making process due to program design. In addition, the disability criteria have not incorporated labor market changes. In determining the effect that impairments have on individuals' earning capacity, SSA continues to use outdated information about the types and demands of jobs in the economy. SSA's current effort to update the disability criteria began in the early 1990s. Between 1991 and 1993, SSA published for public comment the changes it was proposing to make to 7 of the14 body systems in its Medical Listings. By 1994, the proposed changes to 5 of these 7 body systems were finalized. The agency's efforts to update the Medical Listings were curtailed in the mid-1990s due to staff shortages, competing priorities, and lack of adequate research on disability issues. SSA resumed updating the Medical Listings in 1998. Since then, SSA has taken some positive steps in updating portions of the medical criteria it uses to make eligibility decisions, although progress is slow. As of early 2002, SSA has published the final updated criteria for 1 of the 9 remaining body systems not updated in the early 1990s (musculoskeletal) and a portion of a second body system (mental disorders). SSA also plans to update again the 5 body systems that were updated in the early 1990s. In addition, SSA has asked the public to comment on proposed changes for several other body systems. After reviewing the schedule and timing for the revisions, SSA recently pushed back the completion date for publishing proposed changes for all remaining body systems to the end of 2003. The revised schedule does not list target dates, with one exception, for submitting changes for final clearance to the Office of Management and Budget. SSA's slow progress in completing the updates could undermine the purpose of incorporating medical advances into its medical criteria. For example, the criteria for musculoskeletal conditions--a common impairment among persons entering DI--were updated in 1985. Then, in 1991, SSA began developing new criteria and published its proposed changes in 1993 but did not finalize the changes until 2002; therefore, changes made to the musculoskeletal criteria in 2002 were essentially based on SSA's review of the field in the early 1990s. SSA officials told us that in finalizing the criteria, they reviewed the changes identified in the early 1990s and found that little had taken place since then to warrant changes to the proposed criteria. However, given the advancements in medical science since 1991, it may be difficult for SSA to be certain that all applicable medical advancements are in fact included in the most recent update. SSA has made various types of changes to the Medical Listings thus far. As shown in table 1, these changes, including the proposed changes released to the public for comment, add or delete qualifying conditions; modify the criteria for certain physical or mental conditions; and clarify and provide additional guidance in making disability decisions. Examples Remove peptic ulcer.Add inflammatory bowel disease by combining two existing conditions already listed: chronic ulcerative and regional enteritis. Expand the types of allowable imaging techniques. Reduce from three to two in the number of difficulties that must be demonstrated to meet the listings for a personality disorder.Remove discussion on distinction between primary and secondary digestive disorders resulting in weight loss and malnutrition. Expand guidance about musculoskeletal "deformity." Rationales Advances in medical and surgical management have reduced severity. Reflect advances in medical terminology. The Medical Listings previously referred to x-ray evidence. With advancements in imaging techniques, SSA will also accept evidence from, for example, computerized axial tomography (CAT) scan and magnetic resonance imaging (MRI) techniques. Specific rationale not mentioned. Distinction not necessary to adjudicate disability claim. Clarify that the term refers to joint deformity due to any cause. Despite these changes, program design issues have limited the extent that advances in medicine and technology have been incorporated into the DI and SSI disability decision-making criteria. The statutory and regulatory design of these programs limits the role of treatment in deciding who is disabled. Unless an individual has been prescribed treatment, SSA does not consider the possible effects of treatment in the disability decision, even if the treatment could make the difference between being able and not being able to work. Thus, treatments that can help restore functioning to persons with certain impairments may not be factored into the disability decision for some applicants. For example, medications to control severe mental illness, arthritis treatments to slow or stop joint damage, total hip replacements for severely injured hips, and drugs and physical therapies to possibly improve the symptoms associated with multiple sclerosis are not automatically factored into SSA's decision making for determining the extent that impairments affect people's ability to work. Additionally, this limited approach to treatment raises an equity issue: Applicants whose treatment allows them to work could be denied benefits while applicants with the same condition who have not been prescribed treatment could be allowed benefits. As with treatment, the benefits of innovations in assistive technologies-- such as advanced prosthetics and wheelchair designs--have not been fully incorporated into DI and SSI disability criteria because the design of these programs does not recognize these advances in disability decision making. For example, SSA does not require an applicant who lost a hand to use a prosthetic before the agency makes its decision about the impact of this condition on the ability to engage in substantial gainful activities. For an applicant who does not have an impairment that meets or equals the severity of the Medical Listings, SSA evaluates whether the individual is able to work despite his or her limitations. Specifically, an individual who is unable to perform his or her previous work and other work in the labor market is awarded benefits. SSA relies upon the Department of Labor's Dictionary of Occupational Titles (DOT) as its primary database to help make this determination. However, Labor has not updated DOT since 1991 and does not plan to do so. Although Labor has been working on a replacement for the DOT called the Occupational Information Network (ONET) since 1993, Labor and SSA officials recognize that ONET cannot be used in its current form in the DI and SSI disability determination process. The ONET, for example, does not contain SSA-needed information on the amount of lifting or mental demands associated with particular jobs. The agencies have discussed ways that ONET might be modified or supplemental information collected to meet SSA's needs, but no definitive solution has been identified. Absent such changes to the O*NET, SSA officials have indicated that an entirely new occupational database could be needed to meet SSA's needs, but such an effort could take many years to develop, validate, and implement. Meanwhile, as new jobs and job requirements evolve in the national economy, SSA's reliance upon an outdated database further distances the agency from the current market place. In order to incorporate the medical, economic, and social advances and changes into the programs' disability criteria, some steps can be taken within the existing program design, while others would require more fundamental changes. Within the context of the current statutory and regulatory framework, SSA will need to continue to update the medical portion of the disability criteria and vigorously expand its efforts to examine labor market changes. However, in addition, policymakers and agency officials could look beyond the traditional concepts that underlie the DI and SSI programs to re-examine the core elements of federal disability programs. This broader approach would raise a number of significant policy issues, and more information is needed to address them. To this end, approaches taken by private disability insurers offer useful insights. Within the context of the programs' existing statutory and regulatory design, SSA will need to further incorporate advances and changes in medicine and the labor market. That is, SSA should continue to update the criteria used to determine which applicants have physical and mental conditions that limit their ability to work. As we noted above, SSA began this type of update in the early 1990s, although the agency's efforts have focused much more on the medical portion than labor market issues. In addition to continuing the medical updates, SSA will need to vigorously expand its efforts to more closely examine labor market changes. SSA's results could yield updated information used to make decisions about whether or not applicants have the ability to perform their past work or any work that exists in the national economy. More fundamentally, the recent scientific advances and labor market changes discussed earlier raise issues about the programs' basic design, goals, and orientation in an economy increasingly different from that which existed when these programs were first designed. Whereas the programs currently are grounded in assessing and providing benefits based on individuals' incapacities, fully incorporating recent advances and changes could result in SSA assessing individuals with physical and mental conditions with a focus on their capacity to work and then providing them with, or helping them obtain, needed assistance to improve their capacity to work. Moreover, reorienting programs in this direction is consistent with increased expectations of people with disabilities and the integration of people with disabilities into the workplace, as reflected in the Americans with Disabilities Act. We have recommended in prior reports that SSA place a greater priority on work, design more effective means to more accurately identify and expand beneficiaries' work capacities, and develop legislative packages for those areas where the agency does not have legislative authority to enact change. However, for people with disabilities who do not have a realistic or practical work option, long-term cash support would remain the best option. In reexamining the fundamental concepts underlying the design of the DI and SSI programs, approaches used by other disability programs may offer some valuable insights. For example, our prior review of three private disability insurers shows that they have fundamentally reoriented their disability systems toward building the productive capacities of people with disabilities, while not jeopardizing the availability of cash benefits for people who are not able to return to the labor force. These systems have accomplished this reorientation while using a definition of disability that is similar to that used by SSA's disability programs. However, it is too early to fully measure the effect of these changes. In these private disability systems, the disability eligibility assessment process evaluates a person's potential to work and assists those with work potential to return to the labor force. This process of identifying and providing services intended to enhance a person's productive capacity occurs early after disability onset and continues periodically throughout the duration of the claim. In contrast, SSA's eligibility assessment process encourages applicants to concentrate on their incapacities, and return-to-work assistance occurs, if at all, only after an often lengthy process of determining eligibility for benefits. SSA's process focuses on deciding who is impaired sufficiently to be eligible for cash payments, rather than on identifying and providing the services and supports necessary for making a transition to work for those who can. While cash payments are important to individuals, the advances and changes discussed in this testimony suggest the option to shift the disability programs' priorities to focus more on work. Reorienting the DI and SSI programs would have implications on their core elements--eligibility standards, the benefits structure, and the access to and cost of return-to-work assistance. We recognize that re-examining the programs at the broader program level raises a number of profound policy questions, including the following: Program design and benefits offered - Would the definition of disability change? Would some beneficiaries be required to accept assistance to enhance work capacities as a precondition for benefits versus relying upon work incentives, time-limited benefits, or other means to encourage individuals to maximize their capacity to work? What can SSA accomplish through the regulatory process and what requires legislative action? Accessibility and cost - Are new mechanisms needed to provide sufficient access to needed services? In the case of DI and SSI, what is the impact on the ties with the Medicare and Medicaid programs? Who will pay for the medical and assistive technologies and will beneficiaries be required to defray costs? Would the cost of providing treatment and assistive technologies in the disability programs be higher than cash expenditures paid over the long-term? Will net costs show that some expenditures could be offset with cost savings by paying reduced benefits?	Since the Disability Insurance (DI) and Supplemental Security Income (SSI) programs began, much has changed and continues to change in medicine, technology, the economy, and societal views and expectations of people with disabilities. GAO found that scientific advances, changes in the nature of work, and social changes have generally enhanced the potential for people with disabilities to work. Medical advances, such as organ transplantation, and assistive technologies, such as advances in wheelchair design, have given more independence to some individuals. At the same time, a service- and knowledge-based economy has opened new opportunities for people with disabilities, and societal changes have fostered the expectation that people with disabilities can work and have the right to work. GAO further found that DI and SSI disability criteria have not kept pace with these advances and changes. Depending on the claimant's impairment, decisions about eligibility benefits can be based on both medical and labor market criteria. Finally, some steps to incorporate these advances and changes can be taken within the existing programs' design, but some would require more fundamental changes.	4,235	226
U.S. interests in South Korea involve a wide range of security, economic, and political concerns. The United States has remained committed to maintaining peace on the Korean Peninsula since the 1950 to 1953 Korean War. Although most of the property that the United States once controlled has been returned to South Korea, the United States maintains about 37,000 troops in South Korea, which are currently scattered across 41 troop installations and an additional 54 small camps and support sites. According to U.S. Forces Korea officials, many of the facilities there are obsolete, poorly maintained, and in disrepair to the extent that the living and working conditions in South Korea are considered to be the worst in the Department of Defense (DOD). We observed many of these conditions during our visits to U.S. facilities and installations in South Korea. While improvements have been made in recent years, U.S. military personnel still use, as shown in figure 1, some Korean War-era Quonset huts for housing. Improving overall facilities used by the United States in South Korea will require an enormous investment. At the same time, rapid growth and urbanization in South Korea during the last several decades have created a greater demand for land and increased encroachments on areas used by U.S. forces. Consequently, many of the smaller U.S. camps and training areas that were originally located in isolated areas are now in the middle of large urban centers, where their presence has caused friction with local residents; urban locations also limit the ability of U.S. forces to train effectively. Figure 2 shows the boundaries of Yongsan Army Garrison and other U.S. installations that have become encircled by the city of Seoul. Historically, DOD reports difficulties filling its military personnel assignments in South Korea, which are generally 1-year hardship tours in which 90 percent of the assigned military personnel are unaccompanied by their families. A DOD survey conducted in 2001 found that Army and Air Force personnel considered South Korea as the least desirable assignment and that many soldiers were avoiding service in South Korea by various means, including retirement and declining to accept command assignments. U.S. Forces Korea has wanted to make South Korea an assignment of choice by improving living and working conditions, modifying assignment policies to increase accompanied tours to 25 percent by 2010, and reducing the out-of-pocket expenses for personnel to maintain a second household in South Korea. To address these problems, military officials from the United States and South Korea signed the Land Partnership Plan on March 29, 2002. The LPP, as originally approved, was described as a cooperative U.S.-South Korean effort to consolidate U.S. installations and training areas, improve combat readiness, enhance public safety, and strengthen the U.S.-South Korean alliance. The United States views the plan as a binding agreement under the Status of Forces Agreement, not as a separate treaty. However, U.S. Forces Korea officials told us that South Korea views the plan as a treaty requiring approval by the South Korea National Assembly and that approval occurred on October 30, 2002. The three components of the plan are as follows: Installations--establishes a timeline for the grant of new land, the construction of new facilities, and the closure of installations. The plan calls for the number of U.S. military installations to drop from 41 to 23. To accomplish this, the military will close or partially close some sites, while enlarging or creating other installations. Training areas--returns training areas in exchange for guaranteed time on South Korean ranges and training areas. The plan calls for the consolidation and protection of remaining U.S. training areas. Safety easements--acknowledges that South Korean citizens are at risk of injury or death in the event of an explosion of U.S. weapons, provides a prioritized list of required safety easements, and establishes a procedure and timeline for enforcing the easements. The costs of the LPP must be shared between the United States and South Korea. U.S. funding is provided from the military construction and operations and maintenance accounts and from nonappropriated funds. The South Korean government provides host nation funds and funding obtained from sales of property returned to South Korea by the United States. As a general rule, the United States funds the relocation of units from camps that it wishes to close, and South Korea funds the relocation of units from camps South Korea has asked to be closed. The execution of the LPP is shown on figure 3. The target date for the completion of the LPP was December 31, 2011, although the timetable and the scale could be adjusted by mutual agreement. More information on the plan as originally envisioned is included in appendix II. U.S. military infrastructure funding in South Korea involves multiple organizations and sources. It involves 10 organizations from the United States (Army, Navy, Air Force, Marine Corps, Special Operations, Army and Air Force Exchange Service, Defense Logistics Agency, Department of Defense Dependents School, Medical Command, and Defense Commissary Agency), as well as construction funded by South Korea. These organizations provide funding for military construction using five different sources of money--U.S. military construction funds, U.S. operations and maintenance funds, U.S. nonappropriated funds, South Korea-funded construction, and South Korea combined defense improvement program funding. Figure 4 shows the sources of funding for $5.6 billion that, until recently, was planned for infrastructure construction costs for U.S. installations in South Korea during the 2002 through 2011 time frame. Most of the approximately $2 billion projected cost of implementing the plan was expected to be paid for by the government of South Korea, with much of it financed through land sales from property returned by the United States. Figure 5 shows all planned funding sources and amounts for the plan. More information on funding and sequencing actions associated with the LPP, as originally approved, is included in appendix II. A wide array of military operations-related facilities (command and administrative offices, barracks, and maintenance facilities) and dependent-related facilities and services (family housing units; schools; base exchanges; morale, welfare, and recreation facilities; child care programs; and youth services) have recently been constructed or are in the process of being constructed in South Korea. Typically, as U.S. installations overseas are vacated and turned over to host governments, the status of forces agreements between the United States and host governments address any residual value remaining, at the time of release, of construction and improvements that were financed by the United States. The agreement in South Korea differs from the agreements used in some other overseas locations where the United States receives residual value for returned property--such as currently in Germany--in that South Korea is not obliged to make any compensation to the United States for any improvements made in facilities and areas or for the buildings and structures left there. In recent months, political dynamics in South Korea have been changing as DOD has been reassessing future overseas basing requirements. According to U.S. Forces Korea officials, there have always been groups in South Korea that have criticized the U.S. presence and have claimed that the U.S. presence hinders reconciliation between North and South Korea. Demonstrations against American military presence increased sharply during last year's South Korean presidential election. South Koreans were angered in November 2002 by a U.S. military court's acquittal of two American soldiers charged in association with a tragic training accident that claimed the lives of two South Korean schoolgirls in June 2002. The South Korean government wanted the two American soldiers who had been operating the vehicle involved in the accident turned over to South Korean authorities; however, they were tried in a U.S. military court. As a result, South Koreans demonstrated against U.S. forces in Korea, carried out isolated violence directed at U.S. soldiers, and practiced discrimination against Americans (such as businesses refusing to serve them). Subsequently, other groups demonstrated in support of the U.S. government. At the same time, the United States and South Korea were working to strengthen their alliance and to address issues involving North Korea's active nuclear weapons program and the proliferation of its missile programs. In December 2002, the Secretary of Defense and the Defense Minister of South Korea agreed to conduct a Future of the Alliance study to assess the roles, missions, capabilities, force structure, and stationing of U.S. forces, including having South Korea assume the predominant role in its defense and increasing both South Korean and U.S. involvement in regional security cooperation. The results of the Future of the Alliance study are not expected until later this year. In February 2003, the Secretary of Defense testified before the Congress that the United States was considering the relocation of U.S. troops now based within and north of Seoul, including those near the demilitarized zone. Consideration of such a move would be in keeping with a broader reassessment of U.S. presence overseas that is now underway. In April 2003, the Deputy Assistant Secretary of Defense for Asian and Pacific Affairs and other U.S. officials met with officials of the South Korean Ministry of National Defense to discuss redeploying U.S. troops and relocating key military bases in South Korea. Following these discussions, the U.S. and Korean press reported that the United States would relocate from Yongsan Army Garrison in Seoul to an area located south of Seoul. According to the U.S. Deputy Assistant Secretary of Defense for Asian and Pacific Affairs, both South Korea and the United States have decided that this is an issue that cannot wait any longer for resolution. U.S. and South Korean officials are expected to hold more discussions to finalize the realignment of U.S. troops by fall 2003. Moreover, the Secretary of Defense has recently directed acceleration on work that began during the development of the 2001 Quadrennial Defense Review, related to the global positioning of U.S. forces and their supporting infrastructure outside the United States. In March 2003, the Secretary of Defense requested that the Under Secretary of Defense for Policy and the Chairman, Joint Chiefs of Staff, develop a comprehensive and integrated presence and basing strategy for the next 10 years. An Integrated Global Presence and Basing Strategy will build upon multiple DOD studies, including the Overseas Basing and Requirements Study, the Overseas Presence Study, and the U.S. Global Posture Study. In addition, the Integrated Global Presence and Basing Strategy will use information from the combatant commanders to determine the appropriate location of the infrastructure necessary to execute U.S. defense strategy. The Integrated Global Presence and Basing Strategy is not expected to be completed until the summer of 2003. However, we were recently told by DOD officials that the United States will likely concentrate its forces in South Korea in far fewer, though larger, installations than were initially envisioned under the LPP, and that over time the forces now located north of Seoul will be relocated south of Seoul. Although the Land Partnership Plan as approved was broad in scope, it was designed to address only a portion of the U.S. military's previously existing infrastructure needs in South Korea, and it left unresolved a number of significant land disputes. Specifically, the LPP covered about 37 percent of the construction costs planned at U.S. military installations in South Korea over the next 10 years, encompassing about $2 billion of the $5.6 billion that the U.S. military and South Korea planned to spend to improve the U.S. military infrastructure in South Korea from 2002 through 2011. It was intended to resolve 55 percent, or 49, of the 89 separate land disputes that were pending in South Korea in January 2003, which was considered a significant step forward. One example of a land dispute that would be resolved under the LPP involves Camp Hialeah, located on the southern tip of the Korean peninsula in the port city of Pusan, South Korea's second largest city. According to press reports, South Korea wanted this base returned because of its proximity to the port and the impediments it posed to urban redevelopment. However, no relocation agreement could be reached until the LPP included an agreement to begin relocating Camp Hialeah's functions to a new site in Noksan, South Korea, in 2008 and to close Camp Hialeah in 2011. According to press reports attributed to an official from the South Korean Ministry of Foreign Affairs and Trade, relocating in-city bases like Camp Hialeah would help lessen the potential tension between U.S. forces and neighboring communities. Although the plan was considered a major step forward, it was not designed to resolve a number of significant land disputes. As far back as far as 1982, negotiations over some land returns have been deadlocked and left unresolved. For example, the relocation of Yongsan Army Garrison remained unresolved because of its projected financial cost to South Korea. The relocation of the garrison has been and continues to be a politically sensitive, complex, and expensive issue for U.S. Forces Korea and the South Korean government. In 1991, the governments of the United States and South Korea signed an agreement to relocate the garrison by 1996. In 1993, the plan was suspended, largely because of the anticipated high cost and the lack of alternative locations for the garrison. More than a decade later, the relocation of Yongsan is an ongoing, contentious issue. Since the 1990s, U.S. military and South Korean officials have held discussions on moving the military base out of the city, including screening various suburb locations. In December 2002, the United States and South Korea agreed on the need to find a mutually acceptable way to relocate U.S. forces outside the city of Seoul as a result of the Future of the Alliance Study. DOD has had many construction projects underway in South Korea, both within and outside of the LPP. However, DOD-sponsored studies now underway examining future overseas presence requirements are likely to significantly change the number and locations for U.S. military bases in South Korea. As noted, we were recently told that the United States will likely concentrate its forces in far fewer, though larger, installations than were envisioned under the LPP and that, over time, the forces would be relocated south of Seoul. Therefore, a number of sites and facilities retained under the LPP are likely to be affected. Figure 6 shows the locations of U.S. troop installations in South Korea under the LPP, as originally approved. Except as otherwise provided by the LPP, South Korea is not obliged to compensate the United States for any improvements made in facilities and areas or for the buildings and structures left behind. This could be particularly important because of military infrastructure projects planned or underway in areas from which the United States is considering relocating its troops, including Seoul's Yongsan Army Garrison and U.S. installations located north of Seoul, which, according to a U.S. Forces Korea official, had recently represented $1.3 billion in ongoing or planned construction projects. For example, construction projects in Yongsan included apartment high-rises for unaccompanied soldiers, a hospital, a sports and recreation complex, a mini-mall, and an overpass between Yongsan's main and south posts. We discussed with U.S. Forces Korea officials the need to reassess construction projects under way or planned in South Korea and to delay the execution of some projects until better decision-making information becomes available. Subsequently, U.S. Forces Korea officials announced that they were reviewing all projects and that over $1 billion in ongoing and planned construction had been put on hold. Further, DOD recently submitted an amendment to the President's fiscal year 2004 budget to the Congress to cancel about $5 million of construction projects planned for the garrison and to redirect $212.8 million of construction planned for the garrison and northern installations to an installation located south of Seoul. During the initial phase of our review we identified funding and other management challenges that could adversely affect the implementation of the Land Partnership Plan. As we considered these issues in light of the potential for even greater basing changes, we recognized that they could also affect the associated U.S. military construction projects throughout South Korea. First, the LPP is dependent on substantial amounts of funding that South Korea expects to realize through land sales from property returned by the United States, host-nation-funded construction, and U.S. military construction funds. While U.S. Forces Korea officials expect to build on this LPP framework for likely additional basing changes, the details have not been finalized for the broader changes. As U.S. Forces Korea revises its plans, competition for limited funding for other priorities could become an issue. Second, U.S. Forces Korea does not have a detailed road map to manage current and future facilities requirements in South Korea. The LPP, as originally approved, was dependent on substantial amounts of South Korean funding to be realized through land sales, host-nation- funded construction, and U.S. military construction funds. The extent to which these sources of funding would be required and available for broader infrastructure changes is not yet clear, particularly for the relocation of Yongsan Army Garrison. While U.S. officials expect the South Korean government to fund much of the cost of these additional basing changes, details have not yet been finalized. The South Korean government is also expected to remain responsible for providing funding for the relocation of forces now based at the Yongsan Army Garrison property, although those costs could be reduced by the fact that a residual number of U.S. and United Nations personnel are expected to remain at Yongsan. It should also be noted that the Yongsan Garrison property is expected to be used for municipal purposes and is not subject to resale to provide funding to support relocation of U.S. forces. At this point, insufficient information is available to determine precisely how many replacement facilities will be required for U.S. troops moving out of Yongsan Garrison and to anticipate any difficulties that might be encountered in obtaining the funding. However, if South Korea encounters problems or delays in acquiring needed lands and providing replacement facilities, future projects could be delayed. Figure 7 presents the amount of funding, as of May 2003, that the United States and South Korean governments expected to pay for the LPP--as originally approved--by fiscal year. The funding amounts for fiscal year 2004 and beyond are subject to revision. The LPP, as originally approved, was dependent on designating up to 50 percent of South Korea's host nation funding for construction. Historically, the stability of host nation funding from South Korea has been subject to some uncertainty because international economic factors have played a part in determining the level of funding. South Korea host nation payments are paid in both South Korean won and U.S. dollars; consequently, a downturn in the South Korean economy or a sharp fluctuation in the South Korean currency could affect the South Korean government's payments. For example, during South Korea's economic downturn in 1998, host nation payments were less than expected (the United States received from South Korea $314.2 million of the $399 million that had been agreed to). Designating up to 50 percent of host nation funding for the LPP would also limit funding for readiness and other needs. Non-LPP readiness-related infrastructure funding shortages previously identified in readiness reports at the time of our visit to South Korea in November 2002 were estimated to be in the hundreds of millions of dollars and represented competing requirements for limited funding. Such needs included Air Force facilities at Osan and Kunsan ($338.2 million), Navy facilities at Pohang and Chinhae ($10.3 million), and Army facilities at Humphreys, Carroll, and Tango ($25.2 million). Recently, U.S. Forces Korea officials have also expressed the desire to increase from 10 percent to 25 percent the number of servicemembers in South Korea who are permitted to be accompanied by their families. While these expressions have not been finalized, such an increase could be expected to cause a significant increase in the demand for housing, schools, and other support services and could result in greater competition for U.S. and Korean funding. For example, U.S. Forces Korea officials estimated that the increased demand for housing alone would cost $900 million in traditional military construction funding and, to reduce costs, officials were exploring a build-to-lease program using Korean private-sector funding and host-nation-funded construction, where possible. In the past, funding from U.S. military construction accounts, which represent 13 percent of funding for the LPP as originally approved, has fluctuated. From 1990 through 1994, U.S. forces in South Korea did not receive any military construction funds, resulting in a significant backlog of construction projects. Implementation of the LPP was expected to involve a closely knit series of tasks to phase out some facilities and installations while phasing in new facilities and expanding other facilities and installations. U.S. Forces Korea was developing an implementation plan for each installation encompassed by the LPP and, at the time of our visit there, was developing a detailed, overarching implementation plan capable of integrating and controlling the multiple, sometimes simultaneous, actions needed to relocate U.S. forces and support their missions. According to U.S. Forces Korea officials, such a master plan is needed to accomplish training, maintain readiness, and control future changes. During our visits to U.S. installations in South Korea, we found that, in the absence of a completed master plan for implementation, installation commanders had varying interpretations of what infrastructure changes were to occur. U.S. Forces Korea officials told us that this was not unusual, given that detailed implementation plans were still being developed. At the same time, these officials emphasized the need for a detailed plan to guide future projects and to help minimize the costly changes that can occur when subsequent commanders have a different vision of the installations' needs than their predecessors, which could lead to new interpretations of the LPP and more changes. In light of the potentially broader repositioning of forces in South Korea, the master plan under development could be substantially changed; thus, a significantly revised road map will be needed to manage future facilities requirements and changes in South Korea. As approved, the Land Partnership Plan represented an important step to reduce the size of the U.S. footprint in South Korea by leveraging the return of facilities and land to South Korea in order to obtain replacement facilities in consolidated locations. However, subsequent events suggest the LPP, as originally outlined, will require significant modification. Available data indicate that changes in the U.S. basing structure in South Korea are likely; therefore, a significant portion of the $5.6 billion in construction projects planned over the next 10 years is being reassessed based on currently expected basing changes and may need to be further reassessed when the results of ongoing overseas presence and basing studies are completed. The LPP was to require 10 years of intensive management to ensure implementation progressed as planned. The master plan U.S. Forces Korea officials are developing to guide its implementation will require significant revision to accommodate the more comprehensive changes in basing now anticipated and to identify funding requirements and division of funding responsibilities between the United States and South Korea. We recommend that the Secretary of Defense require the Commander, U.S. Forces Korea, to (1) reassess planned construction projects in South Korea as the results of ongoing studies associated with overseas presence and basing are finalized and (2) prepare a detailed South Korea-wide infrastructure master plan for the changing infrastructure for U.S. military facilities in South Korea, updating it periodically as needed, and identifying funding requirements and division of funding responsibilities between the United States and South Korea. The Deputy Assistant Secretary of Defense for Asian and Pacific Affairs provided written comments to a draft of this report. DOD agreed with our recommendations and pointed out that it is taking actions that address our recommendations. In commenting on our recommendation to reassess planned construction projects in South Korea, DOD stated that U.S. Forces Korea is already reassessing all planned construction in South Korea and will ensure that all planned construction projects support decisions regarding global presence and basing strategy. In commenting on our recommendation for a detailed South Korea-wide infrastructure master plan, DOD stated that U.S. Forces Korea is already developing master plans for all enduring installations and, once decisions have been reached on global presence and basing strategy, they will ensure that all master plans are adjusted to support these decisions. DOD's comments are reprinted in appendix IV. DOD also provided a separate technical comment, and we revised the report to reflect it. We are sending copies of this report to the appropriate congressional committees, the Commander, U.S. Forces Korea, and the Director, Office of Management and Budget. The 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 on the matters discussed in this report, please contact me at (202) 512-5581. Key contributors to this report were Ron Berteotti, Roger Tomlinson, Nelsie Alcoser, Susan Woodward, and Ken Patton. To determine the scope and cost of the plan in relation to total infrastructure issues in South Korea, we analyzed provisions of the Land Partnership Plan (LPP), identified the scope and cost of construction projects outside of the LPP, compared the scope and cost of LPP construction projects to the scope and cost of all construction projects in South Korea, and analyzed some of the key unresolved infrastructure issues not included in the plan, such as the relocation of U.S. troops from Yongsan Army Garrison. We met with officials from the Joint Chiefs of Staff (Logistics Directorate and Strategy Division); Under Secretary of Defense for Policy (Office of Asia-Pacific Affairs); Deputy Under Secretary of Defense (Installations and Environment); U.S. Pacific Command, Headquarters Pacific Air Forces, U.S. Army Pacific, Marine Forces Pacific, U.S. Pacific Fleet; U.S. Forces Korea, Eighth U.S. Army and 7th Air Force; U.S. Department of State; U.S. Embassy (South Korea); and South Korea's Defense Ministry to document their input to the plan. We visited 16 U.S. military installations and facilities in South Korea that are affected by the plan. We selected these installations and facilities because they provided a cross-section of the activities that are covered by the plan (i.e., some that will be closed, some that will be scaled back, some that will be expanded, some where new construction will take place, and some possible new installation locations). We also visited land transfer sites that remain unresolved and military construction projects that are not addressed in the plan to gain an understanding and perspective on the wide range of infrastructure issues affecting U.S. troops stationed in South Korea. To determine the implications of potential basing changes on the plan and other construction projects in South Korea, we obtained the views of officials from the Joint Chiefs of Staff (Logistics Directorate and Strategy Division); Under Secretary of Defense for Policy (Office of Asia-Pacific Affairs); and U.S. Forces Korea on the potential impact of changing defense policies. We conducted a literature review of U.S. and South Korean publications to collect information on the LPP and possible basing changes in South Korea. We also attended various congressional hearings, which discussed funding for U.S. Forces Korea construction projects and potential basing changes. We used this information to identify the costs of ongoing and planned construction associated with improving military infrastructure in areas where there is uncertainty about future U.S. presence--such as Yongsan Army Garrison and U.S. installations located north of Seoul. We did not verify the accuracy and completeness of this information. To identify implementation challenges associated with the plan that could affect future U.S. military construction projects in South Korea, we met with officials from the above organizations and reviewed the Status of Forces Agreement, an agreement under Article IV of the Mutual Defense Treaty between South Korea and the United States, and other related agreements and defense guidance. We discussed challenges that must be addressed during implementation of the LPP and implementation issues associated with the plan that could affect future construction projects throughout South Korea. We performed our review from September 2002 through May 2003 in accordance with generally accepted government auditing standards. The Land Partnership Plan (LPP) provides a comprehensive plan for more efficient and effective stationing of U.S. Forces in South Korea. The LPP is intended to strengthen the South Korea-U.S. alliance, improve the readiness posture of combined forces, reduce the overall amount of land granted for U.S. Forces Korea use, and enhance public support for both the South Korean government and U.S. Forces Korea, while positioning U.S. forces to meet alliance security requirements well into the future. According to U.S. Forces Korea officials, LPP imperatives are as follows: The agreement should be based on readiness and security, not the amount of land involved. The agreement should be comprehensive, allowing for land issues that cannot be resolved independently to be resolved as part of a package and ensuring stationing decisions that fit into a comprehensive vision for the disposition of U.S. forces. When new land and facilities are ready for use, U.S. Forces Korea can release old land and facilities. U.S. Forces Korea needs all existing facilities and areas and can only return them when replacement facilities are available or the requirement is met in another manner. The agreement should be binding under the Status of Forces Agreement. The LPP is not just an "agreement in principle" but also a commitment to take action, and it operates within the Status of Forces Agreement--which means there are no new rules. The agreement should be self-financing--the costs of the LPP must be shared between the United States and South Korea. U.S. funding is provided from the military construction account. The South Korean government provides host nation funds and funding obtained from sales of property returned to South Korea by the United States. As a general rule, the United States funds the relocation of units from camps the United States wishes to close, and South Korea funds the relocation of units from camps that South Korea has asked the United States to close. The execution of the LPP is shown in figure 1. The LPP has been negotiated under the authority of the Joint Committee under the Status of Forces Agreement. The Status of Forces Agreement gives the Joint Committee the authority and responsibility to determine the facilities and areas required for U.S. use in support of the United States/South Korea Mutual Defense Treaty. The Joint Committee established the Ad-hoc Subcommittee for LPP to develop and manage the LPP. The LPP components address installations, training areas, and safety easements. Installations: The LPP reduces the number of U.S. installations from 41 to 23 and consolidates U.S. forces onto enduring installations. The LPP establishes a timeline for the grant of new land, the construction of new facilities, and the closure of installations. Figure 8 illustrates the sequence in which new lands are to be granted to the United States and their relationship to facilities that will be returned to South Korea from calendar years 2002 through 2011. Training Areas: The LPP returns U.S. training areas in exchange for guaranteed time on South Korean ranges and training areas. To ensure the continued readiness of U.S. Forces Korea, the United States agrees to return certain granted facilities and areas and to accept the grant of joint use of certain South Korea military facilities and areas on a limited time-share basis as determined by the Status of Forces Agreement Joint Committee. The United States is expected to return approximately 32,186 acres, or 39,396,618 pyong, of granted training areas. Table 1 shows the exclusive use of existing grants retained by U.S. Forces Korea. Table 2 shows training areas that will be provided on a temporary basis to U.S. Forces Korea. Table 3 shows new safety easements to be designated for training areas. Table 4 shows training areas that will be returned to South Korea under the LPP. Table 5 shows training areas where parts of the land will be returned to South Korea. Table 6 shows training facilities and areas that the South Korean government is expected to grant to the U.S. for joint use for the time specified. Safety Easements: According to U.S. Forces Korea officials, a safety easement is a defined distance from an explosive area that personnel and structures must be kept away from and is directly related to the quantity and types of explosives and ammunition present. The presence of Korean citizens in areas requiring explosive safety easements has placed them at risk of injury or death in the event of an explosion. Tables 7, 8, and 9 show the various tiers of easements established under the LPP at U.S. military installations. Upper tier easements are those required at enduring installations; middle tier easements are required during armistice, but will not be required after a change in the armistice condition; and lower tier easements are those required at closing installations. U.S. Forces Korea shall enforce safety easements inside U.S. installations, while South Korea will enforce safety easements outside U.S. installations.	The U.S.-South Korean Land Partnership Plan (LPP), signed in March 2002, was designed to consolidate U.S. installations, improve combat readiness, enhance public safety, and strengthen the U.S.-South Korean alliance by addressing some of the causes of periodic tension associated with the U.S. presence in South Korea. The Senate report on military construction appropriations for fiscal year 2003 directed GAO to review the LPP. GAO adjusted its review to also address the effect of ongoing reassessments of U.S. overseas presence upon the LPP and other infrastructure needs. In this report, GAO assessed (1) the scope of the LPP, (2) the implications on the LPP and other construction projects of proposals to change basing in South Korea, and (3) implementation challenges associated with the LPP that could affect future U.S. military construction projects in South Korea. Although broad in scope, the LPP was not designed to resolve all U.S. military infrastructure issues. Specifically, the plan was intended to resolve 49 of the 89 separate land disputes that were pending in South Korea. Of the land disputes the plan did not address, the most politically significant, complex, and expensive dispute involves the potential relocation of U.S. forces from Yongsan Army Garrison, located in the Seoul metropolitan area. As a result, the LPP, as approved, covered about 37 percent of the $5.6 billion in construction costs planned at U.S. military installations in South Korea over the next 10 years. Ongoing reassessments of U.S. overseas presence and basing requirements could diminish the need for and alter the locations of many construction projects in South Korea, both those associated with the LPP and those unrelated to it. For example, over $1 billion of ongoing and planned construction associated with improving military infrastructure at Yongsan Army Garrison and U.S. installations located north of Seoul--areas where there is uncertainty about future U.S. presence--has recently been put on hold, canceled, or redirected to an installation located south of Seoul. GAO identified some key challenges that could adversely affect the implementation of the LPP and future U.S. military construction projects throughout South Korea. First, the plan relies on various funding sources, including funding realized through land sales from property returned by the United States. The extent to which these sources of funding would be required and available for broader infrastructure changes is not yet clear. Second, a master plan would be needed to guide future military construction to reposition U.S. forces and basing in South Korea.	7,242	556
Our objectives were to determine whether participating judges' contributions for the 3 plan years ending on September 30, 2007, funded at least 50 percent of the JSAS costs and, if not, what adjustments in the contribution rates would be needed to achieve the 50 percent ratio. To satisfy our objectives, we used the normal cost rates determined by actuarial valuations of the system for each of the 3 fiscal years. We also examined participants' contributions, the federal government's contribution, and other relevant information in each plan years' JSAS actuarial valuation report. An independent accounting firm hired by the Administrative Office of the United States Courts (AOUSC) audited the JSAS financial and actuarial information included in the JSAS actuarial valuation reports, with input from the plan's actuary regarding relevant data, such as the actuarial present value of accumulated plan benefits. The plan's actuary certified those amounts that are included in the JSAS actuarial valuation reports. We discussed the contents of the JSAS actuarial valuation reports with officials from AOUSC for the 3 plan years (2005 through 2007). In addition, we discussed with the plan's actuary the actuarial assumptions made to project future benefits of the plan. We noted that the JSAS actuarial valuation for plan years 2005 through 2007 used a 0.0 percent salary increase per year, above inflation, in contrast to the September 30, 2007, Civil Service Retirement and Disability System valuation which used a 0.75 percent salary increase per year, above inflation. We determined that the use of 0.0 percent salary increase for the JSAS is reasonable, and consistent with a recent trend analysis we performed on judicial pay plans. We also reviewed the qualifications of the plan's actuary who prepared the JSAS actuarial valuation reports for plan years 2005 to 2007 and nothing came to our attention that would lead us to question the qualifications of the actuary. We did not independently audit the JSAS actuarial valuation reports or the actuarially calculated cost figures. We conducted this performance audit 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. We performed our review in Washington, D.C., from June 2008 through August 2008. We made a draft of this report available to the Director of AOUSC for review and comment. Depending on the circumstances, judicial participants may be eligible for some combination of five retirement plans, including the Civil Service Retirement System (CSRS) or the Federal Employees' Retirement System (FERS). Three other separate retirement plans, described in appendix I, apply to various groups of judges in the federal judiciary, with JSAS being available to participants in all three retirement plans to provide annuities to their surviving spouses and children. JSAS was created in 1956 to help provide financial security for the families of deceased federal judges. It provides benefits to surviving eligible spouses and dependent children of judges who participate in the plan. Judges may elect coverage within 6 months of taking office, 6 months after getting married, if they were not married when they took office, 6 months after being elevated to a higher court, or during an open season authorized by statute. Active and senior judges currently contribute 2.2 percent of their salaries to JSAS, and retired judges contribute 3.5 percent of their retirement salaries to JSAS. Upon a judge's death, the surviving spouse is to receive an annual annuity that equals 1.5 percent of the judge's average annual salary during the 3 highest consecutive paid years (commonly known as the high-3) times the judge's years of creditable service. The annuity may not exceed 50 percent of the high-3 and is guaranteed to be no less than 25 percent. Separately, an unmarried dependent child under age 18, or 22 if a full-time student, receives a survivor annuity that is equal to 10 percent of the judge's high-3 or 20 percent of the judges' high-3 divided by the number of eligible children, whichever is smaller. JSAS annuitants receive an annual adjustment in their annuities at the same time, and by the same percentage, as any cost-of-living adjustment (COLA) received by CSRS annuitants. Spouses and children are also eligible for Social Security survivor benefits. Since its inception in 1956, JSAS has been amended several times. Because of concern that too few judges were participating in the plan, Congress made broad reforms effective in 1986 with the Judicial Improvements Act of 1985. The 1985 act (1) increased the annuity formula for surviving spouses from 1.25 percent to the current 1.5 percent of the high-3 for each year of creditable service and (2) changed the provisions for surviving child benefits to relate benefit amounts to judges' high-3 rather than the specific dollar amounts provided in 1976 by the Judicial Survivors' Annuities Reform Act. In recognition of the significant benefit improvements that were made, the 1985 act increased the amounts that judges were required to contribute from 4.5 percent to 5 percent of their salaries, including retirement salaries. The 1985 act also changed the requirements for government contributions to the plan. Under the 1976 Judicial Survivors' Annuities Reform Act, the government matched the judges' contributions of 4.5 percent of salaries and retirement salaries. The 1985 act modified this by specifying that the government would contribute the amounts necessary to fund any remaining cost over the future lifetime of current participants. That amount is limited to 9 percent of total covered salary each year. In response to concerns that required contributions of 5 percent may have created a disincentive to participate, Congress enacted the Federal Courts Administration Act of 1992. Under this act, participants' contribution requirements were reduced to 2.2 percent of salaries for active and senior judges and 3.5 percent of retirement salaries for retired judges. The 1992 act also significantly increased benefits for survivors of retired judges. This increase was accomplished by including years spent in retirement in the calculation of creditable service and the high-3 salary averages. Additionally, the 1992 act allowed judges to stop contributing to the plan if they ceased to be married and granted benefits to survivors of any judge who died in the interim between leaving office and the commencement of a deferred annuity. As of September 30, 2007, there were 1,303 active and senior judges, 223 retired judges, and 333 survivor annuitants covered under JSAS, according to the JSAS actuarial valuation report for plan year 2007. JSAS is financed by judges' contributions and direct appropriations in an amount estimated to be sufficient to fund the future benefits paid to survivors of current and deceased participants. The plan's actuary, using the plan's funding method--in this case, the aggregate cost method-- determines the plan's normal cost rate and the normal costs for each plan year. The normal cost rate is the level percentage of future salaries that will be sufficient, along with investment earnings and the plan's assets, to pay the plan's benefits for current participants and beneficiaries. Normal cost calculations are estimates and require that many actuarial assumptions be made about the future, including, but not limited to mortality rates, turnover rates, and returns on investment, salary increases, and COLA increases over the life spans of current participants and beneficiaries. There are many acceptable actuarial methods for calculating normal cost. Regardless of which cost method is chosen, the expected total long-term cost of the plan should be the same; however, year-to-year costs may differ, depending on the cost method used. The expected annual federal, actuarially recommended contribution is the product of the federal government's contribution rate and the participating judges' salaries. However, the actual federal government contribution is approved through annual appropriations which have varied, both above and below the actuarially recommended amount. To determine the actuarially recommended annual contribution of the federal government, AOUSC, which is responsible for the administration of the JSAS, engages an enrolled actuary to perform the calculation of funding needed based on the difference between the present value of the expected future benefit payments to participants and the present value of net assets in the plan. Appendix II provides more details on the methodology used to determine the federal government's contribution rate and lump sum payments. For JSAS plan years 2005 through 2007, the participating judges contributed, on average, about 54 percent of the plan's costs. In plan years 2005 and 2006, participating judges paid slightly more than 61 percent and 50 percent of JSAS normal costs, respectively, and in plan year 2007, they paid slightly less than 50 percent of JSAS normal costs. Table 1 shows the judges' and the federal government's contribution rates and shares of JSAS' normal costs (using the aggregate cost method, which is discussed in appendix II) for the period covered in our review. The judges' and the federal government's contribution rates for each of the 3 years shown in Table 1 were based on the actuarial valuations that occurred at the end of the prior year. For example, the judges' contribution rate of 2.32 percent and the federal government's contribution rate of 1.48 in plan year 2005 were based on the September 30, 2004, valuation contained in the plan year 2005 JSAS report. The total normal costs expressed as a percentage of the present value of participant's future salaries shown in table 1 increased from 3.8 percent in plan year 2005 to 5.13 percent in plan year 2007. The judges' share of the JSAS normal costs decreased from approximately 61 percent in plan year 2005, to approximately 50 percent in plan years 2006 and 2007. The federal government's share of JSAS normal costs increased, from approximately 39 percent in plan year 2005, to approximately 50 percent in plan years 2006 and 2007. During those same years, the government's contribution rates increased from 1.48 percent of salaries in plan year 2005 to 2.5 percent of salaries in plan year 2006, and then to 2.59 percent in plan year 2007. The increase in the federal government's contribution rates was a result of the increase in normal costs resulting from several combined factors, such as changes in actuarial assumptions; lower-than-expected investment experience on plan assets; demographic changes--retirement, death, disability, new members, pay increases; as well as an increase in plan benefit obligations. However, the majority of the increase in the federal government's contribution rate is because of changes in actuarial assumptions and a lesser degree the government's contributing less than the actuarially recommended amounts, in plan years 2005, 2006, and 2007. Based on our review of the judges' contribution rates for the JSAS, we determined that there was no need for any adjustments in the judges' contribution rate. JSAS actuarial reports for the 3 years under review show that participating judges' contributed at least 50 percent of JSAS normal costs as required by the Federal Courts Administration Act for plan years 2005 and 2006, and slightly below half for plan year 2007. As shown in Table 1 above, the judges' average contribution for JSAS normal costs for this review period was approximately 54 percent, which exceeded the 50 percent contribution goal for judges. Table 2 provides a summary of the percentage share of contribution for judges and the federal government over the past 9 years. As shown above, the judges' contribution share, in any given year, may vary from the 50 percent contribution goal, either exceeding or not meeting this goal. The judges' average contribution share for the 9-year period was approximately 60 percent. Therefore, there is no reason to modify the judges' contribution rates at this time. We requested comments on a draft of this report from the Director of AOUSC or his designee. In a letter dated September 10, 2008, the Director provided written comments on the report, which we have reprinted in appendix III. AOUSC also provided technical comments, which we have incorporated as appropriate. In its comments, AOUSC stated that our report showed that for a third consecutive triennial cycle, judges have paid a greater share of the cost of this system. AOUSC stated that our report showed that over the past 9 years, judges' contributions have funded approximately 60 percent of the costs of JSAS. In AOUSC's view, we did not present in our report the downward adjustment that would be needed to the participating judges' contribution rates to attain the 50 percent level, and this omission is not consistent with Congress's intent in enacting the Federal Courts Administration Act of 1992. We disagree with AOUSC's view as to the purpose of section 201(i), of the Act. Since enactment, we have interpreted this section as providing a minimum percentage of the costs of the program to be borne by its participants because the statute requires us to recommend adjustments when the judges' contributions have not achieved 50 percent of the costs of the fund. We do not view the section as calling for parity between the participants and the federal government with respect to funding the program. For the 3-years covered by this review, we determined and reported that judges' contributions represented approximately 54 percent of the normal costs of JSAS, and therefore, an adjustment to the judges' contribution rates was not needed under the existing legislation because the judges' contribution achieved 50 percent of JSAS costs. We have consistently applied this interpretation of the Act's requirements in all of our previously mandated reviews. However, if one were to interpret the Act as calling for an equal sharing of the program's cost between participants and the government, then, on the basis of the information contained in the JSAS actuarial reports over the last 9 years, participating judges' future contributions would have to decrease a total of 0.32 percentage points below the current 2.2 percent of salaries for active judges and senior judges and 3.5 percent for retired judges in order to fund 50 percent of JSAS costs over the last 9 years. If the decrease were distributed equally among the judges, those currently contributing 2.2 percent of salaries would have to contribute 1.88 percent, and those currently contributing 3.5 percent of retirement salaries would have to contribute 3.18 percent. We have not declined to include downward adjustment information, as AOUSC states, but we are not recommending such an adjustment because of our interpretation of the statute's requirements. We are sending copies of this report to interested congressional committees and the Director of AOUSC. Copies of this report will be made available to others upon request. This report is also available at no charge on the GAO Web site at http://www.gao.gov. Please contact Steven J. Sebastian at (202) 512-3406 [email protected], or Joseph A. Applebaum at (202) 512-6336 [email protected], if you or your staff have any questions concerning this report. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report were Julie Phillips, Assistant Director; Jehan Abdel-Gawad; and Kwabena Ansong. The Administrative Office of the United States Courts (AOUSC) administers three retirement plans for judges in the federal judiciary. The Judicial Retirement System automatically covers United States Supreme Court justices; federal circuit and district court judges; and territorial district court judges; and is available, at their option, to the Administrative Assistant to the Chief Justice; the Director of AOUSC; and the Director of the Federal Judicial Center. The Judicial Officers' Retirement Fund is available to bankruptcy and full-time magistrate judges. The United States Court of Federal Claims Judges' Retirement System is available to the United States Court of Federal Claims judges. Also, judges who are not automatically covered under the Judicial Retirement System may opt to participate in the Federal Employees' Retirement System (FERS) or elect to participate in the Judicial Retirement System for bankruptcy judges, magistrate judges, or United States Court of Federal Claims judges. Judges who retire under the judicial retirement plans generally continue to receive the full salary amounts that were paid immediately before retirement, assuming the judges met the age and service requirements. Retired territorial district court judges generally receive the same cost-of- living adjustment that Civil Service Retirement System retirees receive, except that their annuities cannot exceed 95 percent of an active district court judge's salary. United States Court of Federal Claims judge retirees continue to receive the same salary payable to active United States Court of Federal Claims judges. Those in the Judicial Retirement System and the United States Court of Federal Claims Judges' Retirement System are eligible to retire when the number of years of service and the judge's age total at least 80, with a minimum retirement age of 65, and service ranging from 10 to 15 years. Those in the Judicial Officers' Retirement Fund are eligible to retire at age 65 with at least 14 years of service or may retire at age 65 with 8 years of service, on a less than full salary retirement. Participants in all three judicial retirement plans are required to contribute to and receive Social Security benefits. Aggregate funding method. This method, as used by the Judicial Survivors' Annuities System (JSAS) plan, defines the normal cost rate as the level percentage of future salaries that will be sufficient, along with investment earnings and the plan's assets, to pay the plan's benefits for current participants and beneficiaries. The following discussion is intended to illustrate the use of the aggregate funding method. For plan year 2007, the JSAS's actuary estimated the present value of future benefits for participating judges and beneficiaries was $649,628,473 and the JSAS had assets amounting to $491,788,627. The difference between these amounts, $157,839,846, must be financed through future contributions to be paid by the participating judges and the federal government. Using the same assumptions as used to estimate the present value of future benefits, the actuary estimated the present value of participating judges' future salaries to be $3,078,464,410 so that the amount to be financed represented 5.13% ($157,839,846 divided by $3,078,464,410) of the future participating judges' salaries. This percentage is the JSAS's normal cost rate. If all the actuarial assumptions proved exactly correct, then a total contribution of 5.13% of the participating judges' salaries annually would make up the difference between the JSAS's future payments and its assets (the $157,839,846 mentioned above). The JSAS's actuary also estimated the present value of participating judges' future contributions to be $78,123,909. Thus the federal government's share for plan year 2007 is the difference between $157,839,846 and $78,123,909, or $79,715,937. Federal government's actuarially recommended contribution rate. The federal government's actuarially recommended contribution rate is equal to the federal government's share of future financing ($79,715,937) divided by the present value of the participating judges' future salaries ($3,078,464,410). For the plan year 2007 the rate was 2.59% ($79,715,937 divided by $3,078,464,410). Thus, the actuarially recommended federal contribution is the product of the federal government's actuarially recommended contribution rate and the participating judges' salaries. The federal government's contribution is approved through an annual appropriation. It has varied, both above and below the actuarially recommended amount. Lump sum payout. Under JSAS, a lump sum payout may occur upon the dissolution of marriage either through divorce or death of spouse. Payroll contributions cease, but previous contributions remain in JSAS. Also, if there is no eligible surviving spouse or child upon the death of a participating judge, the lump sum payout to the judge's designated beneficiaries is computed as follows: Lump sum payout equals the total amount paid into the plan by the judge plus 3 percent annual interest accrued, less 2.2 percent of salaries for each participating year (forfeited amount). In effect, the interest plus any amount contributed in excess of 2.2 percent of judges' salaries will be refunded.	The Judicial Survivors' Annuities System (JSAS) was created in 1956 to provide financial security for the families of deceased federal judges. It provides benefits to eligible spouses and dependent children of judges who elect coverage within 6 months of taking office, 6 months after getting married, 6 months after being elevated to a higher court, or during an open season authorized by statute. Active and senior judges currently contribute 2.2 percent of their salaries to JSAS, and retired judges contribute 3.5 percent of their retirement salaries to JSAS. Pursuant to the Federal Courts Administration Act of 1992 (Pub. L. No. 102-572), GAO is required to review JSAS costs every 3 years and determine whether the judges' contributions fund at least 50 percent of the plan's costs during the 3-year period. If the contributions fund less than 50 percent of these costs, GAO is to determine what adjustments to the contribution rates would be needed to achieve the 50 percent ratio. For the 2005 to 2007 time frame covered by this review, the participating judges funded approximately 54 percent of JSAS costs, and the federal government funded 46 percent. The increase in the government's contribution rate over the 3-year period was a result of increases in costs. The increase in costs reflected the combined effects of changes in actuarial assumptions; lower-than-expected rates of return on plan assets; demographic changes such as retirement, death, disability, new members, and pay increases; as well as an increase in plan benefit obligations. GAO determined that an adjustment to the judges' contribution rate was not needed because their average contribution share for the 3-year period exceeded the 50 percent minimum contribution goal specified by law. GAO examined the annual share of normal costs covered by judges' contributions over a 9-year period and found that, on average, the participating judges funded approximately 60 percent of JSAS's costs.	4,437	403
GPO's mission includes both printing government documents and disseminating them to the public. Under 44 U.S.C. 501, it is the principal agent for printing for the federal government. All printing for the Congress, the executive branch, and the judiciary--except for the Supreme Court--is to be done or contracted by GPO except for authorized exemptions. The Superintendent of Documents, who heads GPO's Information Dissemination organization, disseminates these government products to the public through a system of 1,200 depository libraries nationwide (the Federal Depository Library Program), GPO's Web site (GPO Access), telephone and fax ordering, an online ordering site, and its bookstore in Washington, D.C. The Superintendent of Documents is also responsible for classification and bibliographic control of tangible and electronic government publications. Printing and related services. In providing printing and binding services to the government, GPO generally dedicates its in-house printing equipment to congressional printing, contracting out most printing for the executive branch. Table 1 shows the costs of these services in fiscal year 2003, as well as the source of these printing services. Printing and binding for the Congress are funded by appropriations; in fiscal year 2004, this appropriation was $90.6 million, and the amount requested for fiscal year 2005 is $88.8 million. Documents printed for the Congress include the Congressional Record, hearing transcripts, bills, resolutions, amendments, and committee reports, among other things. GPO also provides publishing support staff to the Congress; these support staff mainly perform print preparation activities, such as typing, scanning, proofreading, and preparation of electronic data for transmission to GPO. In addition, GPO provides electronic copies of the Congressional Record and other documents to the Congress, the public, and the depository libraries in accordance with the Government Printing Office Electronic Information Access Enhancement Act of 1993. GPO generally provides printing services to federal agencies through contracting. GPO procures about 83 percent of printing for federal agencies from private contractors and does the remaining 17 percent at its own plant facilities. Most of the procured printing jobs (85 percent for the period from June 2002 to May 2003) were for under $2,500 each. There is no appropriation to cover federal agency printing services. Instead, GPO levies a service charge to federal agency customers of its procurement services. The service charge is GPO's only authorized source of funds to pay for the services it provides to agencies. The service charge is intended to cover the cost of specialized printing procurement services that GPO provides to agencies. These services include developing printing specifications and providing quality assurance functions, both of which require printing expertise that agencies often do not have. Procuring printing is more specialized than general procurement, because all printing jobs are custom: that is, printing cannot be bought "off the shelf," like furniture or office supplies. Developing printing specifications requires specialized knowledge of paper and ink qualities, printing presses, and printing processes, for example. Besides printing, GPO provides a range of related services to agencies, including, for example, CD-ROM development and production, archiving/storage, converting products to electronic format, Web hosting, and Web page design and development. Dissemination of government information. The Superintendent of Documents is responsible for the acquisition, classification, dissemination, and bibliographic control of tangible and electronic government publications. Regardless of the printing source, Title 44 requires that federal agencies make all their publications available to the Superintendent of Documents for cataloging and distribution. The Superintendent of Documents manages a number of programs related to distribution, including the Federal Depository Library Program (FDLP), which designates libraries across the country to receive copies of government publications for public use. Generally, documents distributed to the libraries are those that contain information regarding U.S. government activities or are important reference publications. GPO evaluates documents to determine whether they should be disseminated to the depository libraries. When documents are printed through GPO, it evaluates them at the time of printing; if documents are not printed through GPO, Title 44 requires agencies to notify it of these documents, so that it can evaluate them and arrange to receive any copies needed for distribution. A relatively small percentage of the items printed through GPO for the executive branch are designated as depository items. Another distribution program under the Superintendent of Documents is the Document Sales Service, which purchases, warehouses, sells, and distributes government documents. Publications are sold by mail, telephone, and fax; through GPO's online bookstore; and at its bookstore in Washington, D.C. The Superintendent of Documents is also responsible for GPO's Web site, GPO Access, which is one mechanism for electronic dissemination of government documents to the public through links to over 240,000 individual titles on GPO's servers and other federal Web sites. More than 1.6 billion documents have been retrieved by the public from GPO Access since August 1994; almost 372 million downloads of government information from GPO Access were made in fiscal year 2002 alone. About two-thirds of new FDLP titles are available online. Current industry trends show that the total volume of printed material has been declining for the past few years and that this trend is expected to continue. A major factor in this declining volume is the use of electronic media options. More organizations are creating electronic documents for dissemination or publishing their information directly to the Web. The reason for the switch to electronic publishing and dissemination is that once a document is created electronically, the costs associated with reproducing and distributing paper copies of it are greater than the costs of providing online access to it. Therefore, many organizations are making information available electronically and printing fewer documents, moving away from print-centric processes. The move to electronic dissemination is the latest phase in the electronic publishing revolution that has transformed the printing industry in recent decades. This revolution was driven by the development of increasingly sophisticated electronic publishing (or "desktop publishing") software, run on personal computers, that allows users to design documents including both images and text, and the parallel development of electronic laser printer/copier technology with capabilities that approach those of high-end presses. These tools allow users to produce documents that formerly would have required hand work, professional printing expertise, and large printing systems. These technologies have brought major economic and industrial changes to the printing industry. As electronic publishing software becomes increasingly sophisticated, user-friendly, and reliable, it approaches the ideal of the print customer being able to produce files that can be reproduced on the press with little or no intervention by printing professionals As the printing process is simplified, the customer can take responsibility for more of the work. Thus, the technologies diminish the value that printing organizations like GPO add to the printing process, particularly for simpler printing jobs. Nonetheless, professional expertise remains critical for many aspects of printing, and for many print jobs it is still not possible to bypass the printing professional altogether. The advent of the Web and the Internet, however, permits the instantaneous distribution of the electronic documents produced by the new publishing processes, breaking the link between printing and dissemination. As the Web has become virtually ubiquitous, the electronic dissemination of information becomes not only practical, but more economical than dissemination on paper. As a result, many organizations are changing from a print to an electronic focus. In the early stages of the electronic publishing revolution, organizations tended to prepare a document for printing and then convert the print layout to electronic form--in other words, focusing on printing rather than dissemination. Increasingly, however, organizations are changing their focus to providing information--not necessarily on paper. Today an organization may employ computers to generate plates used for printing as well as electronic files for dissemination. Tomorrow, the organization may create only an electronic representation of the information, which can be disseminated through various media, such as Web sites. A printed version would be produced only upon request. GPO's Public Printer--confirmed by the Senate in November 2002-- has initiated efforts to modernize and prepare GPO for the 21st century. The Public Printer has initiated a reorganization with a chief executive officer (Public Printer), chief operating officer, and managing directors in addition to the Superintendent of Documents. The Public Printer and his management team also reorganized the agency into three customer-focused functional areas (Customer Services, Information Dissemination, and Plant Operations) and three support areas (Information Technology and Systems, Finance and Administration, and Human Resources). According to GPO, this interim restructuring will be used during a 2-year transitional phase. During this time, further decisions will be made about its future and organizational alignment. According to GPO officials, the Public Printer has also initiated efforts to develop a strategic plan to guide its transformation efforts. These efforts include * conducting fact-finding activities to support plan development, * convening meetings of top management to discuss and document the "as-is" state of the organization, and * finalizing the plan by December 2004. In keeping with overall industry trends, the volume of material provided to GPO to print has diminished in recent years and is creating financial challenges for the agency. According to GPO, its federal agency print jobs at one time generated close to $1 billion a year. In fiscal year 2003, the amount was just over half of that--$570 million. Federal agencies are publishing more items directly to the Web--without creating paper documents at all--and are doing more of their printing and dissemination of information without using GPO services. This reduction in demand has resulted in GPO's procured printing business, which was once financially self- sustaining, experiencing losses in 3 of the past 5 years, with a net loss of $15.8 million over that period. Similar changes have affected its sales program. The introduction of GPO Access, which allows downloading and printing of documents at no cost, has contributed to major losses to the sales program in recent years. The availability of free government documents for downloading is a boon to the public, but it clearly affects GPO's ability to generate sales revenue. According to the Superintendent of Documents, GPO sold 35,000 subscriptions to the Federal Register 10 years ago and now sells 2,500; at the same time, over 4 million Federal Register documents are downloaded each month from GPO Access. The Superintendent also reported that the overall volume of sales has dropped from 24.3 million copies sold in fiscal year 1993 to 4.4 million copies sold in fiscal year 2002. The sales program has operated at a loss for the past 5 years, with a net loss of $77.1 million over that period, $20 million in fiscal year 2003 alone. According to GPO, these losses are due to a downward trend in customer demand for printed publications that has significantly reduced program revenues. Ongoing technological changes are also creating challenges for GPO's longstanding structure for centralized printing and dissemination. As mentioned earlier, the requirement in Title 44 that agencies notify GPO of their published documents (if they used other printing sources) allows it to review agency documents to determine whether the documents should be disseminated to the depository libraries. If they should be, GPO can then add a rider to the agency's print contract to obtain the number of copies that it needs for dissemination. However, if agencies do not notify it of their intent to print, these documents remain unknown, becoming "fugitive documents" which may not be available to the public through the depository library program. In responding to our surveys, executive branch agencies reported that while printing requirements are declining, they are producing a significant portion of their total volume internally, generally on desktop publishing and reproduction equipment instead of large- scale printing equipment. In addition, while most agencies (16 of 21) reported that they have established procedures to ensure that documents that should be disseminated through the libraries are forwarded to GPO, 5 of 21 did not have such procedures, thus potentially adding to the fugitive document problem. Responding agencies also reported that although currently more government documents are still being printed than are being published electronically, publishing documents directly to the Web is increasing and expected to grow further in the future. Most agencies reported that documents currently published directly to the Web were not of the type that is required to be sent to GPO for dissemination. However, of the 5 agencies that did publish eligible documents electronically, only 1 said that it had submitted these documents to GPO. As electronic publishing continues to grow, such conditions may contribute further to the fugitive document problem. Finally, the ongoing agency shift toward electronic publishing is also creating challenges for GPO's existing relationships with its executive branch customers. In responding to our surveys, executive branch agencies expressed overall satisfaction with GPO's products and services and expressed a desire to continue to use these services for at least part of their publishing needs. However, these agencies reported a few areas in which GPO could improve-- for example, in the presentation of new products and services. Further, some agencies indicated that they were less familiar with and less likely to use GPO's electronic products and services. Specifically, these agencies were hardly or not at all familiar with services such as Web page design and development (8 of 28), Web hosting services (8 of 29), and electronic publishing services (5 of 28). As a consequence, these agencies were also less likely to use these services. With the expected growth in electronic publishing and other services, making customer agencies fully aware of its capabilities in these areas is important. The Public Printer and his leadership team recognize the challenges that they face in this changing environment and have embarked upon an ambitious effort to transform the agency. First and foremost, the Public Printer agrees with the need to reexamine the mission and focus of the agency within the context of technological change that is occurring. To assist in that process, our panel of printing and dissemination experts developed a series of options for GPO to consider in its planning. In summary, these options were as follows: * Focus its mission on information dissemination as its primary goal, rather than printing. The panel suggested that GPO first needs to create a new vision of itself as a disseminator of information, not only a printer of documents. As one panel member put it, GPO should end up resembling a bank of information rather than a mint that stamps paper. Further, the panel suggested that GPO develop a business plan that emphasizes direct electronic dissemination methods over distribution of paper documents. The panel suggested that the plan also address (1) improving its Web site, GPO Access, (2) investigating methods to "push" information and documents into the hands of those that need them, (3) modernizing its production processes to publish electronically and print only when necessary, (4) promoting the use of metadata-- descriptive information about the data provided--as a requirement for electronic publishing, and (5) providing increased support for the federal depository libraries' role in providing access to electronically disseminated government information. * Demonstrate value to customers and the public. The panel agreed that while GPO appears to provide value to agencies because of its expertise in printing and dissemination, it is not clear that agencies and the general public realize this. Therefore, GPO needs to collect data to show that, in fact, it can provide value in printing documents, providing expert assistance in electronic dissemination, and disseminating information to the public. * Establish partnerships with collaborating and customer agencies. According to the panel, GPO should establish partnerships with other information dissemination agencies to coordinate standards and best practices for digitizing documents and to archive documents in order to keep them permanently available to the public. In addition, the panel suggested that GPO improve and expand its partnerships with customer agencies. While most agencies recognize GPO as a resource for printing documents, it now has the capability to assist in the collection and dissemination of electronic information. * Improve internal operations. The panel suggested that GPO would need to improve its internal operations to be successful in the very competitive printing and dissemination marketplace. For example, panel members suggested that GPO hire a chief technology officer (in addition to its chief information officer), who would focus on bringing in new printing and dissemination technologies while maintaining older technologies. GPO officials responded positively to these results, commenting that that the panel's suggestions dovetail well with their own assessments. In addition, these officials stated that they are using the results of the panel as a key part of the agency's ongoing strategic planning process. GPO also has taken a number of steps to address the issues raised by the expert panel. Specifically: * GPO has established an Office of New Business Development that is to develop new products and service ideas that will result in increased revenues. GPO officials stated that they are using the results of the panel discussion to categorize and prioritize their initial compilation of ideas and, in this context, plan to assess how these ideas would improve operations and revenue. * Regarding GPO's mission to disseminate information, GPO officials stated that its Office of Innovation and New Technology, established in early 2003, is leading an effort to transform GPO into an agency "at the cutting edge of multichannel information dissemination." A major goal in this effort is to disseminate information while still addressing the need "to electronically preserve, authenticate, and version the documents of our democracy." In addition, the Public Printer has been added to the oversight committee of the National Digital Information Infrastructure and Preservation Program, a national cooperative effort to archive and preserve digital information, led by the Library of Congress. * Further, to address the adequacy of its internal functions, GPO's Deputy Chief of Staff stated that the agency is in the process of searching for a chief technology officer, with the intention that the current chief information officer will focus primarily on internal business processes, and the chief technology officer will focus on identifying the specific technology solutions needed to support its printing and dissemination mission. These efforts are valuable first steps that, if properly followed through and implemented, should contribute to the success of GPO's transformation. The Public Printer recognizes that to successfully transform, GPO will have to ensure that it strategically manages its people. At the center of any serious change management initiative are the people. Thus the key to a successful transformation is to recognize the people element and implement strategies to help individuals maximize their full potential in the organization. In our October 2003 report, we stated that under the Public Printer's direction, GPO also had taken several steps that recognize the important role strategic human capital management plays in its transformation. For example, GPO established and filled the position of Chief Human Capital Officer (CHCO), shifted the focus of existing training, expanded opportunities for more staff to attend needed training, and enhanced recruitment strategies. We also made numerous recommendations to GPO on the steps it should take to strengthen its human capital management in support of its transformation. These recommendations focused on the following four interrelated areas: * communicating the role of managers in GPO's transformation, * strengthening the role of the human resources office, * developing a strategic workforce plan to ensure GPO has the skills and knowledge it needs for the future, and * using a strategic performance management system to drive change. GPO has taken or plans to take steps that address these recommendations. According to the CHCO, a performance element and standard is being added to all managers' performance plans to address their role as communicators within GPO. Managers are now required to meet with their employees at a minimum of once a month with key information from these meetings communicated to the CHCO. In addition, according to the CHCO, the human resources office has been reorganized into teams responsible for a particular GPO division, serving as a "one-stop shop" for all of the divisions' human resource needs. The intention is to fully integrate human capital management throughout the agency's operational divisions. All human resources office employees will be trained as human resource generalists in the full range of human resources activities including change management, strategic human resource planning, position classification, recruitment and placement, benefits, performance management, career development, and labor/employee relations. Training will be provided by a combination of in-house talent and outside vendors to upgrade the skills of current human resources staff. Additionally, GPO has hired a Director of Workforce Development, Education, and Training to manage the expanding training program at GPO. The human resources office plans to survey GPO's operational divisions regarding their level of satisfaction with the new human resources office. As a first step in GPO's strategic workforce plan, GPO's CHCO plans to conduct a skills assessment of its workforce within the next 6 months. GPO's newly hired Director of Workforce Development, Education, and Training has met with GPO's senior managers, union leaders, employees, and skills assessment consultants to determine the methodology that will be used for the skills assessment. The skills assessment will include a number of measurement tools and methods. Employees will be asked to participate in taking assessment inventories, skills tests, and electronic and paper-based surveys. While the skills assessments are being completed, GPO's leadership plans to identify the critical skills and competencies that GPO will need for its transformation. As an interim effort, GPO is in the process of surveying its managers to identify skills that are lacking for large groups of employees. For example, GPO's Chief Information Officer identified the need for staff to have enhanced project management skills, and the human resources office has worked to provide training to GPO staff to address this gap. Finally, GPO's CHCO is initiating a pay for performance pilot program. The plan is to pilot the new system with Senior Level Service employees, and will offer three levels of bonus for employees who meet at least 80 percent of their goals. GPO officials have contacted other federal agencies to benchmark pay for performance systems, including us, and has examples of performance plans and goals from at least five federal agencies and from six business and educational institutions. While GPO has made progress on human capital initiatives, significant challenges remain. For example, the restructuring and creation of many new positions within GPO produces a great deal of work for the human resource office. Developing position descriptions, posting new job opportunities, and vetting applications--all the while being reorganized and trained to do new tasks--will stretch the human resource office. Although the human resource office's culture is becoming more collaborative, program officials and human resource officials acknowledged that the cultural change is difficult and will take time. Given these challenges, continued top leadership commitment will be needed to reinforce and sustain the progress the human resource office is making to change its culture. Effective integration and alignment of GPO's human capital approaches with its strategies for achieving mission and programmatic goals and results will be a key factor in successfully transforming GPO and sustaining high performance. As GPO moves forward to draft its strategic plan, it will have the opportunity to revisit its progress in human capital management and focus the human resource office's priorities on areas that contribute most to accomplishing the goals and objectives in the strategic plan. Developing a strategic workforce plan that is linked to the strategic plan will undoubtedly be a key activity for GPO as it moves forward in the second year of its transformation. GPO is also taking steps to put greater emphasis on customer needs. Based on executive agencies' responses to our surveys, we provided observations and suggestions for action to GPO. Specifically, we suggested that the agency consider * working with executive branch agencies to examine the nature of their in-house printing and determine whether it could provide these services more economically; * addressing the few areas in which executive branch agencies rated its products, services, and performance as below average, * re-examining its marketing of electronic services to ensure that agencies are aware of them; and * using the results of the surveys to work with agencies to establish processes that will ensure that eligible documents (whether printed or electronic) are forwarded to GPO for dissemination to the public, as required by law. GPO officials agreed with the issues identified by executive branch agencies and said they are already taking action to address them. According to these officials, GPO is * taking a new direction with its Office of Sales and Marketing, including hiring an outside expert and establishing nine National Account Managers, who spend most of their time in the field building relationships with key customers, analyzing their business processes, identifying current and future needs, and offering solutions; * working with its largest agency customer, the Department of Defense, to determine how to work more closely with large in-house printing operations; * evaluating recommendations received from the Depository Library * continuing to implement a Demonstration Print Procurement Project, jointly announced with the Office of Management and Budget on June 6, 2003. This project is to provide a Web-based system that will be a one-stop, integrated print ordering and invoicing system. The system is to allow agencies to order their own printing at reduced rates, with the option of buying additional printing procurement services from GPO. According to GPO, this project is also designed to address many of the issues identified through our executive branch surveys, particularly the depository library fugitive document problem. Such actions, although still in their early stages, should assist GPO in determining how to better serve its customers and address issues such as those involving fugitive documents. In summary, the new printing and dissemination environment at the beginning of the 21st century has created significant challenges for GPO. Agency leadership recognizes these challenges and has made a commitment to transform the agency to function effectively within this changed environment. As part of this effort, the Public Printer has taken an important step by establishing a strategic planning process, which, in part, will consider changes to the agency's future mission and focus. Further, in realizing the importance of effective human capital management, he is establishing the foundation needed to successfully transform GPO. In addition, by placing new emphasis on its customers, the agency is focusing on a key characteristic of high-performing organizations. Fulfilling this commitment, however, will require sustained attention from GPO leadership as well as clear-sighted analysis of the challenges and the actions required in response. In the coming months, we plan to continue to work with these leaders cooperatively as they make further progress in their transformation. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or other members of the committee may have at this time. For further information, please contact Linda D. Koontz at (202) 512-6240 or by e-mail at [email protected]. Other key contributors to this testimony were Barbara Collier, Ben Crawford, Tonia Johnson, Steven Lozano, William Reinsberg, and Warren Smith. Senate Report 107-209 mandated that we perform a comprehensive review of the current state of printing and dissemination of government information and report on strategic options for GPO to enhance the efficiency, economy, and effectiveness of its printing and dissemination operations. In addition, the Chairman of the Legislative Branch Subcommittee, Senate Committee on Appropriations, requested us to carry out a general management review of GPO's operations. As a result of our efforts on the mandate and request to date, we prepared interim briefings for the Legislative Branch Subcommittee, Senate Committee on Appropriations, which we presented to staff of this subcommittee on August 27, 2003, and April 1, 2004. To help explore GPO's options for the future, we contracted with the National Academy of Sciences to convene a panel of experts to discuss (1) trends in printing, publishing, and dissemination and (2) the future role of GPO. In working with the National Academy to develop an agenda for the panel sessions, we consulted with key officials at GPO, representatives of library associations including the Association of Research Libraries and the American Library Association, and other subject matter experts. The National Academy assembled a panel of experts on printing and publishing technologies, information dissemination technologies, the printing industry, and trends in printing and dissemination. This panel met on December 8 and 9, 2003. To obtain information on GPO's printing and dissemination activities--including revenues and costs--we collected and analyzed key documents and data, including laws and regulations, studies of GPO operations, prior audits, historical trends for printing volumes and prices, financial reports and data, and budget and appropriations data. We also interviewed appropriate officials from GPO, the Library of Congress, and the Office of Management and Budget. To determine how GPO collects and disseminates government information, we collected and analyzed documents and data on the depository libraries, the cataloging and indexing program, and the International Exchange Service program. We also interviewed appropriate officials from GPO. To determine executive branch agencies' current reported printing expenditures, equipment inventories, and preferences; familiarity and level of satisfaction with services provided by GPO, and current methods for disseminating information to the public, we developed two surveys of GPO's customers in the executive branch: We sent our first survey to executive agencies that are major users of GPO's printing programs and services. It contained questions relating to the department's or agency's (1) familiarity with these programs and services and (2) level of satisfaction with the customer service function. These major users, according to GPO, account for the majority of printing done through GPO. This survey was sent to 11 departments that manage printing centrally, 15 component agencies within 3 departments that manage printing in a decentralized manner, and 7 independent agencies. A total of 33 departments and agencies were surveyed. The response rate for the user survey was 91 percent (30 of 33 departments and agencies). We sent our second survey to print officers who manage printing services for departments and agencies. These print officers act as liaisons to GPO and manage in-house printing operations. This survey contained questions concerning the department's or agency's (1) level of satisfaction with GPO's procured printing and information dissemination functions; (2) printing preferences, equipment inventories, and expenditures; and (3) information dissemination processes. These agencies include those that were sent the user survey plus two others that do not use GPO services. We sent this survey to 11 departments that manage printing centrally, 15 component agencies within 3 departments that manage printing in a decentralized manner, and 9 independent agencies. A total of 35 departments and agencies were surveyed. The response rate for the print officer survey was 83 percent (29 of 35 departments and agencies). To develop these survey instruments, we researched executive agencies' printing and dissemination issues with the assistance of GPO Customer Services and Organizational Assistance Offices. We used this research to develop a series of questions designed to obtain and aggregate the information that we needed to answer our objectives. After we developed the questions and created the two survey instruments, we shared them with GPO officials. We received feedback on the survey questions from a number of internal GPO organizations including Printing Procurement, Customer Services, Information Dissemination, and Organizational Assistance. We pretested the executive branch surveys with the Department of Transportation and the Environmental Protection Agency. We chose these agencies because each had a long-term relationship with GPO, experience with agency printing, and familiarity with governmentwide printing and dissemination issues. Finally, we reviewed customer lists to determine the appropriate sample size for the executive branch surveys. We did not independently verify agencies' responses to the surveys. Our work on strategic human capital management is based on our October 2003 report on that topic. 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.	Advances in technology have led to more organizations making information available over the Internet and the World Wide Web rather than through print, significantly changing the nature of printing and information dissemination. Government Printing Office (GPO) management recognizes that the new environment in which it operates requires that the agency modernize and transform itself and the way it does business. To assist in this transformation, GAO has been performing a comprehensive review of government printing and information dissemination and of GPO's operations. In this testimony, GAO summarizes the result of its work to date, for which GAO convened a panel of experts on printing and dissemination (assembled with the help of the National Academy of Sciences) to develop options for GPO to consider in its transformation, and surveyed executive branch customers regarding their practices and preferences for printing and dissemination, as well as on their interactions with GPO. The testimony reports on how changes in the technological environment are presenting challenges to GPO and on its progress in addressing actions that GAO's work indicates could advance its transformation effort. The changing technological environment is creating challenges for GPO. Specifically, the agency has seen declines in its printing volumes, printing revenues, and document sales. At the same time, more and more government documents are being created and downloaded electronically, many from its Web site (GPO Access). The agency's procured printing business, once selfsustaining, has experienced losses in 3 of the past 5 years, showing a net loss of $15.8 million. The sales program lost $77.1 million over the same period. In addition, these changes are creating challenges for GPO's longstanding structure for centralized printing and dissemination and its interactions with customer agencies. The Public Printer recognizes these challenges and in response has embarked upon an ambitious transformation effort. To assist in this effort, the panel of printing and dissemination experts GAO convened suggested that in its planning, GPO should focus on dissemination, rather than printing. The panel also provided specific options for it to consider as it transforms itself. GPO officials welcomed the options presented, commenting that the panel's suggestions dovetail well with their own assessments. In addition, these officials stated that they are using the results of the panel as a key part of the agency's ongoing strategic planning process. In addition, in October 2003, we reported that under the Public Printer's direction, GPO had taken several steps that recognize the important role that strategic human capital management plays in its transformation, including establishing and filling the position of Chief Human Capital Officer. At that time, we made numerous recommendations on the further actions it could take to strengthen its human capital management. In response, GPO is beginning to address these recommendations. For example, it has reorganized its human resources office into teams responsible for each of its divisions, serving as a "one-stop shop" for all of a division's human resource needs. It also plans to conduct a skills assessment of its workforce and is initiating a pay for performance pilot.	6,792	637
About 14 percent of the near elderly are uninsured--a rate comparable to that of 45- to 54-year-olds and lower than that among the entire nonelderly population. Differences in labor force attachment, health status, and family income, however, distinguish the near elderly from younger Americans and foreshadow some of the difficulties this age cohort could have in accessing health insurance other than that offered by an employer. The near elderly are a group in transition from the active workforce to retirement. Almost three-quarters of those between the ages of 55 and 61 were employed in 1996, and about half worked full time. In contrast, however, less than one-half of those between the ages of 62 and 64 were employed at all during 1996, with only about one-quarter working full time. Concurrent with leaving the workforce, both the health and income of this group are beginning to decline (see app. I). Compared with individuals between the ages of 45 and 54, the near elderly are more likely to experience health conditions such as diabetes, hypertension, and heart disease. In addition, the near elderly are the most frequent users of many health care services. Their hospital discharge rates and days of hospital care were 51 percent and 66 percent higher, respectively, than those of 45- to 54-year-olds. Furthermore, their expenditures on health care services are estimated to be about 45 percent higher than those of the younger group, while their median family income is about 25 percent less. through the individual market and Medicare. It is not surprising that the near elderly are among the most likely age groups to have insurance and the least likely to be uninsured. Because aging is associated with greater use of health care services, the importance attached to having health insurance should increase with age. In fact, the extent to which the near-elderly purchase individual insurance suggests that this is the case. Whether the near elderly obtained their health insurance through the individual market or through public sources was related to their employment, health, and income status. For example, a relatively high percentage of the near elderly with individual insurance reported that they worked (67 percent) and had excellent or good health (85 percent). In contrast, those with public sources of coverage were more likely to report that they were unemployed (87 percent) or in poor health (69 percent). And compared with those who purchased individual insurance, twice as many with public coverage had incomes under $20,000. The relationship between insurance status and income is not entirely predictable, however, since about 20 percent of the uninsured near elderly had family incomes of $50,000 or more, while almost one-third of those with individual insurance earned less than $20,000. Despite their limited resources, about the same share of the near elderly with low incomes purchased individual insurance as did those with higher incomes. Given the cost of comprehensive coverage in the individual market, those with lower incomes may be purchasing less expensive, limited-benefit products. At the same time, however, income alone may not be the only resource available to individuals. a higher percentage of both groups had low incomes, were minorities, were not working, or were in poor health. Again, however, there were important differences, as the uninsured were more likely to work, be married, have better health, and have higher incomes than those with public insurance. While an estimated 60 to 70 percent of large employers offered retiree health coverage during the 1980s, fewer than 40 percent do so today, and that number is continuing to decline despite the recent period of strong economic growth. Surveys from two benefit consulting firms show that the number of employers offering coverage to early retirees dropped by 8 to 9 percentage points between 1991 and 1997 (see fig. 2). Concurrently, employment has shifted away from firms more likely to offer coverage, that is, from manufacturing to service industries. The decision by some large employers not to offer retiree health benefits will primarily affect future retirees. In fact, one survey sponsored by the Department of Labor suggests that very few of those who were retired in 1994--only about 2 percent--had lost coverage as a result of an employer's subsequent decision to terminate retiree coverage. income in 1994 on health care--an amount that includes not only insurance premiums or employer-required cost sharing but also out-of-pocket expenses for copayments, deductibles, and services not covered by health insurance. (App. II compares the affordability of employer-based early retiree health insurance with that purchased in the individual market.) At the same time employers have increased retiree cost sharing, they have also tightened the eligibility requirements for participation in postemployment health benefits. Most firms now have a minimum service and age requirement, and some tie their own contribution to these minimums. For example, one employer we interviewed required retirees to have 35 years of service to qualify for the maximum employer contribution of 75 percent. In contrast, retirees with 19 years of service are eligible for only a 30-percent employer contribution. Furthermore, if workers change jobs frequently, especially as they become older, they may not qualify for retiree health benefits in the future. According to surveys sponsored by the Labor Department in 1988 and 1994, higher costs for individuals could result in fewer participating in employer-based retiree health plans when such coverage is available. Between 1988 and 1994, the proportion of workers who continued coverage into retirement declined by 8 percentage points. Among those already retired, the proportion covered also declined, falling 10 percentage points over the same 6-year period. Of the approximately 5.3 million retirees who discontinued employer-based benefits in 1994, an estimated 27 percent cited the expense as a factor--up by over one-fifth from the earlier survey. For some retirees, coverage with lower cost sharing through a working or retired spouse may have influenced their decision to decline health benefits from a former employer. are eligible to elect continuation coverage if their former employer had 20 or more workers and offered health insurance. Because the employer is not required to pay any portion of the premium, COBRA may be an expensive alternative for the near elderly--especially since the loss in employer-based coverage is probably accompanied by a decrease in earnings. In 1997, the annual per-employee cost of health insurance for employer-based coverage was about $3,800. However, there is significant variation in premiums as a result of differences in firm size, benefit structure, locale, demographics, or aggressiveness in negotiating rates. For early retirees in one company, annual premiums in 1996 for family coverage ranged, depending on the plan, from about $5,600 to almost $8,000. Since this firm paid the total cost of practically all of the health plans it offered to current workers, the COBRA cost would have come as a rude awakening to retirees. The limited information available on eligibility for and use of COBRA by Americans in general and the near elderly in particular leaves many important questions unanswered. On the one hand, the data suggest that relatively few near elderly use COBRA; on the other hand, compared with younger age groups, 55- to 64-year-olds are more likely to elect continuation coverage. One database suggests that, on average, 61- to 64-year-olds only keep continuation coverage for a year. The fact that it makes sense for the near elderly who lack an alternate source of coverage and can afford the premium to elect COBRA raises concerns among employers about the impact on overall employer health insurance costs. Employers contend that COBRA's voluntary nature and high costs that result from the lack of an employer subsidy or contribution could result in the enrollment of only those individuals who expect their health care costs to exceed the premium. The costs of near-elderly COBRA enrollees in excess of the premium would, in turn, push up the employer's overall health care expenditures. However, there is no systematically collected evidence on the extent to which such elections affect employer costs. The election of COBRA coverage by some near elderly as well as younger individuals may simply reflect an antipathy to living without health insurance. On the other hand, since COBRA election is associated with job turnover, the demographics of a firm or industry will also affect an employer's insurance costs. For example, a firm with an older workforce that does not offer retiree health benefits may indeed experience higher insurance costs as a result of COBRA elections. In the majority of states, some individuals aged 55 to 64 may be denied coverage in the individual insurance market, may have certain conditions or body parts excluded from coverage, or may pay premiums that are significantly higher than the standard rate. Unlike employer-sponsored coverage, in which risk is spread over the entire group, premiums in the individual markets of many states reflect each enrollee's demographic characteristics and health status. For example, on the basis of experience, carriers anticipate that the likelihood of requiring medical care increases with age. Thus, a 60-year-old in the individual market of most states pays more than a 30-year-old for the same coverage. Likewise, a carrier may also adjust premiums on the basis of its assessment of the applicant's health status. This latter process is called medical underwriting. Since health tends to decline with age, some near elderly may face serious obstacles in their efforts to obtain needed coverage through the individual market. On the basis of the underwriting results, a carrier may deny coverage to an applicant determined to be in poorer health. Individuals with serious health conditions such as heart disease and diabetes are frequently denied coverage, as are those with such non-life-threatening conditions as chronic back pain and migraine headaches. The most recent denial rates for carriers with whom we spoke in February 1998 ranged from zero in states where guaranteed issue is required to about 23 percent, with carriers typically denying coverage to about 15 percent of all applicants. Carriers may also offer coverage that excludes a certain condition or part of the body. A person with asthma or glaucoma, for example, may have all costs associated with treatment of those conditions excluded from coverage. products available in the individual markets of Colorado and Vermont are at least 10 percent and 8.4 percent, respectively, of the 1996 median family income of married near-elderly couples. In contrast, the average retiree contribution for employer-subsidized family coverage is about one-half of these percentages. While at least 27 states have high-risk insurance pools that act as a safety net to help ensure that individuals with health problems can obtain coverage, the cost is generally 125 to 200 percent of the average or standard rate charged to healthy individuals in the individual market for a comparable plan. Individuals who have been rejected for coverage by at least one carrier generally qualify for their state's high-risk pool. However, participation in some state pools is limited by enrollment caps. In addition to state initiatives, federal standards established by HIPAA guarantee some people leaving group coverage access to the individual market--a guarantee referred to as group-to-individual portability. Each state establishes a mechanism so that these "HIPAA eligibles" have access to coverage regardless of their health status, and insurance carriers may not impose coverage exclusions. To be eligible for a portability product, however, an individual must have had at least 18 months of coverage under a group plan without a break of more than 63 days, and have exhausted any COBRA or other conversion coverage available. One survey estimates that 61- to 64-year-olds typically remain enrolled in COBRA for only 12 months--6 to 24 months short of exhausting COBRA coverage. Since HIPAA changes the incentives for electing and exhausting COBRA coverage, past evidence may not be a guide to future use. However, depending on their state's mechanism, the premiums faced by unhealthy individuals who are eligible for a HIPAA product, like those faced by unhealthy individuals who have always relied on the individual market for coverage, may be very expensive. baby-boom generation. Experts are divided about the impact on employer-based coverage of actions that increase costs for the private sector, such as increasing the eligibility age for Medicare. In responding to Medicare's financial crisis, policymakers need to be aware of the potential for the unintended consequences of their actions. In addition to events that could affect the erosion in employer-based retiree coverage, use of the HIPAA guaranteed-access provision by eligible individuals may improve entry into the individual market for those with preexisting health conditions who lack an alternative way to obtain a comprehensive benefits package. Depending on the manner in which each state has chosen to implement HIPAA, however, cost may remain an impediment to such entry. Since group-to-individual portability is only available to qualified individuals who exhaust available COBRA or other conversion coverage, HIPAA may lead to an increased use of employer-based continuation coverage. Moreover, additional state reforms of the individual market may improve access and affordability for those who have never had group coverage or who fail to qualify for portability under HIPAA rules. Mr. Chairman, this concludes my statement. I will be happy to answer your questions. Rate per 1,000 people per year Rate per 1,000 people per year Average length of stay (days) Using data from the March 1997 CPS and 1995 and 1996 information on insurance premiums, we estimated the percentage of median income that a 55-to 64-year-old would have to commit to health insurance under a number of possible scenarios, including purchasing coverage through the individual market in a community-rated state (Vermont) as well as one that had no restrictions on the premiums that could be charged (Colorado), using 1996 rates for a commonly purchased health insurance product; and cost sharing under employer-based coverage using 1995 Peat Marwick estimates of the lowest, highest, and average retiree contribution. While no official affordability standard exists, research suggests that older Americans commit a much higher percentage of their income to health insurance than do younger age groups. Congressional Budget Office calculations based on data from the Bureau of Labor Statistics' Consumer Expenditure Survey indicate that between 1984 and 1994, spending by elderly Americans aged 65 and older on health care ranged from 10.2 percent to 12.9 percent of household income. In 1994, elderly Americans spent 11.2 percent of household income, about three times as much as younger age groups. These estimates include costs other than premiums or employer-imposed cost sharing--for example, copayments, deductibles, and expenditures for medical services not covered by insurance. Table II.1 compares the cost of health insurance purchased in the individual market and employer-imposed cost sharing for early retirees with the median income for the near elderly in 1996. As demonstrated by table II.1, the near elderly's share of employer-subsidized coverage is generally lower than that for coverage purchased through the individual market. For example, on average, employer-based family coverage for retirees at $2,340 annually represents 4.7 percent of median family income. In contrast, costs in the individual market can be significantly higher--in part because they lack an employer subsidy. In Colorado, the annual premium for a commonly purchased individual insurance product in 1996 was about $2,500 for single coverage and $5,000 for a couple--representing about 12 percent and 10 percent, respectively, of median income for 55- to 64-year-olds. While less expensive than the Colorado example, premiums for health insurance through the individual market in Vermont--a community-rated state--would represent 9.9 percent of median income for single coverage and 8.4 percent of median income for a couple. For more than one-half of the near elderly, these individual market costs typically exceed average health care spending for Americans under age 65--in some cases significantly. In April 1998, the Center for Studying Health System Change reported that older adults who purchased individual coverage typically spent a considerably higher proportion of their income on premiums than other adult age groups--about 9 percent for the 60- to 64-year-old group. Preferred provider organization/$250 Preferred provider organization/$500 Preferred provider organization/$500 $214-$602 (low end and high end)$160-$309 (rural/urban) 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 access to health insurance by near-elderly Americans aged 55 to 64, focusing on the near elderly's: (1) health, employment, income, and health insurance status; (2) ability to obtain employer-based health insurance if they retire before they are eligible for Medicare; and (3) access to individually purchased coverage or employer-based continuation insurance and the associated costs. GAO noted that: (1) the overall insurance picture of the near elderly is no worse than that of other segments of the under-65 population and is better than that of some younger age groups; (2) the current insurance status of the near elderly is largely due to: (a) the fact that many current retirees still have access to employer-based health benefits; (b) the willingness of near-elderly Americans to devote a significant portion of their income to health insurance purchased through the individual market; and (c) the availability of public programs to disabled 55- to 64-year-olds; (3) the individual market and Medicare and Medicaid for the disabled often mitigate declining access to employer-based coverage for near-elderly Americans and may prevent a larger portion of this age group from becoming uninsured; (4) the steady decline in the proportion of large employers who offer health benefits to early retirees, however, clouds the outlook for future retirees; (5) in the absence of countervailing trends, it is less likely that future 55- to 64-year-olds will be offered health insurance as a retirement benefit, and those who are will bear an increased share of the cost; (6) access and affordability problems may prevent future early retirees who lose employer-based health benefits from obtaining comprehensive private insurance; (7) the two principal private insurance alternatives are continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) and the individual market; (8) although 55- to 64-year-olds who become eligible for COBRA are more likely than younger age groups to enroll, the use of continuation coverage by early retirees is relatively low; (9) with respect to individual insurance, the cost may put it out of reach of some 55- to 64-year-olds; (10) some states have taken steps to make individual insurance products more accessible; (11) for eligible individuals leaving group coverage who exhaust any available COBRA or other conversion coverage, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) guarantees access to the individual market, regardless of health status and without coverage exclusions; (12) since the new federal protections under HIPAA hinge on exhausting COBRA, the incentives for enrolling and the length of time enrolled could change; and (13) the premiums faced by some individuals eligible for a HIPAA guaranteed-access product, however, may be substantially higher than the prices charged to those in the individual market who are healthy.	3,712	616
Iraq is ethnically, religiously, and linguistically diverse. Ethnically, Arabs comprise about 75 percent of the population of Iraq, with Kurds comprising around 15 percent and other ethnic groups, such as Turkoman and Assyrians, comprising the remaining 10 percent. Religiously, Shi'a and Sunni Muslims make up 97 percent of the population of Iraq, with non-Muslim groups--such as Baha'i, Christians, Sabean Mandaeans, and Yazidis--comprising the remaining 3 percent of the population. Some communities may be an ethnic majority but a religious minority (such as Arab Christians), while other communities may be an ethnic minority but a religious majority (such as Shi'a Shabaks). For the purpose of this report, we refer to the following religious and ethnic communities as minority groups: Anglican, Armenian, Assyrian, Baptist, Chaldean, Coptic, Greek Orthodox, Latin Catholic, Presbyterians, Sabean Mandaean, Shabak, Syriac, Turkoman, and Yazidi. Since 2003, Iraq's minority groups have experienced religiously and ethnically motivated intimidation, arbitrary detention, killings, abductions, and forced displacements, as well as attacks on holy sites and religious leaders. In August 2007, coordinated truck bombings killed some 400 Yazidis and wounded more than 700. In August 2009, a series of attacks in Ninewa province killed almost 100 and injured more than 400 from the Yazidi, Shabak, and Turkoman communities. In February 2008, a Chaldean archbishop was kidnapped and killed--the third senior Christian religious figure to be killed in the city of Mosul since 2006. A series of attacks against Christians occurred in 2010, including an attack in October on a Catholic church in Baghdad that left more than 50 dead and 60 wounded. As a result of such violence, a significant portion of minority groups has fled either to other parts of the country, becoming internally displaced persons, or to neighboring countries, becoming refugees. According to nongovernmental organizations, religious minorities make up a significant portion of those migrating from locations in southern Iraq to locations in northern Iraq, such as the Ninewa plain region. The International Organization for Migration reports that, in 2010, in the provinces of Dahuk, Erbil, and Ninewa, 49 percent, 24 percent, and 35 percent, respectively, of the internally displaced population were Christian. According to nongovernmental organizations, religious minority groups face increased marginalization and are less able to access public services or employment because of ethnic or religious prejudices. The United Nations reports that, between 2003 and 2005, 36 percent of the Iraqis seeking refugee status in Syria were Christian. In 2007, Iraq's Ministry of Displacement and Migration estimated that nearly half of the minority communities had left the country. According to the U.S. Commission on International Religious Freedom, at least half of the Christians in Iraq have left the country since 2003. Further, the commission reports that since 2003 nearly 90 percent of the roughly 50,000-60,000 Sabean Mandaeans have either fled Iraq or been killed. Concern for Iraq's minority groups led Congress to issue a series of directives beginning in June 2007 to provide assistance to these groups. These directives are as follows: 2008 directive: In December 2007, for fiscal year 2008, the House Committee on Appropriations directed that not less than $10 million of unobligated Economic Support Fund (ESF) account funds provided in prior fiscal years for Iraq should be used to assist religious minorities in the Ninewa plain region of Iraq. Further, the Committee directed that $2 million of such assistance should be provided for microfinance programs and $8 million for internally displaced families in the Ninewa plain region. 2008 supplemental directive: In June 2008, the Explanatory Statement submitted by the Chairman of the Senate Committee on Appropriations explaining the fiscal year 2008 Supplemental Appropriations Act directed that up to $10 million of funds made available under various accounts, including the Migration and Refugee Assistance account, should be made available for programs to assist vulnerable Iraqi religious and ethnic minorities. Further, the Explanatory Statement directed that the Secretary of State should designate staff at the U.S. embassy in Baghdad to oversee and coordinate such assistance. 2010 directive: In December 2009, in the fiscal year 2010 Consolidated Appropriations Act, Congress directed that up to $10 million of ESF account funds should be made available to continue programs and activities to assist minority populations in Iraq, including religious groups in the Ninewa plain region. 2012 directive: In September 2011, the Senate Appropriations Committee report accompanying the fiscal year 2012 appropriations for the Department of State, Foreign Operations, and Related Programs directed the Secretary of State to submit a report detailing U.S. efforts to help ethno-religious minority communities in Iraq, including assistance to build an indigenous community police force and to support nongovernmental organizations in the Ninewa plain region. As of November 2011, USAID and State reported to Congress that they had provided about $40 million in assistance for minority groups in Iraq in response to these directives. According to the agencies, USAID provided $14.8 million for the 2008 directive; USAID and State provided $10.4 million for the 2008 supplemental directive; and State provided $16.5 million for the 2010 directive. In its report to Congress, in response to the 2008 directive, USAID officials identified projects that they believed were in support of minority groups from six existing programs that were designed broadly to assist all Iraqis. However, our analysis of documents found that USAID could not demonstrate how it met the provisions of the 2008 directive because of three weaknesses. First, USAID documents--specifically, the list of projects the agency submitted to Congress--linked only 26 percent of the $14.8 million in assistance directly to the Ninewa plain region. Second, USAID documents generally did not show whether the projects included minority groups among the beneficiaries of the assistance and, specifically, whether $8 million of assistance was provided for internally displaced families. Third, USAID officials and documents did not demonstrate that the agency used unobligated prior year ESF funds to initiate projects in response to the 2008 directive. According to USAID officials, USAID identified projects from six existing programs that were designed broadly to assist all Iraqis. These six existing programs were implemented countrywide; funded many types of activities; and had broad goals related to stabilizing communities and developing agriculture, the economy, and essential services. Accompanying its report to Congress on the 2008 directive, USAID provided a list of 155 projects totaling $14.8 million of assistance to minority groups. USAID could not provide information on how the agency compiled the list of projects. Table 1 provides a description of the six programs and the reported amount of assistance provided in support of Iraq's minority groups for the 2008 directive. The $14.8 million in assistance that USAID reported in response to the 2008 directive represented about 1 percent of the $1.5 billion in assistance provided through these six programs. Our analysis of USAID documents found that USAID could not demonstrate that it met the provisions of the 2008 directive because of three weaknesses. First, although USAID reported that it provided $14.8 million in assistance to minority groups through existing programs to meet the 2008 directive, its documents could link only $3.82 million (26 percent) of that amount to the Ninewa plain region. The documents linked $1.67 million (11 percent) of the assistance to areas outside of the Ninewa plain region. USAID documents did not provide sufficient detail to determine the location of the remaining $9.35 million (63 percent). Second, USAID documents generally did not show whether the projects included minority groups among the beneficiaries of the assistance and whether $8 million was provided specifically for internally displaced families. According to USAID officials, the agency generally did not track its beneficiaries by religious affiliation. For $14.7 million of the $14.8 million in assistance, USAID documents did not provide sufficient detail for us to determine that Iraqi minority groups were among the beneficiaries of all of the projects. Only 1 of the 155 projects ($66,707 out of $14.8 million) provided sufficient detail in its documents for us to determine that the assistance was directed to internally displaced families; however, the location of that project was outside of the Ninewa plain region. While USAID documents listed $2 million in funding for a microfinance institution, USAID officials were unable to provide detail on whether all of these loans were disbursed in the Ninewa plain region. Third, USAID officials and documents did not demonstrate that the agency used unobligated prior year ESF funds to initiate projects in response to the 2008 directive. USAID could document that the agency used unobligated prior year funds for two of the six programs after the date of the 2008 directive. However, according to USAID officials, the agency did not use unobligated prior year funds for the remaining four programs. According to USAID and State documents, the agencies approved $26.9 million in assistance for minority groups, primarily through the QRF program.million in response to the 2008 supplemental directive and State approved $16.5 million of assistance in response to the 2010 directive. For the 2008 supplemental directive, the agencies approved assistance in support of minority groups in four provinces. For the 2010 directive, State approved assistance in eight provinces. At least $4.8 million of this assistance was linked to the locations mentioned in the directive. Specifically, both agencies approved assistance totaling $10.3 USAID and State approved 36 projects in response to the 2008 supplemental directive and 90 projects in response to the 2010 directive. QRF projects utilized four funding mechanisms: micro-grants, micro- purchases, grants, and direct procurements. Micro-purchases and micro- grants were used for projects costing up to $25,000; grants and direct procurements were used for projects costing over $25,000. Projects included procuring hospital equipment, paving roads, and constructing water lines, among others and fell into four major categories (see table 2 below). Reported projects varied in cost and scope, ranging from about $2,000 to $1.6 million. For example, in response to the 2008 supplemental directive, USAID reported that it initially approved $1.3 million to assist in the reconstruction of a village that suffered significant damage from a coordinated car-bomb attack. In response to the 2010 directive, State reported that it initially approved $458,000 for a project in a municipality that had an influx of internally displaced Christians. According to State officials, the final disbursed amount of assistance likely will be lower than the amount of assistance initially approved and reported to Congress because many projects cost less than the initial approved estimate. State officials told us that they completed reconciling project disbursed amounts for the QRF program in early March 2012. According to these officials, the final disbursed amount was about the same as the approved amount for the 2008 supplemental directive and $420,000 less than the approved amount for the 2010 directive. State met the provision of the 2008 supplemental directive to designate staff at the U.S. embassy in Baghdad to oversee and coordinate assistance to minority groups. In 2008, the U.S. embassy in Baghdad announced the appointment of a special coordinator for minority issues and has since appointed only senior staff to that position, which is evidence--according to State officials--of State's prioritization of assistance in support of minority groups. The current special coordinator, who is an ambassador as well as the Assistant Chief of Mission for Assistance Transition in Iraq, told us that he conducts outreach to Iraq's minority communities, including religious leaders and members of the Iraqi diaspora in the United States. In addition, he said that State organizes dialogues and meetings for Iraqi religious minority group leaders in an effort to improve connections and interactions among Christian minority communities in Iraq. Moreover, in January 2011, the U.S. embassy in Baghdad established a working group for minority issues to further coordinate interagency efforts and outreach to minority communities. This working group, led by the special coordinator, meets on a monthly basis and includes representatives from State, USAID, and the Departments of Justice and Defense. According to U.S. embassy officials, the special coordinator intends to continue to coordinate the U.S. embassy's efforts in support of minority groups during fiscal year 2012. USAID and State could generally demonstrate how they met the 2008 supplemental and 2010 directives through their use of the QRF program, which served as the primary mechanism for the agencies to categorize, track, monitor, and report on minority directive projects, among others. Specifically, the agencies took the following five steps to provide assistance that supported minority groups through the QRF program: Made minority directive projects one of the goals of the QRF program. As directed by the U.S. embassy in Baghdad, the Office of Provincial Affairs made support of minority groups one of the thematic goals of the QRF program in 2008. Thus, USAID and State initiated new projects through the PRTs in support of this goal at that time. State established the QRF program in 2007 to enable PRTs in Iraq to support local entities through short-term projects to fill gaps that were not funded through existing programs. QRF projects under $25,000 were implemented by PRTs and projects over $25,000 mostly were implemented by USAID or State's implementing partner. Categorized projects. USAID and State officials categorized projects in the agencies' respective QRF program databases by thematic goal. The agency officials categorized projects in support of minority groups as "Minority Directive" upon initiation, which allowed them to track these projects for reporting purposes. For the 14 projects that we spot-checked, the agencies were able to provide supporting documents from their databases that included information about the projects and showed that projects were categorized as "Minority Directive." Further, as a result of categorizing projects, the agencies were able to produce lists that reported the amount of assistance approved in support of minority groups for each directive. These lists also showed that numerous minority groups were beneficiaries. Conducted outreach to identify potential beneficiaries. To inform potential beneficiaries of the availability of assistance through the QRF program, PRTs and the special coordinator for minority issues in Baghdad conducted informal outreach to community members, religious leaders, elected officials, and civil society groups. For example, the special coordinator met with minority group leaders to discuss funding needs for projects, such as promoting private investment opportunities. In addition, the agencies identified potential beneficiaries through existing U.S. military and USAID relationships with Iraqi officials and organizations. Conducted final site visits and prepared close-out reports. According to USAID and State officials, PRTs or the QRF program implementing partner conducted final site visits and prepared project close-out reports. We found that the implementing partner prepared close-out reports for all 14 projects that we spot-checked. In the close-out reports, the implementing partner reported on whether the grant objectives were met and whether the grantee met all of their responsibilities and reporting requirements, among others. In addition, the implementing partner received a final report from the grant recipient that included information on the project's impact and on its beneficiaries. Because the security situation hindered the agencies' ability to independently verify the implementing partner's reports, both agencies relied on American and local PRT staff and, in some cases, the U.S military to verify the implementing partner's reports through photographs and site visits. However, according to USAID and State officials, PRTs did not always complete or document site visits for all projects. State officials said that site visits by U.S. government personnel could compromise the security of project sites and Iraqi recipients. Conducted third-party assessments. Both USAID and State conducted third-party assessments at the close of their respective components of the QRF program. Completed in 2010, the USAID evaluation concluded that the information reported by the implementing partner was valid and recipients received the equipment that was agreed upon in the grant agreement. As of February 2012, State had not finalized its third party's QRF program evaluation. During our fieldwork in Iraq, Iraqi recipients told us that assistance reached their communities. The QRF program--which served, among other things, as USAID's and State's primary mechanism to provide, categorize, track, monitor, and report on assistance to minority groups in Iraq from 2008 to 2011--ended in December 2011. Further, PRTs--which helped identify and monitor QRF projects--ceased operations during the drawdown of U.S. forces from Iraq during 2011. U.S. forces completely withdrew from Iraq in December 2011. According to USAID and State officials, the two agencies have continued to assist Iraq's minority groups through the obligation of an additional $28 million in reprogrammed ESF funds from prior fiscal years. USAID officials told us they obligated $18 million through a program for microfinance loans to members of minority groups in September 2011. State officials told us that they obligated $10 million, in September 2011, to support one project outside of Baghdad. According to officials from both agencies, they have mechanisms in place to categorize, track, monitor, and report on assistance to minority groups. According to State officials, State intends to continue providing assistance for minority groups in Iraq in fiscal year 2012. However, the officials could not discuss State's plans for providing assistance because, as of March 20, 2012, State had not yet determined its funding allocations for Iraq for fiscal year 2012. We provided drafts of this report to State and USAID. Both agencies submitted technical comments on the draft that were incorporated, as appropriate. State did not submit an agency comment letter in response to the draft. In its agency comment letter, USAID remarked that despite GAO's findings, USAID met the needs of internally displaced persons and religious minorities to a greater extent than is presented in this report (see app. II). However, USAID did not provide additional documentation to support its statement. We continue to believe that USAID could not demonstrate how its reported assistance met the provisions of the 2008 directive. We are sending copies of this report to interested congressional committees, the Secretary of State, and the Administrator of USAID. The report is also available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff members have any questions, 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 key contributions to this report are listed in appendix III. Our objectives were to examine the extent to which (1) the U.S. Agency for International Development (USAID) demonstrated that the assistance it reported to Congress met the 2008 directive and (2) USAID and the Department of State (State) demonstrated that the assistance they reported to Congress met the 2008 supplemental and 2010 directives. This report is a publicly releasable version of a prior GAO report, issued in May 2012, that State and USAID had designated Sensitive But Unclassified. To address the first objective, we reviewed the provisions of the 2008 directive and analyzed USAID's report to Congress and a list of projects summarizing the reported amount of assistance provided in response to the 2008 directive. To determine (1) the amount of assistance that USAID provided in the Ninewa plain region and (2) if minority groups were among the beneficiaries, we analyzed the list of projects and project descriptions to identify locations where possible and beneficiaries where identified. We also reviewed program documents, including program evaluations and contracts. We interviewed USAID officials in Washington, D.C., and Iraq, as well as former USAID-Iraq program managers in Washington, D.C., and via teleconference in Cairo, Egypt. To address the second objective, we analyzed (1) the provisions of the 2008 supplemental and 2010 directives; (2) State's report to Congress summarizing assistance in response to the 2008 supplemental and 2010 directives; and (3) USAID and State's project lists. The project lists for the 2008 supplemental and the 2010 directives included information such as the project name, grant identification number, project description, project location, minority group served, and the initial approved estimate of each project's cost. We asked State to provide us with project lists that included the recipient's name. State officials told us that they could not provide us with this information due to security concerns. However, we determined that the project lists were sufficiently reliable for our purposes by interviewing agency officials in Washington, D.C., and reviewing the QRF database, in Iraq, that was used to create the lists. To address the second objective, we also (1) interviewed USAID and State officials in Washington, D.C., and Iraq; (2) conducted a spotcheck of project documents, such as proposals and close-out reports; and (3) conducted fieldwork in Baghdad and Erbil, Iraq, in October 2011. For the spotcheck, we judgmentally selected 14 of the 126 projects to include a crosssection of characteristics such as year (2008 or 2010), funding amount, and type of project (i.e., procurement, training, etc.). We also interviewed USAID and State officials in Washington, D.C., and Iraq (including former Provincial Reconstruction Team staff); USAID and State's implementing partner; and Iraqi recipients of assistance, such as officials of religious and nongovernmental organizations. During our fieldwork, we met with 14 Iraqi recipients of assistance who received funding for 28 of the 126 projects and collectively represented about 30 percent of the $26.9 million in assistance provided in response to the 2008 supplemental and 2010 directives. However, their views are not generalizable to all recipients of this assistance. Due to security constraints, we were able to visit only one project site in Iraq, which is located in Baghdad. This site received one of the largest amounts of funds for the 2008 supplemental and 2010 directives. We conducted this performance audit from June 2011 to July 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. Key contributors to this report include Judith McCloskey (Assistant Director), Jenna Beveridge, Lisa McMillen, and Sushmita Srikanth. In addition, Debbie Chung, Martin De Alteriis, Etana Finkler, Mary Moutsos, and Michael Rohrback provided technical assistance.	Since 2003, minority groups in Iraq have experienced religiously and ethnically motivated attacks, killings, and forced displacements. Concern for Iraqi religious and ethnic minorities led various congressional committees and Congress as a whole to issue a series of directives to provide assistance to these groups. The 2008 directive directed that $10 million of unobligated ESF funds from prior years be provided to assist religious minorities in the Ninewa plain region of Iraq. The 2008 supplemental and 2010 directives directed that up to $10 million be provided to assist religious and ethnic minority groups in Iraq for each directive. USAID and State reported to Congress that they met the provisions of these three directives by providing $40 million in assistance to Iraqi minority groups. Congressional requesters asked GAO to examine the extent to which (1) USAID demonstrated that the assistance it reported to Congress met the 2008 directive and (2) USAID and State demonstrated that the assistance they reported to Congress met the 2008 supplemental and 2010 directives. To address these objectives, GAO analyzed documents and interviewed officials from State and USAID in Washington, D.C., and Iraq. This report is a public version of a Sensitive But Unclassified report issued in May 2012. GAO is not making recommendations. Both agencies provided technical comments on the draft that were incorporated, as appropriate. State did not submit an agency comment letter in response to the draft. In its agency comment letter, USAID stated that it met minority groups' needs to a greater extent than is presented in the report. GAO continues to believe that USAID could not demonstrate how its reported assistance met the provisions of the 2008 directive. GAO found that the United States Agency for International Development (USAID) could not demonstrate how the projects that it reported to Congress met the provisions of the 2008 directive because of three weaknesses. First, USAID documents--specifically, the list of projects the agency submitted to Congress-- linked only $3.8 million of the $14.8 million in assistance (26 percent) directly to the Ninewa plain region. Second, USAID documents generally did not show whether the projects included minority groups among the beneficiaries of the assistance and specifically whether $8 million of assistance was provided for internally displaced families. Third, USAID officials and documents did not demonstrate that the agency used unobligated prior year Economic Support Fund (ESF) funds to initiate projects in response to the 2008 directive. USAID and the Department of State (State) generally could demonstrate how they met the 2008 supplemental and 2010 directives. According to USAID and State documents, the agencies approved $26.9 million in assistance--primarily in essential services and humanitarian assistance--to meet the 2008 supplemental and 2010 directives' provisions to spend up to $10 million for each directive to assist religious and ethnic minority groups in Iraq (see figure below). In addition, as directed by Congress, the U.S. embassy in Baghdad designated staff at the embassy to oversee and coordinate assistance to minority groups in 2008. Using the Quick Response Fund (QRF) program, USAID and State took five steps that generally demonstrated how they met the 2008 supplemental and 2010 directives. First, the U.S. embassy in Baghdad directed that support of minority groups be made one of the thematic goals of the QRF program in 2008. Second, USAID and State categorized projects in their respective QRF databases by thematic goal. Third, the U.S. embassy in Baghdad and its Provincial Reconstruction Teams (PRTs) conducted outreach to inform potential beneficiaries of the availability of assistance through the QRF program. Fourth, PRTs or the QRF implementing partner conducted final site visits and prepared project close-out reports. Fifth, both USAID and State conducted third-party assessments at the close of their respective components of the QRF program. The QRF program closed and the PRTs ceased their operations by the end of 2011, as planned. According to USAID and State officials, the two agencies continue to assist minority groups through the obligation of an additional $28 million in reprogrammed ESF funds from previous years.	4,907	865
Historically, federal outlays and receipts generally have been reported on a cash basis. That is, receipts are recorded when received and outlays are recorded when paid without regard to the period in which the taxes and fees were assessed or the costs resulting in the outlay were incurred. This has an advantage in that the deficit (or surplus) closely approximates the cash borrowing needs (or cash in excess of immediate needs) of the government. However, over the years analysts and researchers have raised concerns that the current cash- and obligation-based budget does not adequately reflect the cost of some programs--such as federal credit or insurance--in which the government makes a commitment now to incur a cost, but some or most of the cash flows come much later. This means that for some programs the current cash- and obligation-based budget does not recognize the full costs up front when decisions are made or provide policymakers the information to compare the full costs of a proposal with their judgment of its benefits. Programs such as federal employee pensions, retiree health care, and environmental liabilities are examples where the cash basis of accounting does not represent the government's full commitments. Environmental liabilities are the result of federal operations that create hazardous waste that federal, state, or local laws and/or regulations require the federal government to clean up. Because these cleanup costs are not usually paid until many years after the government has committed to the operation creating the waste, policymakers have not been provided complete cost information when making decisions about undertaking the waste-creating operation. Although all agencies are not yet in compliance, current federal accounting standards require agencies to estimate and report in their financial statements their liability for cleanup costs when they are deemed probable and measurable. Traditionally, budget guidance has required agencies to estimate the funds expected to be obligated for cleanup activities during the budget year in which the funds are needed. However, in recent years OMB also has issued guidance for agencies to estimate life-cycle costs when purchasing capital assets. Among the items to be included in the total amount of these life-cycle costs are decommissioning and disposal costs. The life-cycle cost estimates are reported to OMB in budget Exhibit 300 and do not separately break out cleanup and disposal costs. The exhibits are for OMB's informational purposes only; they are not included in the President's budget request or agency's budget justification provided to Congress. Department of Energy (DOE) and Department of Defense (DOD) officials told us that the cleanup portion of these total costs has traditionally not been separated out or identified at the time of purchase. This is because estimates developed at that time were very preliminary, often based only on a percentage of total costs rather than specific unit costs. To examine ways that budgeting might be improved for environmental liabilities, we focused on three key questions: (1) What are the federal government's reported environmental liabilities? (2) How are environmental liabilities currently valued for financial statements and budgeted at selected programs within DOD and DOE? and (3) How could budgeting for these environmental liabilities be improved? To determine the federal government's reported environmental liabilities, we extracted data from agencies' fiscal year 2001 consolidated balance sheets. Because this analysis showed that about 98 percent of the government's reported environmental liabilities were associated with DOD and DOE, we focused our review on the practices of these two departments. We reviewed published reports, related guidance, and budget and financial statement documentation from each agency. We also interviewed DOD, DOE, and OMB staff to discuss current budget practices. To develop alternative approaches to improve budgeting for environmental liabilities, we discussed ideas with staff from DOD, DOE, OMB, and CBO. We also met with appropriations subcommittee staff with jurisdiction over DOD and DOE to discuss the type of information that they would find most helpful. We analyzed the pros and cons of the approaches based on the extent to which they would (1) provide meaningful, full-cost information to decision makers up front, (2) provide disincentives for artificially low cost estimates, and (3) present implementation issues, such as additional administrative burdens for agencies or increased complexity to the budget and appropriations process. Finally, to understand how private organizations provide for environmental cleanup, we conducted limited research of private sector budgeting practices. However, little information was available about up-front decision making. Our work was done in Washington, D.C., in accordance with generally accepted government auditing standards. We provided a draft of this report to the Secretary of Defense, the Secretary of Energy, and the Director of OMB. Comments are summarized in the "Agency Comments" section. Nearly all of the $307 billion in environmental liabilities reported for fiscal year 2001 was associated with DOD and DOE. About 78 percent of these liabilities were associated with DOE and represent the environmental legacy resulting from the production of nuclear weapons. The 21 percent associated with DOD is primarily for environmental restoration of military installations and disposal of nuclear materials. The remaining environmental liabilities associated with other federal agencies include such things as replacement of underground storage tanks, asbestos removal, and lead abatement. Some of this remaining 1 percent will be paid out of Treasury's judgment fund. DOD and DOE manage environmental cleanup quite differently: DOD's decentralized activities are managed within the individual services, at the program level, while DOE's activities are centralized within its Environmental Management (EM) program. For example, DOD considers environmental liabilities in two categories: (1) disposal and (2) environmental restoration/cleanup. Army's chemical weapons and Navy's nuclear-powered carriers, ships, and submarines dominate DOD's disposal liabilities. Funding for disposal is provided to the Army, Navy, and Air Force Operation and Maintenance (O&M) accounts. Restoration/cleanup activities are largely addressed through the Defense Environmental Restoration Program (DERP), which is funded through five environmental restoration accounts for Army, Navy, Air Force, Formerly Used Defense Sites (FUDS), and Defense-wide. The funds in these accounts are then transferred to the service levels' O&M budgets. In contrast, within DOE, facilities that have reached the end of their useful lives and require cleanup typically are transferred to EM, along with some additional funds for surveillance and maintenance. EM also receives budget authority directly through an appropriation. Thus, budgeting and funding for cleanup is almost entirely handled by EM, not individual program offices. EM's program emphasis is on site closure and project completion. Its activities include environmental restoration, waste management, and nuclear material and facility stabilization. Figures 1 and 2 illustrate the flow of cleanup funds for these two departments. Current budget guidance and accounting standards both require agencies to estimate cleanup and disposal costs. However, neither requires that these costs be separately estimated for decisions when assets are being considered for purchase--before the government is legally committed to paying these costs. While information about private sector decision making on these costs is limited, at least some organizations set aside funds to address these future cleanup and disposal costs. Agencies have little or no budgetary incentive to develop estimates of future cleanup costs. With respect to primary budget data, agencies do not reflect associated cleanup costs in their budget requests for new waste- producing assets. Funding for such cleanup costs is not requested until many years later when the waste produced is ready to be cleaned up or disposed of. Budget guidance does require agencies to estimate cleanup costs as part of total life-cycle costs when requesting funds for new assets. However, agencies are not required to specifically break out the cleanup portion of these costs. DOD and DOE officials told us that separating out the cleanup/disposal component from total life-cycle costs would be relatively difficult because their estimates of cleanup costs are very preliminary. Often, a percentage of the purchase price instead of a specific unit cost is used as the cost estimate. Moreover, they noted that future, unknown changes in regulatory requirements and technology make it difficult to develop what they believe to be reasonable and credible cost estimates at the time an asset is acquired. However, since estimates for retiring assets are being made under today's regulatory requirements and technology, the same methodology might be used for preliminary estimates with respect to new assets. This would permit comparisons between or across different assets. Over time, as laws and technology change, periodic cleanup cost reestimates could be made. Clear definitions for hazardous substances also may need to be resolved to ensure that reasonable estimates are developed. For example, the Federal Accounting Standards Advisory Board (FASAB) defines hazardous wastes in relatively broad terms (see footnote 1) for accounting purposes. However, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), which requires the cleanup of waste sites, provides a substantially more detailed definition. While accounting standards promote an earlier recognition of environmental liabilities than does the budget, they do not call for estimates of environmental liabilities before an acquisition decision is made because they recognize these cleanup costs only after a transaction has occurred and an asset is put into service. Given that these conditions are met, agencies must estimate the environmental liabilities associated with all existing assets. Despite this, not all agencies comply with accounting standard requirements to estimate the environmental liabilities associated with all of their assets. For example, DOD typically records the liabilities associated with assets for which cleanup or disposal is imminent. DOD's inability to comply with requirements for environmental liabilities was one of several reasons why independent auditors were not able to render an opinion about DOD's fiscal year 2001 financial statements. Absent budgetary incentives to estimate future environmental liabilities, these cost estimates will not be developed as assets are considered for purchase--the time when decision makers still have an opportunity to judge whether the government should commit to these costs. Data about how non-federal organizations consider environmental liabilities when planning to purchase assets or start new projects were largely unavailable. However, there are cases where companies set aside funds for future cleanup costs. For example, the Nuclear Regulatory Commission (NRC) requires private utilities to accumulate the funds necessary to decommission their nuclear power plants and most established sinking funds so that the decommissioning funds are accumulated over the operational life of a nuclear power plant as part of the cost charged to customers for the electricity they use. With the deregulation of electric utilities and the resultant industry restructuring, we recently reported that in most of the requests to transfer licenses to own or operate nuclear power plants approved by NRC, the financial arrangements have either maintained or enhanced the assurance that adequate funds will be available to decommission those plants. For example, projected decommissioning funds were generally prepaid by the selling utility. Also, an Environmental Protection Agency contracted study recommended that a Canadian hydroelectric company establish a liability fund to accumulate funds to finance asset removal, decommissioning, irradiated fuel disposal, and low-to-intermediate radioactive waste disposal. Alternative approaches to promote more complete consideration of the full costs of environmental cleanup and disposal associated with the acquisition of new assets fall along a continuum from provision of supplemental information to accrual of those costs in budget authority up front, as assets are acquired. We explored three approaches along this continuum ranging from the relatively simple one of providing more information but making little other change to current budgeting, to a more complicated one involving significant changes to what is included in primary budget data. The approaches along this continuum represent the degree of certainty that the costs will be considered in decision making. Figure 3 summarizes the three approaches along the continuum. The first approach would be to report long-term environmental liability costs associated with new assets as supplemental information along with the budget authority and outlay amounts requested in the budget. For example, the program and financing schedules within the President's budget appendix could be expanded to report these associated costs by budget account or program. This would enable those being asked to make a decision to see the full cost information along with currently requested funds. Although the estimates provided in the supplemental information would not be precisely correct, they would clearly be closer to correct than the current implication of no cost. If a running tally of total environmental liabilities is desired, periodic reestimates would be needed. A second approach would move beyond providing supplemental information to establishing budget process mechanisms to require explicit disclosure and prompt consideration of the full costs of the environmental liability associated with a proposed asset acquisition. Thus, Congress could revise its rules to permit a point of order against legislation that does not disclose estimates for environmental liabilities associated with the acquisition of new assets to be funded in the bill. This would have the effect of requiring cleanup cost estimates to be made, either by the executive branch or CBO, so that the estimates could be considered. At the other end of the continuum is the more comprehensive approach of accruing amounts for environmental liabilities associated with new assets in any requested budget authority for new assets. This approach represents the largest departure from current budgeting practices. Along these lines, OMB is developing a legislative proposal to require programs that generate hazardous waste to "pay the accruing cost to clean up contaminated assets at the end of their useful life. These payments would go to funds responsible for the cleanup." Implementation of an approach that would include budget authority for environmental liabilities would require development of new budgeting mechanisms. The provision to accumulate budget authority over an asset's life would require a means of "fencing off" the budget authority to ensure that it is actually used for cleanup. Also, since no such amounts were set aside for existing assets, it would be necessary to continue financing the cleanup of existing assets while implementing the new approach for new assets. One way to do this is to use a pair of accounts--a liquidating account and a cleanup fund account--in each department involved in budgeting for the cleanup costs. The liquidating account would obtain discretionary budget authority for the past share of cleanup costs of assets already in operation and for the cleanup costs of retired assets. It would pay the past share of cleanup costs for operating assets to the cleanup fund and would conduct or contract for the cleanup of assets no longer in use at the inception of this new approach. Given technological and other changes, regular reestimates of cleanup costs would be necessary. The cleanup fund account would obtain budget authority from two sources: (1) from the liquidating account for the past share of the cleanup cost for assets that are in operation when the new approach is established and (2) for new assets, from programs that operate assets that generate cleanup needs. The cleanup fund account would receive annual accruing cost payments from programs based on the estimated (and reestimated) cost of cleanup for all operating assets--those purchased after the new approach is implemented and those already in service. These payments would be a required part of the discretionary appropriations for running any program that generates cleanup costs. When needed, the cleanup fund accounts could also request additional budget authority for the assets in operation at its inception. These appropriations could be made to the liquidating account and paid to the cleanup fund account when the assets are ready for cleanup. Once in the cleanup fund account, the budget authority from the programs and liquidating accounts could be permanent, indefinite authority available for cleanup, subject only to the usual apportionment process. Figure 4 below illustrates one possible flow of funds through accounts. Each of the three approaches described offer both potential benefits and challenges to consider. All three would be likely to improve the quality of cleanup estimates. Although agencies are required to develop these estimates for financial statement purposes, they are not developed until after the asset is purchased. Also, not all agencies have completely complied with financial accounting standards. For example, in December 2001, we reported that DOD was not estimating and reporting liabilities associated with a significant portion of property, plant, and equipment that was no longer being used in its operations. Moreover, DOD's financial statements did not provide cleanup cost information on all of its closed or inactive operations known to result in hazardous wastes. In addition, in 1997 and 1998 we issued a series of reports on DOD environmental liabilities that were not being reported, even though they could be reasonably estimated. Each of the three approaches would result in decision makers having information about costs and benefits of a proposed acquisition while there is still the opportunity to make a choice--before the government actually incurs an environmental liability. Since the cleanup costs for any asset will become a future claim on federal resources regardless of whether these costs were considered at the outset, good budgeting principles call for up- front consideration of these costs. Given that agencies are not currently experienced in separately estimating cleanup/disposal costs before assets are purchased, reasonable and credible estimates may take time to develop. This, however, is not an insurmountable issue. We have reported on numerous occasions that environmental liabilities can be estimated and have pointed out how estimation methodologies can be improved. For example, in December 2001 we recommended that, among other things, DOD correct real property records, develop and implement standard methodologies for estimating related cleanup costs, and systematically accumulate and maintain the site inventory and cost information needed to report this liability. Of the three approaches described, the supplemental information and the budget process mechanism approaches would be easiest to implement and could be done separately or together. Neither requires the enactment of budget authority and so would not increase reported budget totals. Supplemental reporting requirements would be the easiest to implement since OMB could require it under OMB's current authority. However, unless agencies see that the new supplemental information is used in decision making, they may have less incentive to develop meaningful estimates. The budget process mechanism approach would increase the perceived importance of these estimates by permitting a point of order that could block legislation lacking appropriate cost information. For example, unfunded mandates legislation permits a point of order to be raised against proposed legislation containing significant intergovernmental mandates if a CBO estimate of the cost of the mandate has not been published in the committee report or the Congressional Record. Unlike supplemental reporting alone, the budget mechanism approach has the potential to promote improved estimates because it could present members an opportunity to challenge legislation without appropriate cost information. Implementing a budget process approach with a point of order would require an amendment either to the Congressional Budget Act of 1974 or a change to committee rules. The third approach, accruing budget authority over the life of the asset, represents the largest departure from current budgeting practices. By requiring that agencies obtain budget authority before acquiring new assets, this approach would ensure consideration of environmental cleanup costs before an asset is acquired. Such an approach would require legislation. If Congress and the Administration agree to take such action, it would ensure that each program's costs are fully reflected in program budgets. Requiring that agencies accrue budget authority for cleanup costs would likely increase the attention paid to improving the quality of estimates. All in all, given the current quality of agency estimates and significant implementation issues, such an approach may best be viewed as something to be considered in the future. Beyond the issue of developing reasonable and credible estimates early on, this third approach also would present administrative and structural challenges such as developing mechanisms to ensure that (1) budget authority provided for cleanup is adequately fenced off for cleanup, (2) agencies adequately track and manage that budget authority, and 3) reestimates provide positive incentives to reflect the best approximation of the government's total environmental liabilities. When demand for current funding is great, fencing off budget authority for future use can be a challenge. One way to address this would be to have payments into the cleanup fund come from discretionary appropriations, but once in the fund, the budget authority would become permanent, subject only to the usual apportionment process. Providing higher levels of budget authority now for expenses that may not be paid until well into the future may be difficult. It is important to note that this approach would not in fact change the costs of future cleanups--in effect these have already been determined by the decision to acquire the asset. Rather, this would only shift the timing of their recognition. Ensuring that agencies adequately track and manage the earmarked budget authority would be a second challenge to successful implementation of this approach. For example, there is more than one way to manage the budget authority needed to clean up assets already in operation at the inception of the new approach. One way would be to transfer budget authority from a liquidating account to a cleanup fund for such assets when they are ready to be cleaned up. Alternatively, the full amount of budget authority for the past share of the cleanup cost could be enacted in one lump sum for the cleanup fund. This would simplify implementation since it would apply the new accrual concept fully to all assets in operation. Since this could be a considered a concept change, any discretionary caps on budget authority (if renewed) would be adjusted upward to accommodate the additional budget authority--but it would still increase reported budget authority totals. Some believe that covering all of the costs immediately would be a cleaner, more consistent application of full costing since it would eliminate a lengthy and possibly confusing transition period. However, such a decision to provide budget authority for retired assets could shift the control over the timing of the cleanup from Congress to the Administration. Finally, a way to budget for inevitable reestimates of cleanup costs would have to be designed. If agencies must obtain additional budget authority for these reestimates, they will have less incentive to make artificially low initial estimates but may be reluctant to provide upward reestimates. On the other hand, one could envision agencies forwarding a low estimate "today" with the idea that they could worry about "tomorrow" later. Alternatively, reestimates could be handled as they are with credit programs, that is, agencies could automatically receive permanent, indefinite budget authority for upward reestimates of cleanup costs. This would hold agencies harmless for additional costs that result from technological or regulatory changes. It would also, however, provide an incentive to make artificially low initial estimates. Because the federal budget does not recognize the full costs of a program that will have cleanup costs when decisions to commit to the program are being made, policymakers do not have sufficient information to compare the full costs of a particular program with their judgment of its benefits. Cleanup costs are in fact a liability associated with the ownership of many assets. Decision makers need to consider these costs before committing to acquire the waste-producing asset. Agencies generally do not yet have experience in estimating future cleanup/disposal costs up front, before the decision to purchase the waste- producing asset is made. Accordingly, all of the alternative approaches we discuss for providing this information represent a challenge for both agencies and OMB to develop an estimation methodology. Increasing the visibility of cost estimates may increase the effort spent on them and ultimately improve both the quality of the estimates and enhance decision making. As a first step, we believe that OMB and agencies should provide supplemental information. This can be expected to improve the focus and attention and permit improvements in estimating models. As this proceeds, further consideration should be given to budget process and budget accounting changes. Ultimately, accruing budget authority for the tail-end cleanup/disposal costs along with the front-end purchase costs of assets would best ensure that the cleanup/disposal costs are considered before the government incurs the liability, but raises significant implementation challenges. We recommend that the Director of OMB require supplemental reporting in the budget to disclose future environmental cleanup/disposal costs for new acquisitions. To this end, agency and OMB officials should consult with legislative branch officials to ensure that useful information on estimated environmental cleanup/disposal costs is provided to congressional decision makers when requesting appropriations to acquire waste-producing assets. The Secretary of Defense had no comments on our draft report. We did not receive comments from the Secretary of Energy in time to be considered and included in this report. In consultation with OMB staff, GAO was commended for its useful analysis and noted that the ideas discussed merit consideration. OMB staff also provided technical clarifications, which we incorporated as appropriate. As agreed with your office, unless you release this report earlier, we will not distribute it until 30 days from the date of this letter. At that time we will send copies to the Ranking Minority Member of the House Committee on the Budget and the chairmen and ranking minority members of the Senate Committee on the Budget; the subcommittees on Defense and on Energy and Water Development, Senate Committee on Appropriations; and the subcommittees on Defense and on Energy and Water Development, House Committee on Appropriations. We are also sending copies to the Director, Office of Management and Budget. In addition, we are sending copies to the Secretary of Defense and of Energy. Copies will also be made available to others upon request. In addition, the report is available at no charge on GAO's Web site at http://www.gao.gov. This report was prepared under the direction of Christine Bonham, Assistant Director, Strategic Issues, who may be reached at (202) 512-9576. Other major contributors were Carol Henn and Brady Goldsmith. Please contact me at (202) 512-9142 if you or your staff have any questions concerning the report. About a dozen federal agencies report environmental liabilities in their financial statements. This appendix provides additional detail on the environmental liabilities reported by the Department of Energy (DOE) and the Department of Defense (DOD) and about those reported by the other federal agencies. These data were extracted from agencies' fiscal year 2001 consolidated balance sheets and represent existing assets--not proposed acquisitions. Because DOD and the National Aeronautics and Space Administration auditors disclaimed an opinion on their financial statements, it is not certain that these amounts fairly present their liabilities.	Although environmental liabilities resulting from federal programs and activities represent the third largest category of the federal government's liabilities, the current cash- and obligation-based budget does not provide information on estimated cleanup costs before waste-producing assets are purchased. As a result, policymakers do not have the opportunity to weigh the full costs of a proposal with their judgment of its benefits. The Chairman of the House Committee on the Budget asked GAO to examine and report on various ways budgeting might be improved for environmental cleanup costs, including some of the benefits, limitations, and challenges associated with each. The federal government is legally required to clean up hazardous wastes that result from its operations. Agencies are currently required to report these environmental liabilities in their financial statements, but these estimates are not recognized until after a waste-producing asset is placed into service. Although agencies are supposed to consider cleanup and disposal costs associated with these assets as part of the acquisition process, they typically do not request the related budget authority until many years after the government has committed to the operation creating the waste, when cleanup is imminent. Alternative approaches to promote up-front consideration of the full costs of environmental cleanup and disposal for assets being proposed for purchase fall along a continuum ranging from supplemental information to enactment of additional budget authority. While each approach has potential benefits and challenges, agencies' lack of experience in estimating future cleanup/disposal costs up front suggest starting at the more modest end of the continuum--providing supplemental information to decision makers. Eventually, however, accruing budget authority for the tail-end cleanup/disposal cost along with the front-end purchase cost estimates would do the most to ensure that these costs are considered before the government incurs the liability.	5,465	366
Contamination from the Hanford site that may threaten the Columbia River includes (1) contamination that resulted from disposal activities during the era in which DOE produced nuclear material; (2) contamination that could occur during cleanup activities, such as from an accidental spill; and (3) possible future migration of contamination from waste that will be permanently disposed of on the Hanford site in accordance with the cleanup actions DOE and the regulators plan to use. Contamination from production era. Contamination at Hanford resulting from plutonium production (which occurred from 1943 to 1989) that is currently migrating to the river is primarily from: Intentional disposal of liquid waste and contaminated water into the ground (about 450 billion gallons). Leaks into the soil from waste tanks and the pipelines that connect them (between 500,000 to 1 million gallons containing about 1,000,000 curies of radioactivity). Contamination that has begun to migrate from solid waste (more than 710,000 cubic meters) disposed of on-site in burial grounds, pits, and other facilities. Chemical and radioactive contamination currently affects more than 180 of the 586 square miles of the site's groundwater and large areas of the vadose zone. While there are numerous contaminants now in the vadose zone and the groundwater below, DOE believes the key contaminants in the groundwater include hazardous chemicals (such as carbon tetrachloride, chromium, nitrate, and trichloroethane) and radioactive materials (such as iodine-129, strontium-90, technetium-99, tritium, and uranium). These contaminants are of concern because of their extent, their mobility in the groundwater, and the potential health risks associated with them--at sufficient levels, some of these contaminants are toxic to humans or fish, while others are potential carcinogens. Potential contamination from current activities. Current cleanup efforts at the Hanford site could contribute to contamination of the vadose zone and groundwater that eventually reaches the river. For example, some of the waste put into underground storage tanks as liquid has since turned into sludge or saltcake. To dissolve it, more water will have to be introduced into the tanks--including tanks known to have leaked. This process may cause additional discharges into the soil. Possible future contamination. Under DOE's cleanup plans, and with regulator approval, a large amount of contaminants will remain on-site long into the future. This contamination may be in buildings, in mostly empty underground tanks, in covered burial grounds and waste disposal areas, and in approved disposal facilities. Contaminants may leach out of these facilities in the future and join existing contamination in the vadose zone and migrate to the groundwater, where they could migrate to the river. Based on groundwater sampling results, DOE reports that plumes of contamination continue to move through the vadose zone and the groundwater, and are leaching into the river. DOE estimates that about 80 square miles of groundwater under the site contains contaminants at, or above, federal drinking water standards. Because the groundwater and the river are at the same relative elevation, these plumes are leaching directly into about 10 of the nearly 50 miles of river shore on the site. DOE's Office of Groundwater and Soil Remediation under the Assistant Secretary for Environmental Management sets overall policy and oversight for groundwater and soil remediation. At the Hanford site, both the Richland Operations Office and the Office of River Protection, as well as several contractors, are involved in groundwater and vadose zone activities. The monitoring of river and shoreline conditions, and groundwater sampling, is managed by the Pacific Northwest National Laboratory (PNNL). Analysis of the samples is performed by several approved laboratories. Funding for groundwater and vadose zone activities at the site is difficult to identify due to the large number of organizations and activities involved and the structure of DOE's budget accounts. However, monitoring, characterization, well drilling and maintenance, remediation, and research activities received nearly $175 million in fiscal year 2006. DOE is taking steps to better understand the risk to the Columbia River from Hanford site contamination and to replace ineffective cleanup technologies. Specifically, DOE is addressing problems with three main aspects of its Columbia River protection efforts. First, DOE and its regulators have agreed that additional investigation of contamination in the vadose zone is needed, although doing so could delay by about 3 years the date by which DOE will propose its cleanup plans to the regulators. Second, DOE is reworking its approach to modeling the future effects of contamination on river conditions. DOE abandoned past modeling efforts in response to criticism that the models used inconsistent assumptions, were based on data of questionable reliability, and had weak quality control processes. Third, in response to concerns about the effectiveness of some of the technologies DOE had deployed to remove or contain contamination near the river, and with specific direction from Congress, DOE is evaluating alternative technologies that may be more effective at addressing the contamination. While DOE has extensive knowledge of the contaminants in the river and groundwater, and the movement of contaminants in the groundwater and on or near the surface, DOE has only recently developed limited information about the extent and location of the contamination that has migrated from the surface areas into the vadose zone above the groundwater. Understanding the nature of vadose zone contamination is critical to determining the most appropriate steps to take to protect the river now, and in future years, because contaminants still in the soil may continue to migrate until they eventually reach the groundwater and the river. DOE has studied some portions of the vadose zone, such as around the underground storage tanks, where extensive contamination from leaks and spills occurred in the past. In doing so, DOE found that some contamination, including technetium-99, had migrated as far as the groundwater. DOE contractors were able to map the migration of some of these contaminants. However, DOE acknowledges that its understanding of contaminants in the vadose zone is limited in many areas of the site. For example, cribs and trenches near the underground tanks received large volumes of contaminated wastes that dispersed directly to the ground. DOE has little information on the extent and location of the contamination in those areas, according to DOE officials responsible for planning their cleanup. They also said that characterization of the lower portions of the vadose zone is difficult and expensive, and few remediation techniques have been developed or tested for removing or isolating wastes that are located deep in the vadose zone. Understanding the extent of vadose zone contamination is critical because some contaminants still in the soil may continue to migrate until they eventually reach the groundwater and the river. Thus, understanding the type and volume of contaminants in the vadose zone and their rate of migration is essential to determining the most appropriate steps to take to protect the river now, and in future years. After finding unexpected contaminant migration in the vadose zone at one waste disposal area known as BC cribs--a location where liquids were discharged directly into the ground--DOE agreed with its regulators that its understanding of the vadose zone was inadequate to support the development of a final cleanup remedy for that area and some others. Although DOE had originally planned to defer some of its study of the vadose zone until after December 2008, when draft cleanup plans were due, DOE now agrees that more sampling and analysis of the vadose zone is needed to guide cleanup decisions. As a result, DOE has proposed to regulators to extend the date for submitting draft cleanup plans until 2011. DOE officials said this will allow the time needed to develop a better understanding of vadose zone conditions and to investigate potential remedies. In response to the discovery that its previous models to estimate the future risks of the movement of contamination toward the river were based on data of questionable reliability, DOE has begun reworking these efforts. While DOE relies on sampling to determine current conditions, it uses computer simulation models to predict future conditions and estimate future risks. In 1998, DOE groundwater program officials said DOE concluded from its simulation models that the migration was slow enough that the contaminants included in the study would not exceed their limits for 1,000 years into the future. However, DOE was concerned about the completeness of the model and began an effort, known as the System Assessment Capability, to develop a more comprehensive model. This $16 million, 8-year effort was cancelled when, in the course of a lawsuit over Hanford's disposal plans, several quality assurance problems were found, including discrepancies in the data. DOE abandoned the past modeling efforts in response to criticisms that the models used inconsistent assumptions, were based on data of questionable reliability, and had weak quality control processes. In January 2006, DOE and Washington State settled the lawsuit. In the settlement agreement, DOE agreed to re-analyze and update its study of the cleanup's effect on groundwater. In addition, DOE agreed to consolidate two studies of the cleanup's effects on groundwater into a single, integrated study. Both DOE and its regulators have determined that the results of all three of DOE's approaches to treating groundwater--pump-and-treat, chemical treatment, and natural attenuation--are not fully satisfactory. Specifically: Pump-and-treat. In a 2004 report, the DOE Inspector General concluded that the pump-and-treat system to remove strontium-90 was ineffective and that the other four pump-and-treat systems have had mixed results. However, Hanford's acting groundwater project manager told us that four of the five pump-and-treat systems at the Hanford site meet the remedial objectives agreed to with Hanford's regulators. The official acknowledged that the system to remove strontium-90 was largely ineffective and that DOE had been trying to obtain permission from the regulators to turn it off. Both DOE and the regulators told us that the regulators refused to allow the system to be turned off, however, until a more effective remedy was found. In March 2006, after spending about $16 million since 1996 to install and operate the system, DOE turned the system off with the regulators' permission, and began testing a chemical barrier to prevent the strontium-90 from entering the river. Chemical treatment. In 2004, DOE reported that, based on groundwater samples, the chemical barrier for chromium was not fully effective, and that the hazardous form of chromium was detected beyond the barrier and close to the river. DOE is currently testing alternative approaches to improve the barrier. Natural attenuation. According to monitoring well data, DOE's reliance on natural attenuation to dissipate a uranium plume near the city of Richland was ineffective and has not controlled the migration of uranium to the river. The plume has not dissipated in the 10-year period since the natural attenuation strategy was adopted. DOE is currently investigating the plume, testing chemical barriers, and exploring other ways to mitigate the problem. In the conference report accompanying the fiscal year 2006 Energy and Water Development Appropriations Act, the conferees directed DOE to make $10 million available to analyze and identify new technologies to address contaminant migration to the Columbia River. DOE convened a study group to identify potential technologies and determine how best to allocate the funds to support them. According to DOE's groundwater project manager, if the technologies tested are successful, DOE will seek funds to expand the systems to fully address these problems. DOE is testing the following: To address problems with pump-and-treat systems, DOE is testing new approaches to containing strontium-90 and chromium. To contain the strontium, DOE is testing two techniques: (1) using a chemical to bind the strontium to the soil until it decays, which would prevent it from leaching into the river; and (2) planting willow bushes near shore to capture the strontium in the plants, which can be harvested to dispose of the strontium. For chromium removal, DOE has adopted a "systems approach" which includes combining source removal, pump-and-treat system expansion, and barrier repairs according to DOE's groundwater project manager. DOE is also planning to test an improvement to the pump-and- treat system. The test system will use an electric field to remove the chromium from the groundwater extracted by several of the existing wells. If it succeeds, DOE's project manager said, they will expand the pump- and-treat system to include this technology. To address problems with the chromium barrier near the river, DOE plans to inject chemicals through the wells used to create the barrier to help convert the chromium to a less toxic and less mobile form. To address problems with using natural attenuation to dissipate the uranium plume near the city of Richland, DOE is testing whether injecting a chemical called polyphosphate can help prevent the uranium from migrating to the river. In addition to these activities, DOE plans to research methods to better understand the existing carbon tetrachloride plume in the center of the site. DOE has begun to address management problems with its Columbia River protection efforts at the Hanford site by proposing management improvements to better oversee and coordinate its groundwater and vadose zone activities. Although those steps are important and needed, we are concerned about DOE's ability to sustain any improvements made. Similar efforts in the past failed. In our previous work, we reported that leading organizations use a systematic, results-oriented plan to sustain management improvement initiatives. Such a plan incorporates key elements, such as clear goals, performance measures to gauge progress toward those goals, and an evaluation strategy to help ensure the initiative is effective. Although DOE is beginning to develop a plan for its new integration initiative, it has yet to implement key elements, such as performance measures or an evaluation strategy. These tools could help measure effectiveness and sustain the benefits of the initiative over time. DOE is beginning to address longstanding concerns about the management and oversight of its Columbia River protection efforts at the Hanford site. In November 2005, we reported that DOE's river protection efforts continued to be fragmented among two DOE site operations offices and several site contractors. We raised concerns that the potential existed for duplication, gaps, and inefficiencies. Subsequently, in the November 2005 conference report accompanying the Fiscal Year 2006 Energy and Water Development Appropriations Act, the conference committee cited these continuing management and organization problems and directed DOE to study how to better integrate its river protection efforts. In response to the congressional direction, in March 2006, DOE's Assistant Secretary for Environmental Management developed a new plan to better integrate Hanford's river protection, vadose zone, and groundwater efforts. Specifically, DOE's new integration initiative would: Consolidate most groundwater and vadose zone characterization and cleanup activities under a single project. At the time of the congressional direction, two DOE offices and three main contractors on- site were collectively responsible for characterizing and cleaning up vadose zone and groundwater contamination. The Office of River Protection and its contractor, CH2M Hill Hanford Group, were responsible for characterizing and addressing contamination of the vadose zone in tank farms--areas where tanks containing radioactive liquid waste are buried. The Richland Operations Office and its contractors, Fluor Hanford and Washington Closure Hanford, were responsible for vadose zone characterization in the central plateau area of the site and along the river corridor, respectively. In addition, Fluor Hanford was responsible for groundwater activities in all areas of the site. Within Fluor Hanford, responsibility for cleanup of the groundwater and vadose zone was divided between two different projects with the project handling vadose zone issues also responsible for addressing removal of old buildings and burial grounds. To better coordinate vadose zone and groundwater characterization and cleanup activities, DOE's new integration initiative proposed consolidating most of this work under a single project managed and coordinated by Fluor Hanford. To do so, DOE planned to modify existing contracts with the affected contractors to reflect this reorganization. In June 2006, the Office of River Protection and the Richland Operations Office issued a Plan of Action for Hanford Groundwater and Vadose Zone Integration Improvements. It identified general activities and areas of responsibility that the Fluor Hanford and CH2M Hill Hanford Group contractors would be responsible for under the new initiative. As of the end of July 2006, DOE was negotiating the details of this reorganization of responsibilities with the contractors and anticipated having the contracts modified to reflect the changes by October 1, 2006. Better integrate vadose zone, groundwater, and waste disposal site cleanup decisions. DOE acknowledged that decisions about when and how to address vadose zone and groundwater contamination were not always well coordinated, and they generally were not coordinated with decisions about when and how to address the source contamination in a waste disposal site located above the vadose zone and groundwater. For example, initial plans for cleanup decisions of the surface areas in the Central Plateau were not necessarily linked to the plans for the underlying groundwater units, according to DOE's groundwater project manager. To better integrate vadose zone, groundwater, and waste disposal site cleanup decisions, DOE proposed to implement a new strategy by the end of fiscal year 2006 and to work with regulators to better align regulatory milestone dates for making cleanup decisions about waste sites, the vadose zone, and the groundwater. DOE's new strategy includes plans to transfer most vadose zone characterization activities into the groundwater program. Consolidate responsibility for modeling the movement of contaminants through the vadose zone and groundwater to estimate the potential current and future health risks. DOE has acknowledged that inconsistencies and reliability problems existed in the modeling of how contaminants move through the vadose zone and groundwater, and how the environmental risks associated with those contaminants were estimated. A DOE team reviewing the data quality issues and the modeling effort found that, in addition to issues of the reliability of data used in the models, various modeling efforts under way were based on different assumptions, and information about contamination movement was not always correctly transferred to other models. To address these problems, DOE proposed to more closely coordinate modeling and risk assessment activities at the site and strengthen control over model design so that a common set of databases and assumptions were being used for decision making. The groundwater project would have configuration control over any models used so that any changes to databases and models assumptions would require approval by the groundwater project before users could implement them. In addition to these management improvement efforts at the Hanford site, in May 2006, DOE also established a new Office of Groundwater and Soil Remediation to improve headquarters' oversight on issues dealing with soil and groundwater contamination across the DOE complex. The office is tasked with reviewing all soil and groundwater remedies at DOE sites, helping to develop technologies to solve groundwater and soil contamination problems at different DOE sites, and generally overseeing DOE policy and assessments regarding vadose zone and groundwater cleanup. Given past problems fully implementing and sustaining improvements to the management of DOE's Columbia River protection efforts at the Hanford site, it is uncertain whether any improvements that result from DOE's new integration initiative will be sustained. In 1998, we reported that DOE lacked a comprehensive and integrated groundwater and vadose zone program, and recommended that DOE implement an integrated strategy that defined measurable performance goals, clearly defined leadership roles, and established accountability for meeting those goals. In response to our 1998 report, DOE proposed an integrated management plan to coordinate groundwater and vadose zone work. To accomplish this, DOE assigned a single DOE Assistant Manager in the Richland Operations Office to coordinate all groundwater and vadose zone work at the Hanford site. Because DOE's other site office, the Office of River Protection, and several contractors at the site also carried out groundwater and vadose zone cleanup, DOE made the Assistant Manager responsible for ensuring that all groundwater and vadose zone activities were integrated into a single planning effort. This "Integration Project" included developing a sitewide approach to project planning, funding, and information management, and co-locating contractor staff working on the project to improve coordination. In addition, the project included improving coordination of efforts to develop science and technology to address contamination in the vadose zone and groundwater. Despite these proposed changes, DOE was unable to effectively implement the improvements it planned to make. For example, according to a site official at Hanford who oversaw the initial integration effort, DOE did not implement key elements of the plan, such as establishing a sitewide funding profile for all groundwater and vadose zone activities. DOE implemented other elements of the plan but did not sustain them when changes, such as how projects were organized and contracts were structured, occurred at the site. For example, coordinating all activities through a single federal project manager faltered as site offices were reorganized and responsibilities were distributed among three federal project directors. The DOE official from the Hanford groundwater program attributes the lack of coordination of groundwater and vadose zone efforts to redefining project activities, which resulted in groundwater and vadose zone activities being managed as separate projects and changes in the structure of site contracts, which resulted in scopes of work being organized and assigned differently. A 2001 National Academy of Sciences review of DOE's groundwater science and technology activities noted that DOE's integration efforts had been superimposed over several already existing cleanup projects without establishing a clear line of responsibility for results. The National Academy said that this left the program operating in an unstable environment. To increase the chances of success for DOE's current improvement initiative, we assessed DOE's management of its new integration initiative against model practices used by organizations that successfully sustained improvement initiatives. We previously reported that in high-performing organizations, management improvement initiatives are sustained by using a systematic, results-oriented plan that incorporates a rigorous measurement of progress. Such a plan typically included the following steps: (1) defining clear program goals for the initiative--important because it focuses an organization's efforts on achieving specific outcomes and allows as assessment of future performance against those goals; (2) developing an implementation strategy that sets milestones and establishes individual responsibilities--important because it establishes accountability for achieving the initiative's goals; (3) establishing results- oriented performance measures--important because it allows organizations to measure progress toward achieving their goals; and (4) using results-oriented data to evaluate the effectiveness of the initiative and make additional changes where warranted--important because periodic evaluations can reveal systemic problems and promote continuous program improvement over the long term. As of July 2006, DOE had implemented two components and not implemented other management components to help ensure that it could sustain any improvements resulting from its new integration initiative. For example, in putting forward its plan to Congress, DOE described a general goal of its new integration initiative as better coordination of Hanford's groundwater and vadose zone cleanup activities in order to achieve greater protection of the Columbia River. DOE also outlined steps it would take toward its goal, such as (1) consolidating site modeling and risk assessments; (2) consolidating river protection efforts under a single project; and (3) integrating soil and groundwater cleanup decisions. In going forward, DOE could further refine its goals to include measurable steps to achieving its overall goal of protecting the river. For example, a more measurable goal would be the reduction of contamination reaching the river or ensuring duplication of efforts is reduced in order to better protect the Columbia River. DOE had established general milestones and individual responsibilities for implementing its new integration initiative. For example, DOE's plan of action sets 16 milestones by September 2006 by which various initial steps are to be taken. DOE also reported that five of these actions, including making staff assignments and establishing an integrated project team, had been completed. DOE has not established results-oriented measures to gauge the progress of its integrated management initiative. In outlining the steps it will take under its plan, DOE has generally concentrated on establishing relationships and moving work-scope between various DOE offices and contractors, and not on outcomes, such as reducing redundancies or gaps in river protection efforts. Without clear results-oriented performance measures to gauge progress, problems that occur under a fragmented management structure could be masked and allowed to continue under DOE's integration plan. Translating the general goal of "better integration" and "protection of the river" into a more specific goal, such as reducing duplicative efforts, would help DOE identify ways it could measure results and, therefore, gauge progress toward the goals of its integration initiative. Finally, DOE has not yet identified an evaluation strategy to determine whether the steps it is taking are effective and are being sustained. Without an evaluation strategy based on clear goals and results-oriented measures, DOE will not have the results-oriented data necessary to objectively evaluate progress and implement corrective actions as needed. Although DOE is still working to define and implement its integration initiative, fully developing and putting in place key elements outlined above could help ensure that any program improvements are sustained in the future. DOE's Hanford Assistant Manager in charge of overseeing the latest management improvements for the river protection program said that, beyond outlining broad goals and setting the framework for roles and responsibilities, DOE had not yet fully developed a project execution plan for the new initiative. He said that the management plan is still evolving and that future steps may include more clearly defining performance measures and strategies for evaluating the initiative's effectiveness. DOE is involved in a lengthy process to identify and address potential threats to the Columbia River from contamination in the soil and groundwater at the Hanford site. This requires a good understanding of the risks to the river and an effective management strategy for addressing those risks. Over the years, we and others have raised concerns about DOE's efforts to understand the nature and extent of the contamination and how best to manage the efforts to prevent contamination from seeping into the river. In recent months, DOE has taken several steps to gain a better understanding of the risks from the contamination as well as to improve its management of the program and integration of activities. While these steps are encouraging, DOE has not yet decided whether to put in place elements of a management plan that could help ensure potential benefits of these improvements will be continued, even when organizational and contract changes occur at the site. Such a management plan should include developing results-oriented performance measures, using the measures to determine progress toward objectives, and making changes as necessary. To increase the likelihood that DOE will effectively implement and sustain improvements in its program to protect the Columbia River from contamination at the Hanford site, we recommend that the Secretary of Energy strengthen the management improvement plan by establishing results-oriented performance measures and regular evaluations to gauge the program's effectiveness. We provided a draft of this report to DOE for its review and comment. In a letter from DOE's Principal Deputy Assistant Secretary for Environmental Management, DOE agreed with the report's findings and fully endorsed the recommendation to adopt results-oriented performance measures and regular evaluations of the river protection program. DOE acknowledged that performance measures and regular evaluations are a fundamental and integral component of sound project management practice and said that it would incorporate them into the project. The full text of DOE's comments is presented in appendix II. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 7 days after the date of this report. At that time, we will send copies of this report to other interested congressional committees and to the Secretary of Energy. Copies will be made available to others on request. In addition, this report will be available at no charge on our Web site at http://www.gao.gov. If you or your staff have any questions on this report, please contact me at (202) 512-3841 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. Other staff contributing to this report are listed in appendix III. To understand the risk to the Columbia River from Hanford site contamination, we reviewed risk assessments, groundwater, vadose zone, and river monitoring reports by the Department of Energy (DOE), DOE's Office of Inspector General, DOE contractors including the Pacific Northwest National Laboratory, and various outside groups such as the National Academy of Sciences. We interviewed DOE officials at both headquarters and the Hanford site, as well as contractor staff at Hanford, to obtain information on the distribution of contamination at Hanford and the steps being taken to better understand it. To understand DOE's approach to the vadose zone, we primarily reviewed our 1998 report, as well as documents prepared by DOE and its staff in response to that report. We also reviewed documents DOE submitted to regulators related to changing Tri-Party Agreement milestones; the documents were to be used for preparing initial drafts of plans for all remaining contaminated areas. We discussed the proposed change to the December 2008 Tri-Party Agreement milestone with DOE officials and regulators. In reviewing DOE's efforts to determine the extent of risk of future damage to the river from contamination, we reviewed documents related to DOE's sitewide modeling effort and legal documents related to this modeling effort. We discussed these modeling efforts with DOE officials, contractors, and regulators. In assessing DOE's efforts to deploy effective technologies to address contamination near the river, we visited the sites of existing and planned cleanup efforts. We discussed current existing projects with DOE officials, contractor staff, regulators, and stakeholders, and reviewed reports prepared for DOE and others. To assess technology plans developed by DOE to use $10 million of funds earmarked for fiscal year 2006, we attended DOE screening panels, reviewed reports prepared by DOE and others, and discussed the efforts with DOE regulators. To review DOE efforts to strengthen the management of its river protection efforts, we reviewed DOE's past and current management plans. We obtained DOE's recent integration initiative proposals, including its proposal to Congress in March 2006 and its subsequent Memorandum of Agreement and Plan of Action. We discussed DOE's approach with headquarters and site officials. We reviewed previous work in which we documented strategies used by high-performing organizations to implement improvement initiatives. We reviewed DOE's proposed integration initiative and compared it to key elements of these strategies. We also discussed DOE's plans to implement its strategy with knowledgeable site officials. In reviewing the management of DOE programs related to groundwater and river protection, we reviewed DOE efforts to assure that contamination levels were accurately reported; we also interviewed regulators, DOE officials, and contractors regarding data reliability. While we did not independently test the contaminant data, we reviewed controls over how the data were obtained and tested, visited sampling locations and discussed sampling methods with key staff, and reviewed other relevant information to determine that the data were sufficiently reliable for the purposes of our report. We conducted our work from December 2005 to August 2006 in accordance with generally accepted government auditing standards. In addition to the contact named above, Bill Swick, Assistant Director; Chris Abraham; Doreen Feldman; Nancy Kintner-Meyer; Jeffrey Larson; Omari Norman; Alison O'Neill; Thomas Perry; and Stan Stenersen made significant contributions to this report. Others who made important contributions included Mark Braza, Doreen Eng, and Mehrzad Nadji.	The Department of Energy's (DOE) Hanford site in Washington State is one of the most contaminated nuclear waste sites in North America. The Columbia River flows through about 50 miles of the site. Radioactive and hazardous contamination from decades of producing nuclear materials for the nation's defense have migrated through the soil into the groundwater, which generally flows toward the river. In November 2005, GAO reported on the potential for the Hanford site to contaminate the Columbia River. To address continuing concerns, GAO reviewed the status of DOE's efforts to (1) understand the risk to the Columbia River from Hanford site contamination and to deploy effective technologies to address contamination near the river and (2) strengthen the management of its river protection program. To assess DOE's efforts, GAO reviewed numerous reports by DOE and others, and discussed the problem with federal and state regulators and DOE officials. DOE is actively assessing the risk to the Columbia River from Hanford site contamination and is addressing problems with deployed river protection technologies. While DOE has extensive knowledge of contaminants that are currently in the groundwater and river, DOE knows less about contamination in the soil below the surface, known as the "vadose zone." Before proposing a cleanup approach, DOE has agreed with its regulators to take vadose zone samples in many of the contaminated areas of the site. DOE is also improving its computer simulation model that will predict future risk from the contamination, and deploying alternative technologies it believes will more effectively contain the contamination that may threaten the river. DOE has also begun to address concerns about its management of Columbia River protection efforts, particularly the lack of integration between groundwater and vadose zone activities. In March 2006, in response to congressional committee direction, DOE proposed a new initiative to better integrate its river protection activities. The initiative included consolidating most groundwater and vadose zone characterization work under a single project; better integrating vadose zone, groundwater, and surface cleanup decisions; and improving the coordination and control over computer models used to predict movement of contamination in future years. Initiating these management improvements is important, but it is equally important that they be implemented effectively, and past history gives some cause for concern. For example, one attempt by DOE to better integrate these activities was unsuccessful when key elements, such as putting all activities under a single project manager, failed to continue after project and other changes occurred at the site. In past GAO work, we reported that high-performing organizations sustained improvement initiatives when key elements were in place, such as clear goals, results-oriented performance measures, and evaluation strategies. Although DOE is beginning to develop a management plan for its new initiative, DOE has yet to implement some key elements, such as results-oriented performance measures and evaluations to gauge the effectiveness of its improvements, which could also help sustain the benefits of the improvements over time.	6,707	592
To address its financial crisis and make its operations more efficient, in 1995 Amtrak undertook a major corporate restructuring, along with developing its Strategic Business Plan. The restructuring involved dividing Amtrak's intercity passenger service operations into three distinct operating units, called strategic business units. The Northeast Corridor Unit is responsible for operations on the East Coast between Virginia and Vermont, including high-speed Metroliner service, which currently exists between Washington, D.C., and New York and is being extended to Boston. The West Coast Unit is responsible for services in California, Oregon, and Washington. This unit operates only one long-distance passenger train, and many of its services, especially in California, receive state financial support. Finally, the Intercity Unit provides the remainder of the nation's intercity rail passenger service, including most of the long-distance, cross-country trains. Each strategic business unit develops its own plan and manages its own operations, although under the direction of the corporate parent in Washington, D.C., which also provides business services, such as legal support. To eliminate the need for a federal operating subsidy, Amtrak plans to increase revenues, hold down costs, and increase state contributions. Amtrak's projected annual operating loss is to be reduced to $180 million in fiscal year 2001 in part by increasing revenues from $1.461 billion in fiscal year 1995 to $2.565 billion in fiscal year 2001. During this same period, expenses are planned to increase less than 20 percent, from $2.305 billion to $2.745 billion. Increasing the portion of costs borne by each state for the services they support financially is planned to increase state funding from $36 million in fiscal year 1995 to $132 million in fiscal year 2001. Figure 1 shows Amtrak's financial projections for reducing operating losses, holding down cost increases, and increasing revenues. In each instance, the figure presents Amtrak's financial projections based on what would occur if (1) Amtrak took no actions to address its financial condition (i.e., if it had not taken any actions in fiscal year 1995); (2) Amtrak took no further actions to improve its financial condition after fiscal year 1995; and (3) Amtrak successfully implements its Plan in fiscal year 1996 and beyond. Tables 1 through 3 show the specific amounts for each projection for each fiscal year. Amtrak's ambitious plan to almost double revenues by 2001 includes several actions intended to attract more riders and increase the revenue generated by each passenger. Marketing efforts and fare increases are the bases for increasing passenger revenues. In fiscal year 1996, a $15 million advertising investment is projected to generate an additional $35 million in revenues, and fare increases are planned to generate almost $16 million in additional revenues. Other revenue-generating plans include increasing (1) the amount of service Amtrak provides under commuter rail service contracts (adding almost $9 million in fiscal year 1996), (2) reimbursable work for state departments of transportation and others (adding $16.5 million in fiscal year 1996), and (3) mail and express service (adding almost $10 million in fiscal year 1996). Amtrak plans to control expenses through productivity improvements, operating efficiencies, and selective restructuring of routes and services. For example, Amtrak plans to save $15 million in fiscal year 1996 by better matching equipment to service needs. It also plans to reduce costs by $4 million in fiscal year 1996 by improving the productivity of Amtrak's reservations office. Improving price negotiations, specifications, and other aspects of the procurement of goods and services is projected to generate $56.9 million in savings in fiscal year 1996. The increase in state contributions is expected to occur as Amtrak shifts an increasing portion of the costs of state-sponsored rail services to the states. Currently, the states pay only a portion of the costs, but Amtrak is increasing the portion annually and plans to receive 100 percent of these costs from the states by fiscal year 1999. State contributions are planned to almost double from $36 million in fiscal year 1995 to $67.4 million in fiscal year 1996 as this transition begins. In fiscal year 1995, the first year under its Strategic Business Plan, Amtrak reduced its operating loss from the $1.0145 billion projected without the implementation of the Plan to $843.8 million, or by $171 million, which was about $3 million less than it had planned. The fiscal year 1995 savings resulted primarily from reducing and eliminating some routes and services ($54.2 million), cutting management positions ($30 million), and raising fares ($23.5 million); all of these amounts exceeded what was projected in the Plan. Retiring older equipment and negotiating productivity improvements with labor, which were planned to reduce the operating loss by $11 million and $26 million, respectively, were elements of the Plan that were not successfully implemented. Because the states elected to "buy back" some of the services Amtrak had planned to eliminate, the corporation was not able to achieve its planned cost savings from retiring some of its oldest equipment that is used on these routes. To date, Amtrak has made little progress in negotiating new productivity improvements, such as reducing the size of its train crews, with its labor unions. Amtrak currently is purchasing new equipment so that it can retire the older equipment and has proposed legislation for contracting out and for negotiating new labor agreements. Amtrak has compensated for the savings the originally anticipated actions were to have generated. Amtrak projects that the fiscal year 1995 actions will reduce the operating loss by $315 million beginning in fiscal year 1996 as the changes made during fiscal year 1995 are in place and accruing savings for a full year. The Plan included actions to reduce the fiscal year 1996 operating loss by an additional $61.6 million by increasing revenues $81 million while holding expenses to a net increase of only $19.8 million. Thus, the operating loss was to have been reduced from $1.0897 billion projected without the implementation of the Plan to $712.3 million, but on the basis of second quarter results, Amtrak revised its fiscal year 1996 projection in April 1996. The revised projected operating loss is $768.7 million. The $56.4 million shortfall from the projected operating loss shown in table 1 was primarily due to the severe winter weather in fiscal year 1996. The results for each strategic business unit vary. The West Coast and Northeast Corridor units both exceeded their fiscal year 1995 planned savings and are projected to meet or nearly meet their fiscal year 1996 targets. In contrast, the Intercity Unit did not meet its planned reduction in its fiscal year 1995 operating deficit by $41.7 million and is projected to end fiscal year 1996 $19.4 million overbudget. Thus, the Intercity Unit--responsible for the bulk of Amtrak's services and projected improvements--has been substantially overbudget in both years. Table 4 shows the planned and actual revenues, expenses, and operating losses for each unit. The West Coast Unit, which operates commuter service along several routes as well as intercity service in and between California, Oregon, and Washington, had the smallest share of Amtrak's services and costs and the smallest target for fiscal year 1995 savings ($13 million). The West Coast Unit is expanding its services in fiscal year 1996, which will increase its operating deficit slightly for fiscal year 1996 but result in future savings if the projected ridership and revenues materialize. The West Coast Unit is focusing on increasing the amount of commuter service it provides under contract and on aggressive marketing and pricing strategies to reduce its share of the operating loss. Although ahead of the Plan's projections in the first half of fiscal year 1996, the West Coast Unit is now projecting a $2.9 million budget shortfall for year's end because of lost revenues and increased costs caused by the severe winter weather. In fiscal year 1995, the Northeast Corridor Unit, which generated more than 55 percent of Amtrak's passenger revenues while incurring 45 percent of Amtrak's expenses, reduced its operating loss $2.6 million more than planned. After the first two quarters of fiscal year 1996, the Northeast Corridor's operating loss is higher than planned, but specific actions, such as productivity improvements in the mechanical shop, are under way to largely compensate for this by the year's end. However, the future success of the Northeast Corridor depends on the availability of capital to make the investments necessary to complete the electrification of the line and introduce high-speed (maximum speed of 150 mph) rail service between Boston and New York City by fiscal year 2000 and to rebuild the southern end of the corridor between Washington, D.C., and New York, which is in a serious state of disrepair. In contrast, the Intercity Unit--which is the heart of the nationwide intercity network responsible for more than 80 percent of Amtrak's total route miles of service--was $41.7 million overbudget in fiscal year 1995. For fiscal year 1996, the Intercity Unit is not meeting its portion of the Plan's goal and after two quarters is projecting a year-end operating loss $19.4 million over its budget. For fiscal year 1995, the Plan had assumed that more than a dozen of the Intercity Unit's routes would be eliminated or subject to service reductions. But many of the proposed eliminations or reductions were "bought back" by the states in which the routes are operated, increasing the Intercity Unit's operating loss in fiscal year 1995 because the states did not fund 100 percent of the costs of these routes and services. However, the "buybacks" only account for about $10 million of the Unit's $41.7 million fiscal year 1995 budget overrun and are not a factor in the projected fiscal year 1996 shortfall because the Plan took them into account for this fiscal year. The Intercity Unit has experienced several unanticipated problems, including a high turnover of senior management, which has interrupted the Plan's implementation several times; unexpected declines in ridership as a result of fare increases; and, in fiscal year 1996, the severe winter weather that reduced ridership and increased operating costs. Even though Amtrak as a whole reduced its annual operating loss by $171 million in the first year of the Strategic Business Plan, significant improvements are necessary in the remaining 5 years of the Plan for the corporation to meet its longer-term goal of operating self-sufficiency. Although Amtrak reduced its operating loss as planned in fiscal year 1995, it will not achieve its original goal for fiscal year 1996. Additionally, the future-year projections are based on several critical assumptions that may not be realized, including continued federal capital support; the introduction of high-speed rail service in the Northeast Corridor and concurrent revenue increases; improvements in productivity that require negotiations with Amtrak's unions; and increased state operating support. To date, Amtrak has been relatively successful at reaching its financial targets by compensating for planned actions that have not materialized. For example, revenues from contracts to provide commuter rail service increased 70 percent more than planned, improved productivity for track maintenance generated 75 percent more savings than planned, and the management staff was reduced 12 percent more than planned. However, Amtrak has reduced its operating loss by about 29 percent through its fiscal year 1995 actions. Even if it were fully successful in implementing the fiscal year 1996 actions, it would reduce the operating loss by only an additional 8 percent--and second quarter revisions reduce this projection to less than 1 percent. If no further actions were taken, Amtrak would still have an operating loss in excess of $850 million in fiscal year 2001. Therefore, to meet its goal of eliminating the need for a federal operating subsidy by fiscal year 2002, Amtrak still needs to substantially increase revenues and significantly improve productivity after fiscal year 1996. The most important factor underpinning Amtrak's program for achieving its longer-term goal of operating self-sufficiency is that capital funds must be available so that it can make the investments needed to provide attractive and competitive services and thereby significantly increase its revenues. Amtrak plans to invest $5.5 billion by fiscal year 2001 in its systems, equipment, and facilities--$3.2 billion of which is expected to come from federal capital grants. Amtrak's fiscal year 1996 federal capital grant was $345 million, which slightly exceeded the amount anticipated in its Plan, but in future years Amtrak's Plan anticipates significantly increased federal capital assistance to allow it to introduce high-speed rail service in the Boston-New York market, bring the Northeast Corridor as a whole to a state of good repair, and upgrade services on other routes. Most of the remaining capital needs are to be met through greater state contributions, increased passenger revenues, and the proceeds from the Northeast Corridor Unit's planned Power Partnership. These additional moneys are critical to Amtrak as a whole because they are necessary to support the corporation's planned capital investments in the Northeast Corridor and elsewhere. Revenues have increased 6 percent since fiscal year 1994, and state shares for state-sponsored services are projected to double by fiscal year 1996; but the largest revenue increases are projected to result from electrification and the introduction of high-speed rail service from Boston to New York in fiscal years 2000 and 2001. These improvements alone are projected to increase Amtrak's total passenger revenues by 21 percent in fiscal year 2000. Though Amtrak did not receive the federal legislative authority that would have allowed it to become a utility broker, it is working state by state to obtain the authority to market electricity carried over its lines, and it continues to project revenues from the Power Partnership. Even though the Power Partnership is not yet in place, the Northeast Corridor Unit estimates that it or other commercial projects will generate $100 million in fiscal year 1997. The unit has not provided any information to support this projection or to demonstrate a backup plan for generating the $100 million, which is already committed to capital improvements. Top management at the Northeast Corridor and Intercity units is systematically monitoring whether specific actions in the Strategic Business Plan are implemented and meeting financial targets; the West Coast Unit's senior management monitors whether it is operating within its budget and delegates to its department directors the monitoring of whether specific actions have been successfully taken. The Northeast Corridor Unit has established a database that includes the specific actions to be taken, such as introducing self-service ticketing and reducing management staffing, and the monthly projected and actual financial results of each action. This system, supplemented with status reports on individual actions, is used by senior management to monitor the unit's progress, identify any problems early on, and develop ways to compensate for actions that are not generating the expected results. The Intercity Unit recently implemented a similar system for monitoring the implementation of specific actions, although financial results are not determined for each. The Intercity Unit's monitoring system focuses on the actions developed to address the fiscal year 1996 projected shortfall (based on the second quarter results) and is also being used to document whether planned actions were actually taken in fiscal year 1995 and the first two quarters of fiscal year 1996. The West Coast Unit's senior management uses monthly financial and performance reports to monitor whether it is within its budget; department directors are responsible for implementing the Plan's actions within their jurisdiction and for reporting any problems associated with these actions. Each strategic business unit reports its results monthly to the corporate level, where the results are verified and consolidated into corporationwide monthly and quarterly reports. Amtrak's success to date in implementing the Strategic Business Plan provides the Congress with a framework for determining the level of capital and operating funds Amtrak will receive. Amtrak's future progress in implementing its Plan could be critical in determining the continued availability of intercity passenger rail service in the United States and the level of federal support necessary to maintain this service. We provided copies of a draft of this report to Amtrak for its review and comment. We met with Amtrak officials--including the Chief Financial Officer and the Vice President for Government and Public Affairs--who provided comments. Amtrak agreed with the information presented and the observations made throughout the report and considered it a well-prepared, balanced report. Technical comments provided by Amtrak have been incorporated where appropriate. To identify the actions Amtrak plans to take to improve its financial condition, review its progress to date towards achieving improvements and its longer-term goal of operating without a federal operating subsidy, and describe its monitoring of the Strategic Business Plan's implementation, we obtained and analyzed data from Amtrak. These data included Amtrak's Strategic Business Plan and the business plans for each unit; internal monitoring reports; and public monthly, quarterly, and annual reports. We also conducted interviews with Amtrak officials at the Northeast Corridor Unit in Philadelphia, Pennsylvania; the Intercity Unit in Chicago, Illinois; the West Coast Unit in Los Angeles and San Francisco, California; and corporate headquarters in Washington, D.C. We conducted our review from September 1995 through June 1996 in accordance with generally accepted government auditing standards. We did not independently verify the accuracy of the data provided by Amtrak. We are sending copies of this report to the Secretary of Transportation; the President, Amtrak; and interested congressional committees. Copies are available to others upon request and are available via the Internet. Major contributors to this report are listed in appendix I. Please contact me at (202) 512-2834 if you or your staff have any questions. John Rose The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.	GAO reviewed Amtrak's Strategic Business Plan, focusing on: (1) specific planned actions and their expected results; (2) Amtrak's success in achieving financial improvements and its progress toward realizing its long-term goal of self-sufficiency; and (3) Amtrak's efforts to monitor the plan's implementation. GAO found that: (1) by fiscal year (FY) 2001, Amtrak plans to reduce its annual operating loss to about $180 million, which it will offset with funds from sources other than federal subsidies; (2) Amtrak plans to double its revenues and hold operating cost increases to less than 20 percent through FY 2001; (3) Amtrak's actions reduced its FY 1995 operating loss by $171 million, which was $3 million less than expected; (4) Amtrak expects its 1995 loss-reduction efforts to produce $315 million in annual savings beginning in FY 1996; (5) Amtrak planned additional FY 1996 actions to reduce its operating loss by another $61.6 million, but severe winter weather reduced revenues and increased operating costs; (6) if Amtrak reaches its revised FY 1996 goal of a $5.2-million reduction, it will have reduced its operating loss by 30 percent overall; (7) two Amtrak business units are meeting or nearly meeting their goals, but one is not; (8) Amtrak has made progress in its plan's first 18 months, but it is too early to determine whether Amtrak will reach its operating self-sufficiency goal, because success depends on further improvements and realizing certain funding, service, and productivity assumptions; (9) two units' top management monitors implementation of specific plan actions and financial goals, while the third unit focuses on whether it is operating within its budget and makes department directors responsible for implementing and monitoring individual plan actions; and (10) Amtrak prepares monthly and quarterly reports based on monthly unit reports.	3,965	404
The compensation program pays monthly benefits to veterans who have service-connected disabilities (injuries or diseases incurred or aggravated while on active military duty). The pension program pays monthly benefits based on financial need to wartime veterans who have low incomes and are permanently and totally disabled for reasons not service-connected.Disability compensation benefits are graduated in 10 percent increments based on the degree of disability from 0 percent to 100 percent. Eligibility and priority for other VA benefits and services such as health care and vocational rehabilitation are affected by these VA disability ratings. Basic monthly payments range from $103 for 10 percent disability to $2,163 for 100 percent disability. Generally, veterans do not receive compensation for disabilities rated at 0 percent. About 65 percent of veterans receiving disability compensation have disabilities rated at 30 percent or lower; about 8 percent are 100 percent disabled. The most common impairments for veterans who began receiving compensation in fiscal year 2000 were skeletal conditions, tinnitus, auditory acuity impairment rated at 0 percent, arthritis due to trauma, scars, and post-traumatic stress disorder. Veterans may submit claims to any one of VBA's 57 regional offices. To develop veterans' claims, veterans service representatives at the regional offices obtain the necessary information to evaluate the claims. This includes veterans' military service records; medical examinations and treatment records from VA medical facilities; and treatment records from private providers. Once claims are developed, rating veterans service representatives (hereafter referred to as rating specialists) evaluate the claimed disabilities and assign ratings based on degree of disability. Veterans with multiple disabilities receive a single, composite rating. For veterans claiming pension eligibility, the regional office also determines if the veteran served in a period of war, is permanently and totally disabled for reasons not service-connected, and meets the income thresholds for eligibility. If a veteran disagrees with the regional office's decision, he or she can ask for a review of that decision or appeal to VA's Board of Veterans Appeals (BVA). BVA makes the final decision on such appeals and can grant benefits, deny benefits, or remand (return) the case to the regional office for further development and reconsideration. After reconsidering a remanded decision, the regional office either grants the claim or returns it to BVA for a final VA decision. If the veteran disagrees with BVA's decision, he or she may appeal to the U.S. Court of Appeals for Veterans Claims (CAVC). If either the veteran or VA disagrees with the CAVC's decision, they may appeal to the court of appeals for the federal circuit. VBA continues to experience problems processing veterans' disability compensation and pension claims. These include large backlogs of claims and lengthy processing times. As acknowledged by VBA, excessive claims inventories have resulted in long waits for veterans to receive decisions on their claims and appeals. As shown in table 1, VBA's pending workload of rating related claims has almost doubled from fiscal year 1997 to fiscal year 2001. During the same period, VBA's production of rating-related claims has steadily declined from about 702,000 to 481,000. The greatest increase in inventory and decline in production occurred during fiscal year 2001. Several factors contributed to the significant increase in claims inventory in fiscal year 2001. VBA attributes much of the increase to VCAA. According to VBA, the most significant change resulting from the legislation is the requirement to fully develop claims even in the absence of evidence showing a current disability or a link to military service. As a result of the VCAA, VBA undertook a review of about 98,000 veterans' disability claims that were previously denied under the CAVC's Morton decision. In addition, the VCAA has affected the processing of about 244,000 rating-related claims that were pending at the time the VCAA was enacted and all new compensation and pension claims received since the law's enactment. These claims must be developed and evaluated under the expanded procedures required by the VCAA. VBA believes this will increase the time to process cases. Other contributing factors included the recent addition of diabetes as a presumptive service-connected disability for veterans who served in Vietnam; the need to train many new claims processing employees; and the implementation of new VBA processing software. VBA received about 56,500 diabetes claims through November 2001 and expects to receive an additional 76,000 claims during the remainder of fiscal year 2002. The influx of new claims processing staff during fiscal year 2001 has also temporarily hampered the productivity of experienced staff. According to officials at some of the regional offices we visited, experienced rating specialists had less time to spend on rating work because they were helping train and mentor new rating specialists. Although this may have reduced short-term production, it should enable VBA to increase production in the long term by enhancing the proficiency of new staff. Furthermore, regional office officials noted that the learning curve and implementation difficulties with VBA's new automated rating preparation system (Rating Board Automation 2000) hampered their productivity. Over the last 3 years, the average time VBA takes to complete rating- related claims has increased from 166 to 181 days - which places it far from reaching its end of fiscal year 2003 goal of 100 days (see fig. 1).During the same period, the average age of pending claims increased from 144 to 182 days. In fiscal year 2001, the average age of pending cases was actually greater than the average time to complete decisions. According to officials at some of the regional offices we visited, staff have recently been focusing on completing simpler and less time-consuming cases. Officials told us that focusing on completing simpler cases might result in increases in production and short-term improvements in timeliness. At the same time, it may also result in the office's pending inventory getting even older. In addition to problems with timeliness of decisions, VBA acknowledges that the accuracy of regional office decisions needs to be improved. Inaccurate decisions can also lead to delays in resolving claims when veterans appeal to the BVA. Appeals to BVA can add many months to the time required to resolve claims. In fiscal year 2001, the average time to resolve an appeal was 595 days - almost 20 months. VBA has made progress in improving its accuracy; its accuracy rate for rating-related decisions increased from 59 percent in fiscal year 2000 to 78 percent in fiscal year 2001. Beginning in fiscal year 2002, VBA has revised its key accuracy measure to focus on whether regional office decisions to grant or deny claims were correct. This revision to VBA's quality assurance program is consistent with a recommendation made by the 2001 VA Claims Processing Task Force. VBA has made some progress in improving its production and reducing its inventory but will be challenged to meet the production and inventory goals it has set for fiscal year 2002. Recognizing the need to address VBA's long-standing claims processing timeliness problem and excessive inventory, the Secretary of Veterans Affairs has made improving claims processing performance in its regional offices one of VA's top management priorities. Specifically, the Secretary's end of fiscal year 2003 goals are to complete accurate decisions on rating-related compensation and pension claims in an average of 100 days and reduce VBA's inventory of such claims to about 250,000. To achieve these goals, VBA is focusing on increasing the number of claims decisions its regional offices can complete. At the same time, VBA has implemented two initiatives to expedite claim decisions. In October 2001, VBA established the Tiger Team at its Cleveland Regional Office, a specialized unit including experienced rating specialists, to expedite the processing of claims for veterans aged 70 and older and clear from the inventory claims that have been pending for over a year. VBA also established nine Resource Centers to process claims from regional offices that are "ready to rate." A claim is ready to rate after all the needed evidence is collected. To meet the Secretary's inventory goal, VBA plans to complete about 839,000 rating-related claims decisions in fiscal year 2002. Of these claims, the regional offices are expected to complete about 792,000, while VBA's Tiger Team and Resource Centers are expected to complete the balance of 47,000 claims. This level of production is greater than VBA has achieved in any of the last 5 fiscal years --VBA's peak production was about 702,000 claims in fiscal year 1997. However, VBA has significantly more rating staff now than it did in any of the previous 5 fiscal years. VBA's rating staff has increased by about 50 percent since fiscal year 1997 to 1,753. To reach VBA's fiscal year 2002 production goal, rating specialists will need to complete on average about 2.5 cases per day - a level VBA achieved in fiscal year 1999. VBA expects this production level to result in an end of year inventory of about 316,000 rating-related claims, which VBA believes would put the agency on track to meet the Secretary's inventory goal of 250,000 cases by the end of fiscal year 2003. To meet its production goal, in December 2001, VBA allocated its fiscal year 2002 national production target to its regional offices based on each regional office's capacity to produce rating-related claims given each office's number of rating staff and their experience levels. For example, an office with 5 percent of the national production capacity received 5 percent of the national production target. In February 2002, VBA revised how it allocated the monthly production targets to its regional offices based on input from regional offices regarding their current staffing levels. In allocating the target, VBA considered each regional office's fiscal year 2001 claims receipt levels, production capacity, and actual production in the first quarter of fiscal year 2002. To hold regional office managers accountable, VBA incorporated specific regional office production goals into regional office performance standards. For fiscal year 2002, regional office directors are expected to meet their annual production target or their monthly targets in 9 out of 12 months. Generally, the combined monthly targets for the regional offices increase as the year progresses and as the many new rating specialists hired in previous years gain experience and become fully proficient claims processors. The Tiger Team, primarily made up of Cleveland Regional Office staff, was established to supplement regional office capacity. It identifies claims of veterans aged 70 and over as well as those pending for 1 year or more and then requests these claims from the regional offices. The Tiger Team's 17 rating specialists and 18 veterans service representatives are expected to perform whatever additional development work is needed on the claims they receive and to make rating decisions on these claims. To help expedite development work, VBA has obtained priority access for the Tiger Team to obtain evidence from VA and other federal agencies. For example, VA and the National Archives and Records Administration completed a Memorandum of Understanding in October 2001 to expedite Tiger Team requests for service records at the National Personnel Records Center (NPRC) in St. Louis, Missouri. Also, VBA established procedures and timeframes for expediting Tiger Team requests for medical evidence and examinations. Veterans Health Administration (VHA) medical facilities were, in general, given 3 days to comply with requests for medical records and 10 days to provide reports of medical examinations. As of mid-April 2002, the Tiger Team has completed about 7,800 claims requested from 42 regional offices. From December 2001 through March 2002 the team's production exceeded its goal of 1,328 decisions per month. According to Tiger Team officials, its experienced rating specialists were averaging about 4 completed ratings per day. Officials added that in the short term, completing old claims might increase VBA's average time to complete decisions. Meanwhile, the Resource Centers also supplement regional offices' rating capacity by making decisions on claims that were awaiting decisions at the regional offices. VBA officials noted that the rating specialists at the Resource Centers tend to be less experienced; thus, they are expected to produce fewer ratings per day than the Tiger Team. From October 2001 through March 2002, the Resource Centers had completed about 14,000 ratings. Although VBA has made some progress in increasing production and reducing inventory, achieving its fiscal year 2002 production and inventory goals will be challenging. VBA expects to increase production in the second half of the fiscal year. During the first 6 months of fiscal year 2002, VBA produced about 368,000 decisions - 61,000 per month. To meet its goal of producing 839,000 rating decisions for the fiscal year, VBA must increase its production to about 78,000 decisions a month for the second half of the fiscal year. Meanwhile, the rating-related inventory declined by 2 percent during the first half of fiscal year 2002. To reach VBA's inventory goal of 316,000 claims by the end of fiscal year 2002, the inventory must decline by another 23 percent over the next 6 months. Officials at some of the regional offices we visited said they were having difficulty reaching their production targets. Some offices were "cherry picking" -- completing easier cases in order to meet production goals. Meanwhile, older claims were not being worked. While the Tiger Team is designed to resolve some of these older claims, regional offices will eventually have to handle this workload. Another issue raised by officials at one regional office was inadequate numbers of staff to develop claims for the rating specialists. While VBA has defined capacity based on the number and experience of rating specialists, regional offices also need sufficient veterans service representatives to develop claims for the rating specialists. VBA will likely have difficulty meeting the Secretary's fiscal year 2003 timeliness goal, even if it meets its production and inventory goals. VBA will have to cut its average claims processing time by more than half - from an average of 224 days in the first half of fiscal year 2002 -- to meet the 100 day goal. However, improving timeliness depends on more than just increasing production and reducing inventory. VBA also needs to address long-standing problems affecting timeliness. VBA needs to continue to make progress in reducing delays in obtaining evidence; ensuring that it will have enough experienced staff in the long term; and implementing information systems to help improve claims processing productivity. Furthermore, external factors beyond VBA's control, such as decisions made by the CAVC and the filing behavior of veterans, will continue to affect VBA's workload and its ability to make sustained improvements in performance. Much of the delay in completing claims is not related to the time a rating specialist spends on the claim. Rather, delays come in the development process - time waiting for evidence. The Tiger Team has been able to achieve high production levels, in part, through priority access to service and VHA medical records and expedited VHA medical examinations. However, not every regional office can benefit from such expedited access. VBA needs to continue its progress in reducing delays in general. VBA has initiatives to improve its access to evidence needed to decide claims. For example, VBA has established an office at the NPRC to expedite regional office requests for service records. Also, VBA has initiatives to obtain better and more timely medical information from VA medical facilities. VBA has access to VHA's medical records database. Also, VBA and VHA have established a Joint Medical Examination Improvement Office to help identify ways to improve the quality and timeliness of VHA's compensation and pension medical examinations. While these initiatives seem promising, it is unclear the extent to which they will improve timeliness. VBA needs to ensure that it can maintain the necessary expertise to process claims as experienced claims decision makers retire over the next several years. To accomplish this, VBA needs to ensure that its new claims processing staff are receiving the necessary training and on the job experience to become proficient and that it retains these employees. VA plans to complete a workforce plan in 2002, which should address VBA's succession planning needs. Also, VBA needs to continue its progress in implementing its training and performance support system for claims processing staff. Furthermore, VBA needs to overcome delays in implementing its information system improvements. We recently noted that, after 16 years, VBA is still experiencing delays in implementing its replacement benefit delivery system. Also, officials at some of the regional offices we have visited noted that the initial implementation of rating board automation (RBA) 2000 - the application designed to assist rating specialists in rating benefit claims - has reduced their rating production. These challenges affect not only VBA's ability to meet its fiscal year 2003 goals, but also its ability to sustain the progress it makes in improving claims processing performance. To sustain its progress, VBA needs to be able to maintain increased production levels, so it can deal with future events that could significantly increase its workload. Recent history has shown how actions by VA, the Congress, and the CAVC can have significant impacts on VBA's workload. For example, VA's decision to provide compensation to Vietnam veterans with diabetes is having a significant impact on VBA's workload. By the end of fiscal year 2003, VBA expects to have received 197,500 diabetes claims. VBA has cited the influx of diabetes claims as a factor in its fiscal year 2001 inventory increase. Also, the CAVC's Morton decision, and the Congress' reaction in passing the VCAA, show the impact of procedural changes on VBA's workload. In fiscal year 2000, VBA reduced its rating-related inventory from about 250,000 to about 228,000 in part because regional offices denied more than 98,000 claims as not well-grounded under Morton. However, the overruling of Morton by the VCAA was a major factor in the increase in inventory for fiscal year 2001 and is expected to have a continuing impact on timeliness because of lengthened timeframes for obtaining evidence. VBA is working hard to meet the Administration's commitment to improve its service to veterans by providing more timely decisions on their claims. VBA is better staffed to meet its claims workload than it has been in recent years. This, in turn, should translate into a more productive VBA workforce in the future. However, increasing staffing is not enough. VBA needs to address many of the same challenges to improving timeliness we reported in May 2000 - such as improving waiting times for evidence. VBA has a number of initiatives to improve its process, including the implementation of the Claims Processing Task Force's recommendations. VBA needs to continue its progress, while also addressing its future succession planning and information technology needs. By addressing these challenges, VBA can better ensure that it will be able to sustain the performance improvements it makes in fiscal years 2002 and 2003. Mr. Chairman, this concludes my prepared remarks. I would be pleased to respond to any questions you or Members of the Subcommittee may have. For further contacts regarding this testimony, please call Cynthia A. Bascetta at (202) 512-7101. Others who made key contributions to this testimony are Irene Chu, Steve Morris, Martin Scire, and Greg Whitney. Veterans' Benefits: Improvements Needed in Processing Disability Claims. GAO/HRD-89-24. Washington, D.C.: June 22, 1989. Veterans' Compensation: Medical Reports Adequate for Initial Disability Ratings but Need to Be More Timely. GAO/HRD-90-115. Washington, D.C.: May 30, 1990. Veterans' Benefits: Status of Claims Processing Initiative in VA's New York Regional Office. GAO/HEHS-94-183BR. Washington, D.C.: June 17, 1994. Veterans' Benefits: Lack of Timeliness, Poor Communication Cause Customer Dissatisfaction. GAO/HEHS-94-179. Washington, D.C.: September 20, 1994. Veterans' Benefits: Better Assessments Needed to Guide Claims Processing Improvements. GAO/HEHS-95-25. Washington, D.C.: January 13, 1995. Veterans' Benefits: Effective Interaction Needed Within VA to Address Appeals Backlog. GAO/HEHS-95-190. Washington, D.C.: September 27, 1995. Veterans' Benefits: Improvements Made to Persian Gulf Claims Processing. GAO/T-HEHS-98-89. Washington, D.C.: February 5, 1998. Veterans' Benefits Claims: Further Improvements Needed in Claims- Processing Accuracy. GAO/HEHS-99-35. Washington, D.C.: March 1, 1999. Veterans Benefits Administration: Progress Encouraging, but Challenges Still Remain. GAO/T-HEHS-99-77. Washington, D.C.: March 25, 1999. Veterans' Benefits: Promising Claims-Processing Practices Need to Be Evaluated. GAO/HEHS-00-65. Washington, D.C.: April 7, 2000. Veterans Benefits Administration: Problems and Challenges Facing Disability Claims Processing. GAO/T-HEHS/AIMD-00-146. Washington, D.C.: May 18, 2000. Major Management Challenges and Program Risks: Department of Veterans Affairs. GAO-01-255. Washington, D.C.: January 2001.	The Department of Veterans Affairs (VA) will provide $25 billion in compensation and pension benefits in fiscal year 2002 to more than three million veterans, dependents and survivors. For years, the compensation and pension claims process has been subject to long long waits for decision and large claims backlogs. VA's goal for fiscal year 2003 is to complete accurate decisions on rating-related claims in an average of 100 days. To achieve this, the Veterans Benefits Administration (VBA) is focusing on increasing production of rating decisions and reducing the inventory of claims to about 250,000. As of the end of March 2002, VBA was completing claims in an average of 224 days and had an inventory of about 412,000 claims. VBA is trying to significantly increase regional offices' rating decision production to reduce the inventory, and, in turn, reduce the time required to complete decisions. VBA expects to increase production by hiring more staff and increasing the proficiency of new staff. Although VBA has recently increased its production and reduced its inventory, meeting its production and inventory reduction and its timeliness goals will be challenging.	4,544	229
Since September 11, 2001, the federal government has emphasized the need for a coordinated response to maritime threats. In December 2004, the White House issued National Security Presidential Directive 41 (NSPD- 41)/Homeland Security Presidential Directive 13 (HSPD-13), Maritime Security Policy, defining maritime domain awareness as the effective understanding of anything associated with the global maritime domain that could impact the security, safety, economy, or environment of the United States. NSPD-41/HSPD-13 also directed the Secretaries of Defense and of Homeland Security to jointly lead an interagency effort to prepare a National Strategy for Maritime Security to align all federal government maritime security programs and initiatives into a comprehensive and cohesive national effort involving appropriate federal, state, local, and private sector entities. Interagency coordination for maritime domain awareness is primarily exercised within the Maritime Security Interagency Policy Committee, which reports to the National Security Council Deputies Committee. A Maritime Domain Awareness Stakeholders Board consists of representatives from all departments and the intelligence community advises the Maritime Security Interagency Policy Committee through its Executive Steering Committee. DOD, the Department of Homeland Security, and the Department of Transportation have all appointed executive agents for maritime domain awareness who, together with a representative of the intelligence community, constitute the Maritime Domain Awareness Stakeholder Board Executive Steering Committee. DOD Directive 2005.02E establishes policy and roles and responsibilities for maritime domain awareness within DOD. This directive designated the Under Secretary of Defense for Policy as Office of the Secretary of Defense Principal Staff Assistant to oversee the activities of the DOD Executive Agent for Maritime Domain Awareness and designated the Secretary of the Navy as the DOD Executive Agent for Maritime Domain Awareness. In addition, the directive establishes several management functions that the Executive Agent is required to conduct for maritime domain awareness, including: Overseeing the execution of maritime domain awareness initiatives within DOD and coordinating maritime domain awareness policy with the Under Secretary of Defense (Policy); Developing and distributing goals, objectives, and desired effects for maritime domain awareness, in coordination with the Under Secretary of Defense (Policy) and the Under Secretary of Defense (Intelligence); Identifying and updating maritime domain awareness requirements and resources for the effective performance of DOD missions; and Recommending DOD-wide maritime domain awareness planning and programming guidance to the Under Secretary of Defense (Policy) and the Director of Programming, Analysis, and Evaluation (now the Office of Cost Assessment and Program Evaluation). The Secretary of the Navy issued an instruction in January 2009 that assigned the Chief of Naval Operations with responsibility for achieving maritime domain awareness within the Navy. This responsibility includes aligning Navy guidance with DOD policy guidance and coordinating with the Joint Staff to ensure that combatant commands have the necessary Navy resources to support their respective maritime domain awareness requirements. In May 2009, the DOD Executive Agent for Maritime Domain Awareness requested that the Joint Staff solicit maritime domain awareness annual plans from the military services, combatant commands, and defense intelligence components, as required by DOD Directive 2005.02E. In December 2009, the DOD Executive Agent completed an assessment of DOD components' annual maritime domain awareness plans. The effort was intended to provide the Executive Agent with a "horizontal look" at maritime domain awareness concerns across DOD. The Executive Agent used information from the plans to: (1) gather program and project priorities, (2) formulate and update overarching DOD maritime domain awareness goals and objectives, (3) craft programming and planning recommendations, and (4) synchronize and align combatant command and component efforts and resources. The DOD Executive Agent is currently conducting an assessment of 2010 component plans. DOD relies on organizations both within and outside of the department to achieve maritime domain awareness. The Office of Naval Intelligence is a core element of Global Maritime Intelligence Integration, whose goal is complete maritime domain awareness and their primary mission is to produce meaningful maritime intelligence. The Office of Naval Intelligence produces a Common Operating Picture and Common Intelligence Picture, both of which are compiled from multiple sources of intelligence. The Office of Naval Intelligence, together with the Coast Guard's Intelligence Coordination Center, compiles and provides a list of vessels of interest to DOD and Department of Homeland Security (DHS) components. In addition, the National Maritime Intelligence Center, created by the Director of National Intelligence, serves as the integration point for maritime information and intelligence collection and analysis in support of national policy and decision makers, maritime domain awareness objectives, and interagency operations at all levels. DOD, combatant commands, and joint task forces leverage numerous capabilities to enhance maritime domain awareness, including intelligence, surveillance, and reconnaissance collection platforms; intelligence fusion and analysis; and information sharing and dissemination. These capabilities assist DOD in responding to the range of maritime challenges, some of which are identified in figure 1. A range of platforms, such as sensors on naval vessels and aircraft, provide intelligence, surveillance, and reconnaissance collection capabilities. Once maritime domain awareness related data is collected, fusion and analysis capabilities assist DOD combatant commands and joint task forces to combine data from a variety of sources to provide information that may include location, course, destination, cargo, crew, and passengers of a given vessel. In addition, DOD uses a number of capabilities to promote the sharing and dissemination of maritime domain awareness information. For example, the Maritime Safety and Security Information System uses an existing, worldwide vessel safety system--the Automatic Information System--to produce an unclassified, Internet- based, password-protected ship tracking system. Currently, more than 50 nations participate in the Maritime Safety and Security Information System. In addition, DOD is working with other international partners to set up more advanced networks to share information. To validate joint warfighting requirements, including those associated with maritime domain awareness, DOD uses its Joint Capabilities Integration and Development System. The primary objective of the system is to ensure the capabilities required by the joint warfighter are identified with their associated operational performance criteria in order to successfully execute assigned missions. The Joint Requirements Oversight Council oversees this system and Functional Capabilities Boards, headed by a general, admiral, or government civilian equivalent, support the council by evaluating capability needs, recommending enhancements, examining joint priorities, and minimizing duplication of effort across the department. There are eight Functional Capabilities Boards: Battlespace Awareness, Building Partnerships, Command and Control, Force Application, Force Support, Logistics, Net-Centric, and Protection. DOD has articulated a broad strategy for maritime domain awareness and identified numerous maritime capability gaps through various documents. However, DOD does not have a departmentwide strategy that adequately defines roles and responsibilities for addressing gaps, aligns objectives with national strategy, and includes measures to guide the implementation of maritime domain awareness efforts, measure progress, and assess and manage risk associated with capability gaps. We previously reported that it is standard practice to have a strategy that lays out goals and objectives, identifies actions for addressing those objectives, allocates resources, identifies roles and responsibilities, and measures performance against objectives. The federal government, DOD, and its components have developed a number of documents that incorporate some of these key elements of an overall strategy for maritime domain awareness. Examples include the following: The National Strategy for Maritime Security broadly identifies threats to maritime security and strategic objectives and actions needed to achieve maritime security. The National Plan to Achieve Maritime Domain Awareness is intended to guide the execution of the security plans tasked in NSPD- 41/HSPD-13. It supports the National Strategy for Maritime Security by outlining broad goals, objectives, threats, and priorities in order to coordinate maritime domain awareness efforts at the federal level. U.S. Northern Command and U.S. Pacific Command worked with the Joint Staff to develop DOD's Maritime Domain Awareness Joint Integrating Concept to, among other things, provide a common vision for the future of maritime domain awareness related operations within DOD, identify maritime domain awareness capabilities and tasks and conditions for each capability, and inform future capability analyses. The DOD's Executive Agent for Maritime Domain Awareness completed an annual assessment of maritime domain awareness plans prepared by several DOD commands, military services, and defense intelligence components. The assessment organized the analyzed information from the plans into three critical areas where it determined that DOD must focus and expand its efforts: increased information sharing, enhanced situational awareness, and enhanced data on vessels, cargo, and people. We found that these documents and others DOD and the Navy have developed demonstrate a considerable amount of effort toward defining and organizing DOD's maritime domain awareness efforts, but we determined that they do not have several key elements that a strategy should contain. DOD's Maritime Domain Awareness Joint Integrating Concept and the Assessment of U.S. Defense Components Annual Maritime Domain Awareness Plans are two of the key documents used to guide current maritime domain awareness efforts and execute the national strategies. Table 1 summarizes the desirable characteristics of a strategy and compares the elements contained in DOD's Maritime Domain Awareness Joint Integrating Concept and the DOD Executive Agent's Assessment of the U.S. Defense Components Annual Maritime Domain Awareness Plans 2009. DOD and its components have completed or are developing additional efforts that may assist the department in organizing its maritime domain awareness efforts. The Department of the Navy developed a strategy for maritime domain awareness in response to a congressional committee report requirement, and several draft maritime domain awareness roadmaps to guide the Navy's implementation of maritime domain awareness. Additionally, as of November 2010, the Chief of Naval Operation's Information Dominance Office was developing a Navy Intelligence, Surveillance, and Reconnaissance Roadmap that outlines the Navy's vision for capabilities needed to fulfill its missions and priorities, including maritime domain awareness. As of November 2010, U.S. Pacific Command was in the process of drafting a maritime domain awareness concept of operations. This concept of operations is intended to provide a common understanding of intelligence support to maritime domain awareness throughout the combatant command. In June 2010, an interagency working group issued the Current State Report, a reference document which identifies maritime domain awareness tasks, capabilities gaps, and ongoing efforts related to each gap. Finally, in July 2010, the DOD Executive Agent for Maritime Domain Awareness developed maritime domain awareness planning and programming recommendations, which were based, among other things, on the 2009 annual maritime domain awareness plans submitted by DOD components to the Executive Agent. While these efforts may help the individual components work towards more effective maritime domain awareness, developing a departmentwide strategy that clearly outlines objectives and roles and responsibilities will better position DOD to align more detailed objectives with national strategies and coordinate the results of ongoing and future efforts across the department. As part of the overall framework for successful strategies, prior GAO work has also emphasized the importance of allocating resources, measuring performance, and monitoring progress as sound management practices critical for decision making and achieving results in specified time frames. While DOD, its interagency partners, and other DOD components have identified numerous capability gaps, DOD does not have a risk-based approach for assessing its maritime capabilities and gaps. Although some interagency-level and DOD component-level documents have prioritized maritime domain awareness capability gaps in comparison to other maritime gaps, the identified gaps have not been allocated resources within DOD. Additionally, DOD does not measure performance and monitor progress in implementing maritime domain awareness and addressing these gaps. We assessed a number of DOD and interagency documents to determine the extent to which resource allocation and performance measurement were incorporated and found mixed results. Examples include: National Maritime Domain Awareness Interagency Investment Strategy. DOD representatives collaborated with interagency stakeholders to develop a document that identified critical tasks and recommended lead and supporting federal agency stakeholders to coordinate interagency activities to address these tasks. However, the Interagency Investment Strategy is not what is traditionally considered an investment strategy with developed cost estimates or proposed dollar amounts for each agency to invest. Instead, it identifies critical capability gaps and makes recommendations on areas for interagency efforts. For example, it recommended that DOD work with DHS and the Office of the Director of National Intelligence to establish national data standards for maritime domain awareness. Interagency Solutions Analysis Current State Report. The Current State Report provides the status of maritime domain awareness capability gaps, solutions, and tools in use to address those gaps and the effectiveness of those solutions to mitigate the gaps. This document is an output of the Interagency Solutions Analysis Working Group, a group of interagency subject matter experts that are comparing current capabilities against scenarios that required, among other things, information sharing and other capabilities in the maritime domain. The DOD Executive Agent for Maritime Domain Awareness, the Department of the Navy, and the Office of Naval Intelligence participated in this process. However, this document does not identify resources to address identified gaps. Additionally, this document does not provide metrics to assess performance or monitor progress in addressing identified gaps. Department of Defense Maritime Domain Awareness Joint Integrating Concept. This document identifies required capabilities, associated tasks, and the DOD joint capability area for each required capability and each associated task. However, it does not identify how resources should be targeted to address the capabilities and tasks nor does it assign specific components within DOD to address each capability and task. Additionally, this document does not contain milestones for measuring progress in addressing the capability gaps and tasks will be measured. Assessment of the U.S. Defense Components Annual Maritime Domain Awareness Plans 2009. The DOD Executive Agent solicited maritime domain awareness annual plans from DOD combatant commands, military services, and defense intelligence components. The plans outlined each component's planned maritime domain awareness capabilities and described current gaps. The Executive Agent assessed the plans and listed critical areas for expanded focus and efforts. However, several DOD components did not submit plans, so the assessment may not include departmentwide data. Also, as identified in table 1, this assessment does not incorporate several key elements that would help guide DOD's implementation of maritime domain awareness including an allocation of resources and investments, performance measures, and a mechanism to monitor progress. Department of the Navy Initial Capabilities Document for Data Fusion and Analysis Functions of Navy Maritime Domain Awareness. This 2009 Navy document summarized a capabilities-based assessment that identified capability shortfalls and recommended approaches to improve Navy's overall maritime domain awareness capability. According to some DOD officials this initial capabilities document reflects the Navy's view, but not necessarily the views of other DOD components and interagency stakeholders. For example, many Navy maritime domain awareness documents are Navy-centric and it is unclear how they align with interagency efforts. Lastly, the Navy initial capabilities document does not resource identified gaps. These documents articulated broad strategic goals for maritime domain awareness and identified several critical capability gaps; however, DOD has not allocated resources to these efforts. Additionally, the Department of the Navy initial capabilities document, DOD's Maritime Domain Awareness Joint Integrating Concept, and the National Maritime Domain Awareness Working Group Interagency Investment Strategy gaps were separately approved by DOD's Joint Requirements Oversight Council, but DOD has not developed a departmentwide capability gap assessment for approval by the council. We also previously reported that the requirements determination process is more focused on the needs of military services than the joint warfighter, and combatant commands and defense intelligence agency needs are often not incorporated into this process. A departmentwide strategy, including a capability gap assessment, would assist DOD in assessing and prioritizing maritime domain awareness capability gaps that have already been identified through various service and interagency efforts in order to integrate them into its corporate processes--such as the Joint Capabilities Integration Development System--for determining requirements and allocating resources. Interagency maritime domain awareness documents identified maritime capability gaps and designated DOD as the lead agency to address some of these gaps. For example, in October 2005, the National Plan to Achieve Maritime Domain Awareness identified numerous near- and long-term maritime domain awareness priorities relating to maritime capabilities, and listed DOD as the lead agency for 22 of these priorities. In May 2007, the National Maritime Domain Awareness Requirements and Capabilities Working Group developed the National Maritime Domain Awareness Study Interagency Investment Strategy, which prioritized capability gaps. The Interagency Investment Strategy listed DOD as the lead or co- lead agency to address a majority of the prioritized gaps. The Maritime Domain Awareness Steering Executive Steering Committee approved an execution plan for a maritime domain awareness Interagency Solutions Analysis which would develop a coordinated, interagency approach for addressing previously identified gaps. In April 2010, the Interagency Solutions Analysis Working Group decided to focus immediate efforts on closing existing gaps related to information about the three areas of people, cargo, and vessels for the interagency group to initially address. In addition to interagency efforts, DOD and Navy documents have identified maritime domain awareness capability gaps related to the department's ability to collect, analyze, and share information on maritime vessels. For example, DOD's Maritime Domain Awareness Joint Integrating Concept identified required capabilities that the joint forces will need to address in order to conduct future operations to develop and maintain awareness of the maritime domain. In addition, DOD is conducting a Maritime Domain Awareness Joint Integrating Concept capabilities-based assessment that is considering current and programmed capabilities through 2012 in addition to projections of future programs. An initial capabilities document for this assessment was approved on November 29, 2010. This capabilities-based assessment is also intended to validate the Maritime Domain Awareness Joint Integrating Concept and provide a baseline of maritime domain awareness elements to inform interagency efforts. Key themes have emerged through the identification of capability gaps in several national, interagency, and department documents that DOD may need to address to support maritime domain awareness. DOD components have also identified maritime domain awareness capability gaps. While initial capability assessments share common themes, there has not been a departmentwide prioritization of these capability gaps. As DOD components start developing solutions for these gaps and allocating resources, the absence of a departmentwide prioritization may result in unnecessary duplication of efforts or redundancy in addressing shared capability gaps. A departmentwide prioritization, determined by a comprehensive, risk-based approach would assist decision makers in more effectively allocating resources to the joint forces departmentwide and contribute to interagency efforts to prioritize maritime capability gaps. DOD has not assessed the risk associated with its maritime capability gaps, in addition to not prioritizing these gaps. As we have previously reported, an agency's strategic plan should, among other things, address risk-related issues that are central to the agency's mission. To provide a basis for analyzing these risk management strategies, we have developed a framework based on industry best practices and other criteria. This framework, shown in figure 2, divides risk management into five major phases: (1) setting strategic goals and objectives, and determining constraints; (2) assessing risks; (3) evaluating alternatives for addressing these risks; (4) selecting the appropriate alternatives; and (5) implementing the alternatives and monitoring the progress made and results achieved. Even though DOD, its interagency partners, and its components have made efforts to identify and start prioritizing capability gaps, DOD does not have a departmentwide risk assessment to address high priority capability gaps. DOD Directive 2005.02E, which establishes the department's policy for maritime domain awareness, states that the department will determine its resource priorities and awareness levels needed to persistently monitor the maritime domain. The 2010 Quadrennial Defense Review states that risk management is central to effective decision-making. As shown in table 1, we have previously reported that risk assessment and risk management are desirable characteristics of national strategies. We have described risk assessments as including an analysis of threats to, and vulnerabilities of, critical assets and operations. The results of risk assessments may be used to define and prioritize related resource and operational requirements. Currently, maritime domain awareness is prioritized through various mechanisms across DOD, instead of through a departmentwide approach. For example, DOD's combatant commands and components prioritize maritime domain awareness differently based upon their respective missions. Additionally, when prioritizing capabilities across DOD, maritime domain awareness falls into multiple capability areas. For example, according to DOD documents and DOD officials, maritime domain awareness capabilities are assessed under multiple joint capability areas and functional capability boards through the Joint Capabilities Integration and Development System process. Figure 3 illustrates this. The various interagency and DOD views on capability gaps and priorities may not provide a full assessment of the risks associated with these gaps at a departmentwide level. Table 2 illustrates that current DOD-wide documents do not meet all of GAO's criteria for a risk assessment. Prior GAO work has cited that while principles of risk management acknowledge that risk generally cannot be eliminated altogether, enhancing protection from known or potential threats can serve to significantly reduce risk. Efforts such as The Maritime Domain Awareness Joint Integrating Concept and Assessment of U.S. Defense Component Annual Maritime Domain Awareness Plans have demonstrated DOD's progress in identifying capability gaps related to maritime domain awareness, but have not been included in a larger, departmentwide maritime domain awareness risk assessment. As a result, DOD may lack the insight needed to actively manage the risk associated with identified capability gaps. Additionally, because maritime domain awareness is a broad interagency effort, DOD may be unable to effectively coordinate with its interagency partners in the absence of a clear departmentwide strategy for maritime domain awareness. Consolidating these component efforts to prioritize capability gaps into a comprehensive departmentwide approach to risk management may facilitate developing solutions for each gap. A strategy that includes a comprehensive, risk-based approach to managing maritime domain awareness, including a departmentwide assessment of the critical capabilities, may also provide better information to decision makers about the potential implications of policy and resourcing decisions both within DOD and across the interagency. Our prior work has shown that a strategy including goals, roles, and responsibilities; resource allocation; and performance measures can help ensure that agencies are supporting national and interagency objectives. Achieving maritime domain awareness requires cooperation across a range of agencies throughout the federal, state, and local levels. DOD has a lead role in maritime domain awareness both because it serves as a key enabler for its own maritime activities and because DOD is positioned to provide so many of the resources which assist other agencies in meeting their respective maritime domain awareness needs. It is important that DOD components' efforts are consolidated together and aligned amongst each other to ensure that departmentwide maritime domain awareness needs are met and appropriate contributions to the efforts of its interagency partners are made. In the absence of a departmentwide strategy for maritime domain awareness, including the prioritized allocation of resources to maritime domain awareness, measures of performance in meeting the goals and objectives, monitoring of progress in addressing capability gaps, and assessing risk, DOD may not be effectively managing its maritime domain awareness efforts. Efforts on the part of DOD combatant commands, military services, the DOD Executive Agent for Maritime Domain Awareness, and interagency working groups resulted in the identification of several capability gaps, some identified by multiple components. The next step in achieving effective departmentwide maritime domain awareness would be a departmentwide strategy and risk assessment that incorporates these efforts. As DOD and the rest of government face increasing demand and competition for resources, policymakers will confront difficult decisions on funding priorities. Threats to the maritime domain are numerous and include the use of large merchant vessels to transport weapons of mass destruction; explosive- laden suicide boats as weapons; and vessels to smuggle people, drugs, weapons, and other contraband. The importance and vulnerabilities of the maritime domain require that efforts be made to reduce the risk of maritime threats and challenges, such as a terrorist attack or acts of piracy. Additionally, a comprehensive, risk-based approach would help DOD capitalize on the considerable effort it and its components have already devoted to maritime domain awareness, make the best use of resources in a fiscally constrained environment, and contribute to interagency efforts to address maritime threats. A strategic, risk-based approach is particularly important in light of emerging threats in the maritime domain and an increased strain on government resources. Such a departmentwide approach will provide DOD with important tools that can assist in confronting the myriad policy and fiscal challenges the department faces. To improve DOD's ability to manage the implementation of maritime domain awareness across DOD we recommend that the Secretary of Defense direct the Secretary of the Navy, as DOD's Executive Agent, to take the following two actions: Develop and implement a departmentwide strategy for maritime domain awareness that, at a minimum Identifies DOD objectives and roles and responsibilities within DOD for achieving maritime domain awareness, and aligns efforts and objectives with DOD's corporate process for determining requirements and allocating resources; and Identifies responsibilities for resourcing capability areas and includes performance measures for assessing progress of the overall strategy that will assist in the implementation of maritime domain awareness efforts. In collaboration with other maritime interagency stakeholders, such as the Coast Guard and the National Maritime Intelligence Center, perform a comprehensive risk-based analysis to include consideration of threats, vulnerabilities, and criticalities relating to the management of maritime domain awareness in order to prioritize and address DOD's critical maritime capability gaps and guide future investments. In written comments on a draft of the prior, sensitive report, DOD concurred with our recommendations and discussed actions they are taking--or plan to take--to address them. DOD's written comments are reprinted in their entirety in appendix II. DOD also provided technical comments, which we have incorporated into the report where appropriate. In concurring with the first recommendation, DOD stated that they have completed the initial policy, goals, and objectives for maritime domain awareness and promulgated it in a document to all DOD components. DOD also stated their intent to identify responsibilities for resourcing capability gaps and performance measures for assessing progress in achieving maritime domain awareness. DOD identified further steps it is taking to establish objectives for maritime domain awareness, assign appropriate roles and responsibilities, and conduct a second assessment of annual maritime domain awareness plans to inform DOD's overall effort to develop a departmentwide strategy. We believe these actions will address the intent of our recommendation and better enable DOD to address maritime capability gaps. DOD also concurred with our second recommendation. DOD stated that it will collaborate with the other principal members of the National Maritime Domain Awareness Coordination Office to develop a comprehensive, risk- based approach for maritime domain awareness. The DOD Executive Agent is also requesting that DOD components include risk assessments in their annual maritime domain awareness plans. We believe these actions will address the intent of our recommendation and help DOD prioritize its maritime capability gaps and guide future investment decisions. We are distributing this report to the Secretary of Defense, the Secretary of the Navy, and other relevant DOD officials. We are also sending copies of this report to interested congressional committees. The report is also available on our Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-5431 or [email protected]. Contact points for our offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. We were initially asked to look at four questions: (1) to what extent has the Department of Defense (DOD) developed the capability to perform intelligence, surveillance, and reconnaissance (ISR) activities in the maritime domain; (2) to what extent has DOD integrated the maritime domain awareness investment strategy into its overall ISR capability investment strategy; (3) to what extent does DOD have operational plans, planning and coordination structures in place to meet maritime domain awareness and maritime homeland defense requirements; and (4) what gaps, if any, exist in DOD's ability to identify maritime threats, achieve fusion of information sources from interagency and international partners, coordinate a response, and deploy forces to address identified threats at all relevant distances from the United States. We agreed with the requesters to respond to this request with two reports. The first report focuses on maritime capabilities and the second report will focus on maritime homeland defense. However, we considered the homeland defense perspective when we determined our site visits so we could gather relevant data on maritime homeland defense where possible and feasible to support the second report. As a result, we focused the scope of this audit on geographic combatant commands that had both a maritime focus and a homeland defense mission set. We determined that U.S. Northern Command, U.S. Southern Command, and U.S. Pacific Command met this criteria, and we conducted site visits to a facilities, such as operations centers, engaged in both maritime domain awareness and homeland defense that support these combatant commands. To determine what capabilities DOD currently uses to support maritime domain awareness, what gaps still exist and how these gaps are prioritized, we assessed capability needs established in national guidance such as the National Plan to Achieve Maritime Domain Awareness and DOD guidance such as the Joint Integrating Concept and DOD Directive 2005.02E, which establishes DOD policy for maritime domain awareness. We compared this information with current capabilities and gaps described by combatant command, military service, and supporting intelligence agency's officials during interviews and site visits. For example, we visited several combatant and joint operation centers to observe what capabilities were used at maritime operations centers. In addition, we evaluated DOD's efforts to prioritize capability gaps against established DOD acquisition processes such as the Joint Capabilities Integration and Development System. We reviewed prior GAO work on risk management and compared it to existing DOD maritime domain awareness capability documents to determine the extent to which DOD applies a risk-based approach to managing capabilities and identified gaps related to maritime domain awareness. To determine the extent to which DOD developed a strategy to address maritime domain awareness capability gaps, we reviewed prior GAO work on strategic planning including GAO's work on assessing specific components of national strategies. Given that there is no established set of requirements for strategies, we relied on GAO assessments of national strategies and the criteria that were applied to assess these strategies. We identified six desirable characteristics that national or departmentwide strategies should contain. We assessed these criteria against existing DOD and component-level documents such as the Joint Integrating Concept, the DOD Executive Agent's Assessment of the U.S. Defense Components Annual Maritime Domain Awareness Plans 2009, and the Department of the Navy's capability assessment and roadmaps to determine the extent to which these documents contain the elements of a departmentwide strategy. We specifically focused our assessment on the two departmentwide efforts to identify a maritime domain awareness strategy, DOD's Maritime Domain Awareness Joint Integrating Concept and DOD's Executive Agent for Maritime Domain Awareness's Assessment of U.S. Defense Components Annual Maritime Domain Awareness Plans 2009. To determine the extent to which DOD has allocated resources, measured performance and monitored progress in addressing identified capability gaps, we reviewed the same documents noted above to see if identified gaps were resourced within DOD, and if implementation and monitoring programs were discussed in relation to these gaps. We also assessed the information described in these documents against information obtained from combatant command, military service, and supporting intelligence agency's officials during interviews and site visits. To evaluate our reporting objectives, we obtained relevant national, interagency, and DOD-level documentation and interviewed officials from the following DOD components and interagency partners: Under Secretary of Defense (Intelligence) Office of the Assistant Secretary of Defense for Homeland Defense and America's Security Affairs Defense Intelligence Agency Defense Intelligence Operations Coordination Center National Geospatial-Intelligence Agency Under Secretary of Defense (Acquisition, Technology and Logistics) Joint Chiefs of Staff Department of the Navy Executive Agent for Maritime Domain Awareness Office of the Chief of Naval Operations (N3/N5) Office of the Chief of Naval Operations, Information Dominance Division (N2/N6) Office of the Chief Information Officer Office of Naval Intelligence Office of Naval Research U.S. Navy Pacific Fleet U.S. Navy Third Fleet Naval Air Systems Command Space and Naval Warfare Systems Command Combatant Commands Headquarters, U.S. Pacific Command Headquarters, U.S. Northern Command Headquarters, North American Aerospace Defense Command Headquarters, U.S. Southern Command Headquarters, Fleet Forces Command Joint Forces Component Command for Intelligence, Surveillance and Reconnaissance, U.S. Strategic Command The United States Coast Guard Headquarters District Five, Sector Hampton Roads District Eleven, Sector San Diego Intelligence Coordination Center Maritime Intelligence Fusion Center (Atlantic Area) Maritime Intelligence Fusion Center (Pacific Area) Joint Harbor Operations Center, Port of San Diego The Office of Global Maritime Situational Awareness / National Maritime Domain Awareness Coordination Office We conducted this performance audit primarily from June 2009 through November 2010, and coordinated with DOD from January to June 2011 to produce this public version of the prior, sensitive report issued in November 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Davi M. D'Agostino, (202) 512-5431 or [email protected]. In addition to the contact named above, Joseph Kirschbaum (Assistant Director), Alisa Beyninson, Christy Bilardo, Stephen Caldwell, Gina Flacco, Brent Helt, Greg Marchand, Timothy Persons, Steven Putansu, Amie Steele, and Cheryl Weissman made key contributions to this report.	Maritime security threats to the United States are broad, including the naval forces of potential adversary nations, terrorism, and piracy. The attacks on the USS Cole in 2000, in Mumbai in 2008, and on the Maersk Alabama in 2009 highlight these very real threats. The Department of Defense (DOD) considers maritime domain awareness--that is, identifying threats and providing commanders with sufficient awareness to make timely decisions--a means for facilitating effective action in the maritime domain and critical to its homeland defense mission. GAO was asked to examine the extent to which DOD has developed a strategy to manage its maritime domain awareness efforts and uses a risk-based approach. GAO analyzed national and DOD documents; interviewed DOD and interagency maritime domain awareness officials; and conducted site visits to select facilities engaged in maritime related activities. This report is a public version of a previous, sensitive report.. DOD has identified numerous maritime capability gaps and developed documents that articulate a broad strategy for maritime domain awareness. However, DOD does not have a departmentwide strategy that adequately defines roles and responsibilities for addressing gaps, aligns objectives with national strategy, and includes measures to guide the implementation of maritime domain awareness efforts, and to assess and manage risk associated with capability gaps. GAO has previously reported that it is standard practice to have a strategy that lays out goals and objectives, suggests actions for addressing those objectives, allocates resources, identifies roles and responsibilities, and measures performance against objectives. DOD and its components have developed a number of documents that incorporate some of these key elements of an overall strategy for maritime domain awareness such as a definition of the problem. However, collectively they do not have several key elements a strategy should contain. For example, neither DOD's Maritime Domain Awareness Joint Integrating Concept nor the DOD's Executive Agent Assessment of U.S. Defense Components Annual Maritime Domain Awareness Plans fully address organizational roles and responsibilities and resources, investments, performance measures, and risk management. Additionally, DOD leverages numerous capabilities to collect, fuse, and share maritime information to respond to global maritime challenges. DOD components have identified and started prioritizing capability gaps; however, DOD does not have a departmentwide risk assessment to address high priority capability gaps. DOD combatant commands and components prioritize maritime domain awareness differently based upon their respective missions and these component-level views may not provide a full view of the risks associated with these gaps at a departmentwide level. Prior GAO work has emphasized the importance of using a comprehensive risk assessment process. A strategy that includes a comprehensive, risk-based approach to managing maritime domain awareness may provide better information to decision makers about the potential implications of policy and resourcing decisions both within DOD and across the interagency. In the absence of a departmentwide strategy, DOD may not be effectively managing its maritime domain awareness efforts. This report is a publicly releasable version of a previously issued, sensitive report. GAO recommends that DOD (1) develop and implement a strategy with objectives, roles, and responsibilities for maritime domain awareness, aligns with DOD's corporate process, identifies capability resourcing responsibilities, and includes performance measures; and (2) perform a comprehensive risk-based analysis, including prioritized capability gaps and future investments. DOD agreed with the recommendations.	7,308	725
Federal operations and facilities have been disrupted by a range of events, including the terrorist attacks on September 11, 2001; the Oklahoma City bombing; localized shutdowns due to severe weather conditions, such as the closure of federal offices in Denver for 3 days in March 2003 due to snow; and building-level events, such as asbestos contamination at the Department of the Interior's headquarters. Such disruptions, particularly if prolonged, can lead to interruptions in essential government services. Prudent management, therefore, requires that federal agencies develop plans for dealing with emergency situations, including maintaining services, ensuring proper authority for government actions, and protecting vital assets. Until relatively recently, continuity planning was generally the responsibility of individual agencies. In October 1998, PDD 67 identified FEMA--which is responsible for responding to, planning for, recovering from, and mitigating against disasters--as the executive agent for federal COOP planning across the federal executive branch. FEMA was an independent agency until March 2003, when it became part of the Department of Homeland Security, reporting to the Under Secretary for Emergency Preparedness and Response. PDD 67 is a Top Secret document controlled by the National Security Council. FPC 65 states that PDD 67 made FEMA, as executive agent for COOP, responsible for formulating guidance for agencies to use in developing viable plans; coordinating interagency exercises and facilitating interagency coordination, as appropriate; and overseeing and assessing the status of COOP capabilities across the executive branch. According to FEMA officials, PDD 67 also required that agencies have COOP plans in place by October 1999. In July 1999, FEMA issued FPC 65 to assist agencies in meeting the October 1999 deadline. FPC 65 states that COOP planning should address any emergency or situation that could disrupt normal operations, including localized emergencies. FPC 65 also determined that COOP planning is based first on the identification of essential functions--that is, those functions that enable agencies to provide vital services, exercise civil authority, maintain safety, and sustain the economy during an emergency. FPC 65 gives no criteria for identifying essential functions beyond this definition. Although FPC 65 gives no specific criteria for identifying essential functions, a logical starting point for this process would be to consider programs that had been previously identified as important. For example, in March 1999, as part of the efforts to address the Y2K computer problem, the Director of OMB identified 42 programs with a high impact on the public: Of these 42 programs, 38 were the responsibility of the 23 major departments and agencies that we reviewed. (App. III provides a list of these 38 high-impact programs and the component agencies that are responsible for them.) Of these 23 major departments and agencies, 16 were responsible for at least one high-impact program; several were responsible for more than one. Programs that were identified included weather service, disease monitoring and warnings, public housing, air traffic control, food stamps, and Social Security benefits. These programs, as well as the others listed in appendix III, continue to perform important functions for the public. The Y2K planning to support these high-impact programs included COOP planning and specifically addressed interdependencies. Planning included identifying partners integral to program delivery, testing data exchanges across partners, developing complementary business continuity and contingency plans, sharing key information on readiness with other partners and the public, and taking other steps to ensure that the agency's high-impact program would work in the event of an emergency. Although the identification of essential functions was established as the first step in COOP planning, FPC 65 also identified an additional seven other planning topics that make up a viable COOP capability. The guidance provided a general definition of each of the eight topics and identified several actions that should be completed to address each topic. Table 1 lists the eight topic areas covered in FPC 65 and provides an example of an action under each. The identification of essential functions is a prerequisite for COOP planning because it establishes the planning parameters that drive the agency's efforts in all other planning topics. For example, FPC 65 directs agencies to identify alternative facilities, staff, and resources necessary to support continuation of their essential functions. The effectiveness of the plan as a whole and the implementation of all other elements depend on the performance of this step. Of the 34 agency COOP plans we reviewed, 29 plans included at least one function that was identified as essential. These agency-identified essential functions varied in number and scope. The number of functions identified in each plan ranged from 3 to 399. In addition, the apparent importance of the functions was not consistent. For example, a number of essential functions were of clear importance, such as "ensuring uninterrupted command, control, and leadership of the "protecting critical facilities, systems, equipment and records"; and "continuing to pay the government's obligations." Other identified functions appeared vague or of questionable importance: "provide speeches and articles for the Secretary and Deputy Secretary"; "schedule all activities of the Secretary"; and "review fiscal and programmatic integrity and efficiency of Departmental activities." In contrast to the examples just given, agencies did not list among their essential functions 20 of the 38 "high-impact" programs identified during the Y2K effort at the agencies we reviewed. Another important consideration in identifying essential functions is the assessment of interdependencies among functions and organizations. As we have previously reported, many agency functions rely on the availability of resources or functions controlled by another organization, including other agencies, state and local governments, and private entities. (For example, the Department of the Treasury's Financial Management Service receives and makes payments for most federal agencies.) The identification of such interdependencies continues to be essential to the related areas of information security and critical infrastructure protection. Although FPC 65 does not use the term "interdependencies," it directs agencies to "integrate supporting activities to ensure that essential functions can be performed." Of the 34 plans we reviewed, 19 showed no evidence of an effort to identify interdependencies and link them to essential functions, which is a prerequisite to developing plans and procedures to support these functions and all other elements of COOP planning. Nine plans identified some key partners, but appeared to have excluded others: for instance, six agencies either make or collect payments, but did not mention the role of the Treasury Department in their COOP plans. The high level of generality in FEMA's guidance on essential functions contributed to the inconsistencies in agencies' identification of these functions. In its initial guidance, FPC 65, FEMA provided minimal criteria for agencies to make these identifications, giving a brief definition only. According to FEMA officials, the agency is currently developing revised COOP guidance that will provide more specific direction on identifying essential functions. According to these officials, FEMA expects to release the revised guidance in March 2004. Further, although FEMA conducted several assessments of agency COOP planning between 1995 and 2001, none of these addressed the identification of essential functions. In addition, FEMA has begun development of a system to collect data from agencies on the readiness of their COOP plans, but FEMA officials told us that they will not use the system to validate the essential functions identified by each agency or their interdependencies. According to FEMA officials, the agencies are better able to make those determinations. However, especially in view of the wide variance in number and importance of functions identified, as well as omissions of high-impact programs, the lack of FEMA review lowers the level of assurance that the essential functions that have been identified are appropriate. Additionally, in its oversight role, FEMA had the opportunity to help agencies refine their essential functions through an interagency COOP test or exercise. According to FPC 65, FEMA is responsible for coordinating such exercises. FEMA is developing a test and training program for COOP activities, but it has not yet conducted an interagency exercise to test the feasibility of these planned activities. FEMA had planned a governmentwide exercise in 2002, but the exercise was cancelled after the September 11 attacks. FEMA is currently preparing to conduct a governmentwide exercise in mid-May 2004. Improper identification of essential functions can have a negative impact on the entire COOP plan, because other aspects of the COOP plan are designed around supporting these functions. If an agency fails to identify a function as essential, it will not make the necessary arrangements to perform that function. If it identifies too many functions as essential, it risks being unable to adequately address all of them. In either case, the agency increases the risk that it will not be able to perform its essential functions in an emergency. As of October 1, 2002, almost 3 years after the planning deadline established by PDD 67, 3 of the agencies we reviewed had not developed and documented a COOP plan. The remaining 20 major federal civilian agencies had COOP plans in place, and the 15 components that we reviewed also had plans. (App. IV identifies the 15 components and the high-impact programs for which they are responsible.) However, none of these plans addressed all the guidance in FPC 65. Of the eight topic areas identified in FPC 65, these 34 COOP plans generally complied with the guidance in one area (developing plans and procedures); generally did not comply in one area (tests, training, and exercises); and showed mixed compliance in the other six areas. The following sections present the results of our analysis for each of the eight planning topics outlined in FPC 65. In analyzing each plan, we looked for the answers to a series of questions regarding each planning topic. We present the compiled results for each topic in the form of a table showing the answers to these questions. Appendix I provides more detail on our analysis and methods. Although most agency plans identified at least one essential function, less than half the COOP plans fully addressed other FPC 65 guidance related to essential functions, such as prioritizing the functions or identifying interdependencies among them (see table 2). If agencies do not prioritize their essential functions and identify the resources that are necessary to accomplish them, their COOP plans will not be effective, since the other seven topics of the COOP plan are designed around supporting these functions. FPC 65 calls for COOP plans to be developed and documented that provide for the performance of essential functions under all circumstances. Most agency COOP documents included the basic information outlined in FPC 65 (see table 3). However, in those cases where plans and procedures are not adequately documented, agency personnel may not know what to do in an emergency. Orders of succession ensure continuity by identifying individuals who are authorized to act for agency officials in case those officials are unavailable. Although most agency COOP documents adequately described the order of succession to the agency head and described orders of succession by position or title, fewer addressed other succession planning procedures outlined in FPC 65 (see table 4). If orders of succession are not clearly established, agency personnel may not know who has authority and responsibility if agency leadership is incapacitated in an emergency. To provide for rapid response to emergencies, FPC 65 calls for agencies to delegate authorities in advance for making policy determinations at all levels. Generally, these delegations define what actions those individuals identified in the orders of succession can take in emergencies. Few agency COOP documents adequately described the agency's delegations of authority (see table 5). If delegations of authority are not clearly established, agency personnel may not know who has authority to make key decisions in an emergency. Alternate facilities provide a physical location from which to conduct essential functions if the agency's existing facilities are unavailable. Most agency COOP plans document the acquisition of at least one alternate facility for use in emergencies, but few of those plans demonstrate that the facilities are capable of meeting the agencies' emergency operating requirements (see table 6). If alternate facilities are not provided or are inadequate, agency operations may not be able to continue in an emergency. The success of agency operations at an alternate facility depends on available and redundant communications with internal organizations, other agencies, critical customers, and the public. Most COOP documents identified some redundant emergency communications capabilities, but few included contact information that would be necessary to use those capabilities in an emergency (see table 7). If communications fail in an emergency, essential agency operations may not be possible. FPC 65 states that agency personnel must have access to and be able to use the electronic and hard-copy records and information systems that are needed to perform their essential functions. About 24 percent of the COOP plans fully identified agencies' vital paper and electronic records, while fewer documented the procedures for protecting or updating them (see table 8). If agency personnel cannot access and use up-to-date vital records, they may be unable to carry out essential functions. Tests, training, and exercises of COOP capabilities are essential to demonstrate and improve agencies' abilities to execute their plans. Few agencies have documented that they have conducted tests, training, and exercises at the recommended frequency (see table 9). If emergency procedures are not tested and staff is not trained in their use, planned responses to an emergency may not be adequate to continue essential functions. The lack of compliance shown by many COOP plans can be largely attributed to FEMA's limited guidance and oversight of executive branch COOP planning. First, FEMA has issued little guidance to assist agencies in developing plans that address the goals of FPC 65. Following FPC 65, FEMA issued more detailed guidance in April 2001 on two of FPC 65's eight topic areas: FPC 66 provides guidance on developing viable test, training, and exercise programs, and FPC 67 provides guidance for acquiring alternate facilities. However, FEMA did not produce any detailed guidance on the other six topic areas. In October 2003, FEMA began working with several members of the interagency COOP working group to revise FPC 65. FEMA officials expect this revised guidance, which was still under development as of January 2004, to incorporate the guidance from the previous FPCs and to address more specifically what agencies need to do to comply with the guidance. Second, as part of FEMA's oversight responsibilities, its Office of National Security Coordination is tasked with conducting comprehensive assessments of the federal executive branch COOP programs. With the assistance of contractors, the office has performed assessments, on an irregular schedule, of federal agencies' emergency planning capabilities: In 1995, FEMA performed a survey of agency officials (this assessment predated FPC 65). In 1999, FEMA assessed compliance with the elements of FPC 65 through a self-reported survey of agency COOP officials, supplemented by interviews. In 2001, FEMA surveyed agency officials to ask, among other things, about actions that agencies took on and immediately after September 11, 2001. Of these three assessments, only the 1999 assessment evaluated compliance with the elements of FPC 65. Following this assessment, FEMA gave agencies feedback on ways to improve their respective COOP plans, and it made general recommendations, not specific to individual agencies, that addressed programwide problems. However, FEMA did not then follow up to determine whether individual agencies made improvements in response to its feedback and general recommendations. Besides inquiring about actions in response to the September 2001 attacks, the 2001 assessment was designed to provide an update on programwide problems that had been identified in the assessments of 1995 and 1999. It did not address whether individual agency COOP plans had been revised to correct previously identified deficiencies, nor did FEMA provide specific feedback to individual agencies. According to FEMA officials, the system it is developing to collect agency- reported data on COOP plan readiness will improve FEMA's oversight. The system is based on a database of information provided by agencies for the purpose of determining if they are prepared to exercise their COOP plans, in part by assessing compliance with FPC 65. However, according to FEMA officials, while they recognize the need for some type of verification, FEMA has not yet determined a method of verifying these data. Without regular assessments of COOP plans that evaluate individual plans for adequacy, FEMA will not be able to provide information to help agencies improve their COOP plans. Further, if FEMA does not verify the data provided by the agencies or follow up to determine whether agencies have improved their plans in response to such assessments, it will have no assurance that agencies' emergency procedures are appropriate. FEMA officials attributed the limited level of oversight that we found to two factors. First, they stated that before its transition to the Department of Homeland Security, the agency did not have the legal or budgetary authority to conduct more active oversight of the COOP activities of other agencies. However, FPC 65 states that PDD 67 made the agency responsible for guidance, coordination, and oversight in this area, in addition to requiring agencies to develop COOP plans. Accordingly, although it cannot determine how agencies budget resources for such planning, it does have the authority to oversee this planning. Second, according to these officials, until last year, the agency devoted roughly 13 staff to COOP guidance, coordination, and oversight, as well as the development of FEMA's own COOP plan. According to the official responsible for COOP oversight, the agency now has 42 positions authorized for COOP activities, 31 of which were filled as of December 31, 2003. The agency expects to fill another 4 positions in fiscal year 2004. While most of the federal agencies we reviewed had developed COOP plans, three agencies did not have documented plans as of October 2002. Those plans that were in place exhibited weaknesses in the form of widely varying determinations about what functions are essential and inconsistent compliance with guidance that defines a viable COOP capability. The weaknesses that we identified could cause the agencies to experience difficulties in delivering key services to citizens in the aftermath of an emergency. A significant factor contributing to this condition is FEMA's limited efforts to fulfill its responsibilities first by providing guidance to help agencies develop effective plans and then by assessing those plans. Further, FEMA has done very little to help agencies identify those functions that are truly essential or to identify and plan for interdependencies among agency functions. FEMA has begun taking steps to improve its oversight, by developing more specific guidance and a system to track agency-provided COOP readiness information, and it is planning a governmentwide exercise. However, although the proposed guidance and exercise may help agencies improve their plans, the system that FEMA is developing to collect data on COOP readiness is weakened by a lack of planning to verify agency-submitted data, validate agency-identified essential functions, or identify interdependencies with other activities. Without this level of active oversight, continuity planning efforts will continue to fall short and increase the risk that the public will not be able to rely upon the continued delivery of essential government programs and services following an emergency. We are making three recommendations to enhance the ability of the executive branch to continue to provide essential services during emergencies. To ensure that agencies can continue operations in emergencies and are prepared for the governmentwide exercise planned for May 2004, we recommend that the Secretary of Homeland Security direct the Under Secretary for Emergency Preparedness and Response to take steps to ensure that agencies that do not have COOP plans develop them by May 1, 2004. We further recommend that the Secretary direct the Under Secretary to take steps to improve the oversight of COOP planning by ensuring that agencies correct the deficiencies in individual COOP plans identified here, as well as those identified in previous assessments, and conducting assessments of agency continuity plans that include independent verification of agency-provided information, as well as an assessment of the essential functions identified and their interdependencies with other activities. In written comments on a draft of this report, which are reprinted in appendix V, the Under Secretary for Emergency Preparedness and Response agreed that better COOP planning is needed to ensure delivery of essential services, and that FEMA could do more to improve COOP planning. He added that the agency has begun to correct the identified deficiencies and stated that the federal government is currently poised to provide services in an emergency. The Under Secretary's commitment to improve FEMA's oversight of COOP planning can be instrumental in ensuring that agencies prepare adequate plans. Specifically, once FEMA ensures that each agency has a COOP plan, ensures that agencies correct the identified deficiencies in existing plans, and conducts independent verification and assessments of those plans, it will be in a position to effectively demonstrate the readiness of federal agencies to respond to emergencies. 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 report. At that time, we will send copies to the Chairmen and Ranking Minority Members of the Subcommittee on Homeland Security, House Committee on Appropriations; Subcommittee on National Security, Emerging Threats, and International Relations, House Committee on Government Reform; and the Subcommittee on Oversight of Government Management, the Federal Workforce, and the District of Columbia, Senate Committee on Governmental Affairs. We are also sending copies to the Secretary of Homeland Security. We will also make copies available 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 contained in this report, please contact me at (202) 512-6240 or by e-mail at [email protected]. Other key contributors to this report were Barbara Collier, Mirko Dolak, Neela Lakhmani, Susan Sato, James R. Sweetman, Jr., Jessie Thomas, and Marcia Washington. To accomplish our objectives, we obtained and evaluated headquarters contingency plans that were in place as of October 1, 2002, from 20 of the 23 largest civilian departments and agencies (listed in app. II). We also obtained and evaluated 14 plans covering 15 components of civilian cabinet-level departments, selected because these components were responsible for a program previously deemed high impact by the Office of Management and Budget (OMB). (App. III lists these components and the high-impact programs.) We also interviewed agency officials who were responsible for developing each of the 34 continuity of operations (COOP) plans (comprising the 20 plans for the largest civilian departments and agencies and the 14 plans covering components with high-impact programs); obtained and analyzed COOP guidance issued by the Federal Emergency Management Agency (FEMA) and documents describing its efforts to provide oversight and assessments of federal COOP planning efforts; and conducted interviews with FEMA officials to clarify the activities described in these documents. To assess the adequacy of agency-identified essential functions, we analyzed the COOP plans from agencies that were responsible for programs that OMB designated as having high impact to determine whether the plans described how those programs would continue to function during an emergency, and we assessed COOP documentation for evidence of agency efforts to identify interdependencies between their essential functions and functions or resources controlled by others. For example, for those agencies responsible for processing incoming or outgoing payments, we looked for evidence that the agency had identified services provided by the Department of the Treasury as necessary to the continuation of its functions. To assess how well agency plans followed Federal Preparedness Circular (FPC) 65, we analyzed the guidance and identified 34 yes/no questions, grouped by the eight topic areas identified in FPC 65. Each topic area included two to eight questions. On the basis of the agency contingency planning documents, we used content analysis to assign an answer of "yes" (compliant), "no" (not compliant), or "partially" to these 34 questions. Documents were reviewed and compared independently by several of our analysts. The analysts then met to compare their assessments and reach a consensus assessment. We shared these initial assessments with each agency during structured interviews, giving agency officials the opportunity to provide additional documentation to demonstrate compliance. Any supplemental information provided by the agencies was again reviewed by multiple analysts, first independently and then jointly. From this analysis, we created the summary tables that appear in this report (tables 2 to 9) to compare answers across agencies. We requested that the National Security Council provide a copy of Presidential Decision Directive (PDD) 67, which lays out the policy guidance for executive branch contingency planning and describes the authority granted to FEMA and other agencies. To date, we have not received a copy. Instead, we relied on the characterization of PDD 67 in FPC 65 and on statements from FEMA officials on the requirements within PDD 67. Without a copy of PDD 67, we were unable to verify the responsibilities or scope of authority of the various executive branch entities responsible for contingency planning. We conducted our review between April 2002 and January 2004, in accordance with generally accepted government auditing standards. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO's commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO's Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. You can print these documents in their entirety, including charts and other graphics. Each day, GAO issues a list of newly released reports, testimony, and correspondence. GAO posts this list, known as "Today's Reports," on its Web site daily. The list contains links to the full-text document files. To have GAO e- mail this list to you every afternoon, go to www.gao.gov and select "Subscribe to e-mail alerts" under the "Order GAO Products" heading.	To ensure that essential government services are available in emergencies--such as terrorist attacks, severe weather, or building-level emergencies-- federal agencies are required to develop continuity of operations (COOP) plans. Responsibility for formulating guidance on these plans and for assessing executive branch COOP capabilities lies with the Federal Emergency Management Agency (FEMA), under the Department of Homeland Security. FEMA guidance, Federal Preparedness Circular (FPC) 65 (July 1999), provides elements of a viable COOP capability, including the requirement that agencies identify their essential functions. GAO was asked to determine the extent to which (1) major civilian executive branch agencies have identified their essential functions and (2) these agencies' COOP plans follow FEMA guidance. From an assessment of 34 COOP plans against FEMA guidance, GAO found that most agencies' plans identified at least one function as essential. However, the functions identified in each plan varied widely in number-- ranging from 3 to 399--and included functions that appeared to be of secondary importance, while at the same time omitting programs that had been previously defined as high-impact programs. (Examples of these highimpact programs are Medicare, food stamps, and border inspections.) For example, one department included "provide speeches and articles for the Secretary and Deputy Secretary," among its essential functions, but did not include 9 of 10 high-impact programs for which it is responsible. Several factors contributed to these shortcomings: FPC 65 did not provide specific criteria for identifying essential functions; FEMA did not review the essential functions identified when it assessed COOP planning; and it did not conduct tests or exercises to confirm that the essential functions were correctly identified. Unless agencies' essential functions are correctly and completely identified, their COOP plans may not effectively ensure that the most vital government services can be maintained in an emergency. Although all but three of the agencies reviewed had developed and documented some of the elements of a viable COOP plan, none of the agencies could demonstrate that they were following all the guidance in FPC 65. There is a wide variation in the number of agencies that addressed various elements identified in the guidance. A contributing cause for the deficiencies in agency COOP plans is the level of FEMA oversight. In 1999, FEMA conducted an assessment of agency compliance with FPC 65, but it has not conducted oversight that is sufficiently regular and extensive to ensure that agencies correct the deficiencies identified. Because the resulting COOP plans do not include all the elements of a viable plan as defined by FPC 65, agency efforts to provide services during an emergency could be impaired.	5,577	545
In December 2014, we reported on the progress the departments that coordinate federal emergency support functions (ESF) have made in conducting a range of coordination, planning, and capability assessment activities. For example, all 10 ESF coordinators identified at least one nonemergency activity through which they coordinate with their ESFs' primary and support agencies. Further, all 10 ESF coordinators identified at least one planning document--in addition to the information contained in the NRF's ESF annexes--that they had developed for their ESFs to further define the roles, responsibilities, policies, and procedures for their ESFs' coordination and execution. We found, however, that the ESF Leadership Group and FEMA, as the group's chair, had not worked with other federal departments to issue supplemental guidance detailing expectations for the minimum standards for activities and product deliverables necessary to demonstrate ESF preparedness. In the absence of such guidance, we found that ESF coordinators are inconsistently carrying out their emergency response preparedness activities. We also found that, while federal departments have identified emergency response capability gaps through national- level exercises, real-world incidents, such as Hurricane Sandy and other assessments, the status of federal interagency implementation of these actions is not comprehensively collected by or reported to DHS or FEMA and, as a result, DHS's and FEMA's ability to assess and report on the nation's overall preparedness is hampered. Further, we found that FEMA's plan to lead interagency actions to identify and address capability gaps in the nation's preparedness to respond to improvised nuclear device (IND) attacks did not contain detailed program management information--such as specific timeframes, milestones, and estimated resources required to close any given capability gap--which is needed to better enable ongoing management oversight of gap closure efforts. In our December 2014 report, we recommended that FEMA--in collaboration with other federal agencies--(1) issue supplemental guidance to ESF coordinators detailing minimum standards for activities and product deliverables necessary to demonstrate ESF preparedness, develop and (2) issue detailed program management information to better enable management oversight of the DHS IND Strategy's recommended actions, and (3) regularly report on the status of corrective actions identified through prior national-level exercises and real-world disasters. DHS concurred with our recommendations and FEMA has taken actions in response. For example, in June 2015, FEMA issued guidance for ESF coordinators that details minimum standards for activities and product deliverables necessary to demonstrate ESF preparedness. The ESF Leadership Group established a set of preparedness performance metrics to guide ESF coordination, planning, and capabilities assessment efforts. The ESF Leadership Group-generated metrics set standardized performance targets and preparedness actions across the ESFs. Collectively, the metrics and reporting of these metrics should provide an opportunity to better measure preparedness efforts by assessing if ESF coordination and planning is sufficient, and whether required ESF capabilities are available for disaster response. In addition, FEMA developed a detailed program plan to provide a quantitative analysis of current work and addressing existing capability gaps linked to a project management tracking system to identify specific dates for past, present and upcoming milestones for its IND Program. We believe that FEMA's actions in these areas have fully met the intent of these two recommendations. FEMA officials also collected information on the status of National Level Exercise Corrective Actions from 2007-2014, an important step to respond to our other recommendation and we are continuing to monitor FEMA's efforts in this area, however it has not provided a timeframe for its completion. We recently reported in September 2015 on FEMA's progress in working with its federal partners to implement the National Response Framework (NRF) Emergency Support Function #7 (ESF 7) Logistics Annex. We found that FEMA's efforts reflect leading practices for interagency collaboration and enhance ESF 7 preparedness. For example, FEMA's Logistics Management Directorate (LMD) has facilitated meetings and established interagency agreements with ESF 7 partners such as the Department of Defense and the General Services Administration, and identified needed quantities of disaster response commodities, such as food, water, and blankets. Additionally, FEMA tracks the percentage of disaster response commodities delivered by agreed-upon dates, and available through FEMA and its ESF 7 partners. Regarding FEMA's support of its state and local stakeholders, we found that FEMA could strengthen the implementation of its Logistics Capability Assessment Tool (LCAT). For example, FEMA--through LMD and its regional offices--has made progress in offering training and exercises for state and local stakeholders, developing the LCAT, and establishing an implementation program to help state and local stakeholders use the tool to determine their readiness to respond to, disasters. However, we found that, while feedback from states that have used the LCAT has generally been positive, implementation of the program by FEMA's regional offices has been inconsistent; 3 of 10 regional offices no longer promote or support LCAT assessments. Further, LMD did not identify staff resources needed to implement the program, and did not develop program goals, milestones, or measures to assess the effectiveness of implementation efforts. In our September 2015 report, we recommended that FEMA identify the LMD and regional resources needed to implement the LCAT, and establish and use goals, milestones and performance measures to report on the LCAT program implementation. DHS concurred with the recommendations and is taking actions to address them. For example, FEMA officials said they intend to work closely with regional staff to identify resources and develop a plan to monitor LCAT performance. We also reported on the status of FEMA's development of the Logistics Supply Chain Management System (LSCMS) as part of a broader look at 22 acquisition programs at DHS, in April 2015. We reported that, according to FEMA officials, LSCMS can identify when a shipment leaves a warehouse and the location of a shipment after it reaches a FEMA staging area near a disaster location. At the time of our review, LSCMS could not track partner organizations' shipments in route to a FEMA staging area, and lacked automated interfaces with its partners' information systems. We also reported that DHS leadership had not yet approved a baseline establishing the program's cost, schedule, and performance parameters. According to FEMA officials, FEMA's partners and vendors can now receive orders directly from LSCMS and manually input their shipment data directly into a vendor portal, providing FEMA with the ability to track orders and shipments from time and date of shipment to the estimated time of arrival, but not the in-transit real-time location of shipments. They also said that the program baseline was still under consideration by DHS leadership at the time of our review. In addition, DHS's Office of the Inspector General (OIG) issued a report on LSCMS in September 2014. The DHS OIG made 11 recommendations designed to address operational deficiencies that FEMA concurred with, such as identifying resources to ensure effective program management and developing a training program for staff. As of July 2015, FEMA officials report that 5 of the OIG's recommendations have been implemented, and the agency is taking steps to address the remaining 6 recommendations. In addition to these completed reviews of preparedness efforts, we currently have work underway for this committee assessing how FEMA's regional coordination efforts support national preparedness. Specifically, we plan to assess and report on FEMA's management of preparedness grants, implementation of the National Incident Management System, and interactions with regional advisory councils later this year. In September 2012, we reported on FEMA's processes for determining whether to recommend major disaster declarations. We found that FEMA primarily relied on a single criterion, the per capita damage indicator, to determine whether to recommend to the President that a jurisdiction receive Public Assistance (PA) funding. However, because FEMA's current per capita indicator at the time of our report, set at $1 in 1986, did not reflect the rise in (1) per capita personal income since it was created in 1986 or (2) inflation from 1986 to 1999, the indicator was artificially low. Further, the per capita indicator did not accurately reflect a jurisdiction's capability to respond to or recover from a disaster without federal assistance. We identified other measures of fiscal capacity, such as total taxable resources, that could be more useful in determining a jurisdiction's ability to pay for damages to public structures. We also reported that FEMA can recommend increasing the usual proportion (75 percent) of costs the federal government pays (federal share) for PA (to 90 percent) when costs get to a certain level. However, FEMA had no specific criteria for assessing requests to raise the federal share for emergency work to 100 percent, but relied on its professional judgment. In our September 2012 report, we recommended, among other things, that FEMA develop a methodology to more accurately assess a jurisdiction's capability to respond to and recover from a disaster without federal assistance, develop criteria for 100 percent cost adjustments, and implement goals for and monitor administrative costs. FEMA concurred with the first two recommendations, but partially concurred with the third, saying it would conduct a review before taking additional action. Since that time, FEMA has submitted a report to Congress outlining various options that the agency could take to assess a jurisdiction's capability to respond to and recover from a disaster. We met with FEMA in April 2015 to discuss its report to Congress. FEMA officials told us that the agency would need to undertake the rulemaking process to implement a new methodology that provides a more comprehensive assessment of a jurisdiction's capability to respond and recover from a disaster without federal assistance. They said that they identified three potential options, which taken individually or in some combination would implement our recommendation by (1) adjusting the PA per capita indicator to better reflect current national and state specific economic conditions; (2) developing an improved methodology for considering factors in addition to the PA per capita indicator; or (3) implementing a state-specific deductible for states to qualify for PA. Although FEMA initially concurred with our recommendation to develop criteria for 100 percent cost adjustments, it has concluded that it will not establish specific criteria or factors to use when evaluating requests for cost share adjustments. FEMA conducted a historical review of the circumstances that previously led to these cost share adjustments, and determined that each circumstance was unique in nature and could not be used to develop criteria or factors for future decision making. Based on FEMA's review and its clarification of the intent to use cost share adjustments during only rare catastrophic events, we agreed that their decision could lead to better stewardship of federal dollars. In December 2014, we reported on FEMA's progress in improving its ability to detect improper and potentially fraudulent payments. Specifically, while safeguards were generally not effective after Hurricanes Katrina and Rita, the controls FEMA implemented since then, designed to improve its capacity to verify applicants' eligibility for assistance, have improved the agency's ability to prevent improper or potentially fraudulent Individuals and Households Program (IHP) payments. We reported that as of August 2014, FEMA stated that it had provided over $1.4 billion in Hurricane Sandy assistance through its IHP--which provides financial awards for home repairs, rental assistance, and other needs--to almost 183,000 survivors. We identified $39 million or 2.7 percent of that total that was at risk of being improper or fraudulent compared to 10 to 22 percent of similar assistance provided for Hurricanes Katrina and Rita. However in December 2014, we identified continued challenges in the agency's response to Hurricane Sandy, including weaknesses in the agency's validation of Social Security numbers, among other things. Although FEMA hired contractors to inspect damaged homes to verify the identity and residency of applicants and that reported damage was a result of Hurricane Sandy, we found 2,610 recipients with potentially invalid identifying information who received $21 million of the $39 million we calculated as potentially improper or fraudulent. Our analysis included data from the Social Security Administration (SSA) that FEMA does not use, such as SSA's most-complete death records. We also found that FEMA and state governments faced challenges in obtaining the data necessary to help prevent duplicative payments from overlapping sources. In addition, FEMA relied on self-reported data from applicants regarding private home insurance--a factor the agency uses in determining benefits, as federal law prohibits FEMA from providing assistance for damage covered by private insurance; however that data can be unreliable. In our December 2014 report, we recommended, among other things, that FEMA collaborate with SSA to obtain additional data, collect data to detect duplicative assistance, and implement an approach to verify whether recipients have private insurance. FEMA concurred with the report's five recommendations and has taken actions to address them. For example, in response to our recommendations, FEMA started working with SSA to determine the feasibility and cost effectiveness of incorporating SSA's identify verification tools and full death file data into its registration process, and expects to make its determination by the end of 2015. FEMA indicated that, depending on the determination, one option would be to enter into a Computer Matching Agreement with SSA. FEMA has also approved plans to improve the standardization, quality and accessibility of data across its own disaster assistance programs, which includes efforts to enhance data sharing with state and local partners, that should allow it to more readily identify potentially duplicative assistance. Also, after reviewing various options, FEMA has decided to add an additional question to its application to help confirm self-reported information on whether applicants have private insurance. We are reviewing these actions to determine if they reflect sufficient steps to consider our recommendations fully implemented. In July 2015 we reported that during the Hurricane Sandy Recovery, five federal programs--the FEMA's Public Assistance (PA) and Hazard Mitigation Grant Program (HMGP), the Federal Transit Administration's Public Transportation Emergency Relief Program, the Department of Housing and Urban Development's Community Development Block Grant-Disaster Recovery, and the U.S. Army Corps of Engineers' Hurricane Sandy program--helped enhance disaster resilience--the ability to prepare and plan for, absorb, recover from, and more successfully adapt to disasters. We found that, these programs funded a number of disaster-resilience measures, for example, acquiring and demolishing at-risk properties, elevating flood-prone structures, and erecting physical flood barriers. State and local officials from all 12 states, the District of Columbia, and New York City in the Sandy affected-region reported that they were able to effectively leverage federal programs to enhance disaster resilience, but also experienced challenges. The challenges included implementation challenges within PA and HMGP, limitations on comprehensive risk reduction approaches in a post disaster environment, and local ability and willingness to participate in mitigation activities. We found there was no comprehensive, strategic approach to identifying, prioritizing and implementing investments for disaster resilience, which increased the risk that the federal government and nonfederal partners will experience lower returns on investments or lost opportunities to strengthen key critical infrastructure and lifelines. Most federal funding for hazard mitigation is available after a disaster and there are benefits to investing in resilience post disaster. Individuals and communities affected by a disaster may be more likely to invest their own resources while recovering. However, we concluded that the emphasis on the post-disaster environment can create a reactionary and fragmented approach where disasters determine when and for what purpose the federal government invests in disaster resilience. In our July 2015 report, we recommended that (1) FEMA assess the challenges state and local officials report and implement corrective actions as needed and (2) the Mitigation Framework Leadership Group (MitFLG) establish an investment strategy to identify, prioritize, and implement federal investments in disaster resilience. DHS agreed with both recommendations. With respect to the challenges reported by state and local officials, FEMA officials said it would seek input from federal, tribal, state, and local stakeholders as part of its efforts to reengineer the PA program, which it believes will address many of the issues raised in the report. In addition, DHS said that FEMA, though its leadership role in the MitFLG would take action to complete an investment strategy by August 2017. We currently have work underway for this committee assessing several of FEMA's disaster response and recovery programs. For example, we are reviewing FEMA's urban search and rescue program, incident management assistance teams, and evacuation planning, as well as national disaster assistance programs for children and special needs populations. In addition, we are reviewing DHS's national emergency communications programs and efforts to implement the National Disaster Recovery Framework. In December 2014, we reported on FEMA's progress in taking steps to reduce and better control administrative costs--the costs of providing and managing disaster assistance. For example, FEMA issued guidelines intended to better control its administrative costs in November 2010. In addition, FEMA recognized that administrative costs have increased and it has taken steps such as setting a goal in its recent strategic plan to lower these costs, and creating administrative cost targets. Specifically, FEMA established a goal in its Strategic Plan for 2014-2018 to reduce its average annual percentage of administrative costs, as compared with total program costs, by 5 percentage points by the end of 2018. To achieve this goal, FEMA officials developed administrative costs goals for small, medium, and large disasters, and are monitoring performance against the goals. However, FEMA does not require these targets be met, and we found that had FEMA met its targets, administrative costs could have been reduced by hundreds of millions of dollars. We found that FEMA continued to face challenges in tracking and reducing these costs. FEMA's average administrative cost percentages for major disasters during the 10 fiscal years 2004 to 2013 was double the average during the 10 fiscal years 1989 to 1998. Further, we found that FEMA did not track administrative costs by major disaster program, such as Individual or Public Assistance, and had not assessed the costs versus the benefits of tracking such information. In our December 2014 report, we recommended that FEMA (1) develop an integrated plan to better control and reduce its administrative costs for major disasters, (2) assess the costs versus the benefits of tracking FEMA administrative costs by the Disaster Relief Fund program, and (3) clarify the agency's guidance and minimum documentation requirements for direct administrative costs. FEMA agreed with the report and its recommendations. As of August 2015, FEMA told us it is developing an integrated plan to control and reduce administrative costs for major disaster declarations. According to FEMA officials, their Disaster Administrative Cost Integrated Project Team has been working over the past several months to analyze FEMA's historic administrative costs, identify cost drivers, document and evaluate the delivery of disaster assistance, and set an improved framework to standardize the way FEMA does business. FEMA officials previously told us that the plan will describe the steps the agency plans take to reduce administrative costs, milestones for accomplishing the reduction, and clear roles and responsibilities, including the assignment of senior officials/offices responsible for monitoring and measuring performance. FEMA also continues to assess the costs versus the benefits of tracking administrative costs by program. According to FEMA officials, this project requires connecting multiple disparate data sources. FEMA has identified some, but not all of the data which needs to be integrated in order to be able to track administrative costs by program area. FEMA is also evaluating its direct administrative costs pilot program, which applies a standard fixed percentage towards administrative costs. According to FEMA, if successful, results from this program could inform the development of additional guidance or regulatory modification and similar approaches could be applied in future disasters. For current and other past disasters, FEMA told us it plans to provide clarifying guidance. According to FEMA, this information will be incorporated into the Public Assistance unified guidance document that is scheduled to be issued in January 2016. In July 2015, we reported on FEMA's progress in taking steps to address various long-standing workforce management challenges in completing and integrating its strategic workforce planning efforts we have identified since 2007. We found that FEMA had not yet resolved these challenges and fully addressed our prior workforce-related recommendations. However, according to agency officials, they plan to do so through efforts to develop (1) a new incident workforce planning model--pending final approval--that will determine the optimal mix of workforce components to include in FEMA's disaster workforce, (2) a new Human Capital Strategic Plan that was to have been finalized in September 2015--that will help ensure it has the optimal workforce to carry out its mission, and (3) an executive-level steering committee to help ensure that these workforce planning efforts are completed and integrated. In addition, we discussed FEMA's continuing, long-standing challenges in implementing an employee credentialing system and addressing employee morale issues. We also reported that FEMA faces challenges in implementing and managing its two new workforce components, the Surge Capacity Force and the FEMA Corps. (The Surge Capacity Force consists of employees of DHS components who volunteer to deploy to provide support to FEMA in the event of a disaster. The FEMA Corps are temporary national service participants of the National Civilian Community Corps who complete FEMA service projects to complement its disaster-related efforts.) For example, as of January 2015, the Surge Capacity Force was at 26 percent of its staffing target of 15,400 personnel, and FEMA did not have a plan for how it will increase the number of volunteers to meet its goals. We also found that FEMA did not collect full cost information, including the costs of FEMA Corps background investigations and the costs of the salaries and benefits of Surge Capacity Force volunteers who are paid by DHS components while they are deployed. Further, we concluded that FEMA did not assess all aspects of program performance because it does not have performance measures that correspond to all program goals and that doing so would better enable FEMA to assess whether it was meeting its program goals. In our July 2015 report, we recommended, among other things, that FEMA develop a plan to increase Surge Capacity Force volunteer recruitment and collect additional cost and performance information for its new workforce components. DHS concurred with the five recommendations in the report and identified related actions the department is taking to address them, primarily focusing on FEMA's plans to issue a new strategic workforce plan. However, FEMA has not met its September milestone for issuing the plan, but told us it expects to issue the plan on October 30, 2015. We reported in September 2015 on FEMA's progress in building and managing its contracting workforce and structure to support disasters since enactment of the Post-Katrina Act. We found that the size of FEMA's contracting officer workforce at the end of fiscal year 2014 was more than triple the size of its workforce at the time of Hurricane Katrina, growing from a total of 45 contracting officers in 2005 to 163 contracting officers at the end of fiscal year 2014. FEMA's workforce increases are due in part to the creation of a headquarters staff in 2010 charged with supporting disasters, known as the Disaster Acquisition Response Team (DART). DART has gradually assumed responsibility for administering the majority of FEMA's disaster contract spending, but FEMA does not have a process for how the team will prioritize its work when they are deployed during a busy disaster period. During this period of growth in the size of its contracting officer workforce, FEMA has struggled with attrition at times. We found this turnover in FEMA's contracting officer workforce has had particular impact on smaller regional offices which, with only one or two contracting officers, face gaps in continuity. Further, we found that FEMA's 2011 agreement that establishes headquarters and regional responsibilities in overseeing regional contracting staff poses challenges for FEMA to cohesively manage its contracting workforce. For example, regional contracting officers have a dual reporting chain to both regional supervisors and headquarters supervisors, which heightens the potential for competing interests for the regional contracting officers. Furthermore, FEMA has not updated the agreement to incorporate lessons learned since creating DART, even though the agreement states it will be revisited each year. We also found that FEMA has not fully implemented the four Post-Katrina Act contracting requirements we examined, due in part to incomplete guidance and that inconsistent contract management practices during disaster deployments--such as incomplete contract files and reviews--create oversight challenges. In our September 2015 report, we made eight recommendations to the FEMA Administrator and one recommendation to DHS to help ensure FEMA is prepared to manage the contract administration and oversight requirements of several simultaneous large-scale disasters or a catastrophic event, to improve coordination and communication between headquarters and regional offices with respect to managing and overseeing regional contracting officers, and to improve the implementation of contracting provisions under the Post-Katrina Act. DHS concurred with our recommendations and identified steps FEMA plans to take to address them within the next year. Specifically, FEMA plans to update relevant guidance and policies related to headquarters and regional office roles and responsibilities for managing regional contracting officers and disaster contracting requirements. We currently have work underway for this committee assessing additional FEMA management areas, including assessing FEMA's management of information technology systems that support disaster response and recovery programs. We plan to report on that work early next year. Chairman McSally, Ranking Member Payne 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 members have any questions about 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. Christopher Keisling, Assistant Director; Aditi Archer, Tracey King, and David Alexander made contributions to this testimony. Emergency Management: FEMA Collaborates Effectively with Logistics Partners but Could Strengthen Implementation of Its Capabilities Assessment Tool. GAO-15-781. Washington, D.C.: September 10, 2015. Emergency Preparedness: Opportunities Exist to Strengthen Interagency Assessments and Accountability for Closing Capability Gaps. GAO-15-20. Washington, D.C.: December 4, 2014. National Preparedness: Actions Taken by FEMA to Implement Select Provisions of the Post-Katrina Emergency Management Reform Act of 2006. GAO-14-99R. Washington, D.C.: November 26, 2013. National Preparedness: FEMA Has Made Progress in Improving Grant Management and Assessing Capabilities, but Challenges Remain. GAO-13-456T. Washington, D.C.: March 19, 2013. Extreme Weather Events: Limiting Federal Fiscal Exposure and Increasing the Nation's Resilience. GAO-14-364T. Washington, D.C.: February 12, 2014. National Preparedness: FEMA Has Made Progress, but Additional Steps Are Needed to Improve Grant Management and Assess Capabilities. GAO-13-637T. Washington, D.C.: June 25, 2013. Managing Preparedness Grants and Assessing National Capabilities: Continuing Challenges Impede FEMA's Progress. GAO-12-526T. Washington, D.C.: March 20, 2012. FEMA Has Made Limited Progress in Efforts to Develop and Implement a System to Assess National Preparedness Capabilities. GAO-11-51R. Washington, D.C.: October 29, 2010. Emergency Preparedness: FEMA Faces Challenges Integrating Community Preparedness Programs into Its Strategic Approach. GAO-10-193. Washington, D.C.: January 29, 2010. 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. Hurricane Sandy: An Investment Strategy Could Help the Federal Government Enhance National Resilience for Future Disasters. GAO-15-515. Washington, D.C.: July 30, 2015. Budgeting for Disasters: Approaches for Budgeting for Disasters in Selected States. GAO-15-424. Washington, D.C.: March 26, 2015. Hurricane Sandy: FEMA Has Improved Disaster Aid Verification but Could Act to Further Limit Improper Assistance. GAO-15-15. Washington, D.C.: December 12, 2014. Disaster Resilience: Actions Are Underway, but Federal Fiscal Exposure Highlights the Need for Continued Attention to Longstanding Challenges. GAO-14-603T. May 14, 2014. Federal Disaster Assistance: Improved Criteria Needed to Assess a Jurisdiction's Capability to Respond and Recover on Its Own. GAO-12-838. Washington, D.C.: September 12, 2012. Disaster Recovery: FEMA's Long-term Assistance Was Helpful to State and Local Governments but Had Some Limitations. GAO-10-404. Washington, D.C.: March 30, 2010. Disaster Housing: FEMA Needs More Detailed Guidance and Performance Measures to Help Ensure Effective Assistance after Major Disasters, GAO-09-796. August 28, 2009. Hurricanes Gustav and Ike Disaster Assistance: FEMA Strengthened Its Fraud Prevention Controls, but Customer Service Needs Improvement. Washington, D.C.: GAO-09-671. June 19, 2009. Disaster Recovery: FEMA's Public Assistance Grant Program Experienced Challenges with Gulf Coast Rebuilding. GAO-09-129. Washington, D.C.: December 18, 2008. Federal Emergency Management Agency: Additional Planning and Data Collection Could Help Improve Workforce Management Efforts. GAO-15-437. Washington, D.C.: July 9, 2015. Federal Emergency Management Agency: Opportunities Exist to Strengthen Oversight of Administrative Costs for Major Disasters, GAO-15-65. Washington, D.C.: December 17, 2014. Federal Emergency Management Agency: Opportunities to Achieve Efficiencies and Strengthen Operations. GAO-14-687T. Washington, D.C.: July 24, 2014. High-Risk Series: An Update. GAO-13-283. Washington, D.C.: February 14, 2013. FEMA Reservists: Training Could Benefit from Examination of Practices at Other Agencies. GAO-13-250R. Washington, D.C.: March 22, 2013. Disaster Assistance Workforce: FEMA Could Enhance Human Capital Management and Training. GAO-12-538. Washington, D.C.: May 25, 2012. Federal Emergency Management Agency: Workforce Planning and Training Could Be Enhanced by Incorporating Strategic Management Principles. GAO-12-487. Washington, D.C.: April 26, 2012. FEMA Has Made Progress in Managing Regionalization of Preparedness Grants. GAO-11-732R. Washington, D.C.: July 29, 2011. Government Operations: Actions Taken to Implement the Post-Katrina Emergency Management Reform Act of 2006. GAO-09-59R. Washington, D.C.: November 21, 2008. 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.	A little more than 10 years ago, Hurricane Katrina caused an estimated $108 billion in damage, making it the largest, most destructive natural disaster in our nation's history. Following the federal response to Hurricane Katrina in 2005, Congress passed the Post-Katrina Emergency Management Reform Act of 2006 (Post-Katrina Act). The act contained over 300 provisions that are intended to enhance national preparedness, emergency response and recovery, and the management of select disaster programs. In October 2012, another catastrophic hurricane--Hurricane Sandy--caused $65 billion in damage and once again tested the nation's preparedness and emergency response and recovery functions. GAO has issued multiple reports that discuss a wide variety of emergency management issues reflecting the federal government and FEMA's efforts to implement provisions of the Post-Katrina Act and address various aspects of emergency management. This statement discusses GAO's work on the progress FEMA has made and challenges that it still faces in three areas: (1) national preparedness, (2) disaster response and recovery, and (3) selected FEMA management areas. This statement is based on previously issued GAO reports from 2012 to 2015. GAO's recent work highlights both the progress and challenges in the Federal Emergency Management Agency's (FEMA) efforts to lead national preparedness efforts, particularly efforts to assess emergency support capabilities and enhance logistics capabilities. Assessing capabilities is critical to ensure that they will be available when needed in emergencies. For example, GAO found in December 2014 that federal departments have identified emergency response capability gaps through national-level exercises and real-world incidents, but the status of agency actions to address these gaps is not collected by or reported to Department of Homeland Security or FEMA. GAO recommended that FEMA--in collaboration with other federal agencies--regularly report on the status of corrective actions. FEMA agreed with GAO's recommendation and is taking action to address it but has not established a timeframe for completion. GAO's recent work on disaster response and recovery programs also identified progress and challenges in a number of areas. From fiscal years 2004 through 2013, FEMA obligated over $95 billion in federal disaster assistance for 650 major disasters declared during this timeframe. With the growing cost of disasters it is vital for the federal government to address its fiscal exposure and ensure that response and recovery programs are as efficient and effective as possible. For example, in December 2014, GAO found that FEMA demonstrated progress controlling for potentially fraudulent payments to individuals during Hurricane Sandy as compared to Hurricanes Katrina and Rita. However, GAO reported continued challenges, including weaknesses in validation of Social Security numbers and made recommendations to strengthen these processes. Further, in July 2015, GAO reported that states and localities affected by Hurricane Sandy were able to effectively leverage federal programs to enhance resilience during their recovery. However, states experienced continued challenges in implementing certain FEMA recovery programs, such as Public Assistance. GAO also found that there was no comprehensive, strategic approach to identifying, prioritizing, and implementing investments for disaster resilience. GAO made recommendations to address these continued challenges and FEMA is taking a range of actions to address them. FEMA has also taken steps to strengthen a number of its management areas, but GAO reported that additional progress is needed in several areas. Specifically, In December 2014, GAO found that FEMA had taken steps to control its administrative costs--the costs of providing and managing disaster assistance--by issuing guidelines and reduction targets. However, GAO reported that FEMA does not require the targets to be met and continued to face challenges tracking the costs. Among other things, GAO recommended that FEMA develop an integrated plan to better control and reduce its administrative costs for major disasters. Further, in July 2015 GAO reported that FEMA had taken action to address various long-standing workforce management challenges, but faced multiple challenges, including implementing and managing its temporary workforces and completing strategic workforce planning efforts. FEMA agreed with GAO's recommendations and is taking action to address them. GAO has made numerous recommendations in its prior reports to FEMA designed to address the challenges discussed in this statement. FEMA has taken actions to address many of these recommendations.	6,769	902
The number of tax-related identity theft incidents (primarily refund or employment fraud attempts) identified by IRS has grown: 51,702 incidents in 2008, 169,087 incidents in 2009, and 248,357 incidents in 2010. Refund fraud can stem from identity theft when an identity thief uses a legitimate taxpayer's name and Social Security Number (SSN) to file a fraudulent tax return seeking a refund. In these cases, the identity thief typically files a return claiming a refund early in the filing season, before the legitimate taxpayer files. IRS will likely issue the refund to the identity thief after determining the name and SSN on the tax return appear valid (IRS checks all returns to see if filers' names and SSNs match before issuing refunds). IRS often first becomes aware of a problem after the legitimate taxpayer files a return. At that time, IRS discovers that two returns have been filed using the same name and SSN, as shown in figure 1. The legitimate taxpayer's refund is delayed while IRS spends time determining who is legitimate. Employment fraud occurs when an identity thief uses a taxpayer's name and SSN to obtain a job. IRS subsequently receives income information from the identity thief's employer. After the victim files his or her tax return, IRS matches income reported by the victim's employer and the thief's employer to the tax return filed by the legitimate taxpayer, as shown in figure 2. IRS then notifies the taxpayer of unreported income because it appears the taxpayer earned more income than was reported on the tax return. Employment fraud causes tax administration problems because IRS has to sort out what income was earned by the legitimate taxpayer and what was earned by the identity thief. The name and SSN information used by identity thieves to commit refund or employment fraud are typically stolen from sources beyond the control of IRS. IRS officials told us they are unaware of any incidents where information was stolen from IRS and used to commit employment or refund fraud. However, there are risks at IRS. In a recent audit, we found that although IRS has made progress in correcting previously reported information security weaknesses, it did not consistently implement controls intended to prevent, limit, and detect unauthorized access to its systems and information, including sensitive taxpayer information. In 2009, we also reported that third-party software used to prepare and file returns may pose risks to the security and privacy of taxpayer information. IRS agreed with our recommendations to address these and other issues. We recently followed up with IRS on this issue and learned that IRS has begun monitoring adherence to security and privacy standards in the tax software industry. In 2004, IRS developed a strategy to address the problem of identity theft- related tax administration issues. According to IRS, the strategy has evolved and continues to serve as the foundation for all of IRS's efforts to provide services to victims of identity theft and to reduce the effects of identity theft on tax administration. Indicators--account flags that are visible to all IRS personnel with account access--are a key tool IRS uses to resolve and detect identity theft. IRS uses different indicators depending on the circumstances in which IRS receives indication of an identity theft-related problem. Once IRS substantiates any taxpayer-reported information, either through IRS processes or the taxpayer providing documentation of the identity theft, IRS will place the appropriate indicator on the taxpayer's account and will notify the taxpayer. IRS will remove an indicator after 3 consecutive years if there are no incidents on the account or will remove an indicator sooner if the taxpayer requests it. The three elements of IRS's strategy are resolution, detection, and prevention. Resolution. Identity theft indicators speed resolution by making a taxpayer's identity theft problems visible to all IRS personnel with account access. Taxpayers benefit because they do not have to repeatedly explain their identity theft issues or prove their identity to multiple IRS units. Indicators also alert IRS personnel that a future account problem may be related to identity theft and help speed up the resolution of any such problems. Since our 2009 report, IRS developed a new, temporary indicator to alert all IRS units that an identity theft incident has been reported but not yet resolved. IRS officials told us that they identified a need for the new indicator based on their ongoing evaluation of their identity theft initiatives. The temporary indicator's purpose is to expedite problem resolution and avoid taxpayers having to explain their identity theft issues to multiple IRS units. As discussed in our 2009 report, taxpayers with known or suspected identity theft issues can receive assistance by contacting the Identity Protection Specialized Unit. The unit operates a toll-free number taxpayers can call to receive assistance in resolving identity theft issues. Detection. IRS also uses its identity theft indicators to screen tax returns filed in the names of known refund and employment fraud victims. During the 2009, 2010, and 2011 filing seasons, IRS screened returns filed in the names of taxpayers with identity theft indicators on their accounts. There are approximately 378,000 such taxpayers. In this screening, IRS looks for characteristics indicating that the return was filed by an identity thief instead of the legitimate taxpayer, such as large changes in income or a change of address. If a return fails the screening, it is subject to additional IRS manual review, including contacting employers to verify that the income reported on the tax return was legitimate. In addition to U.S. taxpayers with indicators on their accounts, IRS officials also told us that they screened returns filed in the name of a large number--about 350,000--of Puerto Rican citizens who have had their U.S. SSNs compromised in a major identity theft scheme. As of May 12, 2011, 216,000 returns filed in 2011 failed the screens and were assigned for manual processing. Of these, IRS has completed processing 195,815 and found that 145,537 (74.3 percent) were fraudulent. In January 2011, IRS launched a pilot program for tax year 2010 returns (due by April 15, 2011) using a new indicator to "lock" SSNs of deceased taxpayers. If a locked SSN is included on a tax return, the new indicator will prompt IRS to automatically reject the return. PIPDS officials told us they intend to expand the pilot to include more SSNs of deceased taxpayers after analyzing the results of the initial pilot. A program IRS uses to identify various forms of refund fraud--including refund fraud resulting from identity theft--is the Questionable Refund Program. IRS established this program to screen tax returns to identify fraudulent returns, stop the payment of fraudulently claimed refunds, and, in some cases, refer fraudulent refund schemes to IRS's Criminal Investigation offices. Prevention. As described in our 2009 report, IRS has an office dedicated to finding and stopping online tax fraud schemes. IRS also provides taxpayers with targeted information to increase their awareness of identity theft, tips and suggestions for safeguarding taxpayers' personal information, and information to help them better understand tax administration issues related to identity theft. Appendix I summarizes information IRS and FTC provide to taxpayers to protect themselves against identity theft. Since our 2009 report, IRS began a pilot program providing some identity theft victims with a 6-digit Identity Protection Personal Identification Number (PIN) to place on their tax return. IRS officials told us they created the PIN based on their ongoing evaluation of their identity theft initiatives. When screening future years' returns for possible identity theft, IRS will exclude returns with a PIN, which will help avoid the possibility of a "false positive" and a delayed tax refund. IRS sent letters containing an identity theft PIN to 56,000 taxpayers in the 2011 filing season. IRS will provide taxpayers a new PIN each year for a period of 3 years following an identity theft. IRS's initiatives to address identity theft are limited in part because tax returns and other information submitted to and, in some cases generated by, IRS are confidential and protected from disclosure, except as specifically authorized by statute. As discussed in more detail in our 2009 report, IRS can disclose identity theft-related events that occur on a taxpayer's account to the taxpayer, such as the fact that an unauthorized return was filed using the taxpayer's information or that the taxpayer's SSN was used on another return. However, IRS cannot disclose to the taxpayer any other information pertaining to employment or refund fraud, such as the perpetrator's identity or any information about the perpetrator's employer. Additionally, IRS has limited authorities to share identity theft information with other federal agencies. When performing a criminal investigation, IRS can make only investigative disclosures, that is, the sharing of specific, limited information necessary for receiving information from other federal agencies that might support or further IRS's investigation. Disclosure of taxpayer information to state and local law enforcement agencies is even more limited. Because of the timing of tax return filing, IRS is often unable to detect suspicious cases until well after the fraud occurred. Validating the identity theft and substantiating the victim's identity takes further time. For example, IRS may not be able to detect employment fraud until after the following year's tax filing deadline of April 15 when it matches income reported by employers against taxpayers' filed returns. It is only after IRS notifies a taxpayer of unreported income that IRS may learn from the taxpayer that the income was not the taxpayer's and that someone else must have been using his or her identity. By the time both the victim and IRS determine that an identity theft incident occurred, well over a year may have passed since the employment fraud. IRS officials told us that IRS pursues criminal investigations of suspected identity thieves in only a small number of cases. IRS's Criminal Investigations (CI) Division's investigative priorities include tax crimes, such as underreporting income from legal sources; illegal source financial crimes; narcotics-related financial crimes; and counterterrorism financing. In fiscal year 2010, CI initiated 4,706 investigations of all types, a number far smaller than the total number of identity theft-related refund and employment fraud cases identified in that year. Also, the decision to prosecute identity thieves does not rest with IRS. CI conducts investigations and refers cases to the Department of Justice (DOJ), which is responsible for prosecuting cases in the federal courts. IRS officials said that the small number of tax-related identity theft cases that they investigate recognizes that DOJ has to conclude that the case is of sufficient severity that it should be pursued in the federal courts before it will be prosecuted. According to data from CI included in our prior report, the median amount of suspected identity theft-related refunds identified in the 2009 filing season was around $3,400. CI has investigated tax-related identity theft cases that DOJ has successfully prosecuted. In our prior report we cited the example of a former Girl Scout troop leader serving 10 years in federal prison for stealing the SSNs of girls in her troop and then claiming more than $87,000 in fraudulent tax refunds. Options exist, now and in the future, to improve detection of identity theft-related tax fraud, but they come with trade-offs. Known identity theft victims. IRS could screen returns filed in the names of known identity theft victims more tightly than is currently done. More restrictive screening may detect more cases of refund fraud before IRS issues refunds. However, more restrictive screening will likely increase the number of legitimate returns that fail the screenings (false positives). Since returns that fail screening require a manual review, this change could harm innocent taxpayers by causing delays in their refunds. Using more restrictive rules would also place additional burden on employers because IRS contacts employers listed on all returns that fail screening. All taxpayers. Beyond screening returns with known tax-related identity theft issues, screening all tax returns for possible refund fraud would pose similar trade-offs, but on a grander scale. For example, as noted above, one way to check for identity theft is to look for significant differences between current year and prior year tax returns, but this could be confounded by a large number of false positives. IRS officials told us that in 2009 there were 10 million address changes, 46 million changes in employer, and millions of deaths and births. Checking all returns that reflect these changes for possible refund fraud could overwhelm IRS's capacity to issue refunds to legitimate taxpayers in a timely manner. Looking Forward. IRS's identity protection strategy and the creation of PIPDS were part of an effort to more efficiently identify refund and employment fraud as well as to assist innocent taxpayers. Since adopting the recommendation in our 2009 report regarding using performance measures to assess effectiveness, IRS has followed through, using its improved performance information to identify additional steps it could take. These include the new indicators for taxpayer accounts, improved routing of suspect returns, and PIN numbers. However, none of these steps will completely eliminate refund or employment fraud. By continuing to monitor the effectiveness of its identity theft initiatives, IRS may find additional steps to reduce the problems faced by both taxpayers and IRS. Looking further forward, other long-term initiatives underway at IRS have at least some potential to help combat identity theft-related fraud. In April 2011, the Commissioner of Internal Revenue gave a speech about a long- term vision to increase up-front compliance activities during returns processing. One example is to match information returns with tax returns before refunds are issued. Before this could happen, IRS would have to make significant changes. Third-party information returns would have to be filed with IRS earlier in the filing season. IRS would also have to improve its automated processing systems; IRS's current Customer Account Data Engine (CADE 2) effort is one key step. While these efforts are part of a broad compliance improvement vision, they could also detect some identity theft-related fraud. If, for example, IRS could match employer information to tax returns before refunds are issued, identity thieves could not use phony W-2s to claim fraudulent refunds. Chairman Nelson, Ranking Member Crapo, and Members of the Subcommittee, this completes my prepared statement. I would be happy to respond to any questions you may have at this time. For further information on this testimony, please contact James R. White at (202) 512-9110 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. In addition to the individual named above, David Lewis, Assistant Director; Shannon Finnegan, analyst-in-charge; Michele Fejfar; Donna Miller; Erika Navarro; Melanie Papasian; and Sabrina Streagle made key contributions to this report. Both the Internal Revenue Service (IRS) and the Federal Trade Commission (FTC) provide helpful information to taxpayers to deter, detect, and defend against identity theft. IRS provides taxpayers with targeted information to increase their awareness of identity theft, tips and suggestions for safeguarding taxpayers' personal information, and information to help them better understand tax administration issues related to identity theft. For example, IRS has published on its website the list in table 1 below. The FTC operates a call center for identity theft victims where counselors tell consumers how to protect themselves from identity theft and what to do if their identity has been stolen (1-877-IDTHEFT ; TDD: 1-866-653-4261; or www.ftc.gov/idtheft). The FTC also produces publications on identity theft, including Take Charge: Fighting Back Against Identity Theft. This brochure provides identity theft victims information on 1. immediate steps they can take, such as placing fraud alerts on their credit reports; closing accounts; filing a police report; and filing a complaint with the FTC; 2. their legal rights; 3. how to handle specific problems they may encounter when clearing their name, including disputing fraudulent charges on their credit card accounts; and 4. minimizing recurrences of identity theft. 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.	Identity theft is a serious and growing problem in the United States. Taxpayers are harmed when identity thieves file fraudulent tax documents using stolen names and Social Security numbers. In 2010 alone, the Internal Revenue Service (IRS) identified over 245,000 identity theft incidents that affected the tax system. The hundreds of thousands of taxpayers with tax problems caused by identity theft represent a small percentage of the expected 140 million individual returns filed, but for those affected, the problems can be quite serious. GAO was asked to describe, among other things, (1) when IRS detects identity theft based refund and employment fraud, (2) the steps IRS has taken to resolve, detect, and prevent innocent taxpayers' identity theft related problems, and (3) constraints that hinder IRS's ability to address these issues. GAO's testimony is based on its previous work on identity theft. GAO updated its analysis by examining data on identity theft cases and interviewing IRS officials. GAO makes no new recommendations but reports on IRS's efforts to address GAO's earlier recommendation that IRS develop performance measures and collect data suitable for assessing the effectiveness of its identity theft initiatives. IRS agreed with and implemented GAO's earlier recommendation. Identity theft harms innocent taxpayers through employment and refund fraud. In refund fraud, an identity thief uses a taxpayer's name and Social Security Number (SSN) to file for a tax refund, which IRS discovers after the legitimate taxpayer files. In employment fraud, an identity thief uses a taxpayer's name and SSN to obtain a job. When the thief's employer reports income to IRS, the taxpayer appears to have unreported income on his or her return, leading to enforcement action. IRS has taken multiple steps to resolve, detect, and prevent employment and refund fraud: Resolve--IRS marks taxpayer accounts to alert its personnel of a taxpayer's identity theft. The purpose is to expedite resolution of existing problems and alert personnel to potential future account problems. Detect--IRS screens tax returns filed in the names of known refund and employment fraud victims. Prevent--IRS provides taxpayers with information to increase their awareness of identity theft, including tips for safeguarding personal information. IRS has also started providing identity theft victims with a personal identification number to help identify legitimate returns. IRS's ability to address identity theft issues is constrained by (1) privacy laws that limit IRS's ability to share identity theft information with other agencies; (2) the timing of fraud detection--more than a year may have passed since the original fraud occurred; (3) the resources necessary to pursue the large volume of potential criminal refund and employment fraud cases; and (4) the burden that stricter screening would likely cause taxpayers and employers since more legitimate returns would fail such screening.	3,480	591
Farming has always been an inherently risky enterprise because farmers operate at the mercy of nature and frequently are subjected to weather-related perils such as droughts, floods, hurricanes, and other natural disasters. Since the 1930s, many farmers have been able to transfer part of the risk of loss in production to the federal government through subsidized crop insurance. Major legislation enacted in 1980 and 1994 restructured the crop insurance program. The 1980 legislation enlisted, for the first time, private insurance companies to sell, service, and share the risk of federal insurance policies. Subsequently, in 1994, the Federal Crop Insurance Reform and Department of Agriculture Reorganization Act revised the program to offer farmers two primary levels of insurance coverage, catastrophic and buyup. Catastrophic insurance is designed to provide farmers with protection against extreme crop losses for a small processing fee. Buyup insurance provides protection against more typical and smaller crop losses in exchange for a producer-paid premium. The government subsidizes the total premium for catastrophic insurance and a portion of the premium for buyup insurance. Farmers who purchase buyup crop insurance must choose both the coverage level (the proportion of the crop to be insured) and the unit price (such as, per bushel) at which any loss is calculated. With respect to the level of production, farmers can choose to insure as much as 75 percent of normal production or as little as 50 percent of normal production at different price levels. With respect to the unit price, farmers choose whether to value their insured production at USDA's full estimated market price or at a percentage of the full price. In recent years, USDA has introduced a new risk management tool called revenue insurance. Unlike traditional crop insurance, which insures against losses in the level of crop production, revenue insurance plans insure against losses in revenue. The plans protect the farmer from the effects of declines in crop prices or declines in crop yields, or both. Like traditional buyup insurance, the government subsidizes a portion of the premiums. One of the plans, called Crop Revenue Coverage, is available in many states for major crops. Two other plans, called Income Protection and Revenue Assurance, are available to farmers in only limited areas. USDA reimburses the insurance companies for the administrative expenses associated with selling and servicing crop insurance policies, including the expenses associated with adjusting claims. Between 1995 and 1998, USDA paid participating insurance companies about $1.7 billion in administrative expense reimbursements. In addition to receiving an administrative expense reimbursement, the insurance companies share underwriting risk with USDA and can earn or lose money according to the claims they must pay farmers for crop losses. Companies earn underwriting profits when the premiums exceed the crop loss claims paid for those policies on which the companies retain risk. They incur underwriting losses when the claims paid for crop losses exceed the premiums paid for the policies that the companies retained. Between 1995 and 1998, USDA paid participating insurance companies about $1.1 billion in underwriting profits. Critical to the success of achieving an actuarially sound crop insurance program is aligning premium rates with the risk each farmer represents. The riskiness of growing a particular crop varies from location to location, from farm to farm, and from farmer to farmer. If the rates are too high for the risk represented, farmers are less likely to purchase insurance, lowering the revenue from premiums and the usefulness of the program to farmers. Conversely, if the rates are too low, farmers are more likely to purchase crop insurance, but because the rates are too low, the revenue from premiums will be insufficient to cover the claims. Therefore, USDA sets different premium rates for the various coverage and production levels, which vary by crop, location, farm, and farmer. Consequently, hundreds of thousands of premium rates are in effect. To set premium rates, USDA calculates a basic rate for each crop in each county for the farmers who buy insurance at the 65-percent coverage level and whose normal production level is about equal to the average production in the county. From this basic rate, USDA makes adjustments to establish rates for other coverage levels and for those farmers whose production levels are higher or lower than the county's average. In 1995, we reported that for the six crops we reviewed--barley, corn, cotton, grain sorghum, soybeans, and wheat--basic premium rates overall were 89 percent adequate, on average, to meet the Congress's legislative requirement of actuarial soundness. However, we found that while overall premiums were approaching actuarial soundness, USDA's rates for some crops and locations and for some coverage and production levels were too low. For the 183 state crop programs we examined, 54 had basic premium rates that were adequate to achieve actuarial soundness. These 54 programs were generally those that had the greatest volume of insurance. For the remaining 129 programs, 40 had premium rates that were near the target level. However, the other 89 programs, representing about 24 percent of the crop insurance premiums for the six crops in 1994, had basic rates that were less than 80 percent adequate for actuarial soundness. We reported that premium rates that were too low generally occurred when the historical databases used for establishing rates added or deleted years of severe losses, thus affecting USDA's estimate of expected crop losses. USDA did not increase the rates where necessary. For example, for one of the crops we reviewed, USDA did not increase the rates as much as it could have when (1) severe losses from 1993 were added to the database for establishing the 1995 rates and (2) a year from the 1970s when losses were lower was deleted from the database. According to USDA, it had not sufficiently raised rates out of concern that higher rates would discourage farmers from buying crop insurance. Furthermore, when we examined the rates at various levels of coverage and production, we found that the rates were (1) too high for coverage at the 75-percent level and (2) too low for farmers with above-average crop yields. As a result, the rates for both coverage and production levels were not always aligned with risk. This occurred because USDA did not periodically review and update the calculations it used to adjust rates above and below the basic rate. To set premium rates for the 75-percent coverage level, USDA applies pre-established mathematical factors to the basic rate. However, these factors have not resulted in rates that are aligned with risk. For crops insured at the 75-percent coverage level, USDA set premium rates ranging from 19 to 27 percent more than required. As a result, the 1994 income from premiums was about $30 million more than required for this coverage. Although grain sorghum had the greatest percentage of rates in excess of those required, corn had the greatest amount of additional premium income because its program is much larger. USDA also adjusts the basic rates for a farmer's individual crop yields. USDA's basic rate applies to the farmer whose average yield is about equal to the average for all producers in the county. However, many farmers' average yield is above or below the county's average, and USDA's research shows that the higher a farmer's yield, the lower the chance of a loss. Therefore, USDA establishes rates for different yield levels using a mathematical model. The rates per $100 of insurance coverage decrease as a farmer's average yield increases; however, the mathematical model overstated the rate decrease. According to our analysis, the rates at higher average crop yields were too low for the six crops reviewed. We reported that for these above-average yields, USDA's rates in 1995 should have been from 13 to 33 percent higher than they were. Subsequent to our 1995 report, USDA took action to increase premium rates an average of 6 percent and developed a plan to periodically evaluate the mathematical factors used to set rates. These actions have contributed to the federal crop insurance program's achieving a loss ratio well below the target in recent years, thereby improving the program's financial soundness. However, although overall premium rates appear adequate, rates for crops in some states remain too low. For example, since 1996, the loss ratio has averaged 1.36 for cotton in Texas and 1.45 for peanuts in Alabama, well exceeding the target loss ratio. Thus, premium rates for these farmers may be too low. Consequently, USDA needs to continue to monitor and adjust premium rates to ensure they are appropriately aligned with risk. In 1997, we reported that USDA's administrative expense reimbursements to participating insurance companies selling traditional buyup insurance--31 percent of premiums--were much higher than the expenses that can be reasonably associated with the sale and service of federal crop insurance. For the 2-year period we reviewed, 1994 and 1995, the companies reported $542.3 million in expenses, compared with a reimbursement of $580.2 million--a difference of about $38 million. Additionally, about $43 million of the companies' reported expenses could not be reasonably associated with the sale and service of federal crop insurance to farmers. Therefore, we reported that these expenses should not be considered in determining an appropriate future reimbursement rate for administrative expenses. The expenses that could not be reasonably associated with the sale and service of federal crop insurance included the following: payments of $12 million to compensate executives of an acquired company to refrain from joining or starting competing companies, fees of about $11 million paid to other insurance companies to protect against underwriting losses, bonuses of about $11 million tied to company profitability, management fees of about $1 million assessed by parent companies with no identifiable benefit to subsidiary crop insurance companies, and lobbying expenditures of about $400,000. In addition, we found a number of expenses reported by the companies that, while in categories associated with the sale and service of crop insurance, seemed to be excessive under a taxpayer-supported program. These expenses included agents' commissions of about $6 million, paid by one company, that exceeded the industry standard. Thus, we reported that opportunities existed for the government to reduce its reimbursement rate for administrative expenses while still adequately reimbursing companies for the reasonable expenses of selling and servicing crop insurance policies. Subsequent to our report, the Agricultural Research, Extension, and Education Reform Act of 1998 revised reimbursement rates downward to 24.5 percent of premiums for traditional buyup insurance. However, as changes are made to the crop insurance program that increase participation and sales volume, further downward adjustments to the reimbursement rate may be warranted. We also reported that although the current arrangement for reimbursing companies for their administrative expenses has certain advantages, including ease of administration, expense reimbursements based on a percentage of premiums do not necessarily reflect the amount of work involved to sell and service crop insurance policies and may create incentives to focus sales to larger farmers. Alternative reimbursement arrangements, such as (1) capping the reimbursement per policy and (2) paying a flat dollar amount per policy plus a reduced fixed percentage of premiums, offer the potential to have reimbursements more reasonably reflect expenses and encourage more service to smaller farmers than does the current arrangement. While these alternative reimbursement methods may result in lower cost reimbursements to insurance companies, they may increase USDA's own administrative expenses for reporting and compliance. In 1995, we found that companies generally preferred USDA's current reimbursement method because of its administrative simplicity. In 1997, we also reported that the government's costs to deliver catastrophic insurance policies in 1995 were higher through private companies than through the local offices of USDA's Farm Service Agency. The basic cost to the government for selling and servicing catastrophic crop insurance was comparable for both delivery systems. However, when private companies delivered the insurance, they received an estimated $45 million underwriting gain, which did not apply to USDA's delivery. Underwriting gains are not guaranteed and vary annually, depending on crop losses. Our report did not conclude or recommend the insurance industry should have its role in catastrophic insurance delivery reduced. However, we recommended that USDA needs to more closely monitor the level of underwriting gain paid to the participating insurance companies. For 1996, 1997, and 1998, underwriting gains for catastrophic coverage totaled $58 million, $87 million, and $105 million, respectively. Beginning with crops harvested in 1997, the Federal Agriculture Improvement and Reform Act of 1996 required that USDA phase out its delivery of catastrophic crop insurance in areas that have sufficient private company providers. In May 1997, the Secretary of Agriculture authorized the movement of all catastrophic insurance policies away from USDA to commercial delivery. In 1998, we reported shortcomings in the way premium rates are established for each of the three revenue insurance plans we reviewed. Appropriate methods for setting rates for these plans are critical to ensuring the financial soundness of the crop insurance program over time. We reported that the Crop Revenue Coverage plan did not base its rate structure on the interrelationship between crop prices and farm-level yields--an essential component of actuarially sound rate setting. For example, a decline in yields is often accompanied by an increase in prices, which mitigates the impact of the decline in yields on a farmer's revenue. Because this plan did not recognize this interrelationship, the premium adjustments may not be sufficient over the long term to cover claims payments and may not be appropriate to the risk each farmer presents. We were not able to determine whether premium rates for this plan were too high or too low. In contrast, the rate-setting approaches for the Revenue Assurance and Income Protection plans were based on a likely statistical distribution of revenues that reflects the interrelationship between crop prices and yields. However, the two plans had several shortcomings that were not as serious as the problem we identified for Crop Revenue Coverage. For example, in constructing its revenue distribution, we found that the Revenue Assurance plan used only 10 years of yield data (1985-94), which was not a sufficient historical record to capture the fluctuations in yield over time. Furthermore, 3 of these 10 years had abnormal yields: 1988 and 1993 had abnormally low yields, and 1994 had abnormally high yields. Additionally, Income Protection based its estimate of future price increases or decreases on the way that prices moved in the past. This approach could be a problem because price movements in the past occurred in the context of past government programs, such as commodity income-support payments, which were eliminated by the 1996 farm bill. In the absence of the above government programs, the price movements may have been considerably more pronounced. While favorable weather and stable crop prices generated very favorable claims experience over the first 2 years that the plans were available to farmers, these shortcomings raise questions about whether the rates established for each plan will be actuarially sound and fair--that is, appropriate to the risk each farmer presents over the long term. Furthermore, while the plans were initially approved only on a limited basis, USDA authorized the substantial expansion of Crop Revenue Coverage before the initial results of claims experience were available. In doing so, USDA was acting within its authority to approve privately developed crop insurance plans in response to strong demand from farmers. USDA's Office of General Counsel advised against the expansion, noting that an expansion without any data to determine whether the plans or rates are sound might expose the government to excessive risk. While Crop Revenue Coverage was expanded rapidly, Revenue Assurance and Income Protection essentially remain pilot plans with no nationwide availability. As a result of the shortcomings with the revenue insurance plans' rating methods and to ensure premiums were appropriate to the risk each farmer presents, we recommended that the Secretary of Agriculture direct the Administrator of the Risk Management Agency to address the shortcomings in the methods used to set premiums. Specifically, with respect to all three plans, we recommended that the Secretary direct the Risk Management Agency to reevaluate the methods and data used to set premium rates to ensure that each plan is based on the most actuarially sound foundation. With respect to Crop Revenue Coverage, which does not incorporate the interrelationship between crop prices and farm-level yields, we recommended that the Risk Management Agency direct the plan's developer to base premium rates on a revenue distribution or another appropriate statistical technique that recognizes this interrelationship. While USDA subsequently took action to improve the actuarial soundness of the Revenue Assurance plan, it has not, to date, acted on our recommendations regarding the other two plans. As the Congress considers proposals to reform the federal crop insurance program and improve the safety net for farmers, the issues and some of the recommendations in our reports remain important to the success of the program. Specifically, premiums in all areas of the country should be set at levels that are actuarially sound and represent the risk each farmer brings to the program. Furthermore, continued oversight of the reasonableness of the program's administrative reimbursement rate is necessary. Increased program participation and sales volume that could result from crop insurance reform may lead to lower delivery costs, warranting a downward adjustment in the rate. In addition, USDA needs to closely monitor the catastrophic insurance program to ensure that over time the underwriting gain earned by insurance companies is not excessive. Finally, before revenue insurance plans are expanded to cover new crops, USDA needs to ensure that the plans are based on an actuarially sound foundation. 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 Department of Agriculture's (USDA) federal crop insurance program, focusing on whether USDA: (1) has set adequate insurance rates to achieve the legislative requirement of actuarial soundness; (2) appropriately reimburses participating crop insurance companies for their administrative costs; (3) can deliver catastrophic crop insurance at less cost to the government than private insurance companies; and (4) has established methodologies in the revenue insurance plans that set sound premium rates. GAO noted that: (1) GAO has reported that several aspects of USDA's crop insurance program are of concern and need attention; (2) in 1995, GAO reported that premiums charged farmers for crop insurance were not adequate to achieve the actuarial soundness mandated by Congress; (3) GAO's review showed that the basic premium rates for the six crops reviewed were approaching actuarial soundness in 1995, but USDA's rates for some crops and locations and for some coverage and production levels were well below the legislative requirement; (4) about 24 percent of the crop insurance premiums for the six crops GAO reviewed had basic rates that were less than 80-percent adequate for actuarial soundness; (5) USDA subsequently took actions to improve the program's actuarial soundness, but some rates remain too low; (6) the government's administrative expense reimbursement to insurance companies--31 percent of premiums--were greater than the companies' reported expenses to sell and service federal crop insurance; (7) GAO stated that some of these reported expenses did not appear to be reasonably associated with the sale and service of federal crop insurance; (8) the Agricultural Research, Extension, and Education Reform Act of 1998 subsequently revised reimbursement rates downward to 24.5 percent of premiums for most crop insurance; (9) increased program participation and sales volume that could result from crop insurance reform may lead to lower delivery costs, warranting a downward adjustment in the rate; (10) GAO reported that the government's costs to deliver catastrophic insurance in 1995 were higher through private companies than through USDA; (11) although the basic costs associated with selling and servicing catastrophic crop insurance through USDA and private companies were comparable, delivery through USDA avoids paying an underwriting gain to companies in years when there is a low incidence of catastrophic loss claims; (12) GAO reported its doubts about whether new USDA-supported revenue insurance plans will be actuarially sound over the long term and appropriate to the risk each farmer presents to the program; and (13) with respect to the most popular plan, Crop Revenue Coverage, GAO recommended that USDA's Risk Management Agency require the plan's developer to base premium rates on a revenue distribution or other appropriate statistical technique that recognizes the interrelationship between farm-level yields and expected crop prices.	3,872	588
The Trust manages the interior 80 percent of the Presidio, while the Park Service manages the remaining 20 percent, essentially the coastal areas. Figure 1 shows the area managed by the Park Service (Area A) and the area managed by the Trust (Area B). The Trust's area of responsibility includes 729 commercial and residential buildings and structures encompassing almost 6 million square feet of floor space. The Presidio was designated as a National Historic Landmark in 1962. Included in this designation are more than 400 buildings and the Presidio's landscape. As such, any new development or proposed changes to the Presidio's historic buildings and its landscape are guided by rehabilitation standards established by the Secretary of the Interior and the Park Service. In Public Law 104-333, the Congress gave the Trust wide latitude for managing, preserving, and protecting the Presidio in its effort to achieve financial self-sufficiency by 2013. The Trust has the authority to, among other things, guarantee loans to tenants who finance capital improvements of Presidio buildings, manage building leases, borrow up to $50 million from the U.S. Treasury, and demolish buildings that it deems to be beyond cost-effective rehabilitation. The Trust is managed by a 7-member Board of Directors. The President of the United States appoints six members and the Secretary of the Interior or her designee is the seventh member. Board members, who are not compensated, are generally appointed to 4-year terms and can be reappointed; however, no Board member may serve more than 8 consecutive years. The Board must hold three meetings per year, two of which must be open to the public. An executive director oversees the daily operations of the Trust and, as of May 30, 2001, managed a 468-member staff. The Trust is organized into an office of general counsel and six divisions, each managed by a deputy director; these managers report directly to the executive director. The Trust can set the compensation and duties of the executive director and staff as it deems appropriate. For fiscal year 2001, the Trust projects that its revenues will be $79.4 million. Figure 2 shows the Trust's projected revenues from all sources for fiscal year 2001. The Trust's projected expenditures for fiscal year 2001 are $79.4 million. Figure 3 shows the Trust's projected expenditures for fiscal year 2001, including operations costs such as salaries, day-to-day operations, costs associated with future planning efforts, and public safety. From 1997 through March 30, 2001, the Trust spent about $15.4 million to repair and replace the Presidio's infrastructure, upgrading roads and grounds, telecommunications systems, electrical, and water and sewer systems. From April 1, 2001, through the end of fiscal year 2002, the Trust plans to spend an additional $7 million and, with these expenditures, about 80 percent of the electrical, water, sewer, and telecommunications upgrades will be complete. According to the Trust, these improvements have increased health and safety systems, enhanced park resources, and prepared more of the Presidio for residential and commercial tenants. The major infrastructure upgrades undertaken, and their approximate costs to date, were the following: $6.0 million on electrical upgrades by replacing or repairing 12,000 linear feet of existing lines and installing an additional 10,000 linear feet of lines in support of the Trust's residential and commercial leasing programs; $5.4 million to upgrade telecommunications capacity including increasing the number of available lines from 8,000 to 21,000 in support of the Trust's residential and commercial leasing programs; $2.4 million for sewer system upgrades including replacing about 7,000 linear feet of sewer lines; $1.1 million for water system upgrades, including replacing and repairing old water lines that were leaking millions of gallons of water a week; and $0.5 million to improve roads, trails, sidewalks, and grounds to enhance resident and visitor facilities. To preserve the Presidio's many historic buildings and generate the revenues needed to achieve financial self-sufficiency by 2013, the Trust has spent about $23 million to repair and rehabilitate residential housing units and commercial buildings for lease. Figure 4 shows the interior of a residential housing unit before and after rehabilitation and figure 5 shows a commercial building before and after rehabilitation. The funds to repair and rehabilitate these facilities have come primarily from congressional appropriations and rental revenue. The Presidio has 1,198 housing units contained in 349 buildings, 155 of which are historic. According to the Trust's residential leasing records, as of January 2001, 869 residential housing units contained in 247 buildings were leased. Appendix I provides more specific information about the number and types of buildings the Trust manages. The Trust also manages 306 commercial buildings--225 of which are historic--that contain 3.86 million square feet of space. Currently, the Trust has about 1 million square feet of commercial space rented to private entities. The Trust and the Park Service occupy another 660,000 square feet of commercial space. Private entities have spent about $40.8 million to repair and rehabilitate commercial space that they subsequently leased from the Trust. In these cases, the Trust generally reduces rental rates to recognize the private entity's investment. The Trust has embarked on a number of initiatives to clean up and restore the Presidio's environment. These initiatives include assuming the Army's responsibility for cleaning up the contamination left at the Presidio from over 2 centuries of use as a military post, restoring Mountain Lake, and restoring the Presidio's vegetation and forest. In October 1994, when the Army transferred jurisdiction of the Presidio to the Park Service, the Army retained the lead agency responsibility for cleaning up contamination. The Army began cleanup activities primarily in Crissy Field in Area A--an area now managed by the Park Service. In May 1997, the Army announced an updated plan for continued cleanup of the Presidio. The Army's plan however, was criticized by local neighborhood groups, the Sierra Club, and the Trust because its cleanup strategy relied primarily on monitoring contaminated sites and restricting public land use, rather than removing contamination. Also, the Army's cleanup plan was expected to cover a 30-year period. In May 1998, the Trust presented to the Army its own assessment of the cleanup plan for the Presidio that was designed to address the areas criticized in the Army's plan. The Trust also proposed that the Army delegate its cleanup authority to the Trust to expedite the cleanup activities. In May 1999, the Army, the Trust, and the Department of the Interior signed a memorandum of agreement transferring cleanup responsibility to the Trust. Under the agreement, the Army will pay the Trust $100 million to clean up both Areas A and B. The Trust is responsible for all currently known contamination; the Army remains responsible for any unknown contamination that may be discovered. The Trust also purchased a $100 million insurance policy for $6.7 million in the event that cleanup costs exceed the $100 million paid by the Army. The Trust plans to complete the environmental cleanup by 2010. As of March 31, 2001, the Trust had spent about $12 million for cleanup activities. Almost 80 percent of the expenditures to date were for insurance premiums, program management and administration, planning, and oversight. The remaining funds were used for cleanup activities including monitoring groundwater, evaluating landfills, removing contaminated soil, and removing lead pellets. Mountain Lake is one of the few remaining natural lakes within the city of San Francisco. It is a popular destination for visitors and residents and provides habitat for many species of birds and plants. Over the years, the depth of the 4-acre lake has fallen from 30 feet to less than 10 feet. In addition, the lake's water quality has deteriorated because of sedimentation, runoff, and the byproducts of nearby road construction. The National Park Service, Golden Gate National Park Association, and the Trust have jointly sponsored a public planning process, including community forums, site research, and other technical analyses, to produce a plan to restore the lake and adjacent shoreline, which encompass a total of 14 acres. A two-phased plan and an environmental assessment were completed and adopted in the spring of 2001. The goals of the plan are to improve water quality, enhance the habitat, and improve visitor experiences. The first phase will consist of dredging and aerating the bottom of the lake; removing nonnative trees and vegetation and replacing them with native species; and planting native trees and shrubs to buffer the lake from the roadway, improving trails, and constructing overlooks and interpretive exhibits. The Trust estimates that phase one of the plan will cost $677,000 and should be completed by the fall of 2002. This cost estimate assumes that all removed sediment will be disposed of at a site on the Presidio. If the lake's sediment is found to be contaminated, however, it will require off- site disposal and result in additional costs. The San Francisco International Airport Authority provided $500,000 for phase one as approved mitigation for filling in wetlands for the airport's new terminal. The second phase will be initiated within 2 to 5 years after the completion of the first one. This phase consists of removing an additional 4.3 acres of weeds around the shoreline and replanting the area with native plants as well as construction of a bridge. The Trust's preliminary estimate is that phase two will cost from $600,000 to $750,000. The preservation and enhancement of the Presidio's natural resources, including its vegetation, is one of the Trust's goals. The Presidio contains more than 230 native plant species and a 300-acre forest of eucalyptus, Monterey cypress, and Monterey pine trees. Over the years, human activities and the overgrowth of nonnative plants have threatened the Presidio's landscape and native vegetation. Also, many of the trees planted a century ago as part of the Army's beautification project are nearing the end of their natural life span and need restoration. Working in partnership with the Trust, the Park Service developed the Vegetation Management Plan to preserve and enhance native landscapes and to extend the life of the park's forest over the coming decades. Initially, the Trust and the Park Service will collaborate on a number of pilot projects designed to test and establish effective restoration techniques for future vegetation management projects. Over the next 5 years, the Trust expects to spend $9 million on pilot projects aimed at restoring and nurturing the Presidio's vegetation and forest. The Trust has made substantial progress in repairing, rehabilitating, and leasing buildings since taking over responsibility for its portion of the Presidio in July 1998. Revenue from residential and commercial leases is the Trust's primary source of revenue, and these leases will play a more important role as the Trust's federal appropriation declines and then ends in fiscal year 2012. In fiscal year 2000, residential leases generated $13.3 million in revenue. Currently, more than 52 percent of the occupied residential units are leased at market rental rates averaging about $2,910 per month. The remaining occupied units are rented under several discounted rental programs whereby tenants, such as public safety personnel, Presidio employees, and students, pay less than market rental rates. Monthly rental rates under these programs average about $1,375. By the end of fiscal year 2001, the Trust expects to have available for rent an additional 140 residential housing units. The Trust anticipates that it will generate about $21 million in revenue in fiscal year 2001 from residential housing. In fiscal year 2000, commercial leases generated $6.3 million in revenue. Overall, leases for commercial space average less than $10 per square foot, with nearly 79 percent of the total square footage leased averaging slightly more than $3 per square foot. Many of these leases are to tenants who financed the cost of restoring buildings they occupy in exchange for rental offsets and tax credits allowed for the restoration of historic buildings. Other leases are with community organizations that pay only their pro rata share of common area, infrastructure, and security costs. In fiscal year 2001, the Trust is offering an additional 227,000 square feet for lease or rehabilitation; this is expected to raise fiscal year 2001 commercial lease revenues to about $9 million. Appendix II provides information on the Trust's residential and commercial leasing programs. While the Trust has been successful in leasing residential and commercial space, it still has a considerable amount available for rehabilitation and leasing. As of January 2001, the Trust had 329 housing units that were either vacant or awaiting rehabilitation. Similarly, the Trust has 2.2 million square feet of commercial space that could be made available once a decision is made on the use of the space and it is repaired or rehabilitated. Of the 2.2 million square feet, 900,000 square feet will be used for a digital arts center at the Letterman Hospital site. The development agreement for this project was signed on August 14, 2001. When this project is completed, the Trust expects to receive about $5.8 million annually in rent plus an annual service district charge. In July 2000, the Trust began a planning process to create a plan for the future development of its portion of the Presidio. As part of this process, the Trust considered a number of alternatives for future development. The Trust used a financial model to prepare a financial analysis for each of the alternatives it considered and, under every alternative, the model projected that the Trust could become financially self-sufficient by 2013. The Trust issued its Draft Implementation Plan, which contained its proposed action called the "Draft Plan Alternative," as well as a draft environmental impact statement on July 25, 2001. After a public comment period, the Trust expects to issue a final plan and final environmental impact statement by early 2002. Key to the financial model were the assumptions the Trust used which appear to be conservative and to provide estimates of future revenues at the lower end of potential estimates. After choosing the final development plan, the Trust should refine the model and prepare a new financial forecast of operating results under that plan because projections used in the planning process were designed only as tools to test the comparative economic implications of various alternatives. Since assuming responsibility for its portion of the Presidio, the Trust has managed the Presidio using the Park Service's 1994 General Management Plan Amendment. In July 2000, the Trust began to update this plan. The new planning process, called the Presidio Trust Implementation Plan (Implementation Plan), was needed, according to the Trust, because some of the assumptions the Park Service had based its 1994 General Management Plan Amendment on had changed significantly since it was adopted. Specifically: The Park Service's 1994 General Management Plan Amendment assumed that annual appropriations in the range of $16 million to $25 million would be received. However, Public Law 104-333, which created the Trust, mandated that the Trust become financially self- sufficient by 2013. Even after the Presidio closed, the 6th U.S. Army had been expected to occupy up to 30 percent of the Presidio's buildings; however, it has vacated the Presidio. The University of California at San Francisco had planned to locate its research facilities at the Letterman Hospital, but did not do so. The Implementation Plan process began in July 2000 with a 6-month "scoping" period and information-gathering process through workshops in which the public helped define the range of issues and topics to be included in the Implementation Plan. In mid-November 2000, the Trust published its Conceptual Alternatives Workbook, which contained five alternatives for the Presidio's future development. Public comments were solicited on the alternatives until January 16, 2001. On July 25, 2001, the Trust released the Presidio Trust Draft Implementation Plan and draft environmental impact statement, which described and analyzed six alternatives for future development of the Presidio. Two of the alternatives have, thus far, received the most attention from the public. One, referred to as the "General Management Plan Amendment 2000 alternative," would implement the Park Service's 1994 General Management Plan Amendment, assuming the year 2000 conditions. The Trust stated that it modified this alternative from the Conceptual Alternatives Workbook because many neighborhood and environmental groups had commented that they preferred an alternative that was patterned after the Park Service's 1994 General Management Plan Amendment plan but modified to make it financially feasible. The Trust developed another alternative, also in response to public comments, entitled the "Draft Plan Alternative," which is its proposed action for future development of the Trust's portion of the Presidio. The Trust stated that this alternative is the proposed action because it is patterned after the General Management Plan Amendment 2000 alternative but includes modifications to ensure its financial viability and to combine a number of concepts proposed in the Conceptual Alternatives Workbook into a single alternative. These concepts include expansion of open space, no reduction in housing units, and a variety of cultural and educational programs for visitors. Appendix III contains a summary of the alternatives the Trust considered. The public has until October 25, 2001, to provide comments on the Draft Plan Alternative and draft environmental impact statement. The Trust envisions concluding the planning process with the publication of a final plan and final environmental impact statement in early 2002. The Trust's Draft Plan Alternative contains many of the features of the General Management Plan Amendment 2000 alternative, but there are several noteworthy differences between the two. For example, total development at the Presidio under Draft Plan Alternative is 5.6 million square feet, or about 6 percent less than current levels, rather than just over 5 million square feet discussed in the General Management Plan Amendment 2000 alternative. Furthermore, the Draft Plan Alternative permits 50,000 square feet less in building demolition than the General Management Plan Amendment 2000 alternative and replacement buildings under the Draft Plan Alternative could increase by about 540,000 square feet over the General Management Plan Amendment 2000 alternative. Finally, the Draft Plan Alternative calls for 880 more residential housing units than the General Management Plan Amendment 2000 alternative-- more than doubling the projected number of residents at the Presidio. Appendix IV contains a comparison of the land use patterns envisioned by the alternatives. The Draft Plan Alternative assumes expenditures of $10 million annually for Trust programs rather than the $2 million annually provided for in the General Management Plan Amendment 2000 alternative. The difference is due, in part, to the Trust providing programs rather than only the tenants as the General Management Plan Amendment 2000 alternative assumed. According to the Trust, a wide variety of program possibilities would be available including interpretive programs for visitors as well as museums, exhibitions, and community programs. Also, the projected number of annual visitors under the Draft Plan Alternative is 60 percent higher than the projection in the General Management Plan Amendment 2000 alternative. Finally, total capital construction costs under the Draft Plan Alternative would be $61 million higher than under the General Management Plan Amendment 2000 alternative. Appendix V contains a comparison of the capital costs among the alternatives. The Trust's analysis of the public comments it received before releasing the Draft Plan Alternative, indicated that many of those commenting noted concerns with the proposed plans compatibility with the Park Service's 1994 General Management Plan Amendment. Public reaction when the Draft Plan Alternative was released indicated that many believed that the Draft Plan Alternative contained too much development and that the Trust should not have abandoned the Park Service's 1994 General Management Plan Amendment. As part of the planning process, the Trust used a financial model to prepare a financial projection for each alternative. According to the Trust, the financial model was designed as a planning tool to test the comparative economic implications of the alternatives and not as definitive projections of future financial conditions. Specifically, the financial model was designed to (1) evaluate the short-term financial self- sufficiency of each alternative; (2) estimate the time period needed for each alternative to reach long-term financial sustainability, including generating sufficient revenues to meet long-term capital needs and replacement reserves; and (3) compare the relative financial performance of each alternative against the others. The financial model projected that the Trust could become financially self-sufficient by 2013 under every alternative. In developing the financial model, the Trust relied on historical data from a number of sources, such as the San Francisco area's real estate markets for data on fair market rental and vacancy rates and national studies for information on capital costs for rehabilitation and new construction. In addition, the Trust made many assumptions in order to project its financial analyses into the future. Some of the key variables included land use, annual program expenditures, and the timing of demolition and rehabilitation of existing buildings. According to our economic analysis of the financial model, the Trust's assumptions appear to be conservative because they tended to minimize projected revenues. For example, even though the market rental rate in calendar year 2000 for Class B office space in San Francisco was about $60 per square foot, the Trust used a more conservative rental rate of $29 per square foot. This rate was based on the average market rate over the past 7 years. In developing its financial model, the Trust stated that the model was not designed to be a budgetary or accounting tool and the results should not be interpreted as being what will happen, but rather what could happen given certain assumptions. When the Trust finalizes its Presidio Trust Implementation Plan, it needs to refine the financial model to assure itself that the model's results are based on the latest and best information and assumptions. Also, the model meets the definition of a financial forecast as defined by the American Institute of Certified Public Accountants Statements on Standards for Attestation Engagements which provide a mechanism by which financial forecasts that are expected to be used by a third party can be independently examined. Because it is likely that the public, the Congress, and the Trust will rely on the new financial forecast, at least in part, to judge the Trust's likelihood of becoming financially self-sufficient by 2013, we believe that the American Institute of Certified Public Accountants guidelines should be applied and the Trust should have the financial model independently examined. We brought this issue to the attention of Trust officials, who stated they were not aware of such guidance but thought that having a new financial forecast independently examined was a good idea. Depending on future rental revenues and how the Trust proceeds with development of the Presidio, it is possible that at some point the Trust may generate revenues in excess of its costs. The Trust acknowledges that, at some point in the future, excess revenues could be generated at which point it could decide to reduce rents, provide subsidies, or scale back plans for building space and capital projects. Public Law 104-333 allows the Trust to retain all proceeds and other revenues it receives. When passing the law that brought the Trust into being, the Congress gave the Trust wide latitude in determining how it would manage and operate the Presidio. The Trust has made notable progress and now stands ready to define the future development and operation of the Presidio as a national park. While the Trust's financial analysis indicates that the Trust should achieve financial self-sufficiency by 2013, it is only a predictor of what could occur based on several assumptions. The Trust should consider refining its financial forecast once its development plan is finalized. Furthermore, if the Trust generates excess revenues in the future, after achieving financial self-sufficiency and funding capital projects and reserves, the Congress may, at that time, want to revisit the issue of what to do with excess revenues. Given the complexity of the financial model and its importance in the decision-making process and the fact that a refined model could serve as the standard measure of the Trust's progress toward self-sufficiency, we recommend that the Chairman, Presidio Trust Board of Directors, obtain an independent examination of the financial model as defined by the American Institute of Certified Public Accountants Statements on Standards for Attestation Engagements. A certified public accountant's report would express an opinion on whether the underlying assumptions provide a reasonable basis for management's projection of financial self- sufficiency. The Presidio Trust provided oral comments that generally agreed with the report and our recommendation that it have its financial model independently examined when its development plan is finalized. The Presidio Trust also provided a number of technical comments and clarifications, which we have addressed, as appropriate, in the body of the report. We obtained information from the Trust on its activities, reviewed relevant program documents and related materials, and met with Trust officials responsible for major activities, such as facility improvements, residential and commercial leasing, and financial management. We also reviewed the financial model used by the Trust as part of its planning process and discussed the model with Trust officials and officials from the firm that developed the model. We did not independently verify the reliability of the financial data provided nor did we trace the data to the systems from which they came. Because the Trust manages the Presidio in conjunction with the Park Service, we also met with Park Service officials to obtain their views on the Trust's management of the Presidio and its planning process. We performed our work at the Trust's headquarters in San Francisco from January 2001 through August 2001 in accordance with generally accepted government auditing standards. We are sending copies of this report to appropriate congressional committees, the Chairman, Board of Directors, Presidio Trust; the Secretary of the Interior; the Director, National Park Service; the Secretary of Defense; the Director, Office of Management and Budget; and other interested parties. We will also make copies available to others on request. If you or your staff have any questions regarding this report, please call me or Ed Zadjura on (202) 512-3841. Key contributors to this report are listed in appendix VI. Currently, the Presidio has 1,198 residential housing units, of which 73 percent (869 units) were leased or occupied as of January 2001. The remaining 329 units (27 percent) are either vacant or awaiting rehabilitation. A review of occupied units shows 39 percent (470 units) leased at market rental rates while 33 percent (399 units) have leases below market rates. Overall lease rates for commercial space averages less than $10 per square feet. The majority of total commercial square-feet leased averages just over $3 per square foot. Appendix III: General Overview of Planning Alternatives Considered by the Presidio Trust (July 25, 2001) Under this alternative, tenants and residents would work together to make the Presidio a center for education, communication, and exchange. Open space would be increased primarily by removing non-historic housing in the southern portion of the park. Replacement housing would come primarily from the rehabilitation and reuse of buildings. Cultural and natural resources would be protected and enhanced. This alternative would implement the General Management plan developed by the Park Service in 1994 assuming year 2000 conditions. Tenants and residents would work together to create a global center dedicated to addressing the world's critical environmental, social, and cultural challenges. Buildings would be removed to increase open space and/or enhance recreational, cultural, and natural resources. In this alternative, more open space would be created in the southern part of the park; development would be concentrated in the northern part of the Presidio. Overall, building square footage would be reduced and open space and natural resource enhancements would be maximized. Under this alternative, the Presidio would become a sustainable live/work community, and a model of environmental sustainability. Emphasis would be placed on creating a community that offered innovative approaches on environmental sustainability. Open space would be enhanced and some non-historic buildings would be removed. Under this alternative, the Presidio would become a national and international cultural destination park, a portal for visitors to the American West and Pacific, and a place of international distinction for its programs in research, education and communication. Open space would be expanded and a substantial number of non-historic buildings would be removed in the southern part of the park; housing would be added in the northern part of the park. Under this alternative, the Presidio would be minimally managed to fulfill the Presidio Trust's obligations to protect the Presidio's resources. There would be no significant park enhancements and no physical change beyond those currently underway. There would be no new construction and building removal. Difference between Draft & GMPA 3,660 1,940 5,600 1,070 710 (360) 3,690 1,320 5,010 1,120 170 (950) (30) 620 590 (50) 540 (590) 3,980 1,310 5,290 1,910 1,240 (670) 3,770 1,910 5,680 890 620 (270) 4,070 1,890 5,960 1,370 1,370 0 3,530 2,430 5,960 0 0 0 (1) 1,650 770 (880) (880) 1,660 910 (740) 1,650 1,430 (220) Existing housing units include former military bachelors' quarters and barracks not in use. Parkwide capital costs, demolition costs, and program capital costs. In addition, Mark Connelly; Robert Crystal; John Kalmar, Jr.; Jonathan S. McMurray, Roderick Moore; Mehrzad Nadji; and Donald Yamada made key contributions to this report.	The Presidio Trust--a wholly owned government corporation--was created in 1996 to manage a large part of the Presidio grounds using sound principles of land use planning and management while maintaining the area's scenic beauty and historic and natural character. The Trust is responsible for leasing, maintaining, rehabilitating, repairing, and improving the property it controls. The Trust must become financially self-sufficient by 2013. GAO found that the Trust has made significant progress in preserving, protecting, and improving the Presidio. It has launched major efforts to repair and upgrade the Presidio's infrastructure and to repair and rehabilitate residential housing and commercial space. So far, the Trust has converted about half of the former military buildings into useable residential and commercial space. The rehabilitation, repair, and leasing of the remaining 300 residential units and about 2.2 million square feet of undeveloped commercial space is critical to the Trust's efforts to achieve financial self-sufficiency. The Trust has also begun several environmental initiatives, including the cleanup of military contamination and the restoration of Mountain Lake--one of the few remaining natural lakes within the San Francisco city limits. The Trust is also working with the Park Service to revitalize vegetation throughout the Presidio and to replace aging trees in the 300-acre forest. The Trust should meet its goal of financial self-sufficiency by 2013, according to financial projections prepared by the Trust.	6,182	296
This year the space shuttle is scheduled to fly its final six missions to deliver hardware, supplies, and an international scientific laboratory to the International Space Station. NASA officials remain confident that the current flight manifest can be accomplished within the given time, and add that should delays occur, the International Space Station can still function. According to NASA, there are trade-offs the agency can make in what it can take up to support and sustain the station. However, failure to complete assembly as currently planned would further reduce the station's ability to fulfill its research objectives and deprive the station of critical spare parts that only the shuttle can deliver. The recent review completed by the U.S. Human Space Flight Plans Committee included the option of flying the space shuttle through 2011 in order to complete the International Space Station. However, the Committee noted that there are currently no funds in NASA's budget for additional shuttle flights. Most recently, the Administration is proposing over $600 million in the fiscal year 2011 budget to ensure that the space shuttle can fly its final missions, in case the space shuttle's schedule slips into fiscal year 2011. Retirement of the shuttle will involve many activities that warrant special attention. These include: disposing of the facilities that no longer are needed while complying with federal, state, and local environmental laws and regulations; ensuring the retention of critical skills within NASA's workforce and its suppliers; and disposing of over 1 million equipment items. In addition, the total cost of shuttle retirement and transition--to include the disposition of the orbiters themselves--is not readily transparent in NASA's budget. We have recommended that NASA clearly identify all direct and indirect shuttle transition and retirement costs, including any potential sale proceeds of excess inventory and environmental remediation costs in its future budget requests. NASA provided this information to the House and Senate Appropriations committees in July 2009 but did not identify all indirect shuttle transition and retirement costs in its fiscal year 2010 budget request. We look forward to examining the fiscal year 2011 budget request to determine whether this information is identified. Lastly, NASA has recognized that sustaining the shuttle workforce through the retirement of the shuttle while ensuring that a viable workforce is available to support future activities is a major challenge. We commend NASA for its efforts to understand and mitigate the effect of the space shuttle's retirement on the civil service and contractor workforce. Nevertheless, how well NASA executes its workforce management plans as they retire the space shuttle will affect the agency's ability to maintain the skilled workforce to support space exploration. Although it is nearing completion, the International Space Station faces several significant challenges that may impede efforts to maximize utilization of research facilities available onboard. These include: the retirement of the Space Shuttle in 2010 and the loss of its unmatched capacity to move cargo and astronauts to and from the station; the uncertain future for the station beyond 2015; and the limited time available for research due to competing demands for the crew's time. We have previously reported that the International Space Station will face a significant cargo supply shortfall without the Space Shuttle's great capacity to deliver cargo to the station and return it to earth. NASA plans on using a mixed fleet of vehicles, including those developed by international partners, to service the space station on an interim basis. However, international partners' vehicles alone cannot fully satisfy the space station's cargo resupply needs. Without a domestic cargo resupply capability to augment this mixed fleet approach, NASA faces a 40 metric ton (approximately 88,000 pounds) cargo resupply shortfall between 2010 and 2015. While NASA is sponsoring commercial efforts to develop vehicles capable of carrying cargo to the station and the administration has endorsed this approach, none of those currently in development has been launched into orbit, and the vehicles' aggressive development schedules leave little room for the unexpected. Furthermore, upon completion of construction, unless the decision is made to extend station operations, NASA has only 5 years to execute a robust research program before the International Space Station is deorbited. The leaves little time to establish a strong utilization program. At present, NASA projects that its share of the International Space Station research facilities will be less than fully utilized by planned NASA research. Specifically, NASA plans to utilize only 48 percent of the racks that accommodate scientific research facilities onboard, with the remainder available for use by others. Congress has directed NASA to take all necessary steps to ensure that the International Space Station remains a viable and productive facility capable of potential utilization through at least 2020. The Administration is proposing in its fiscal year 2011 budget to extend operations of the International Space Station to 2020 or beyond in concert with its international partners. Lastly, NASA faces a significant constraint for science on board the space station because of limited crew time. There can only be six crew members aboard the station at one time due to the number of spaces available in the "lifeboats," or docked spacecraft that can transport the crew in case of an emergency. As such, crew time cannot presently be increased to meet increased demand. Though available crew time may increase as the six- person crew becomes more experienced with operating the space station efficiently or if the crew volunteers its free time for research, crew time for U.S. research remains a limiting factor. According to NASA officials, potential National Laboratory researchers should design their experiments to be as automated as possible or minimize crew involvement required for their experiments to ensure that they are accepted for flight. We have recommended that NASA implement actions, such as developing a plan to broaden and enhance ongoing outreach to potential users and creating a centralized body to oversee U.S. space station research decision making, including the selection of all U.S. research to be conducted on board and ensuring that all U.S. International Space Station National Laboratory research is meritorious and valid. NASA concurred with our recommendation and is researching the possibility of developing a management body to manage space station research, which would make the International Space Station National Laboratory similar to other national laboratories. NASA projects have produced ground-breaking research and advanced our understanding of the universe. However, one common theme binds most of the projects--they cost more and take longer to develop than planned. As we reported in our recently completed assessment of NASA's 19 most costly projects--which have a combined life-cycle cost that exceeds $66 billion--the agency's projects continue to experience cost growth and schedule delays. Ten of the 19 projects, which had there baselines set within the last 3 years, experienced cost growth averaging $121.1 million or 18.7 percent and the average schedule growth was 15 months. For example, the Glory project has recently breached its revised schedule baseline by 16 months and exceeded its development cost baseline by over 14 percent--for a total development cost growth of over 75 percent in just 2 years. Project officials also indicated that recent technical problems could cause additional cost growth. Similarly, the Mars Science Laboratory project is currently seeking reauthorization from Congress after experiencing development cost growth in excess of 30 percent. Many of the other projects we reviewed experienced challenges, including developing new or retrofitting older technologies, stabilizing engineering designs, and managing the performance of contractors and development partners. Our work has consistently shown that reducing these kinds of problems in acquisition programs hinges on developing a sound business case for each project. Such a business case provides for early recognition of challenges, allows managers to take corrective action, and places needed and justifiable projects in a better position to succeed. Product development efforts that have not followed a knowledge-based business case approach have frequently suffered poor cost, schedule, and performance outcomes. A sound business case includes development of firm requirements, mature technologies, a preliminary design, a realistic cost estimate, and sound estimates of available funding and time needed before the projects proceed beyond preliminary design review. If necessary, the project should be delayed until a sound business case, demonstrating the project's readiness to move forward into product development, is in hand. In particular, two of NASA's largest projects--Ares I and Orion, which are part of NASA's Constellation program to return to the moon--face considerable technical, design, and production challenges. NASA is actively addressing these challenges. Both projects, however, still face considerable hurdles to meeting overarching safety and performance requirements, including limiting vibration during launch, mitigating the risk of hitting the launch tower during liftoff, and reducing the mass of the Orion vehicle. In addition, we found that the Constellation program, from the onset, has faced a mismatch between funding and program needs. This finding was reinforced by the Review of U.S. Human Spaceflight Plans Committee, which reported that NASA's plans for the Constellation program to return to the moon by 2020 are unexecutable without increases to NASA's current budget. To its credit, NASA has acknowledged that the Constellation program, for example, faces knowledge gaps concerning requirements, technologies, funding, schedule, and other resources. NASA stated that it is working to close these gaps and at the preliminary design review the program will be required to demonstrate that the program and its projects meet all system requirements with acceptable risk and within cost and schedule constraints, and that the program has established a sound business case for proceeding into the implementation phase. Even though NASA has made progress in developing the actual vehicles, the mismatch between resources and requirements remains and the administration's proposed fiscal year 2011 budget leaves the future of the program in question. NASA has continually struggled to put its financial house in order. GAO and others have reported for years on these efforts. In fact, GAO has made a number of recommendations to address NASA's financial management challenges. Moreover, the NASA Inspector General has identified financial management as one of NASA's most serious challeng In a November 2008 report, the Inspector General found continuing weaknesses in NASA's financial management process and systems, including internal controls over property accounting. It noted that these deficiencies have resulted in disclaimed audits of NASA's financial statements since fiscal year 2003. The disclaimers were largely attributed to data integrity issues and poor internal controls. NASA has made progress in addressing some of these issues, but the recent disclaimer on the fiscal year 2009 audit shows that more work needs to be done. es. We have also reported that NASA remains vulnerable to disruptions in its information technology network. Information security is a critical consideration for any organization reliant on information technology and especially important for NASA, which depends on a number of key computer systems and communication networks to conduct its work. These networks traverse the Earth and beyond, providing critical two-way communication links between Earth and spacecraft; connections between NASA centers and partners, scientists, and the public; and administrative applications and functions. NASA has made important progress in implementing security controls and aspects of its information security program. However, NASA has not always implemented sufficient controls to protect the confidentiality, integrity, and availability of the information and systems supporting its mission directorates. Specifically, NASA did not consistently implement effective controls to prevent, limit, and detect unauthorized access to its networks and systems. A key reason for these weaknesses is that NASA has not yet fully implemented key activities of its information security program to ensure that controls are appropriately designed and operating effectively. During fiscal years 2007 and 2008, NASA reported 1,120 security incidents that resulted in the installation of malicious software on its systems and unauthorized access to sensitive information. NASA established a Security Operations Center in 2008 to enhance prevention and provide early detection of security incidents and coordinate agency-level information related to its security posture. Nevertheless, the control vulnerabilities and program shortfalls--which GAO identified--collectively increase the risk of unauthorized access to NASA's sensitive information, as well as inadvertent or deliberate disruption of its system operations and services. They make it possible for intruders, as well as government and contractor employees, to bypass or disable computer access controls and undertake a wide variety of inappropriate or malicious acts. As a result, increased and unnecessary risk exists that sensitive information is subject to unauthorized disclosure, modification, and destruction and that mission operations could be disrupted. GAO has recommended actions the NASA Administrator should take to mitigate control vulnerabilities and fully implement a comprehensive information security program including: developing and implementing comprehensive and physical risk assessments; conducting sufficient or comprehensive security testing and evaluation of all relevant security controls; and implementing an adequate incident detection program. In response to our report, the Deputy Administrator noted that NASA is implementing many of our recommendations as part of an ongoing NASA strategic effort to improve information technology management and information technology security program deficiencies. The Deputy Administrator also stated that NASA will continue to mitigate the information security weaknesses identified in our report. The actions identified by the Deputy Administrator, if effectively implemented, will improve the agency's information security program. In executing NASA's space exploration, scientific discovery, and aeronautics research missions, NASA must use its resources as effectively and efficiently as possible because of the severity of the fiscal challenges our nation faces and the wide range of competing national priorities. Establishing a sound business case before a project starts should also better position NASA management to deliver promised capability for the funding it receives. While space development programs are complex and difficult by nature, and most are one-time efforts, the nature of its work should not preclude NASA from being accountable for achieving what it promises when requesting and receiving funds. Congress will also need to do its part to ensure that NASA has the support to hold poorly performing programs accountable in order to provide an environment where the systems portfolio as a whole can succeed with the resources NASA is given. NASA shows a willingness to face these challenges. We look forward to continuing work with NASA to develop tools to enhance the management of acquisitions and agency operations to optimize its investment in space and aeronautics missions. Madam Chairwoman, and Members of the Subcommittee, this concludes my prepared statement. I would be happy to answer any questions you may have at this time. For additional information, please contact Cristina Chaplain at 202-512- 4841 or [email protected]. Individuals making contributions to this testimony include Jim Morrison, Assistant Director; Greg Campbell; Richard A. Cederholm; Shelby S. Oakley; Kristine R. Hassinger; Kenneth E. Patton; Jose A. Ramos; John Warren; and Gregory C. Wilshusen. 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 National Aeronautics and Space Administration (NASA) is in the midst of many changes and one of the most challenging periods in its history. The space shuttle is slated to retire this year, the International Space Station nears completion but remains underutilized, and a new means of human space flight is under development. Most recently, the administration has proposed a new direction for NASA. Amid all this potential change, GAO was asked to review the key issues facing NASA. This testimony focuses on four areas: 1) retiring the space shuttle; 2) utilizing and sustaining the International Space Station; 3) continuing difficulty developing large-scale systems, including the next generation of human spaceflight systems; and 4) continuing weaknesses in financial management and information technology systems. In preparing this statement, GAO relied on completed work. To address some of these challenges, GAO has recommended that NASA: provide greater information on shuttle retirement costs to Congress, take actions aimed at more effective use of the station research facilities, develop business cases for acquisition programs, and improve financial and IT management. NASA concurred with GAO's International Space Station recommendations, and has improved some budgeting and management practices in response. The major challenges NASA faces include: (1) Retiring the Space Shuttle. The impending end of shuttle missions poses challenges to the completion and operation of the International Space Station, and will require NASA to carry out an array of activities to deal with shuttle staff, equipment, and property. This year the shuttle is scheduled to fly its final six missions to deliver hardware, supplies, and an international laboratory to the International Space Station. NASA officials remain confident that the current manifest can be accomplished within the given time, and add that should delays occur, the space station can still function. According to NASA, there are trade-offs the agency can make in what it can take up to support and sustain the station. However, failure to complete assembly would further reduce the station's ability to fulfill its research objectives and short the station of critical spare parts that only the shuttle can currently deliver. Retirement of the shuttle will require disposing of facilities; ensuring the retention of critical skills within NASA's workforce and its suppliers; and disposing of more than 1 million equipment items. (2) Utilizing the International Space Station. The space station, which is nearly complete, faces several significant challenges that may impede efforts to maximize utilization of its research facilities. These include the retirement of the shuttle and the loss of its unmatched capacity to move cargo and astronauts to and from the station; the uncertain future for the station beyond 2015; and the limited time available for research due to competing demands for the crew's time. (3) Developing Systems. A common theme in NASA projects--including the next generation of space flight efforts--is that they cost more and take longer to develop than planned. GAO again found this outcome in a recently completed assessment of NASA's 19 most costly projects--with a combined life-cycle cost of $66 billion. Within the last 3 years, 10 of the 19 projects experienced cost growth averaging $121.1 million or 18.7 percent, and the average schedule growth was 15 months. A number of these projects had experienced considerable cost growth before the most recent baselines were set. (4) Managing Finances and IT. NASA continues to struggle to put its financial house in order. GAO and others have reported for years on these efforts. The NASA Inspector General identified financial management as one of NASA's most serious challenges. In addition, NASA remains vulnerable to disruptions in its information technology network. NASA has made important progress in implementing security controls and aspects of its information security program. However, it has not always implemented sufficient controls to protect information and systems supporting its mission directorates.	3,142	784
Mr. Chairman and Members of the Subcommittee: We are pleased to have this opportunity to assist in your review of the Internal Revenue Service's (IRS) operations. As you requested, our statement today will cover three areas (1) IRS' efforts to correct management and technical weaknesses that have impeded its Tax Systems Modernization (TSM) program as well as whether IRS can successfully complete the program within the time frames and cost figures it has established; (2) IRS efforts to collect delinquent tax debts and deal with its accounts receivable problems; and (3) the viability of return-free filing as an option to the current tax filing system. Our testimony, which is based on past reports and ongoing work, makes the following points: IRS' efforts to modernize tax processing are jeopardized by persistent and pervasive management and technical weaknesses. Our July 1995 report made specific recommendations that were intended to correct many of these weaknesses by December 31, 1995. IRS has initiated some activities to address these weaknesses. However, these weaknesses have not been corrected and ongoing efforts provide little assurance that weaknesses will be corrected. IRS has continued with plans to spend billions more on TSM solutions with little confidence of successfully delivering effective systems within established TSM time frames and cost figures. Inaccurate data and IRS' antiquated and rigid collection process continue to hinder its efforts to stem the growth of its accounts receivable and improve collection of delinquent debts. Little progress has been made in resolving the underlying causes of these problems since 1988, when IRS' accounts receivable was first identified as a high-risk area. Both the private sector and other government entities could offer IRS valuable lessons in improving its collections performance. The size of IRS' total inventory of tax debts--$166 billion at the end of fiscal year 1994--is deceiving because it is an accumulation of debts for a 10-year period and includes debts that are clearly uncollectible--i.e., those of defunct businesses and deceased taxpayers. The inventory also includes accounts that have been established for compliance reasons and that may not be valid receivables. According to IRS estimates, the net result is that only about 20 percent of the inventory, or about $35 billion, is potentially collectible. According to IRS data, collections of delinquent taxes, while increasing to $25.1 billion in fiscal year 1995, are still below the high of $25.5 billion collected in fiscal year 1990. Because of IRS' decision to absorb fiscal year 1996 budget cuts by reducing collections staffing, IRS projects that collections will decrease about 13 percent in fiscal year 1996--to about $21.9 billion. While return-free filing could provide benefits to both the taxpayer and IRS, certain impediments would have to be overcome for successful implementation. Modernizing tax processing is key to IRS' vision of a virtually paper-free work environment in which taxpayer information is readily available to IRS employees to update taxpayer accounts and respond to taxpayer inquiries. In July 1995, we reported on the need for IRS to have in place sound management and technical practices to increase the likelihood that TSM's objectives will be cost-effectively and expeditiously met. A 1996 National Research Council report on TSM has a similar message. Its recommendations parallel the more than a dozen recommendations we made involving IRS' (1) business strategy to reduce reliance on paper, (2) strategic information management practices, (3) software development capabilities, (4) technical infrastructures, and (5) organizational controls. The Treasury, Postal Service and General Government Appropriations Act of 1996 "fences" $100 million in TSM funding until the Secretary of the Treasury reports to the Senate and House Appropriations Committees on the progress IRS has made in responding to our recommendations with a schedule for successfully mitigating deficiencies we reported. The conference report on the act directed that we assess for the Committee the status of IRS' corrective actions. As of March 4, 1996, the Secretary of the Treasury had not reported to the Committees on TSM. This testimony is a progress report to the Committee on actions taken as reported to us by IRS officials. private and public sector organizations that have been successful in improving their performance through strategic information management and technology. These fundamental best practices are discussed in our report Executive Guide: Improving Mission Performance Through Strategic Information Management and Technology (GAO/AIMD-94-115, May 1994), and our Strategic Information Management (SIM) Self-Assessment Toolkit (GAO/Version 1.0, October 28, 1994, exposure draft). To evaluate IRS' software development capability, we validated IRS' August 1993 assessment of its software development maturity based on the Capability Maturity Model (CMM) developed in 1984 by Carnegie Mellon University's Software Engineering Institute, a nationally recognized authority in the area. This model establishes standards in key software development processing areas (i.e., requirements management, project planning, project tracking and oversight, configuration management, quality assurance, and subcontractor management) and provides a framework to evaluate a software organization's capability to consistently and predictably produce high-quality products. When we briefed the IRS Commissioner in April 1995 and issued our report documenting its weaknesses in July 1995, IRS agreed with our recommendations to make corrections expeditiously. At that time, we considered IRS' response to be a commitment to correct its management and technical weaknesses. In September 1995, IRS submitted an action plan to Congress explaining how it planned to address our recommendations. However, this plan, follow-up meetings with senior IRS officials, and other draft and "preliminary draft" documents received through early March 1996 have provided little tangible evidence that actions being taken will correct the pervasive management and technical weaknesses that continue to place TSM, and the huge investment it represents, at risk. Our ongoing assessment has found that IRS has initiated a number of activities and made some progress in addressing our recommendations to improve management of information systems; enhance its software development capability; and better define, perform, and manage TSM's technical activities. However, none of these steps, either individually or in the aggregate, has fully satisfied any of our recommendations. Consequently, IRS today is not in an appreciably better position than it was a year ago to ensure Congress that it will spend its 1996 and future TSM appropriations judiciously and effectively. We reported that IRS was drowning in paper--a serious problem IRS can mitigate only through electronic tax filings. We noted that IRS would not achieve the full benefits that electronic filing can provide because it did not have a comprehensive business strategy to reach or exceed its electronic filing goal, which was 80 million electronic filings by 2001. IRS' estimates and projections for individual and business returns suggested that, by 2001, as few as 39 million returns may be submitted electronically, less than half of IRS' goal. We reported that IRS' business strategy would not maximize electronic filings because it primarily targeted taxpayers who use a third party to prepare and/or transmit simple returns, are willing to pay a fee to file their returns electronically, and are expecting refunds. Focusing on this limited taxpaying population overlooked most taxpayers, including those who prepare their own tax returns using personal computers, have more complicated returns, owe tax balances, and/or are not willing to pay a fee to a third party to file a return electronically. refocus its electronic filing business strategy to target, through aggressive marketing and education, those sectors of the taxpaying population that can file electronically most cost-beneficially. IRS agreed with this recommendation and said that it had convened a working group to develop a detailed, comprehensive strategy to broaden public access to electronic filing, while also providing more incentives for practitioners and the public to file electronically. It said that the strategy would include approaches for taxpayers who are unwilling to pay for tax preparer and transmitter services, who owe IRS for balances due, and/or who file complex tax returns. IRS said further that the strategy would address that segment of the taxpaying population that would prefer to file from home, using personal computers. month with a goal to reduce paper tax return filings to 20 percent or less of the total volume by 2000. These initiatives could result in future progress toward increasing electronic filings. However, these initiatives have yet to culminate in a comprehensive strategy that identifies how IRS will reach its electronic filings goal, including how it plans to target those sectors of the taxpaying population that can file electronically most cost-beneficially, and what efforts it will make to develop requisite supporting systems. take immediate action to implement a complete process for selecting, prioritizing, controlling, and evaluating the progress and performance of all major information systems investments, both new and ongoing, including explicit decision criteria, and using these criteria, to review all planned and ongoing systems investments by June 30, 1995. In agreeing with these recommendations, IRS said it would take a number of actions to provide the underpinning it needs for strategic information management. IRS said, for example, that it was developing and implementing a process to select, prioritize, control, and evaluate information technology investments to achieve reengineered program missions. Since then, IRS has taken steps towards putting into place a process for managing its extensive investments in information systems. For example, IRS has created the executive-level Investment Review Board for selecting, controlling, and evaluating all information technology investments; developed initial and revised sets of decision criteria that it used last summer to rank and prioritize TSM projects and used in November 1995 to recommend additional changes to information systems resource allocations, respectively; developed its Investment Evaluation Handbook and Business Case Handbook to strengthen management decision-making on systems investments; and is using the Investment Evaluation Handbook to review operational TSM projects. Although these steps represent some progress in responding to our concerns, none of them to date--individually or collectively--has fully satisfied our recommendations. IRS has not demonstrated that it is following a well-defined, consistent, and repeatable information technology investment decision-making process for selecting, controlling, and evaluating its information technology initiatives and projects. In particular, working procedures, required decision documents, decision criteria, and reliable cost, benefit and return data needed for an investment process are not complete. IRS has not provided evidence to demonstrate how analyses are being conducted on all systems investments using such data as expected improvement in mission performance, costs to date, technical soundness, or pilot performance. Instead, IRS operates on the assumption that it will receive a specified funding ceiling for systems development and technology, and then determines how much funding can be eliminated from projects in order to lower overall modernization costs to that level. Over the last few months, we have communicated several concerns to IRS about weaknesses in its current investment process that continue to raise risks and erode confidence in the quality of decisions being made about TSM investments. These include: the absence of initial screening criteria to determine if IRS has developed sufficient data about an information technology project--such as benefit-cost analyses, proposed return-on-investment calculations, and an accepted return on investment threshold level used as a decisional cut-off point--in order for the investment review board to reach an informed funding decision; the lack of analysis and trade-offs being made among all proposed information technology investments as a single portfolio--such as spending on legacy, infrastructure, and proposed modernization projects--in order to fully justify a ranking and prioritization of modernization efforts; the lack of mechanisms to ensure that the results of IRS' investment evaluation reviews, such as that recently completed on the Service Center Recognition/Image Processing System, are being used to modify selection and control decision-making processes or to change funding decisions for projects. We reported that, unless IRS improves its software development capability, it is unlikely to build TSM in a timely or economical manner, and systems are unlikely to perform as intended. To assess its software capability, in September 1993, IRS rated itself using the Software Engineering Institute's CMM. IRS found that, even though TSM is a world-class undertaking, its software development capability was immature. IRS placed its software development capability at the lowest level, described as ad hoc and sometimes chaotic and indicating significant weaknesses in its software development capability. Our review also found that IRS' software development capability was immature and weak in key process areas. For instance, a disciplined process to manage system requirements was not being applied to TSM systems, a software tool for planning and tracking development projects was not software quality assurance functions were not well defined or consistently systems and acceptance testing were neither well defined nor required, software configuration management was incomplete. immediately require that all future contractors who develop software for the agency have a software development capability rating of at least CMM level 2, and before December 31, 1995, define, implement, and enforce a consistent set of requirements management procedures for all TSM projects that goes beyond IRS' current request for information services process, and for software quality assurance, software configuration management, and project planning and tracking; and Status of Tax Systems Modernization, Tax Delinquencies, and the Potential for Return-Free Filing define and implement a set of software development metrics to measure software attributes related to business goals. IRS agreed with these recommendations and said that it was committed to developing consistent procedures addressing requirements management, software quality assurance, software configuration management, and project planning and tracking. Regarding metrics, IRS said that it was developing a comprehensive measurement plan to link process outputs to external requirements, corporate goals, and recognized industry standards. Specifically regarding the first recommendation, IRS has (1) developed standard wording for use in new and existing contracts that have a significant software development component requiring that all software development be done by an organization that is at CMM Level 2, (2) developed a plan for achieving CMM Level 2 capability on all of its contracts, and (3) initiated plans for acquiring expertise for conducting CMM-based software capability evaluations of contractors and designated personnel to perform these evaluations. We found, however, no evidence that all contractors developing software for the agency are being required to develop it at CMM Level 2. For example, our review of an IRS electronic filing system being developed by a contractor found that the system was being developed at CMM Level 1. With respect to the second recommendation, IRS is updating three software development lifecycle methodologies, developed a draft quality audit procedures handbook, updated its requirements management request for information services document, and developed and implemented a requirements management course. IRS also evaluated its current contractor management processes, compared these processes with the CMM goals, and is considering improvement activities. However, to progress towards CMM Level 2, IRS must define and implement the detailed procedures to be used for completing the goals of CMM's key process areas. Based on our assessment, we have found some activities to address our recommendations, but IRS still has not allocated the resources needed to define and implement these areas. It appears that IRS software development projects will continue to be built using ad hoc and chaotic processes that offer no assurance of successful delivery. the metrics. According to IRS, although phase one has been completed, no metrics have been defined, and implementation is currently planned for sometime between June 1996 and January 1997. In this regard, although IRS has begun to act on our recommendations, systems are still being developed without the data and discipline needed to give management assurance that they will perform as intended. before December 31, 1995, complete an integrated systems architecture, including security, telecommunications, network management, and data management; institutionalize formal configuration management for all newly approved projects and upgrades and develop a plan to bring ongoing projects under formal configuration management; develop security concept of operations, disaster recovery, and contingency plans for the modernization vision and ensure that these requirements are addressed when developing information system projects; develop a testing and evaluation master plan for the modernization; establish an integration testing and control facility; and complete the modernization integration plan and ensure that projects are monitored for compliance with modernization architectures. IRS agreed with these recommendations and said that it was identifying the necessary actions to define and enforce systems development standards and architectures agencywide. IRS' current efforts in this area follow: IRS is developing a "descriptive overview" of an integrated systems architecture, which, for example, includes a security architecture chapter. A draft of the descriptive overview is due in April 1996, and an executive summary is due in mid-March. IRS has developed and distributed a Configuration Management Plan template, which identifies the elements needed when constructing a configuration management plan, and established a charter for its Configuration Management branch. IRS has prepared a security concept of operations and a disaster recovery and contingency plan. IRS has developed a test and evaluation master plan for TSM. IRS is in the process of establishing an interim integration testing and control facility but has not determined an initial operating date. It is also planning a permanent integration testing and control facility, scheduled to be completed by the end of 1996. IRS has completed an informal draft of its TSM Release Definition Document and a draft of its Modernization Integration Plan. These activities start to address our recommendations. However, they do not fully satisfy any of our recommendations for the following reasons. First, IRS has not completed an integrated systems architecture (the "blueprints" of TSM), and no evidence has been provided to suggest that it will have one in the foreseeable future. The draft architecture documents received are high-level descriptions that fall far short of the level of detail needed to provide effective guidance in designing and building systems. For example, IRS' concept of a three-tier, distributed architecture does not provide sufficient detail to understand the security requirements and implications. It does not, for instance, specify what security mechanisms are to be implemented between and among the three tiers to ensure that only properly authorized users are allowed to access tax processing application software and taxpayer data. Second, IRS has not brought its development, acceptance, and production environments under configuration management control. For example, there is no disciplined process for moving software from the test to the production environment. currently being implemented on systems now being developed and does not indicate how, when, or if these inconsistencies will be resolved. Fourth, IRS' disaster recovery and contingency plan is a high-level document for planning that presents basic tenets for information technology disaster recovery but not the detail needed to provide guidance. For example, it does not explain the steps that computing centers need to take to absorb the workload of a center that suffers a disaster. Fifth, the test and evaluation master plan provides the guidance needed to ensure sufficient developmental and operational testing of TSM. However, it does not describe what security testing should be performed, or how these tests should be conducted. Further, it does not specify the responsibilities and processes for documenting, monitoring, and correcting testing and integration errors. Sixth, the plans for IRS' integration testing and control facility are inadequate. The purpose of an off-line test site is to provide a safe, controlled environment for testing that realistically simulates the production environment. This permits new hardware and software to be thoroughly tested without putting IRS operations and service to taxpayers at risk. However, current plans for the facility do not provide for the testing of all IRS software prior to nationwide delivery. It is unclear why this position has been taken or how difficult and expensive it will be to make the modifications needed to enable the facility to effectively replicate its operational environment. Finally, IRS' draft TSM Release Definition Document and Modernization Integration Plan have not been finalized. In addition, they (1) do not reflect TSM rescoping and the information systems reorganization under the Associate Commissioner; (2) do not provide clear and concise links to other key documents (e.g., its integrated systems architecture, business master plan, concept of operations, and budget); and (3) assume that IRS has critical processes in place that are not implemented (e.g., effective quality assurance and disciplined configuration management). Information Officer, and research and development division. To help address this concern, in May 1995, the Modernization Executive was named Associate Commissioner. The Associate Commissioner was to manage and control systems development efforts previously conducted by the Modernization Executive and the Chief Information Officer. In September 1995, the Associate Commissioner for Modernization assumed responsibility for the formulation, allocation, and management of all information systems resources for both TSM and non-TSM expenditures. In February 1996, IRS issued a Memorandum of Understanding providing guidance for initiating and conducting technology research and for transitioning technology research initiatives into system development projects. give the Associate Commissioner management and control responsibility for all systems development activities, including those of IRS' research and development division. We are concerned that IRS still has not established an organizationwide focus to consistently manage and control information systems. Specifically, we have seen no evidence that systems development, upgrades, and replacements at IRS field locations are being controlled by the Associate Commissioner. Although the Associate Commissioner was given authority for the formulation, allocation, and management of all information systems resources for TSM and non-TSM systems, the research and development division still retains approval authority for initiating technology research projects and for conducting proof-of-concept systems prototypes. It is unclear whether the building processes and budget used for these systems development areas are controlled by the Associate Commissioner. Again, despite some improvements in consolidating management control over systems development, IRS still does not have a single entity with the responsibility and authority to control all of its information systems projects. The growth in IRS' inventory of tax debt, coupled with its inability to collect a significant portion of tax delinquencies, prompted us and OMB to designate IRS' accounts receivable as a high-risk area several years ago. Since that initial designation, IRS has made little progress in resolving the problems at the root of its poor collections performance. As shown in figure 1, its inventory of tax debt grew almost 80 percent, while collections declined about 8 percent from 1990 to 1994. While collections of delinquent taxes increased in fiscal years 1994 and 1995 to $23.5 billion and $25.1 billion, respectively, IRS projects a 13-percent decrease in collections in fiscal year 1996 to $21.9 billion because of its decision to reduce collections staffing due to cuts in its fiscal year 1996 budget. This amount would represent the lowest level of delinquent collections since fiscal year 1986. We realize that it is not an easy task for IRS to fix the underlying causes of its accounts receivable problems. IRS has undertaken many efforts in attempting to do so. However, some of these efforts have been curtailed, and others have produced limited improvements. Further, IRS is in the process of rethinking and rescoping many of its modernization and operational initiatives that would affect accounts receivable and collections. But, despite these initiatives, IRS' efforts do not reflect a comprehensive strategy to address the underlying causes of the problems that cut across the agency and across lines of managerial authority and responsibility. When discussing the problems affecting IRS' receivables, it is important to understand the nature of the tax debt inventory. In the simplest terms, this inventory represents delinquent taxes recorded in IRS' records as being owed by taxpayers. Delinquent taxes are to remain in the inventory until they are paid or abated, or until the 10-year collection statute of limitations expires. While much attention has been focused on the size of IRS' tax debt inventory--which as of September 30, 1994, was $166 billion--this figure is deceiving for several reasons. Primary among these is the fact that this figure includes an IRS estimated $97 billion in potential taxes that have been assessed but which may not be valid receivables. in the full or partial abatement of the tax debt, the amount recorded is not a valid receivable for financial reporting purposes. In the past, IRS used a statistical sampling methodology to estimate the compliance and financial portions of the inventory for financial statement purposes. Using this methodology, IRS estimated that, of the $166 billion tax debt inventory, about $69.2 billion represented financial receivables. IRS recently developed a methodology to identify how much of its inventory of tax debts represents these types of assessments. However, we found that the data upon which the analysis was based was flawed. IRS' inventory of tax debt also includes delinquent debt that may be up to 10 years old. This is because there is a 10-year statutory collection period and IRS generally does not write off uncollectible delinquencies until the 10 years is over. As a result, the receivables inventory includes accounts up to 10 years old that may be impossible to collect because the taxpayers are deceased or the corporations are defunct. Of the $166 billion total receivables inventory, IRS data show that $1.7 billion was owed by deceased taxpayers and $19.1 billion was owed by defunct corporations. During a review of accounts receivable cases greater than $10 million as of September 30, 1995, we identified several examples that illustrate problems with IRS' accounts receivable inventory. For example, out of a total of 460 accounts receivable cases that we reviewed, IRS identified 258 as currently not collectible: 198 of these represented defunct corporations, while the remaining 60 cases represented entities that either could not pay or could not be located. These cases represented $12 billion of the $26 billion included in accounts greater than $10 million. The age of the receivable also does not reflect the additional time it took for IRS to actually assess the taxes in the first place. In many cases, IRS' processing and use of certain taxpayer-related information to identify delinquent debt is a significant factor in determining the ultimate collectibility of the debt. Enforcement tools, such as its matching programs and tax examinations, may take up to 5 years from the date the tax return is due, thus reducing the likelihood that the outstanding amounts will be collected. these and other factors, IRS considers many of the accounts in the inventory to be uncollectible. IRS estimated that only about $35 billion of the $166 billion inventory of tax debt was collectible. However, for 3 of the 4 years we audited IRS' financial statements, we could not determine the reliability of IRS' estimate of accounts receivable and the related estimated collectable amount. We were only able to do so for fiscal year 1992, the first year we audited IRS. That year, we tested the validity of amounts IRS reported using a statistical sample. This resulted in an estimate of $28 billion in collectable accounts receivable. For the subsequent 2 years (fiscal years 1993 and 1994), IRS performed its own statistical sample to determine the collectability of its accounts receivable. As part of our audit, we assessed the reasonableness of these samples and found that we could not validate IRS' estimates. Our inability to rely on these estimates was based on discrepancies between underlying documentation we audited and IRS' reported balances. As we reported in our February 1995 high-risk report, IRS's accounts receivable problems reflect pervasive problems throughout IRS' processes that cumulate in the tax debt inventory and IRS' difficulties in addressing the underlying causes of these problems. For example, the failure of returns processing to correctly account for a taxpayer's payment may result in the creation of an invalid account receivable; the failure of taxpayer service to promptly resolve a taxpayer's inquiry about a delinquent account may perpetuate the receivable; and an IRS compliance effort that overstates a taxpayer's liability also inflates the inventory, makes additional work for collection personnel, and offers little guarantee of revenue generation. is available, IRS will continue to waste time and resources pursuing debts that are not real and thus do not generate revenue. Improving data accuracy and reliability is a key objective of TSM, but progress has been slow and the future success of TSM is uncertain. In addition, until IRS can effectively identify who owes the tax receivables and successfully implements a financial management system that ties its collection results to its operations, it is difficult, if not impossible, to gauge the return achieved from its collection efforts or how effective IRS or anyone could be in collecting outstanding tax receivables. Second, IRS' collection process was introduced several decades ago and, although some changes have been made, the process generally is rigid, costly, and inefficient. The three-stage collection process--computer-generated notices and bills, telephone calls, and personal visits by collection employees--takes longer and is more costly than collection processes in the private sector. While the private sector emphasizes the use of telephone collection calls, a significant portion of IRS' collection resources are devoted to personal visits made by revenue officers. IRS has initiated programs and made procedural changes to speed up the collection process, but historically it has been reluctant to reallocate resources from the field to the earlier, more productive collection activities. Due to budget cuts, however, IRS is in the process of temporarily reassigning about 300 field staff to telephone collection sites to replace temporary employees who were terminated. In addition to IRS' problems with identifying who currently owes taxes and the amount it can expect to collect, it has lacked the capability to accurately track the revenues realized from its various collection efforts. To address this problem, IRS has been developing the Enforcement Revenue Information System (ERIS). ERIS was designed to account for actual collections resulting from IRS' enforcement efforts and to enable IRS to more accurately measure and predict enforcement costs and revenues. However, its implementation was delayed because of inaccuracies found in the system's data; we are currently reviewing the system to assess its reliability. planning to implement a reengineering project that will involve all IRS activities that enable taxpayers to fulfill their tax obligations. Third, while Congress has given IRS strong tools, such as levies and seizures, to collect delinquent taxes, it has also established a number of statutory safeguards to prevent their unwarranted use. An unintended result of these safeguards has been to hamper collections. For example, the 1988 Taxpayer Bill of Rights prohibits IRS from evaluating the performance of its staff on the basis of dollars collected. Without the use of this measure, which is used by most private-sector collectors, IRS staff have less incentive to collect taxes. Their performance evaluations do not distinguish between collection actions that essentially write off a tax debt and actions that result in the collection of taxes owed--both are considered case closings. This practice may be one reason why IRS field collection staff have been declaring more tax debts "currently not collectible" each year than they collect. We understand the importance of balancing the need to protect the rights of taxpayers against the need to collect tax debts. While IRS must be fair and follow appropriate laws and regulations, taxpayers must also accept their lawful tax obligations. Those who evade this obligation cause all other taxpayers to bear a disproportionate share of the overall tax burden. Fourth, IRS' organizational structure, with its considerable sharing of responsibility for collecting tax debts, provides little accountability for results. IRS is in the process of rethinking and restructuring its organization, including reducing the number of employees and the number of regional and district offices and service centers, but the impact of these changes, if any, on the accounts receivable problems will not be felt for several years. Fifth and finally, staffing imbalances among IRS field offices have resulted in staff being available in some offices to pursue both small and large debts, while in other offices even large debts might go uncollected because of staff shortages. In addition, as mentioned earlier, IRS historically has allocated two-thirds of its collection staff to the field, which comprises the last and least productive stage of the collection process. This is in contrast to private-sector collectors, who devote most of their resources to the earlier telephone stage. Several staffing-related projects have been affected by IRS' actions taken in response to its reduced appropriations for fiscal year 1996. One of these projects was focused on redesigning the operation of collection groups in the field to improve productivity and reduce costs. Although preliminary results appeared to IRS to be positive, IRS decided to stop the project in October 1995 for budgetary reasons. This Subcommittee's concern of several years' duration about IRS' delinquent tax collection efforts led to the provisions contained in IRS' fiscal year 1996 appropriations bill that earmark $13 million for a pilot program to test the use of private law firms and debt collection agencies to help collect delinquent tax debts. IRS issued a request for proposals from prospective participants in the pilot program on March 5, 1996. If done successfully, this program may open a new avenue for addressing some of IRS' collection problems. We recognize that IRS has many initiatives under way that could help to resolve the accounts receivable problem. But, we also recognize that IRS has pursued many initiatives over the years without bringing about the desired change. IRS is in the process of rescoping many of its planned modernization and operational initiatives because of changed budget priorities. However, a comprehensive strategy to guide IRS' efforts to improve collections and accounts receivable has not been developed. This strategy, which is critical to the successful resolution of IRS' accounts receivable problems, must recognize and address the five underlying causes of the problem--causes that cut across the agency and across lines of managerial authority and responsibility. Almost 100 million American taxpayers currently must file tax returns, even though most have fully paid their taxes through the withholding system. Given its potential for reducing taxpayer burden and IRS paper processing, we have been studying return-free filing systems and the potential impact they would have on the federal income tax system. While we are still in the process of finalizing our results, we can provide some preliminary information on (1) the two most common types of return-free filing, (2) the number of American taxpayers that could be affected by return-free filing, and (3) some of the issues that would need to be addressed before such a system could be used. In countries with return-free filing, the most common type of system we identified was that termed "final withholding." Under this system, the withholder of income taxes determines the taxpayer's liability and withholds the correct tax liability from the taxpayer. With the final year-end payment to the taxpayer, the withholder makes a final reconciliation of taxes and adjusts the withholding for that period to equal the year's taxes. Another type of return-free filing--known as "agency reconciliation"--depends entirely on information reporting and allows the tax agency to determine the taxpayer's taxes based on these information documents. The tax agency then sends the taxpayer either a refund or a tax bill based on the tax liability and the amount of withholding. We identified 36 countries that use some form 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. Alternatively, an estimated 51 million taxpayers could be covered under the agency reconciliation system. We estimate that taxpayers could save 52 million hours in preparation time and millions of dollars in tax preparation costs under the final withholding system, and 170 million hours and millions of dollars in preparation time and costs under the tax agency reconciliation system. IRS would also save an estimated $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. Employers would face additional burden and costs under the final withholding system, but we were unable to determine how much. 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 return-free filing for that reason. However, given the many processing changes envisioned with the modernization of IRS' computer systems, this problem may be less of an obstacle than it was in 1987. Given the current tax system, a tax agency reconciliation system has the potential to reduce the filing burden on more taxpayers and also put less burden on payors than a final withholding system. In summary, IRS' TSM and delinquent debt collection efforts remain a serious concern to us. Although IRS is attempting to address some of the problems, their underlying causes remain and continue to hinder the potential for significant improvement. TSM, in particular, is at serious risk, and until the weaknesses are corrected, we believe that IRS' ability to successfully complete the program will remain highly questionable. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.	Pursuant to a congressional request, GAO discussed the Internal Revenue Service's (IRS) Tax Systems Modernization (TSM) Plan, focusing on: (1) IRS efforts to correct TSM management and technical weaknesses within an established time frame and cost figure; (2) IRS plans to collect delinquent taxes and correct accounts receivable discrepancies; and (3) the viability of return-free filing. GAO noted that: (1) IRS has attempted to address its management and technical weaknesses, but its initiatives do not satisfy previous recommendations or provide assurance that the problems will be timely corrected; (2) IRS continues to spend billions of dollars on TSM solutions, but it has little confidence in its ability to deliver an effective system within the established TSM time frame and cost figure; (3) IRS is rethinking its modernization and operational initiatives related to accounts receivable and delinquent taxes, but it projects a 13-percent decrease in collections for fiscal year 1996; and (4) return-free filing is a viable option if taxpayers continue to provide information regarding their tax status and number of dependents, and employers are legally authorized to compute tax liabilities under final withholding.	8,124	253
The Commission made 14 recommendations in the general area of aviation safety. Foremost among these is establishing a national goal to reduce the fatal accident rate by 80 percent within 10 years. This is a very challenging goal, particularly in the light of the projected increases in the amount of air traffic in the coming decade. We applaud the Commission's adopting such a goal for accident reduction and endorse many of its recommendations for improving safety. These recommendations include, for example, expanding FAA's inspection program to cover not only aging aircraft's structural integrity but also such areas as electrical wiring, fuel lines, and pumps. A number of these recommendations resonate with safety and efficiency improvements that we and others, including FAA, have suggested over the years. However, we believe that, as FAA tries to fundamentally reinvent itself as the Commission contemplates through some of its recommendations, FAA and the aviation industry will be challenged in three areas: (1) FAA's organizational culture and resource management, (2) FAA's partnerships with the airline industry, and (3) the costs of and sources of funding to implement the recommendations. A number of recent studies and the FAA itself have pointed to the importance of culture in the agency's operations. Last year, our review of FAA's organizational culture found that it had been an underlying cause of the agency's persistent acquisition problems, including substantial cost overruns, lengthy schedule delays, and shortfalls in the performance of its air traffic control modernization program. Furthermore, the lack of continuity in FAA's top management, including the Administrator and some senior executive positions, has fostered an organizational culture that has tended to avoid accountability, focus on the short term, and resist fundamental improvements in the acquisitions process. Similarly, a 1996 report issued by the Aviation Foundation and the Institute of Public Policy stated that the recent actions taken to reorganize FAA have done nothing to change the long-term structural problems that plague the organization. The study concluded that FAA does not have the characteristics to learn and that its culture does not recognize or serve any client other than itself. As FAA's own 1996 report entitled Challenge 2000 points out, it will take several years to overcome the many cultural barriers at FAA, determine the skill mix of the workforce of the 21st century, and recruit the necessary talent in a resource-constrained environment. In the light of these studies' results, we would caution that the organizational and cultural changes envisioned by the Commission may require years of concerted effort by all parties concerned. In connection with resource management, FAA's fiscal year 1998 budget request reveals some difficult choices that may have to be made among safety-related programs. For example, FAA proposes increasing its safety inspection workforce by 273 persons while decreasing some programs for airport surface safety, including a program designed to reduce runway incursions. The National Transportation Safety Board has repeatedly included runway incursions on its annual lists of its "most wanted" critical safety recommendations. FAA's budget request includes a reduction in the Runway Incursion program from $6 million in fiscal year 1997 to less than $3 million in fiscal year 1998. Although FAA set a goal in 1993 to improve surface safety by reducing runway incursions by 80 percent by the year 2000 from the 1990 high of 281, the results have been uneven; there were 186 runway incursions in 1993 and 246 in 1995. As was shown by the November 1994 runway collision in St. Louis, Missouri, between a commercial carrier and a private plane, such incidents can have fatal consequences--2 people lost their lives. It is unclear what progress will be made in this area, given the proposed budget cuts. Similarly, we have reported since 1987 that the availability of complete, accurate, and reliable FAA data is critical to expanding the margin of safety. However, funding for FAA's National Aviation Safety Data Analysis Center, a facility designed to enhance aviation safety by the rigorous analysis of integrated data from many aviation-related databases, is slated to be reduced from $3.7 million in fiscal year 1997 to $2 million in fiscal year 1998. The Commission's report stresses that safety improvements cannot depend solely on FAA's hands-on inspections but must also rely on partnerships with the aviation industry in such areas as self-monitoring and certification. Several programs for the airlines' self-disclosure of safety problems have already contributed to identifying and resolving some of these types of problems. For example, one airline's program for reporting pilot events or observations--a joint effort by the airline, the pilot union, and FAA--has identified safety-related problems, the vast majority of which would not have been detected by relying solely on FAA surveillance. The discovery of these problems has resulted in safety improvements to aircraft, to the procedures followed by flight crews, and to air traffic patterns. As the Commission has recognized, however, such information will not be provided if its disclosure threatens jobs or results in punitive actions. However, FAA's role in some broader partnerships with industry has also raised some questions. For example, FAA's cooperative process working with Boeing on the 777 aircraft helped enable the manufacturer to meet the planned certification date, but FAA was also criticized by some FAA engineers and inspectors for providing inadequate testing of the aircraft's design. In the case of self-disclosure programs, decisions will have to be made on which aviation entities are best suited to such partnership programs, how to monitor these programs and make effective use of the data they offer, how to balance the pressure for public disclosure against the need to protect such information, and how to standardize and share such information across the aviation industry. With broader cooperation between FAA and the aviation industry, the Congress and FAA need to be on guard that the movement toward partnerships does not compromise the agency's principal role as the industry's regulator. Finally, it is important to point out that the costs associated with achieving the accident reduction goal and who should pay for these costs have not yet been determined. In accordance with the Commission's call for more government-industry partnerships, government, the industry, and the traveling public would likely share in these costs. For example, FAA's partnership programs involve significant costs for both the agency and the industry. In the case of equipping the cargo holds of passenger aircraft with smoke detectors, the cost would fall initially on the industry, while the costs associated with the recommendation that children under the age of 2 be required to have their own seats on airplanes would fall more directly on the traveling public. Regardless of who bears the cost of the proposed improvements, the Commission has correctly recognized that additional safety improvements may sometimes be difficult to justify under the benefit-cost criteria applied to regulatory activities. The Commission recommended that cost not always be the determining factor or basis for deciding whether to put new aviation safety and security rules into effect. Specifically, the Commission notes that the potential reduction in the fatal accident rate merits a careful weighing of the options for improving safety in terms of the benefits that go beyond those traditionally considered in benefit-cost analyses. However, we also believe that it is important to recognize that the recommendation (1) represents a significant departure from traditional processes, (2) could result in significant cost increases for relatively modest increases in the safety margin, and (3) could rest on a limited empirical justification. In effect, this recommendation may increase the number of instances in which the primary factor determining whether or not to go forward with a safety or security improvement is what might be referred to as a public policy imperative rather than the result of a benefit-cost analysis. One instance of such a decision is the Commission's recommendation to eliminate the exemption in the Federal Aviation Regulations that allows children under 2 to travel without the benefit of an FAA-approved restraint. The Commission also reviewed the modernization of the air traffic control (ATC) system. FAA is in the midst of a $34 billion dollar, mission-critical capital investment program to modernize aging ATC equipment. This program includes over 100 projects involving new radars, automated data processing, and navigation, surveillance, and communications equipment. We believe this modernization is also important for attaining the next level of safety by replacing aging equipment and providing controllers and pilots with enhanced communication and better information. Recognizing that new technology, such as satellite-based navigation and new computers in ATC facilities and in aircraft cockpits, offers tremendous advances in safety, efficiency, and cost-effectiveness for users of the ATC system and for FAA, the Commission recommended accelerating the deployment of this new technology. According to FAA's current plan, many of these elements would not be in place until the year 2012 and beyond. However, the Commission has recommended that these technologies be in place and operational by the year 2005--7 years ahead of FAA's planned schedule. The Commission's goal is commendable, but given FAA's past problems in developing new ATC technology and the technical challenges that lie ahead, there is little evidence that this goal can be achieved. We have chronicled FAA's efforts to modernize the air traffic control system for the past decade. Because of the modernization effort's size, complexity, cost, and past problems, we designated it as a high-risk information technology initiative in 1995 and again in 1997. Many of FAA's modernization projects have been plagued by cost-overruns, schedule delays, and shortfalls in performance that have delayed important safety and efficiency benefits. We reported last year that the agency's culture was an underlying cause of FAA's acquisition problems. FAA's acquisitions were impaired because employees acted in ways that did not reflect a strong commitment to, among other things, the focus on and the accountability to the modernization mission. More recently, we have identified other important factors that have contributed to FAA's difficulty in modernizing the ATC system. For example, FAA's lack of effective cost-estimating and -accounting practices forces it to make billion-dollar investment decisions without reliable information. Also, the absence of a complete systems architecture, or overall blueprint, to guide the development and evolution of the many interrelated ATC systems forces FAA to spend time and money to overcome system incompatibilities. We agree with the Commission's recommendations to integrate the airports' capacity needs into the ATC modernization effort and to enhance the accuracy, availability, and reliability of the Global Positioning System. However, we have two concerns about accelerating the entire modernization effort that focus on the complexities of the technology and the integrity of FAA's acquisition process. First, the complexity of developing and acquiring new ATC technology--both hardware and software--must be recognized. The Commission contends that new ATC technology to meet FAA's requirements is available "off-the-shelf." However, FAA has found that significant additional development efforts have been needed to meet the agency's requirements for virtually all major acquisitions over the past decade. More recently, two new major contracts for systems--the Standard Terminal Automation Replacement System and the Wide Area Augmentation System--called for considerable development efforts. Second, requiring FAA to spend at an accelerated rate could prove to be inconsistent with the principles of the agency's new Acquisition Management System, established on April 1, 1996, in response to the legislation freeing it from most federal procurement laws and regulations. FAA's acquisition management system calls for FAA to go through a disciplined process of (1) defining its mission needs, (2) analyzing alternative technological and operational approaches to meeting those needs, and (3) selecting only the most cost-effective solutions. Until FAA goes through this analytical and decision-making process, it is premature to predict what new technology FAA should acquire. For example, FAA itself points out that while satellite communications that link the communication and navigation functions offer tremendous potential benefits, the technology is not yet mature enough for civil aviation--significant development is needed to determine the requirements and operational concepts of the technology. In this particular case, accelerating the ATC modernization too much could increase the risk that FAA will make poor investment decisions. Overall, our message in this area is one of caution--accelerating the entire modernization effort will have to overcome a long history of problems that FAA's new acquisition management system was designed to address and a number of obstacles. Aviation security is another component of ensuring the safety of passengers. It rests on a careful mix of intelligence information, procedures, technology, and security personnel. The Commission strongly presented aviation security as a national security priority and recommended that the federal government commit greater resources to improving it. Many of the Commission's 31 recommendations on security are similar to those that we have made in previous reports. For example, the Commission urged FAA to deploy commercially available systems for detecting explosives in checked baggage at U.S. airports while also continuing to develop, evaluate, and certify such equipment. Similarly, the Commission echoed our recommendation that the government and the industry focus their safety and security research on the human factors associated with using new devices, especially on how operators will work with new technology. The Committee's recommendations address a number of long-standing vulnerabilities in the nation's air transportation system, such as (1) the screening of checked and carry-on baggage, mail, and cargo and (2) unauthorized individuals gaining access to an airport's critical areas. Many of the 20 initial security recommendations that the Commission made on September 9, 1996, are already being implemented by the airlines or by government agencies. We found, however, that in the past FAA has had difficulty in meeting some of the time frames for implementing the safety improvements recommended by GAO and the Department of Transportation (DOT) Inspector General. Similarly, in the security area, FAA has also had problems meeting the implementation time frames. For example, FAA is just beginning to purchase explosives-detection systems to deploy at U.S. airports, although the Aviation Security Improvement Act of 1990 set an ambitious goal for FAA to have such equipment in place by November 1993. This delay was due primarily to the technical problems slowing the development and approval of the explosives-detection devices. But we also found that FAA did not develop an implementation strategy to set milestones and realistic expectations or to identify the resources to guide the implementation efforts. It is important that FAA sustain the momentum generated by the Commission's report and move forward systematically to implement its recommendations. Finally, although the Commission concluded that many of its proposals will require additional funding, it did not specifically recommend funding levels for new security initiatives over the long term. Instead, the Commission recommended that the federal government devote at least $100 million annually to meet security capital requirements--leaving the decision on how to fund the remaining security costs to the National Civil Aviation Review Commission. The National Civil Aviation Review Commission is charged with looking at FAA funding issues, and we do not want to preempt its report and recommendations. But, for example, the $144.2 million appropriated by the Congress in 1997 for new security technology represents a fraction of the estimated billions of dollars required to enhance the security of air travel. To improve aviation security, the Congress, the administration, and the aviation industry need to agree on what to do and who will pay for it--and then to take action. In closing, Mr. Chairman, we face a turning point. The public's concern about aviation safety and security has been heightened. The Congress and the administration have a renewed commitment to addressing this urgent national concern. The Commission's work is a good start toward an evolutionary process of reaching agreement on the goals and steps to improve aviation safety and security. To guide the implementation of the Commission's recommendations, DOT and FAA will need a comprehensive strategy that includes (1) clear goals and objectives, (2) measurable performance criteria to assess how the goals and objectives are being met, and (3) a monitoring, evaluation, and reporting system to periodically evaluate the implementation. This strategy could serve as a mechanism to track progress and establish the basis for determining funding trade-offs and priorities. In addition, successful implementation will require strong, stable leadership at DOT and at FAA. Although several complex questions remain unanswered, we hope that the Commission's work can serve as a catalyst for change and a strengthened commitment to resolving these challenges to improving safety. This concludes my prepared statement. We would be glad to respond to any questions that you and Members of the Committee might have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.	GAO discussed recommendations contained in the recently released report of the White House Commission on Aviation Safety and Security, focusing on the implementation issues relating to three areas addressed by the Commission: (1) aviation safety; (2) air traffic control (ATC) modernization; and (3) aviation security. GAO noted that: (1) foremost among the Commission's 14 recommendations for aviation safety is establishing a national goal to reduce the fatal accident rate by 80 percent within 10 years; (2) however, GAO believes that, as the Federal Aviation Administration (FAA) tries to fundamentally reinvent itself as the Commission contemplates through some of its recommendations, FAA and the aviation industry will be challenged by: (a) FAA's organizational culture and resource management; (b) FAA's partnerships with the airline industry; and (c) the costs of and sources of funding to implement the recommendations; (3) recognizing that new technology offers tremendous advances in safety, efficiency, and cost-effectiveness for users of the ATC system and for FAA, the Commission recommended accelerating FAA's deployment of new technology, but given FAA's past problems in developing new ATC technology and the technical challenges that lie ahead, there is little evidence that this goal can be achieved; (4) GAO agrees with the Commission's recommendations to integrate the airports' capacity needs into the ATC modernization effort and to enhance the accuracy, availability, and reliability of the Global Positioning System; however, GAO has two concerns about accelerating the entire modernization effort that focus on the complexities of the technology and the integrity of FAA's acquisition process; (5) the Commission strongly presented aviation security as a national security priority and recommended that the federal government commit greater resources to improving it; (6) in the past, FAA has had difficulty in meeting some of the time frames for implementing safety and security improvement recommendations; and (7) to improve aviation security, the Congress, the administration, and the aviation industry need to agree on what to do and who will pay for it, and then take action.	3,772	432
State child welfare systems consist of a complicated network of policies and programs designed to protect children. Today, these systems must respond to growing numbers of children from families with serious and multiple problems. Many of these families also need intensive and long-term interventions to address these problems. With growing caseloads over the past decade, the systems' ability to keep pace with the needs of troubled children and their families has been greatly taxed. In addition, the continued growth in caseloads expected over the next few years will give child welfare agencies little relief. When parents or guardians are unable to care for their children, state child welfare agencies face the difficult task of providing temporary placements for children while simultaneously working with a wide array of public and private service providers, as well as the courts, to determine the best long-term placement option. The permanency planning process is guided by federal statute and typically occurs in stages requiring considerable time. Finding an appropriate placement solution is extremely difficult because it often involves numerous steps and many different players. In each case, states must make reasonable efforts to prevent the placement of a child in foster care. If the child must be removed from the home, states are required under the Adoption Assistance and Child Welfare Act to take appropriate steps to make the child's safe return home possible. Once removed, if reunification with the parents cannot be accomplished quickly, a child will be placed in temporary foster care while state child welfare agencies and community service providers continue to work with the parents in hope of reunification. To be eligible for federal funding, the state must demonstrate to the appropriate court that it has made reasonable efforts to prevent out-of-home placement and to reunify the family. Federal law further requires that placement be as close as possible to the parent's home in the most family-like setting possible. To guide the permanency planning process by which a state is to find permanent placements for foster care children, the act also requires that the state develop a case plan for each child within 60 days of the time the state agency begins providing services to the child. This plan must describe services to be provided to aid the family and must outline actions that will be expected of various agencies and family members to make reunification possible. States are then required to hold reviews every 6 months before a court or administrative panel to evaluate progress made toward reaching a permanency goal. If progress toward reunification cannot be made, state agencies often face the arduous task of either preparing a case for the termination of parental rights or finding a long-term foster care placement. The federal requirement of conducting a permanency hearing within 18 months serves to ensure that child welfare agencies focus on determining a permanent placement, including return to the family or adoption, in a timely manner rather than continuing a child in foster care. For abused and neglected children, living with their parents may be unsafe. Yet foster care is not an optimal situation, especially not as a permanent solution. State child welfare agencies and the courts are confronted with the dilemma of whether to reunite families as quickly as possible or keep the children in foster care with the expectation of future reunification. They must also determine at what point to abandon hope of reunification, terminate the parents' rights, and initiate a search for an adoptive home or other permanent placement for the child. If children are reunited with their families too quickly, they may return to foster care because the home environment may still be unstable. On the other hand, when children remain in foster care too long, it is difficult to reestablish emotional ties with their families. Furthermore, the chances for adoption can be reduced because the child is older than the most desirable adoption age or has developed behavioral problems. Determining an appropriate placement option for children quickly is of twofold importance. First, finding permanent placements for children removed from their families is critical to ensure their overall well-being. Children without permanent homes and stable caregivers may be more likely to develop emotional, intellectual, and behavioral problems. A second reason for placing children more quickly is the financial costs of children remaining in foster care. The federal share of the average monthly maintenance payment for title IV-E was $574 in 1996. While some options for permanent placements, such as providing long-term support to a relative to care for a child, may not realize cost savings, other options, such as adoption, will reduce foster care costs. Title IV-E payments, between fiscal years 1984 and 1996, increased from $435.7 million to an estimated $3.1 billion. The prolonged stays of children in foster care have prompted states to enact laws or policies to shorten to less than the federally allowed 18 months the time between entry into foster care and the first permanency hearing at which permanent placement is considered. As shown in figure 1, 23 states have enacted such laws, with a majority of these requiring the hearing to be held within 12 months. In two states, the shorter time frame applies only to younger children. Colorado requires the permanency hearing be held within 6 months for children under 6, and Washington requires the hearing to be held within 12 months for children 10 years old or younger. An additional three states, while not enacting such statutes, have policies requiring permanency hearings earlier than 18 months. For a description of the 26 state statutes, policies, and time requirements, see appendix II. The remaining 24 states and the District of Columbia have statutes consistent with the federal requirement of 18 months. The state laws, like federal law, do not require that a final decision be made at the first hearing. Ohio and Minnesota, however, do require that a permanency decision be determined after a limited extension period. Ohio, for example, requires a permanency hearing to be held within 12 months, with a maximum of two 6-month extensions. At the end of that time, a permanent placement decision must be made. According to officials in Ohio's Office of Child Care and Family Services, this requirement was included in an effort to expedite the permanency planning process and reduce the time children spend in foster care. However, state officials also believed that this requirement may have had the unintended result of increasing the number of children placed in long-term foster care because other placement options could not be developed. State data, in part, confirmed this observation. While long-term foster care placements for children supported with state-only funds dropped from 1,301 in 1990 to 779 in 1995, long-term placements for children supported with federal funds rose from 1,657 to 2,057 for the same period. The reasons for the difference between these two groups are unknown. Although the states we reviewed did not systematically evaluate the impact of their initiatives, they implemented a variety of operational and procedural changes to expedite and improve the permanency process. Other efforts made changes to the operation of the courts and the use of resources available to them for making permanency decisions. These states reported that these actions have improved the lives of some children by (1) reuniting them with their families more quickly, (2) expediting the termination of parental rights when reunification efforts were determined to be unfeasible--thus making it possible for child welfare agencies to begin looking for an adoptive home sooner--or (3) reducing the number of different foster care placements in which they lived. States are also addressing changes in the permanency planning process through larger reform efforts of their child welfare systems. However, because these efforts were only recently implemented or were still in the initial implementation stage, no evaluation information on their effect was available. Two states we reviewed implemented low-cost and creative methods for financing and providing services that address specific barriers to reunification. For example, Arizona's Housing Assistance Program focused on families where children had been removed and placed in state custody and the major barrier to reunification was inadequate housing for the family. In 1989, the state enacted a bill authorizing the use of state foster care funds to provide special housing assistance. According to state reports summarizing the program and statistics provided by Arizona Department of Economic Security officials, between 1991 and 1995, 939 children were reunited with their families as a result of this program, representing almost 12 percent of those children reunified during this period. This program saved the state over $1 million in foster care-related costs between 1991 and 1995. Also, Tennessee's Wraparound Funding Program allowed caseworkers to use state funds to provide services that removed economic barriers to reunification. These services were not typically associated with traditional reunification services and prior to this program were not allowable foster care expenditures. Examples include home or car repairs, utilities or rent payments, and respite care. According to a report summarizing the program, during one 6-month period in 1995, the program provided services to 1,279 children. A state Department of Children's Services official estimated that had these children remained in care as long as the average child in foster care, the state would have incurred an additional $700,000 in state and federal foster care maintenance payments. Regarding other changes, Arizona and Kentucky placed special emphasis on expediting the process by which parental rights could be terminated. Arizona's Severance Project focused on cases where termination of parental rights was likely or reunification services were not warranted and for which a backlog of cases had developed. In April 1986, the state enacted a bill providing funds for hiring severance specialists and legal staff to work on termination cases. The following year, in 1987, the state implemented the Arizona State Adoption Project. This project focused on identifying additional adoptive homes, including recruiting adoptive parents for specific children and contracting for adoptive home recruitment activities. State officials reported that the Adoption Project resulted in a 54-percent increase in the number of new homes added to the state registry in late 1987 and 1988. In addition, they noted that the Severance Project contributed to a more than 32-percent reduction in the average length of stay between entry into care and the filing of the termination petition for fiscal years 1991 through 1995. To reduce a backlog of pending cases, Kentucky's Termination of Parental Rights Project focused on reducing the time required to terminate parental rights once this permanency goal was established. This effort included retraining caseworkers, lawyers, and judges on the consequences of long stays in foster care and streamlining and improving the steps caseworkers must follow when collecting and documenting the information required for the termination procedures. A report on this effort indicated that between 1989 and 1991, the state decreased the average time to terminate parental rights by slightly over 1 year. In addition, between 1988 and 1990, the average length of stay for children in foster care decreased from 2.8 years to 2 years, and the number of different foster care placements for each child decreased from four to three. However, as the number of children available for adoption rose, the state was forced to focus its efforts on identifying potential adoptive homes and shifted its emphasis to strategies to better inform the public about the availability of adoptive children. Tennessee's Concurrent Planning Program allowed caseworkers to work toward achieving family reunification while at the same time developing an alternate permanency plan if reunification efforts did not succeed. The goal was to obtain permanency for the child by either (1) strengthening the family and reducing the risks in the home so that the child can be reunified with his or her family; or (2) verifying that the family cannot protect the child, meet the child's needs, or reduce the risks to the child in a timely manner and that termination of parental rights should be pursued. By working on the two plans simultaneously, caseworkers reduced the time required to prepare the necessary paperwork to terminate parental rights if reunification efforts failed. 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. Since this program was initiated in 1991, state officials report that 70 percent of the children in the program obtained permanency, primarily through reunification, within 12 months of placement in foster care. Without this program the children would have stayed in foster care longer than 12 months. The officials attributed obtaining quicker permanency in part to parents making more concerted efforts to make the changes needed to have their children return home. All decisions regarding both the temporary and final placement of foster care children come through states' court systems. As a result, some states and counties focused attention on the courts' involvement in achieving permanency more quickly. Georgia's Citizen Review Panel Program created local advisory panels of private citizens within the child's community to assist judges in their review and decisions regarding foster care placements for each child in care. The objective of these panels is (1) to gather additional information regarding the placement options for each foster child--often information that cannot be collected by state agencies because of large caseloads and limited staff resources--and (2) to review compliance with court-ordered case plans to ensure that the state agencies are working toward permanent placements. The program operates in 56 counties and, in 1996, covered over 42 percent of Georgia's foster care population. The state reported that between 1994 and 1996, the review panels recommended that 5,855 children be placed for adoption, 10,845 children be reunified with their families, and 3,048 children remain in foster care. In Hamilton County, Ohio, juvenile court officials focused attention on the court's involvement in achieving permanency more quickly by developing new procedures to expedite case processing. In 1985, they revised court procedures by (1) designating lawyers specially trained in foster care issues as magistrates to hear cases, (2) assigning one magistrate to each case for the life of that case to achieve continuity and consistent rulings, and (3) agreeing at the end of every hearing--while all participants are present--to the date for the next hearing. According to court officials, the county saved thousands of dollars because it could operate three magistrates' courtrooms for the cost of one judge's courtroom. Also, a report on court activities indicated that because of these changes, between 1986 and 1990, the number of children placed in four or more different foster care placements decreased by 11 percent and the percentage of children leaving temporary and long-term foster care in 2 years or less increased from 37 percent to 75 percent. Even where improvements have been made, there can still be problems that are beyond the control of officials. According to reports prepared by court officials, between 1986 and 1989 the number of children in care in Hamilton County decreased 15 percent. However, in 1992, the number returned to the 1986 level of about 1,100 children and continued to increase through the first half of 1996 to about 1,500. According to court officials, a dramatic rise in crack cocaine use in the county contributed to this sharp increase. Child welfare agencies were unable to readily arrange for the increased services that these families needed. Some states are also addressing the need for quicker permanency as part of larger initiatives designed to make major changes in their foster care programs. One state plans to privatize foster care services. Another state has redesigned its foster care operating policies and procedures to improve outcomes for children. Because these efforts are recent, no information on results was available. In 1996, Kansas began privatizing most child welfare services, including foster care. Two events contributed to this decision. First, because of rising state costs, the Governor directed all state agencies to consider privatizing services to reduce the size of the state workforce. Second, the state had settled a suit brought by the Kansas chapter of the American Civil Liberties Union citing unacceptable increases in the number of children in foster care and lengthy stays in care. The goal of privatization is to allow children in out-of-home placements to experience a minimal number of placements or to achieve permanency in their lives in the shortest time possible. Kansas contracted with private social services agencies for family preservation services, foster and residential care, and adoption services. State officials continue to be responsible for determining if the original charges of dependency, neglect, or abuse are substantiated and to monitor contractor performance. The contracted service providers are responsible for providing all services to the families. Under the contracts, providers will be paid a per-child rate, with a payment structure that pays contractors for results. For example, in the foster care contract, 25 percent of costs will be paid at the time of referral, 25 percent upon receipt of the first 60-day progress report, and 25 percent upon receipt of the 180-day formal case plan. The final 25 percent will not be paid until reunification or a permanent placement is achieved. If a child reenters care before 12 months have passed, the contractor is responsible for all the foster care maintenance costs for out-of-home placement. Arizona also is pursuing major changes to its child welfare system. Arizona's Project Redesign was prompted by a number of fatalities of young children in foster homes in a very short time. Begun in 1994, this project focused on writing and implementing new child welfare policies and procedures with a goal of increasing caseworker contact with foster families and reducing caseworkers' caseloads and the length of time children spend in foster care. The major activities of Project Redesign included rewriting policies and licensing rules, preparing a new supervisors' handbook, creating a mentoring program for new supervisors, developing and implementing a method to more equitably distribute workload among staff, and creating the Uniform Case Practice Record. This record methodically guides caseworkers through all the steps necessary to make a permanent placement decision. This helps ensure that all the needed information is available to the courts, thus preventing delays in the process. Our efforts to assess the overall impact of these initiatives were hampered by the absence of evaluation data. In general, we found that the states did not conduct evaluations of their programs, and outcome information was often limited to state reports and the observations of state officials. While many of these efforts reported improvements, for example, in speeding the termination of parental rights once this permanency goal was established, the lack of comparison groups or quality pre-initiative data made it difficult to reach definitive conclusions about the effectiveness of these initiatives. Several national efforts are under way that may improve the information available on foster children and facilitate states' design and implementation of systematic evaluations in the future. Nationwide, most states are currently designing or implementing Statewide Automated Child Welfare Information Systems as required under the title IV-E foster care program. These systems are to include case-specific data on all children in foster care and all adopted children placed or provided adoption assistance by the state or its contractors. From 1994 to 1996, federal funds have provided up to 75 percent of the costs of planning, design, development, and installation of these state systems. The Personal Responsibility and Work Opportunity Reconciliation Act (P.L. 104-193), enacted in August 1996, continues this enhanced federal match through 1997, at which time the federal match rate will be reduced to 50 percent. In addition, P.L. 104-193 appropriated funds for a national longitudinal study based on random samples of children at risk of abuse or neglect or determined by a state to have been abused or neglected. This study is to include state-level data for selected states. States increased their chances for successfully developing and implementing new initiatives when certain key factors were a part of the process. When contemplating changes, state officials had to take into consideration the intricacies of the foster care process; the inherent difficulty that caseworkers and court officials face when deciding if a child should be returned home; and the need in some cases to change the culture of caseworkers and judges to recognize that, in certain cases, termination of parental rights should be pursued. Some experts believe that current child welfare practices often discourage caseworkers from finding permanent placements other than with the biological parents. Officials in the states we reviewed recognized that addressing these challenges required concerted time and effort, coordination, and resources. These officials identified several critical, often interrelated, factors required to meet these challenges. These included (1) long-term involvement of officials in leadership positions; (2) involvement of key stakeholders in developing consensus and obtaining buy-in concerning the nature of the problem and the solution; and (3) the availability of resources to plan, implement, and sustain the project. The following two examples illustrate these concepts. In the mid-1980s, Ohio officials began a multiyear effort that culminated with the state enacting a new child welfare law that became effective in January 1989. Before enacting this law, the legislature created a task force whose members were involved in planning throughout the drafting and passage of legislation. The task force was cochaired by a state senator and a representative. Other members included state and county child welfare agency officials, juvenile court judges, attorneys, and county commissioners. In addition, public hearings were held throughout the state that provided a forum for input from all parties interested in child welfare, including private citizens, service providers, caseworkers, judges, attorneys, and foster care parents. By involving all interested parties and by providing numerous opportunities for input, state officials were able to develop consensus on the problems and solutions and obtain buy-in to the proposed solutions from program staff. For example, there were numerous discussions about whether a specific time frame for remaining in temporary foster care should be stipulated. They ultimately compromised on 12 months plus two 6-month extensions. In 1988, to shorten the termination of parental rights process, the Kentucky Department of Social Services collaborated with seven other agencies to obtain a federal grant to develop new approaches to address this issue. As part of this effort and to ensure buy-in, the Secretary of Human Resources appointed a multidisciplinary advisory committee chaired by a chief Circuit Court judge. Other members of the committee included representatives from social service agencies, court officials, attorneys, the legislature, and child welfare advocacy groups. The committee met quarterly throughout the 2-year project. Committee members recognized they needed to change the way caseworkers and members of the legal system viewed termination of parental rights. Many caseworkers had viewed terminating parental rights as a failure on their part because they were not able to reunify the family. As a result, they were reluctant to pursue termination and instead kept the children in foster care. Also, often judges and lawyers were not sufficiently informed of the negative consequences for children who do not have permanent homes. Thus, as part of this project, newsletters and training were provided about the effects on the child of delaying termination of parental rights. After 2 years, many meetings, and retraining caseworkers, state officials reported that they had reduced the time to complete the termination of parental rights process by 1 year. Among the changes they believed contributed to this reduction were (1) simplifying the process caseworkers follow when providing termination of parental rights information to the attorneys that handle these cases and (2) using an absent parent search handbook, which was developed to assist caseworkers in conducting more timely and complete searches. Many of the children in foster care are among the nation's most vulnerable citizens. The consequences of long spells in foster care and multiple placements, coupled with the effects of poverty, highlight the need for quick resolution of placement questions for these children. With the expected rise in foster care caseloads through the start of the next century further straining state and federal child welfare budgets, increasing pressure will be placed on states to develop strategies to move children into permanent placements more quickly. Many of these initiatives will need to address the difficult issues of deciding under what circumstances to pursue reunification and what time is appropriate before seeking the termination of parental rights. We found promising initiatives for changing parts of the permanency process so that children can be moved out of foster care into permanent placements more quickly. Developing and successfully implementing these innovative approaches takes time and often challenges long-standing beliefs. To succeed, these initiatives must look to local leadership involvement, consensus building, and sustained resources. As new initiatives become a part of the complex child welfare system, however, they can also create unintended consequences. For example, if states are identifying appropriate cases for the quicker termination of parental rights and processing them more expeditiously--thereby freeing more children for possible adoption--additional problems can occur if efforts to develop more adoptive homes have not been given equal emphasis. Also, if states require more stringent time frames for holding permanency hearings, they must adjust to this shorter time to avoid placements based on expedience rather than careful deliberation about what is best for the child. We also found that a critical feature of these initiatives was often absent: Many of them lacked evaluations designed to assess the impact of the effort. The availability of evaluation information from these initiatives would not only point to the relative success or failure of an effort but also such information could assist in identifying unintended outcomes. The absence of program and evaluation data will continue to hinder the ability of program officials and policymakers to fully understand the overall impact of these initiatives. Efforts are under way, however, to improve the availability of information on foster children. In its written comments on a draft of this report, HHS generally concurred with the conclusions in this report. It agreed that efforts to improve the timeliness of permanent placements are important and indicated that they are a priority of the department. HHS also commented that it would be useful to include a definition of permanency planning in the report, and we revised the report in response to this comment. Although federal requirements establish some guidelines, variation in state policies and priorities make the development of a single definition difficult. Finally, the department recognized the benefits of presenting different approaches to speeding the permanency planning processes while stressing the need for systemic changes. Because of the complex nature of the child welfare system, we agree that states and localities must consider the entire system when attempting to make reforms. We have incorporated the department's technical comments into our report where appropriate. See appendix III for HHS' comments. We are sending copies of this report to the Secretary of HHS, state child welfare agencies, and other interested parties. Copies also will be made available to others on request. If you or your staff have any questions about this report, please call me at (202) 512-7215. Other major contributors to this report are listed in appendix IV. To identify states that have enacted laws or implemented policies establishing requirements regarding the timing of the first permanency hearing that are more stringent than those under federal law, we reviewed pertinent state legislation and policies of 50 states and the District of Columbia. We also discussed those laws and state policies with state legal and child welfare officials. Federal law allows the hearing to be held as late as 18 months after the child's entry into foster care, but state laws vary widely in the terms they use for various hearings. In cases where state law did not specifically identify a hearing as a permanency hearing, we asked for further clarification from state officials. If we determined that the state law was consistent with the federal requirement, we treated the required hearing as a permanency hearing. To determine what changes states and localities have made to achieve more timely permanent placements and factors that contributed to their success, we first reviewed literature on foster care and permanency planning. In addition, we discussed permanency planning and permanent placement decisions with experts in the field, including child welfare officials in all 50 states and the District of Columbia. In the course of our discussions with state officials and experts, we identified specific state and local initiatives that were attempting to permanently place foster care children in a more timely manner. We selected six states that had implemented initiatives that addressed making more timely permanent placements for children in foster care. The states were Arizona, Georgia, Kansas, Kentucky, Ohio, and Tennessee. Each state selected had at least one initiative that was implemented between 1989 and 1992, ensuring that we would be able to obtain historical information about the planning and implementation of those initiatives and that the initiatives had been in place long enough to have some impact. We included states that had initiatives that addressed different aspects of the permanency process. We also included states with statutory requirements for holding the first permanency hearing that were stricter than the federal requirement as well as states with requirements that were consistent with the federal requirement. We conducted site visits in four of the six states--Georgia, Kansas, Kentucky, and Tennessee--and obtained information from Arizona and Ohio through telephone interviews. We interviewed state and county foster care and adoption officials and juvenile court officials and collected information on the initiatives, including descriptions of program goals and objectives and factors that facilitated change, reports on program results, and other statistical information on the foster care population. We did not verify program data from these states. We did our work between January 1996 and January 1997 in accordance with generally accepted government auditing standards. Ariz. Rev. Stat. Ann., Section 8-515.C.(West Supp. 1996) Colo. Rev. Stat., Section 19-3-702(1)(Supp. 1996) Conn. Gen. Stat. Ann., Section 46b-129(d),(e) (West 1995) Ga. Code Ann., Section 15-11-419 (j),(k)(1996) 705 Ill. Comp. Stat. Ann., 405/2-22(5)(West Supp. 1996) Ind. Code Ann., Section 31-6-4-19(c)(Michie Supp. 1996) Iowa Code Ann., Section 232.104 (West 1994) Kan. Stat. Ann., Section 38-1565(b),(c)(1995) La. Ch. Code Ann., Arts. 702,710(West 1995) Mich. Stat. Ann., Section 27.3178(598.19a)(Law Co-op Supp. 1996) Minn. Stat. Ann., Section 260.191 Subd. 3b(West Supp. 1997) Miss. Code Ann., Section 43-21-613 (3)(1993) New Hampshire Court Rules Annotated, Abuse and Neglect, Guideline 39 (Permanency Planning Review) N.Y. Jud. Law, Section 1055(b)(McKinney Supp. 1997) Ohio Rev. Code Ann., Sections 2151.353(F), 2151.415 (A) (Anderson 1994) 42 Pa. Cons. Stat. Ann., Section 6351(e-g)(West Supp. 1996) R.I. Gen. Laws, Section 40-11-12.1(1990) (continued) S.C. Code Ann., Section 20-7-766(Law. Co-op. Supp. 1996) Utah Code Ann., Sections 78-3a-312,(1996) Va. Code Ann., Section 16.1-282(Michie 1996) Wash. Rev. Code Ann., Section 13.34.145(3)(4) (West Supp. 1997) W. Va. Code, Sections 49-6-5, 49-6-8(1996) Wis. Stat. Ann., Sections 48.355(4); 48.38; 48.365(5)(West 1987) Wyo. Stat. Ann., Section 14-6-229 (k)(Michie Supp. 1996) Michigan's time frame to hold the permanency hearing was calculated by adding the days needed to conduct the preliminary hearing, trial, dispositional hearing, and the permanency hearing. Virginia's time frame to hold the permanency hearing was calculated by adding the number of months required to file the petition to hold the permanency hearing plus the number of days within which the court is required to schedule the hearing. In addition to those named above, Diana Eisenstat served as an adviser; David D. Bellis, Octavia V. Parks, and Rathi Bose coauthored the report and contributed significantly to all data-gathering and analysis efforts. Also, Julian P. Klazkin provided legal analysis of state statutes. Child Welfare: States' Progress in Implementing Family Preservation and Support Activities (GAO/HEHS-97-34, Feb. 18, 1997). Child Welfare: Complex Needs Strain Capacity to Provide Services (GAO/HEHS-95-208, Sept. 26, 1995). Child Welfare: Opportunities to Further Enhance Family Preservation and Support (GAO/HEHS-95-112, June 15, 1995). Foster Care: Health Needs of Many Young Children 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). Residential Care: Some High-Risk Youth Benefit, But More Study Needed (GAO/HEHS-94-56, Jan. 28, 1994). Foster Care: Services to Prevent Out-of-Home Placements Are Limited by Funding Barriers (GAO/HRD-93-76, June 29, 1993). Foster Care: State Agencies Other Than Child Welfare Can Access Title IV-E Funds (GAO/HRD-93-6, Feb. 9, 1993). Foster Care: Children's Experiences Linked to Various Factors; Better Data Need (GAO/HRD-91-64, Sept. 11, 1991). Child Welfare: Monitoring Out-of-State Placements (GAO/HRD-91-107BR, Sept. 3, 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. A recorded menu will provide information on how to obtain these lists.	Pursuant to a congressional request, GAO reviewed states efforts to improve the permanency planning process and reduce the time a child spends in foster care, focusing on what: (1) statutory and policy changes states have made to limit the time allowed to determine permanent placements for foster children; (2) changes states or localities have made in their operations in an attempt to achieve more timely permanent placements and what the impact of those changes has been; and (3) factors officials believe helped them meet the challenges of achieving more timely permanent placements. GAO noted that: (1) signaling the importance of a permanent placement to the well-being of children, 23 states have enacted laws establishing requirements regarding the timing of the permanency hearing that are more stringent than those under federal law; (2) federal law requires a hearing within 18 months after the child's entry into foster care; (3) an additional three states, while not enacting such statutes, have imposed similar requirements as a matter of policy; (4) statutory or policy changes alone, however, are not sufficient to resolve the final placement of foster children more quickly; (5) the states GAO reviewed have made changes in their operations to facilitate reunifying children with their families, expedite terminating parental rights when reunification efforts have failed, or modify the role and operations of the court both to streamline the process and to make well-informed permanent placement decisions; (6) while these initiatives focus on certain stages of the permanency planning process, such as when a child first enters foster care, two states are implementing major changes to their overall foster care systems; (7) although initiatives are in place, most of these states have not systematically evaluated the impact of them, and data concerning these efforts were limited; (8) however, most states did report that many of these initiatives contributed to reducing the time spent in foster care or decreasing the total number of placement changes while a child is in foster care; (9) state officials identified a number of factors that helped them meet the challenges involved in making changes; (10) in some cases, child welfare officials and staff had to undergo significant culture change, modifying long-held views about the merits of pursuing termination of parental rights versus family reunification; (11) they found that changing the way they approached making decisions about the well-being of children and their families was a lengthy process; (12) to implement these initiatives successfully, program officials believed that it was necessary to have the long-term and active involvement of key officials at all levels, including the governor, legislators, and agency officials as well as caseworkers, service providers, attorneys, and judges; (13) this participation was essential to define the problem and reach consensus; and (14) doing so required considerable coordination efforts and an extended commitment of resources.	7,455	597
As we reported in May 2011, DHS implemented the Electronic System for Travel Authorization (ESTA) to meet a statutory requirement intended to enhance Visa Waiver Program security and took steps to minimize the burden on travelers to the United States added by the new requirement. However, DHS had not fully evaluated security risks related to the small percentage of Visa Waiver Program travelers without verified ESTA approval. DHS developed ESTA to collect passenger data and complete security checks on the data before passengers board a U.S. bound carrier. DHS requires applicants for Visa Waiver Program travel to submit biographical information and answers to eligibility questions through ESTA prior to travel. Travelers whose ESTA applications are denied must apply for a U.S. visa for travel to the United States. In developing and implementing ESTA, DHS took several steps to minimize the burden associated with ESTA use. For example, ESTA reduced the requirement that passengers provide biographical information to DHS officials from every trip to once every 2 years. In addition, because of ESTA, DHS informed passengers who do not qualify for Visa Waiver Program travel that they need to apply for a visa before they travel to the United States. Moreover, most travel industry officials we interviewed in six Visa Waiver Program countries praised DHS's widespread ESTA outreach efforts, reasonable implementation time frames, and responsiveness to feedback, but expressed dissatisfaction over ESTA fees paid by ESTA applicants. In 2010, airlines complied with the requirement to verify ESTA approval for almost 98 percent of the Visa Waiver Program passengers prior to boarding, but the remaining 2 percent-- about 364,000 travelers-- traveled under the Visa Waiver Program without verified ESTA approval. In addition, about 650 of these passengers traveled to the United States with a denied ESTA. As we reported in May 2011, DHS had not yet completed a review of these cases to know to what extent they pose a risk to the program. At the time of our report, DHS officials told us that there was no official agency plan for monitoring and oversight of ESTA. DHS tracked some data on passengers that traveled under the Visa Waiver Program without verified ESTA approval but did not track other data that would help officials know the extent to which noncompliance poses a risk to the program. Without a completed analysis of noncompliance with ESTA requirements, DHS was unable to determine the level of risk that noncompliance poses to Visa Waiver Program security and to identify improvements needed to minimize noncompliance. In addition, without analysis of data on travelers who were admitted to the United States without a visa after being denied by ESTA, DHS could not determine the extent to which ESTA was accurately identifying individuals who should be denied travel under the program. In May 2011, we recommended that DHS establish time frames for the regular review and documentation of cases of Visa Waiver Program passengers traveling to a U.S. port of entry without verified ESTA approval. DHS concurred with our recommendation and has established procedures to review quarterly a sample of noncompliant passengers to evaluate potential security risks associated with the ESTA program. Further, in May 2011 we reported that to meet certain statutory requirements, DHS requires that Visa Waiver Program countries enter into three information-sharing agreements with the United States; however, only half of the countries had fully complied with this requirement and many of the signed agreements have not been implemented. The 9/11 Act specifies that each Visa Waiver Program country must enter into agreements with the United States to share information regarding whether citizens and nationals of that country traveling to the United States represent a threat to the security or welfare of the United States and to report lost or stolen passports. DHS, in consultation with other agencies, has determined that Visa Waiver Program countries can satisfy the requirement by entering into the following three bilateral agreements: (1) Homeland Security Presidential Directive (HSPD) 6, (2) Preventing and Combating Serious Crime (PCSC), and (3) Lost and Stolen Passports. HSPD-6 agreements establish a procedure between the United States and partner countries to share watchlist information about known or suspected terrorists. As of January 2011, 19 of the 36 Visa Waiver Program countries had signed HSPD-6 agreements, and 13 had begun sharing information according to the signed agreements. Noting that the federal government continues to negotiate HSPD-6 agreements with Visa Waiver Program countries, officials cited concerns regarding privacy and data protection expressed by many Visa Waiver Program countries as reasons for the delayed progress. According to these officials, in some cases, domestic laws of Visa Waiver Program countries limit their ability to commit to sharing some information, thereby complicating and slowing the negotiation process. In November 2011, a senior DHS official reported that 21 of the 36 Visa Waiver Program countries have signed HSPD-6 agreements. The PCSC agreements establish the framework for law enforcement cooperation by providing each party automated access to the other's criminal databases that contain biographical, biometric, and criminal history data. As of January 2011, 18 of the 36 Visa Waiver Program countries had met the PCSC information-sharing agreement requirement, but the networking modifications and system upgrades required to enable this information sharing to take place have not been completed for any Visa Waiver Program countries. According to officials, DHS is frequently not in a position to influence the speed of PCSC implementation for a number of reasons. For example, according to DHS officials, some Visa Waiver Program countries require parliamentary ratification before implementation can begin. Also U.S. and partner country officials must develop a common information technology architecture to allow queries between databases. A senior DHS official reported in November 2011 that the number of Visa Waiver Program countries meeting the PCSC requirement had risen to 21. The 9/11 Act requires Visa Waiver Program countries to enter into an agreement with the United States to report, or make available to the United States through Interpol or other means as designated by the Secretary of Homeland Security, information about the theft or loss of passports. As of November 2011, all Visa Waiver Program countries were sharing lost and stolen passport information with the United States, and 35 of the 36 Visa Waiver Program countries had entered into Lost and Stolen Passport agreements according to senior DHS officials. DHS, with the support of interagency partners, established a compliance schedule requiring the last of the Visa Waiver Program countries to finalize these agreements by June 2012. Although termination from the Visa Waiver Program is one potential consequence for countries not complying with the information-sharing agreement requirement, U.S. officials have described it as undesirable. DHS, in coordination with the Department of State and the Department of Justice, developed measures short of termination that could be applied to countries not meeting their compliance date. Specifically, DHS helped write a classified strategy document that outlines a contingency plan listing possible measures short of termination from the Visa Waiver Program that may be taken if a country does not meet its specified compliance date for entering into information-sharing agreements. The strategy document provides steps that would need to be taken prior to selecting and implementing one of these measures. According to officials, DHS plans to decide which measures to apply on a case-by-case basis. In addition, as of May 2011, DHS had not completed half of the most recent biennial reports on Visa Waiver Program countries' security risks in a timely manner. In 2002, Congress mandated that, at least once every 2 years, DHS evaluate the effect of each country's continued participation in the program on the security, law enforcement, and immigration interests of the United States. According to officials, DHS assesses, among other things, counterterrorism capabilities and immigration programs. However, DHS had not completed the latest biennial reports for 18 of the 36 Visa Waiver Program countries in a timely manner, and over half of these reports are more than 1 year overdue. Further, in the case of 2 countries, DHS was unable to demonstrate that it had completed reports in the last 4 years. DHS cited a number of reasons for the reporting delays. For example, DHS officials said that they intentionally delayed report completion because they frequently did not receive mandated intelligence assessments in a timely manner and needed to review these before completing Visa Waiver Program country biennial reports. We noted that DHS had not consistently submitted these reports in a timely matter since the legal requirement was made biennial in 2002, and recommended that DHS take steps to address delays in the biennial country review process so that the mandated country reports can be completed on time. DHS concurred with our recommendation and reported that it would consider process changes to address our concerns with the timeliness of continuing Visa Waiver Program reports. As we reported in April 2011, ICE CTCEU investigates and arrests a small portion of the estimated in-country overstay population due to, among other things, ICE's competing priorities; however, these efforts could be enhanced by improved planning and performance management. CTCEU, the primary federal entity responsible for taking enforcement action to address in-country overstays, identifies leads for overstay cases; takes steps to verify the accuracy of the leads it identifies by, for example, checking leads against multiple databases; and prioritizes leads to focus on those the unit identifies as being most likely to pose a threat to national security or public safety. CTCEU then requires field offices to initiate investigations on all priority, high-risk leads it identifies. According to CTCEU data, as of October 2010, ICE field offices had closed about 34,700 overstay investigations that CTCEU headquarters assigned to them from fiscal year 2004 through 2010. These cases resulted in approximately 8,100 arrests (about 23 percent of the 34,700 investigations), relative to a total estimated overstay population of 4 million to 5.5 million. About 26,700 of those investigations (or 77 percent) resulted in one of three outcomes. In 9,900 investigations, evidence was uncovered indicating that the suspected overstay had departed the United States. In 8,600 investigations, evidence was uncovered indicating that the subject of the investigation was in-status (e.g., the subject filed a timely application with the United States Citizenship and Immigration Services (USCIS) to change his or her status and/or extend his or her authorized period of admission in the United States). Finally, in 8,200 investigations, CTCEU investigators exhausted all investigative leads and could not locate the suspected overstay. Of the approximately 34,700 overstay investigations assigned by CTCEU headquarters that ICE field offices closed from fiscal year 2004 through 2010, ICE officials attributed the significant portion of overstay cases that resulted in a departure finding, in-status finding, or with all leads being exhausted generally to difficulties associated with locating suspected overstays and the timeliness and completeness of data in DHS's systems used to identify overstays. Further, ICE reported allocating a small percentage of its resources in terms of investigative work hours to overstay investigations since fiscal year 2006, but the agency expressed an intention to augment the resources it dedicates to overstay enforcement efforts moving forward. Specifically, from fiscal years 2006 through 2010, ICE reported devoting from 3.1 to 3.4 percent of its total field office investigative hours to CTCEU overstay investigations. ICE attributed the small percentage of investigative resources it reported allocating to overstay enforcement efforts primarily to competing enforcement priorities. According to the ICE Assistant Secretary, ICE has resources to remove 400,000 aliens per year, or less than 4 percent of the estimated removable alien population in the United States. In June 2010, the Assistant Secretary stated that ICE must prioritize the use of its resources to ensure that its efforts to remove aliens reflect the agency's highest priorities, namely nonimmigrants, including suspected overstays, who are identified as high risk in terms of being most likely to pose a risk to national security or public safety. As a result, ICE dedicated its limited resources to addressing overstays it identified as most likely to pose a potential threat to national security or public safety and did not generally allocate resources to address suspected overstays that it assessed as non- criminal and low risk. ICE indicated it may allocate more resources to overstay enforcement efforts moving forward, and that it planned to focus primarily on suspected overstays who ICE has identified as high risk or who recently overstayed their authorized periods of admission. ICE was considering assigning some responsibility for noncriminal overstay enforcement to its Enforcement and Removal Operations (ERO) directorate, which has responsibility for apprehending and removing aliens who do not have lawful immigration status from the United States. However, ERO did not plan to assume this responsibility until ICE assessed the funding and resources doing so would require. ICE had not established a time frame for completing this assessment. We reported in April 2011 that by developing such a time frame and utilizing the assessment findings, as appropriate, ICE could strengthen its planning efforts and be better positioned to hold staff accountable for completing the assessment. We recommended that ICE establish a target time frame for assessing the funding and resources ERO would require in order to assume responsibility for civil overstay enforcement and use the results of that assessment. DHS officials agreed with our recommendation and stated that ICE planned to identify resources needed to transition this responsibility to ERO as part of its fiscal year 2013 resource planning process. DHS has not yet implemented a comprehensive biometric system to match available information provided by foreign nationals upon their arrival and departure from the United States. In 2002, DHS initiated the United States Visitor and Immigrant Status Indicator Technology Program (US-VISIT) to develop a comprehensive entry and exit system to collect biometric data from aliens traveling through U.S. ports of entry. In 2004, US-VISIT initiated the first step of this program by collecting biometric data on aliens entering the United States. In August 2007, we reported that while US-VISIT biometric entry capabilities were operating at air, sea, and land ports of entry, exit capabilities were not, and that DHS did not have a comprehensive plan or a complete schedule for biometric exit implementation. Moreover, in November 2009, we reported that DHS had not adopted an integrated approach to scheduling, executing, and tracking the work that needed to be accomplished to deliver a comprehensive exit solution as part of the US-VISIT program. We concluded that, without a master schedule that was integrated and derived in accordance with relevant guidance, DHS could not reliably commit to when and how it would deliver a comprehensive exit solution or adequately monitor and manage its progress toward this end. We recommended that DHS ensure that an integrated master schedule be developed and maintained. DHS concurred and reported, as of July 2011, that the documentation of schedule practices and procedures was ongoing, and that an updated schedule standard, management plan, and management process that are compliant with schedule guidelines were under review. In the absence of a comprehensive biometric entry and exit system for identifying and tracking overstays, US-VISIT and CTCEU primarily analyze biographic entry and exit data collected at land, air, and sea ports of entry to identify overstays. In April 2011, we reported that DHS's efforts to identify and report on visa overstays were hindered by unreliable data. Specifically, CBP does not inspect travelers exiting the United States through land ports of entry, including collecting their biometric information, and CBP did not provide a standard mechanism for nonimmigrants departing the United States through land ports of entry to remit their arrival and departure forms. Nonimmigrants departing the United States through land ports of entry turn in their forms on their own initiative. According to CBP officials, at some ports of entry, CBP provides a box for nonimmigrants to drop off their forms, while at other ports of entry departing nonimmigrants may park their cars, enter the port of entry facility, and provide their forms to a CBP officer. These forms contain information, such as arrival and departure dates, used by DHS to identify overstays. If the benefits outweigh the costs, a standard mechanism to provide nonimmigrants with a way to turn in their arrival and departure forms could help DHS obtain more complete and reliable departure data for identifying overstays. We recommended that the Commissioner of CBP analyze the costs and benefits of developing a standard mechanism for collecting these forms at land ports of entry, and do so to the extent that benefits outweigh the costs. CBP agreed with our recommendation and in September 2011 stated that it planned to complete a cost-effective independent evaluation of possible solutions and formulate an action plan based on the evaluation for implementation by March 2012. Further, we previously reported on weaknesses in DHS processes for collecting departure data, and how these weaknesses impact the determination of overstay rates. The 9/11 Act required that DHS certify that a system is in place that can verify the departure of not less than 97 percent of foreign nationals who depart through U.S. airports in order for DHS to expand the Visa Waiver Program. In September 2008, we reported that DHS's methodology for comparing arrivals and departures for the purpose of departure verification would not inform overall or country-specific overstay rates because DHS's methodology did not begin with arrival records to determine if those foreign nationals departed or remained in the United States beyond their authorized periods of admission. Rather, DHS's methodology started with departure records and matched them to arrival records. As a result, DHS's methodology counted overstays who left the country, but did not identify overstays who have not departed the United States and appear to have no intention of leaving. We recommended that DHS explore cost-effective actions necessary to further improve the reliability of overstay data. DHS concurred and reported that it is taking steps to improve the accuracy and reliability of the overstay data, by efforts such as continuing to audit carrier performance and working with airlines to improve the accuracy and completeness of data collection. Moreover, by statute, DHS is required to submit an annual report to Congress providing numerical estimates of the number of aliens from each country in each nonimmigrant classification who overstayed an authorized period of admission that expired during the fiscal year prior to the year for which the report is made. DHS officials stated that the department has not provided Congress annual overstay estimates regularly since 1994 because officials do not have sufficient confidence in the quality of the department's overstay data--which is maintained and generated by US- VISIT. As a result, DHS officials stated that the department cannot reliably report overstay rates in accordance with the statute. In addition, in April 2011 we reported that DHS took several steps to provide its component entities and other federal agencies with information to identify and take enforcement action on overstays, including creating biometric and biographic lookouts--or electronic alerts--on the records of overstay subjects that are recorded in databases. However, DHS did not create lookouts for the following two categories of overstays: (1) temporary visitors who were admitted to the United States using nonimmigrant business and pleasure visas and subsequently overstayed by 90 days or less; and (2) suspected in-country overstays who CTCEU deems not to be a priority for investigation in terms of being most likely to pose a threat to national security or public safety. Broadening the scope of electronic lookouts in federal information systems could enhance overstay information sharing. In April 2011, we recommended that the Secretary of Homeland Security direct the Commissioner of Customs and Border Protection, the Under Secretary of the National Protection and Programs Directorate, and the Assistant Secretary of Immigration and Customs Enforcement to assess the costs and benefits of creating biometric and biographic lookouts for these two categories of overstays. Agency officials agreed with our recommendation and have actions under way to address it. For example, agency officials stated that they have met to assess the costs and benefits of creating lookouts for those categories of overstays. This concludes my prepared testimony statement. I would be pleased to respond to any questions that members of the Subcommittee may have. For further information regarding this testimony, please contact Richard M. Stana 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 who made key contributions to this testimony are Rebecca Gambler, Acting Director; Anthony Moran, Assistant Director; Kathryn Bernet, Assistant Director; Jeffrey Baldwin-Bott; Frances Cook; Kevin Copping; and Taylor Matheson. Visa Waiver Program: DHS Has Implemented the Electronic System for Travel Authorization, but Further Steps Needed to Address Potential Program Risks. GAO-11-335. (Washington, D.C., May 5, 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). Visa Waiver Program: Actions Are Needed to Improve Management of the Expansion Process, and to Assess and Mitigate Program Risks. GAO-08-967. (Washington, D.C., Sep 15, 2008). Border Security: State Department Should Plan for Potentially Significant Staffing and Facilities Shortfalls Caused by Changes in the Visa Waiver Program. GAO-08-623. (Washington, D.C., May 22, 2008). Border Security: Stronger Actions Needed to Assess and Mitigate Risks of the Visa Waiver Program. GAO-06-854. (Washington, D.C., Jul 28, 2006). Overstay Tracking: A Key Component of Homeland Security and a Layered Defense. GAO-04-82. (Washington, D.C., May 21, 2004). Border Security: Implications of Eliminating the Visa Waiver Program. GAO-03-38. (Washington, D.C., Nov 22, 2002). 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 Homeland Security (DHS) manages the Visa Waiver Program, which allows nationals from 36 member countries to apply for admission to the United States as temporary visitors for business or pleasure without a visa. From fiscal year 2005 through fiscal year 2010, over 98 million visitors were admitted to the United States under the Visa Waiver Program. During that time period, the Department of State issued more than 36 million nonimmigrant visas to other foreign nationals for temporary travel to the United States. DHS is also responsible for investigating overstays--unauthorized immigrants who entered the country legally (with or without visas) on a temporary basis but then overstayed their authorized periods of admission. The Implementing Recommendations of the 9/11 Commission Act of 2007 (9/11 Act) required DHS, in consultation with the Department of State, to take steps to enhance the security of the program. This testimony is based on GAO reports issued in September 2008, April 2011, and May 2011. As requested, it addresses the following issues: (1) challenges in the Visa Waiver Program, and (2) overstay enforcement efforts. GAO has reported on actions that DHS has taken in recent years to improve the security of the Visa Waiver Program; however, additional risks remain. In May 2011, GAO reported that DHS implemented the Electronic System for Travel Authorization (ESTA), required by the 9/11 Act, and took steps to minimize the burden associated with this new program requirement. DHS requires applicants for Visa Waiver Program travel to submit biographical information and answers to eligibility questions through ESTA prior to travel. In developing and implementing ESTA, DHS made efforts to minimize the burden imposed by the new requirement. For example, although travelers formerly filled out a Visa Waiver Program application form for each journey to the United States, ESTA approval is generally valid for 2 years. However, GAO reported that DHS had not fully evaluated security risks related to the small percentage of Visa Waiver Program travelers without verified ESTA approval. In 2010, airlines complied with the requirement to verify ESTA approval for almost 98 percent of Visa Waiver Program passengers prior to boarding, but the remaining 2 percent--about 364,000 travelers--traveled under the program without verified ESTA approval. In May 2011, GAO reported that DHS had not yet completed a review of these cases to know to what extent they pose a risk to the program and recommended that it establish timeframes for regular review. DHS concurred and has since established procedures to review a sample of noncompliant passengers on a quarterly basis. Further, to meet 9/11 Act requirements, DHS requires that Visa Waiver Program countries enter into three information-sharing agreements with the United States; however, only 21 of the 36 countries had fully complied with this requirement as of November 2011, and many of the signed agreements have not been implemented. DHS, with the support of interagency partners, has established a compliance schedule requiring the remaining member countries to finalize these agreements by June 2012. Moreover, DHS, in coordination with the Departments of State and Justice, has developed measures short of termination that could be applied on a case-by-case basis to countries not meeting their compliance date. Federal agencies take actions against a small portion of the estimated overstay population, but strengthening planning could improve overstay enforcement. ICE's Counterterrorism and Criminal Exploitation Unit (CTCEU) is the lead agency responsible for overstay enforcement. CTCEU arrests a small portion of the estimated 4 to 5.5 million overstays in the United States because of, among other things, competing priorities, but ICE expressed an intention to augment its overstay enforcement resources. From fiscal years 2006 through 2010, ICE reported devoting about 3 percent of its total field office investigative hours to CTCEU overstay investigations. ICE was considering assigning some responsibility for noncriminal overstay enforcement to its Enforcement and Removal Operations (ERO) directorate, which apprehends and removes aliens subject to removal from the United States. In April 2011, GAO reported that by developing a time frame for assessing needed resources and using the assessment findings, as appropriate, ICE could strengthen its planning efforts. DHS concurred and stated that ICE planned to identify resources needed to transition this responsibility to ERO as part of its fiscal year 2013 resource planning process. GAO made recommendations in prior reports for DHS to, among other things, strengthen plans to address certain risks of the Visa Waiver Program and for overstay enforcement efforts. DHS generally concurred with these recommendations and has actions planned or underway to address them.	4,932	995
Without meaningful reform, the long-term financial outlook for Medicare is bleak. Together, Hospital Insurance (HI) and Supplementary Medical Insurance (SMI) expenditures are expected to increase dramatically, rising from about 12 percent in 1999 to about a quarter of all federal revenues by mid-century, even without adding to the benefit package. Over the same time frame, Medicare's expenditures are expected to double as a share of the economy, from 2.5 to 5.3 percent, as shown in figure 1. The progressive absorption of a greater share of the nation's resources for health care, like Social Security, is in part a reflection of the rising share of the elderly population, but Medicare growth rates also reflect the escalation of health care costs at rates well exceeding general rates of inflation. Increases in the number and quality of health care services have been fueled by the explosive growth of medical technology. Moreover, the actual costs of health care consumption are not transparent. Third-party payers generally insulate consumers from the cost of health care decisions. In traditional Medicare, for example, the impact of the cost- sharing provisions designed to curb the use of services is muted because about 80 percent of beneficiaries have some form of supplemental health care coverage (such as Medigap insurance) that pays these costs. For these reasons, among others, Medicare represents a much greater and more complex fiscal challenge than even Social Security over the longer term. When viewed from the perspective of the entire budget and the economy, the growth in Medicare spending will become progressively unsustainable over the longer term. Our updated budget simulations show that to move into the future without making changes in the Social Security, Medicare, and Medicaid programs is to envision a very different role for the federal government. Assuming, for example, that the Congress and the President adhere to the often-stated goal of saving the Social Security surpluses, our long-term model shows a world by 2030 in which Social Security, Medicare, and Medicaid increasingly absorb available revenues within the federal budget. Under this scenario, these programs would require more than three-quarters of total federal revenue. (See fig. 2.) Budgetary flexibility would be drastically constrained and little room would be left for programs for national defense, the young, infrastructure, and law enforcement. *The "Eliminate non-Social Security surpluses" simulation can only be run through 2066 due to the elimination of the capital stock. Revenue as a share of GDP during the simulation period is lower than the 1999 level due to unspecified permanent policy actions that reduce revenue and increase spending to eliminate the non-Social Security surpluses. Medicare expenditure projections follow the Trustees' 1999 intermediate assumptions. The projections reflect the current benefit and financing structure. When viewed together with Social Security, the financial burden of Medicare on future taxpayers becomes unsustainable, absent reform. As figure 3 shows, the cost of these two programs combined would nearly double as a share of the payroll tax base over the long term. Assuming no other changes, these programs would constitute an unimaginable drain on the earnings of our future workers. While the problems facing the Social Security program are significant, Medicare's challenges are even more daunting. To close Social Security's deficit today would require a 17 percent increase in the payroll tax, whereas the HI payroll tax would have to be raised 50 percent to restore actuarial balance to the HI trust fund. This analysis, moreover, does not incorporate the financing challenges associated with the SMI and Medicaid programs. The elements of restructuring of Medicare as proposed by the President and Breaux-Frist are best understood in light of Medicare's current structure. From the perspective of the program's benefit package, most beneficiaries have two broad choices: they can receive health care coverage through Medicare's traditional fee-for-service program or through its managed care component, called Medicare+Choice. The latter consists of an array of private health plans whose availability to Medicare beneficiaries varies by county across the nation. The choice between traditional Medicare and a Medicare+Choice plan typically involves certain trade-offs related to selection of providers, services covered, and out-of-pocket costs. Another key difference pertains to program payment methods. Providerchoice. Under traditional Medicare, beneficiaries may obtain covered services from any physician, hospital, or other health care provider that receives Medicare payments. Because most providers accept Medicare payments, beneficiaries have virtually unlimited choice. In contrast, beneficiaries in managed care face a more restricted list of providers. Private plan enrollees can generally use only their plan's network of doctors, hospitals, or other providers for nonemergency care. Servicesoffered. Although offering less provider choice, Medicare+Choice plans typically cover more services. For example, Medicare+Choice plans often cover routine physicals, outpatient prescription drugs, and dental care--services that traditional Medicare does not cover. Out-of-pocketcosts.Out-of-pocket costs are generally higher for beneficiaries in traditional Medicare than for those in Medicare+Choice. Traditional Medicare, which has a two-part benefit package, does not pay the full costs of most covered services. Part A has no premium and helps pay for hospitalization, skilled nursing facility care, some home health care, and hospice care. Part B, which is optional in traditional Medicare, requires a monthly premium ($45.50) and helps pay for physician services, clinical laboratory services, hospital outpatient care, and certain other medical services. In addition to the monthly premium, beneficiaries are responsible for an annual $100-deductible and for 20 percent of the Medicare-approved amount for most part B services. To cover these out- of-pocket expenses, many beneficiaries purchase private supplemental insurance, known as Medigap, or may have similar insurance through a former employer. In contrast, beneficiaries covered through a Medicare+Choice plan are required to pay part B premiums but often do not pay the plan a monthly premium or pay a monthly fee that is less than the cost of an equivalent Medigap policy. Plan enrollees may also pay a copayment for each visit or service. Programpayments.Another key difference between traditional Medicare and Medicare+Choice involves the program's payment methods. In traditional Medicare, hospitals, physicians, and other providers receive a separate payment for each covered medical service or course of treatment provided. In contrast, Medicare+Choice plans receive a fixed monthly amount for each beneficiary they enroll, commonly known as a capitation payment. This amount covers the expected costs of all Medicare part A and part B services. If Medicare's payment is projected to result in a plan's earning above normal profits--that is, above the rate of return earned on its commercial contracts--the plan generally must use the excess to fund additional benefits. If the extra benefits--such as prescription drugs and lower cost-sharing-- provided by Medicare+Choice plans resulted exclusively from efficiencies achieved by the plans, there would be no cause for taxpayers to be concerned. However, evidence shows that, because of flaws in Medicare's methodology for computing payments, payments to plans are too high and plans turn these excess payments into extra benefits to attract beneficiaries. Instead of producing program savings as originally envisioned, Medicare's managed care option has added substantially to program spending. Nevertheless, as we reported last year, program savings and extra benefits for Medicare beneficiaries are not mutually exclusive goals.According to their own data, many plans could make a normal profit and provide enhanced benefit packages, even if Medicare payments were reduced. However, to lower program spending would require a better method of adjusting plan payments for differences in the health status of beneficiaries, a process commonly known as risk adjustment. Medicare's current risk adjustment methodology cannot adequately account for the fact that, on average, beneficiaries in Medicare+Choice are healthier than those in traditional Medicare. Extensive research and development over the past 10 years have led to new prescription drug therapies and improvements over existing therapies. In some instances, new medications have expanded the array of conditions and diseases that can be treated effectively. In other cases, they have replaced alternative health care interventions. For example, new medications for the treatment of ulcers have virtually eliminated the need for some surgical treatments. As a result of these innovations, the importance of prescription drugs as part of health care has grown. However, new drug therapies have also contributed to a significant increase in drug spending as a component of health care costs. The Medicare benefit package, largely designed in 1965, provides virtually no coverage. This does not mean, however, that all Medicare beneficiaries lack coverage for prescription drug costs. In 1996, almost one third of beneficiaries had employer-sponsored health coverage, as retirees, that included drug benefits. More than 10 percent of beneficiaries received coverage through Medicaid or other public programs. To protect against drug costs, the remainder of Medicare beneficiaries can choose to enroll in a Medicare+Choice plan with drug coverage if one is available in their area or purchase a Medigap policy. The burden of prescription drug costs falls most heavily on the Medicare beneficiaries who lack drug coverage or who have substantial health care needs. Drug coverage is less prevalent among beneficiaries with lower incomes. In 1995, 38 percent of beneficiaries with income below $20,000 were without drug coverage, compared to 30 percent of beneficiaries with higher incomes. Additionally, the 1995 data show that drug coverage is slightly higher among those with poorer self-reported health status. At the same time, however, beneficiaries without drug coverage and in poor health had drug expenditures that were $400 lower than the expenditures of beneficiaries with drug coverage and in poor health. This might indicate access problems for this segment of the population. Even for beneficiaries who have drug coverage, the extent of the protection it affords varies, and there are signs that this coverage could be eroding. The value of a beneficiary's drug benefit is affected by the benefit design, including cost-sharing requirements and benefit limitations. Although reasonable cost sharing serves to make the consumer a more prudent purchaser, copayments, deductibles, and annual coverage limits can reduce the value of drug coverage to the beneficiary. Recent trends of declining employer coverage and more stringent Medicare+Choice benefit limits suggest that the proportion of beneficiaries without effective protection may grow. Expanding access to more affordable prescription drugs could involve either subsidizing prescription drug coverage or allowing beneficiaries access to discounted pharmaceutical prices. The design of a drug coverage option, that is, the scope of the benefit, the targeted population, and the mechanisms used to contain costs, as well as its implementation, will determine the option's effect on beneficiaries, Medicare or federal spending, and the pharmaceutical market. Any option would need to consider how to balance competing concerns about the sustainability of Medicare, federal obligations, and the hardship faced by some beneficiaries. the President's Plan And The Breaux-Frist Proposal Are Similar In Three Key Areas But Contain Two Major Differences. To Varying Degrees, Both Proposals introduce a competitive premium model, similar in concept to the Federal Employees Health Benefit Program (FEHBP), to achieve cost efficiencies; preserve the traditional fee-for-service Medicare program with enhanced opportunities to adopt prudent purchasing strategies; and modernize Medicare's benefit package by making coverage available for prescription drug and catastrophic Medicare costs. The proposals differ, however, in the extent to which traditional Medicare could face competitive pressure from private plans. In addition, under the President's plan, the Health Care Financing Administration (HCFA) would administer the program, whereas under the Breaux-Frist proposal, an independent Medicare board would perform that function. An elaboration of these points helps explain where the two proposals share common ground and where they diverge. Currently, Medicare follows a complex formula to set payment rates for Medicare+Choice plans, and plans compete primarily on the richness of their benefit packages. Efficient plans that reduce costs below the fixed payment amount can use the "savings" to enhance their benefit packages, thus attracting additional members and gaining market share. Although competition among Medicare plans may produce advantages for beneficiaries, the government reaps no savings. In contrast, the competitive premium approach included in the Breaux- Frist and President's proposals offers certain advantages. Under either version, beneficiaries can better see what they and the government are paying for. In addition, plans that can reduce costs can lower premiums and attract more enrollees. As the more efficient plans gain market share, the government's spending on Medicare will decrease. Fundamentally, this approach is intended to spur price competition. Instead of administratively setting a payment amount and letting plans decide--subject to some minimum requirements--the benefits they will offer, plans would set their own premiums and offer a common Medicare benefit package. Under both proposals, beneficiaries would generally pay a small portion of the premium and the government would pay the rest. Plans that operate at lower cost could reduce premiums, attract beneficiaries, and increase market share. Beneficiaries who joined these plans would enjoy lower out-of-pocket expenses. Taxpayers, however, would also benefit from the competitive forces. As beneficiaries migrated to lower cost plans, the average government payment would fall. (See table 1.) One major difference between the two proposals concerns how the beneficiary premium would be set for those who remained in the traditional fee-for-service program. Under Breaux-Frist, there would be no separate part B premium. All plans--including traditional Medicare-- would calculate a total premium expected to cover the cost of providing Medicare-covered services to the average beneficiary. The maximum government contribution would be based on a formula. Beneficiaries would pay no premiums if they chose plans costing 85 percent or less than the national enrollment-weighted average premium. For plans with higher premiums, beneficiaries would pay an increasing portion of the premium. The traditional fee-for-service Medicare program would be regarded as one more plan. The monthly amount beneficiaries would pay to enroll in it, therefore, would depend on how expensive it was relative to the private plans. In contrast, under the President's proposal, the beneficiary premium for traditional Medicare--the part B premium--would continue to be set administratively. As under Breaux-Frist, all other plans would submit competitive premiums. The maximum government contribution to private plans would be set at 96 percent of the average spending per-beneficiary in traditional Medicare. Beneficiaries who joined plans that cost less than that amount would pay reduced, or no, part B premiums. Beneficiaries who joined more expensive plans would pay higher part B premiums. Some believe the design of the President's proposal would tend to insulate the traditional fee-for-service program, and those beneficiaries that remain in it, from market forces. At least in the short run, however, the practical differences between the President's proposal and the Breaux-Frist proposal may be small. Because the vast majority of beneficiaries are enrolled in the traditional fee-for-service program, the national average premium under Breaux-Frist would, in all likelihood, largely reflect the cost of traditional Medicare. Table 2 presents a hypothetical example to illustrate how similar beneficiary and government contributions would be under Breaux-Frist and the President's proposal. It assumes private plans could provide Medicare-covered benefits for 90 percent of the cost incurred in the traditional fee-for-service program and that they enroll 17 percent of all beneficiaries (the percentage of beneficiaries currently enrolled in private plans).In this example, beneficiaries in private plans would pay slightly less under the Breaux-Frist proposal compared to their contribution under the President's proposal. Beneficiaries in the traditional program would pay slightly more under Breaux-Frist. Over the longer term, larger differences will emerge only if private plans decide to compete aggressively on the basis of price for market share or traditional fee-for-service Medicare becomes significantly less able to control the growth of costs relative to private plans. Although the premium support proposals are intended to slow health care spending through competition, it is not certain that this will occur. Private plans may very well find that their most profitable strategy is to "shadow price" (set prices only slightly under) traditional Medicare and be satisfied with smaller market share. (Paradoxically, serving larger numbers of beneficiaries could lead to higher costs and less profit.) The greater ability of private plans to control cost growth and thereby offer significantly lower premiums is not a foregone conclusion. Medicare's fee-for-service cost containment record over the longer term has not differed substantially from that of the private sector. In some periods, Medicare's cost growth has been lower; in others, higher. Today, actually, we are witnessing a resurgence of cost growth in private plans, while Medicare spending projections have flattened. More than 80 percent of Medicare beneficiaries currently receive their health care coverage through the traditional fee-for-service program. Both leading reform proposals recognize the importance of this program to beneficiaries and would ensure its continued availability nationwide. They also recognize that controlling the growth of overall Medicare spending requires a more efficient traditional program. Consequently, both proposals seek to make Medicare a more prudent purchaser of health care by introducing modern cost control strategies. The President's proposal outlines several new approaches to controlling costs. It would, for example, allow the Secretary of Health and Human Services to contract with preferred provider organizations (PPO), negotiate discounted payment rates for specific services, and develop systems to manage the care (in a fee-for-service setting) of certain diseases or beneficiaries. The proposal would also adjust payments to providers and change beneficiary cost sharing requirements. Adopting these changes will entail considerable challenges given the sheer size of the Medicare program, its complexity, and the need for transparent policies in a public program. Moreover, how much the changes would save is uncertain and likely depends on how, and to what extent, these measures are implemented. For example, without supplemental insurance reform, a PPO option may not attract many beneficiaries because a majority have first-dollar coverage through supplemental policies and thus are insensitive to provider charges. Furthermore, cuts in provider payments are certain to meet with fierce opposition. The Breaux-Frist proposal provides a vehicle to reform traditional Medicare, but does not suggest specific cost control devices. The proposal calls for HCFA to prepare an annual business plan, which would outline intended payment and management strategies, describe partnership arrangements with entities to provide prescription drug benefits, and recommend benefit improvements. It would also include any legislative specifications necessary to enact the plan. Until 2008, HCFA would need explicit congressional approval to implement its business plan. After that, the plan would take effect without Congress' explicit approval. Clearly, the Breaux-Frist proposal could increase HCFA's options for managing the traditional program and controlling spending. Like the President's proposal, however, the extent of its success will depend on the specific details and other reform elements that HCFA designs and the Congress allows to be adopted. The leading proposals include provisions for two commonly discussed benefit expansions: an outpatient prescription drug benefit and coverage for extraordinary out-of-pocket expenses, known as catastrophic or stop- loss coverage. In this regard, Breaux-Frist and the President's proposal share many similarities. (See table 3.) Under both proposals the coverage is voluntary, although income-targeted subsidies are provided to encourage the purchase of prescription drug coverage. By making the drug benefit financially attractive, the proposals seek to maximize participation and avoid "adverse selection" problems--that is, having only high- cost beneficiaries purchase coverage and driving up premium costs. Low- income beneficiaries would pay nothing for the drug benefit, while those earning more would pay up to 75 percent of the cost. To further minimize adverse selection problems, the President's proposal includes, and Breaux-Frist considers, a provision limiting opportunities to select drug coverage. Under Breaux-Frist, all participating health care organizations--including HCFA--would be required to offer a high option plan that provided prescription drug and stop-loss coverage, in addition to coverage for Medicare core benefits. The President's proposal calls for a new voluntary prescription drug benefit, known as part D, and a new Medigap policy that would feature increased cost-sharing and stop-loss coverage. Under both proposals HCFA would contract with private entities to provide drug coverage for beneficiaries enrolled in its high option plan (Breaux-Frist) or in Medicare part D (President). Entities that managed the drug benefit for HCFA or private plans would be permitted to use cost containment mechanisms, such as formularies. The President's proposal includes incentives for private employers to retain drug coverage for their retirees. The challenge of implementing Medicare reforms must be respected. As we have noted before, to determine the likely impact of a particular policy, details matter. Design choices and implementation policies can affect the success of proposed reforms. In addition, because difficult choices tend to meet with opposition from affected parties, the will to stay the course is equally important for successful reform. Following are just a few of the issues germane to Medicare reform that remind us of the proverb, "The devil is in the details." For proposals that include elements of premium support, the task of determining the government's contribution toward each plan's premium raises several technical issues that have profound policy implications. In general, the government's share is greater or smaller, depending on whether the plan's premium is below or above the average of all plan premiums. However, some plans can incur higher-than-average expenses because of local market conditions outside of their control. Unless the government contribution is adjusted for these circumstances, beneficiaries could face higher out-of-pocket costs and plans could be at a competitive disadvantage. The Breaux-Frist proposal allows adjustments for medical price variation only. The President's proposal allows adjustments for medical price variation and regional differences in medical service use. An adjustment for differences in local medical prices is clearly desirable under a premium support system. Without it, beneficiary premiums in high-price areas will tend to be above the national average. Adjusting the government contribution for input price differences can help ensure fair price competition between local and national plans and avoid having beneficiaries pay a higher premium, or higher share of a premium, simply because they live in a high-price area. In addition, the use of medical services varies dramatically among communities because of differences in local medical practices. Under premium support approaches, plan premiums in high-use areas will likely exceed the national average. Whether, or to what extent, to adjust the government contribution for this outcome is a matter of policy choice. On the one hand, without an adjustment, beneficiaries living in high-use areas who join local private plans could face substantial out-of-pocket costs for circumstances outside of their control. Consequently, private plans in these areas might have difficulty competing with a traditional Medicare plan that charged a fixed national premium based on an overall average of medical service use. On the other hand, there have been longstanding concerns about unwarranted variations in medical practice. By not adjusting the government contribution for utilization differences, financial pressures could encourage providers to reduce inappropriate levels of use. Under either leading proposal, Medicare's administrative functions will include the oversight of plans' contracts. In today's Medicare+Choice program, this function is performed by HCFA. Under the President's plan, HCFA would retain this function; under Breaux-Frist, a quasi-independent board would administer Medicare. Whatever the administrative entity is under Medicare reform, the following are questions that policymakers will want to consider. First, how will this entity's mission be defined? Will the emphasis be on controlling costs, protecting beneficiaries, maximizing choice, or some combination of these goals? Policy choices would flow from the stated mission. Second, how much independence would be permitted to the administrative entity to carry out its mission? Would it be appropriately shielded from the pressure exerted by special interest groups? Third, how would the administrative entity hold plans accountable for meeting Medicare standards? Would it rely chiefly on public accountability, in which the process and procedures for compliance are clearly defined and actively monitored, or on market accountability, by providing comparative information on competing plans and letting beneficiary enrollment choices weed out poor performers? Answers to these questions will determine, to a large extent, whether a restructured Medicare program will be administered effectively. Experiences in the Medicare+Choice program suggest lessons for implementing reforms effectively and provide a blueprint for actions that can be taken right away. In response to challenges faced in administering Medicare+Choice, HCFA has several initiatives underway that have faltered for various reasons--including resistance by special provider interests and insufficient agency capacity and expertise. However, the need to further these initiatives will grow in importance under comprehensive reform. Specifically, (1) improved risk adjustment is needed to ensure that Medicare's payments are fair both to the taxpayer and to individual plans, (2) better consumer information is needed to help beneficiaries make comparisons across plans, and (3) improved information systems and analysis capability are needed to promptly assess the impact of new payment and coverage policies. Adjusting for differences in beneficiary health status--commonly known as risk adjustment--enables plans to be fairly compensated when they enroll either healthier or sicker-than-average beneficiaries. Our work and that of others show that, partially because of an inadequate risk adjustment methodology, taxpayers have not benefited from the potential for capitated managed care plans to save money.Under the competitive premium approach, the ability to moderate Medicare spending rests in part on how accurately analysts determine the government's share of a health plan's premium. Today's Medicare+Choice program is phasing in an interim risk-adjustment methodology based on the limited health status data currently available. The challenge, for Medicare+Choice or any premium-based reform proposal, is to implement an improved method that more accurately adjusts payments, does not impose an undue administrative burden on plans, and cannot be manipulated by plans seeking to inappropriately increase revenues. In an ideal market, informed consumers prod competitors to offer the best value. Our recent review of Medicare+Choice, however, showed that a lack of comparative consumer information dampened the program's potential to capitalize on market forces to achieve cost and quality improvements.Despite HCFA's review and approval of health plans' marketing literature, many health plans distributed materials containing inaccurate or incomplete benefit information. Some plans did not furnish complete information on plan benefits and restrictions until after a beneficiary had enrolled. Others never provided full descriptions of benefits and restrictions. In addition, making comparisons across plans was difficult because, in the absence of common standards, plans chose their own format and terms to describe a plan's benefit package. If Medicare is restructured to incorporate a competitive premium support approach, the need for beneficiaries to be well informed about their health care options becomes more critical. To guide its efforts to improve consumer information, HCFA should look to FEHBP--the choice-based health insurance program for federal employees. In FEHBP, for example, health plans are required to follow standard formats and use standard terms in their marketing literature. Informing Medicare beneficiaries, however, is likely to involve challenges not encountered in informing current and former federal employees. For one thing, the size of the Medicare program makes any education campaign a daunting task. Moreover, many beneficiaries have a poor understanding of the current program and may not understand how the proposed changes would affect their situations. The ability to provide prompt and credible policy analyses of newly introduced changes is key during a period of significant transformation. Recent experience with the bold payment reforms established in the Balanced Budget Act of 1997 (BBA) illustrates this point. BBA was enacted in response to continuing rapid growth in Medicare spending that was neither sustainable nor readily linked to demonstrated changes in beneficiary needs. In essence, BBA changed the financial incentives inherent in payment methods that, prior to BBA, did not reward providers for delivering care efficiently. Not surprisingly, affected provider groups conducted a swift, intense campaign to roll back the BBA changes. In the absence of solid, data-driven analyses, anecdotes were used to support contentions that Medicare payment changes were extreme and threatened providers' financial viability. In testifying before the Congress in the fall of 1999, we remarked on the need for obtaining information that could identify and distinguish between desirable and undesirable consequences.More recently, we recommended that HCFA establish a process to assess the potential effects of implementing legislated Medicare changes.This process would entail developing baseline information from available claims data. The information from such assessments would be all the more critical during a period of implementing fundamental reforms. Given the aging of our society and the increasing cost of modern medical technology, it is inevitable that the demands on the Medicare program will grow. The President's proposal reflects the belief that additional revenue will be necessary to meet those demands and ensure that health care coverage is provided to future generations of seniors and disabled Americans. Specifically, the President would earmark a portion of the projected non-Social Security surpluses for Medicare. According to the Administration, this action is designed to make Medicare financing a priority. This aspect of the proposal would entail a major change in program financing. While Medicare will inevitably grow, it must not grow out of control. The risk is that federal resources may not be available for other national priorities, such as education for young people and national defense. In response, both Breaux-Frist and the President's proposals include elements designed to moderate future Medicare spending. Their approaches are untested, however, and it would be imprudent to adopt these--or any other reforms--without a means to monitor their effects. What is needed along with reform is a mechanism that will gauge spending and revenues and will sound an early warning if policy course corrections are warranted. Although both proposals include a warning mechanism, the Breaux-Frist approach would be a more comprehensive measure of program financing imbalances. Under the current Medicare structure, the program consists of two parts. Medicare's HI Trust Fund, also known as part A, is financed primarily by payroll taxes paid by workers and employers. Supplementary Medical Insurance (SMI), also known as part B, is financed largely through general revenues. Currently, the financial health of Medicare is gauged by the solvency of the HI trust fund and not the imbalance between total revenues and total spending. The 1999 Trustees' annual report showed that Medicare's HI component has been, on a cash basis, in the red since 1992, and in fiscal year 1998, earmarked payroll taxes covered only 89 percent of HI spending. Although the Office of Management and Budget has recently reported a $12 billion cash surplus for the HI program in fiscal year 1999 due to lower than expected program outlays, the Trustees' report issued in March 1999 projected continued cash deficits for the HI trust fund. (See fig. 4.) When the program has a cash deficit, as it did from 1992 through 1998, Medicare is a net claimant on the Treasury--a threshold that Social Security is not currently expected to reach until 2014. To finance these cash deficits, Medicare drew on its special issue Treasury securities acquired during the years when the program generated a cash surplus. In essence, for Medicare to "redeem" its securities, the government must raise taxes, cut spending for other programs, or reduce the projected surplus. When outlays outstrip revenues in the HI fund, it is tempting to shift some expenditures to SMI. Such cost-shifting extends the solvency of the HI Trust Fund, but does nothing to address the fundamental financial health of the program. Worse, it masks the problem and may cause fiscal imbalances to go unnoticed. For example, in 1997 BBA reallocated a portion of home health spending from the HI Trust Fund to SMI. This reallocation extended HI Trust Fund solvency but at the same time increased the draw on general revenues in SMI while generating little net savings. The President's plan preserves the program's divided financing structure and continues to rely on projections of HI Trust Fund solvency to warn of fiscal imbalances. By devoting a portion of the non-Social-Security surpluses to Medicare, the President's plan would extend the HI Trust Fund's solvency. This proposed infusion of general revenues represents a major departure in the financing of the HI program. Established as a payroll tax funded program, HI would now receive an explicit grant of funds from general revenues not supported by underlying payroll tax receipts. In effect, this grant would constitute a new claim on the general fund that would limit the ability to set budgetary priorities in the future. It would also further weaken the incomplete signaling mechanism of Medicare's future fiscal imbalances provided by the HI Trust Fund solvency measure. Under an approach that would combine the two trust funds, a continued need would exist for measures of program sustainability that would signal potential future fiscal imbalance. Such measures might include the percentage of program funding provided by general revenues, the percentage of total federal revenues or gross domestic product devoted to Medicare, or program spending per enrollee. As such measures were developed, questions would need to be asked about the appropriate level of general revenue funding as well as the actions to be taken if projections showed that program expenditures would exceed the chosen level. The Breaux-Frist proposal would unify the currently separate HI and SMI trust funds, and, in so doing, would eliminate the ability to shift costs between two funding sources. The Breaux-Frist early warning mechanism consists of defining program insolvency as a year in which general revenue contributions exceed 40 percent of total Medicare expenditures. At that time, the Congress would have several choices. It could raise the limit on general revenue contributions, raise payroll taxes, raise beneficiary premiums, reduce benefits, cut provider payments, or introduce efficiencies to moderate spending. Supporters of the Breaux-Frist proposal have suggested that a more comprehensive measure of program financing would be more useful to policymakers. Current spending projections show that absent reform that addresses total program cost, this limit would be reached in less than 10 years. (See fig. 5.) These data underscore the need for reform to include appropriate measures of fiscal sustainability as well as a credible process to give policymakers timely warning when fiscal targets are in danger of being overshot. In determining how to reform the Medicare program, much is at stake-- not only the future of Medicare itself but also assuring the nation's future fiscal flexibility to pursue other important national goals and programs. Mr. Chairman, I feel that the greatest risk lies in doing nothing to improve the program's long-term sustainability or, worse, in adopting changes that may aggravate the long-term financial outlook for the program and the budget. It is my hope that we will think about the unprecedented challenge facing future generations in our aging society. Relieving them of some of the burden of today's financing commitments would help fulfill this generation's fiduciary responsibility. It would also preserve some capacity to make their own choices by strengthening both the budget and the economy they inherit. While not ignoring today's needs and demands, we should remember that surpluses can be used as an occasion to promote the transition to a more sustainable future for our children and grandchildren. I am under no illusions about how difficult Medicare reform will be. The President's and Breaux-Frist proposals address the principal elements of reform, but many of the details need to be worked out. Those details will determine whether reforms will be both effective and acceptable--that is, seen as helping guarantee the sustainability and preservation of the Medicare entitlement, a key goal on which there appears to be consensus. Experience shows that forecasts can be far off the mark. Benefit expansions are often permanent, while the more belt-tightening payment reforms--vulnerable to erosion--could be discarded altogether. The bottom line is that surpluses represent both an opportunity and an obligation. We have an opportunity to use our unprecedented economic wealth and fiscal good fortune to address today's needs but an obligation to do so in a way that improves the prospects for future generations. This generation has a stewardship responsibility to future generations to reduce the debt burden they will inherit, to provide a strong foundation for future economic growth, and to ensure that future commitments are both adequate and affordable. Prudence requires making the tough choices today while the economy is healthy and the workforce is relatively large. National saving pays future dividends over the long term but only if meaningful reform begins soon. Entitlement reform is best done with considerable lead time to phase in changes and before the changes that are needed become dramatic and disruptive. The prudent use of the nation's current and projected budget surpluses combined with meaningful Medicare and Social Security program reforms can help achieve both of these goals. Mr. Chairman and Members of the Committee, this concludes my prepared statement. I will be happy to answer any questions you may have.	Pursuant to a congressional request, GAO discussed two leading proposals on Medicare reform: (1) the President's Plan to Modernize and Strengthen Medicare for the 21st Century; and (2) S. 1895, entitled the Medicare Preservation and Improvement Act of 1999, which is commonly referred to as the Breax-Frist proposal. GAO noted that: (1) the elements of restructuring of Medicare as proposed by the President and Breaux-Frist are best understood in light of Medicare's current structure; (2) from the perspective of the program's benefit package, most beneficiaries have two broad choices: they can receive health care coverage through Medicare's traditional fee-for-service program or through its managed care component, called Medicare Choice; (3) the choice between traditional Medicare and a Medicare Choice plan typically involves certain trade-offs related to selection of providers, services covered, and out-of-pocket costs; (4) the President's plan and the Breaux-Frist proposal are similar in three key areas but contain two major differences; (5) to varying degrees, both proposals: (a) introduce a competitive premium model, similar in concept to the Federal Employees Health Benefit Program, to achieve cost efficiencies; (b) preserve the traditional fee-for-service Medicare program with enhanced opportunities to adopt prudent purchasing strategies; and (c) modernize Medicare's benefit package by making coverage available for prescription drug and catastrophic Medicare costs; (6) the proposals differ, however, in the extent to which traditional Medicare could face competitive pressure from private plans; and (7) under the President's plan, the Health Care Financing Administration would administer the program, whereas under the Breaux-Frist proposal, an independent Medicare board would perform that function.	8,025	372
Sulfur dioxide and nitrogen oxides have been linked to a variety of health and environmental concerns, and carbon dioxide has been linked to global warming. For example, sulfur dioxide and nitrogen oxides contribute to the formation of fine particles, and nitrogen oxides contribute to the formation of ozone. Both fine particles and ozone have been linked to respiratory illnesses. For example, fine particles have been linked to premature death, aggravated asthma, and chronic bronchitis, while ozone can inflame lung tissue and increase susceptibility to bronchitis and pneumonia. In addition to affecting health, sulfur dioxide and nitrogen oxides reduce visibility and contribute to acid rain, which harms aquatic life and degrades forests. Carbon dioxide has been linked to increases in air and ocean temperatures. Such climate changes, by the end of the century, could cause rising sea levels, droughts, and wind and flood damage, according to the National Academy of Sciences. Electricity generating units that burn fossil fuels, along with other stationary sources (such as chemical manufacturers and petroleum refineries), and transportation sources (such as cars) emit one or all of these substances. Figure 1 compares emissions of sulfur dioxide, nitrogen oxides, and carbon dioxide from fossil-fuel units to those from other sources in 1999, the most recent year for which data for all three substances were available. While the overall proportion of each substance emitted by fossil-fuel units varied--from 67 percent of all sulfur dioxide to 23 percent of all nitrogen oxides--these units emitted more of each substance than any other industrial source in 1999. Under the Clean Air Act, EPA establishes air quality standards and regulates emissions from a number of sources, including electricity generating units that burn fossil fuels. The act required EPA to issue regulations establishing federal performance standards for new sources of air pollution within certain categories of stationary sources. Accordingly, EPA issued new source standards for certain generating units with a capacity greater than 73 megawatts that were built or modified after August 17, 1971. Over time, EPA has made the standards more stringent, subjecting other types of units and those with a lower generating capacity to the standards. The standards do not apply to older units built before that date that have not been modified, although some older units do meet the standards. In addition, under a program called New Source Review, older units must install modern pollution controls when they make "major modifications" that significantly increase their emissions. The level of control required depends on the air quality in the area where the unit is located--a unit in an area that does not meet federal air quality standards must install more stringent controls. Although older units are generally excluded from the new source standards, they are subject to the acid rain provisions of the Clean Air Act Amendments of 1990. The 1990 amendments directed EPA to reduce emissions of sulfur dioxide from electricity generating units by setting a limit, known as a "cap," on emissions from all units and establishing an emissions trading program. Under the trading program, each unit received emissions "allowances" that represent the right to emit one ton of sulfur dioxide. The allowances may be bought, sold, or banked for use in later years, but generating unit owners or operators must own enough allowances at the end of each year to cover their annual emissions. Although the program did not start until 1995, some units affected by the program complied earlier, according to EPA, thereby reducing sulfur dioxide emissions by about 2.2 million tons between 1990 and the end of 1994. Between 1995 and the end of 2000, the affected units reduced their sulfur dioxide emissions by 2.5 million tons (from 13.7 million tons in 1994 to 11.2 million tons in 2000)--a decline of about 18 percent. EPA expects the program to result in further reductions in sulfur dioxide emissions between 2000 and 2010. To reduce emissions of nitrogen oxides, the acid rain provisions of the 1990 amendments limited the annual rate of emissions for individual units, rather than imposing an annual aggregate tonnage of emissions. To achieve emissions reductions while minimizing the burden on generators, the legislation allowed companies with multiple units to comply with the prescribed rate by averaging their emissions rates across two or more units and ensuring that the average did not exceed the prescribed rate. Thus, individual older units may continue to emit at levels above the prescribed annual emissions rate. Although the program started in 1996, some of the affected units complied earlier, according to EPA, thereby reducing emissions of nitrogen oxides by 700,000 tons between 1990 and the end of 1995. Between 1996 and the end of 2000, the affected units reduced their emissions of nitrogen oxides by 900,000 tons (from 6.0 million tons in 1995 to 5.1 million tons in 2000)--a decline of 15 percent. In 2000, older units emitted more sulfur dioxide and nitrogen oxides--and about the same amount of carbon dioxide--per unit of electricity produced than newer units. For each megawatt-hour of electricity generated, older units, in the aggregate, emitted about twice as much sulfur dioxide as newer units--12.7 pounds at older units, compared with 6.4 pounds at newer units. Older units also emitted about 25 percent more nitrogen oxides than newer units--4.7 pounds versus 3.8 pounds--for every megawatt-hour of electricity generated. Older and newer units both emitted about 1 ton of carbon dioxide for each megawatt-hour of electricity generated. (See fig. 2.) Overall, while generating 42 percent of the electricity, older units emitted 59 percent of the sulfur dioxide, 47 percent of the nitrogen oxides, and 42 percent of the carbon dioxide from fossil-fuel units. Units that began operating in 1972 or after were responsible for the remainder of the emissions and electricity production. Of the older units, those in the Mid-Atlantic, Midwest, and Southeast released most of the emissions, and in disproportionate quantities for the amount of electricity they produced. Specifically, older units in these regions accounted for 87 percent of the sulfur dioxide, 75 percent of the nitrogen oxides, and 70 percent of the carbon dioxide emitted from older units nationwide in 2000, while generating 67 percent of the electricity from all older units. (App. I presents, by state, data on older units' electricity generation, emissions per megawatt-hour of electricity generated, and aggregate emissions.) Figures 3, 4, and 5 show the location of older units and the amount of sulfur dioxide, nitrogen oxides, and carbon dioxide they emitted in 2000. Older units that burned coal released a disproportionate share of emissions for the electricity they produced, compared with units burning natural gas and oil. Coal-burning units emitted 99 percent of the sulfur dioxide, 88 percent of the nitrogen oxides, and 85 percent of the carbon dioxide from older units nationwide, while generating 79 percent of the total electricity from older units. Older units generally do not have to meet the standards applicable to newer units, and in 2000, many of the older units emitted sulfur dioxide and nitrogen oxides at levels higher than what is permitted under the standards applicable to newer units for one or both of the pollutants. In that year, 36 percent of older units emitted sulfur dioxide at levels above the new source standard for that pollutant, and 73 percent emitted nitrogen oxides at levels above the new source standard. Approximately 31 percent of all older units emitted both pollutants at levels above the new source standards. As shown in figure 6, in 2000, 34 percent of the total sulfur dioxide emissions (2.13 million of 6.34 million tons) and 60 percent of the total nitrogen oxide emissions (1.41 million of 2.35 million tons) from older units were "additional" emissions--that is, emissions at levels above the standards applicable to newer units. The additional sulfur dioxide emissions represented 20 percent of the sulfur dioxide emissions from fossil-fuel units (older and newer), and the additional emissions of nitrogen oxides represented 28 percent of the emissions of nitrogen oxides from fossil-fuel units. Most of the additional emissions--91 percent of the sulfur dioxide and 78 percent of the nitrogen oxides--came from units located in the Mid-Atlantic, Midwest, and Southeast. Figures 7 and 8 show the level of additional emissions at older units in 2000. The majority of these emissions--99 percent of the sulfur dioxide and 91 percent of the nitrogen oxides--were from coal units, while other fossil fuel-burning units accounted for the remainder. As noted, the additional emissions shown in figure 6 represent the emissions by older units above the limits applicable to new sources. If the same older units had generated the same quantity of electricity in 2000 but had met the new source standards, total emissions would have been lowered by an amount equal to the computed additional emissions. However, a requirement that older units meet the standards could have reduced the quantity of electricity generated, raised the price of electricity, and/or shifted generation among units. Among other things, owners might have chosen to retire some older units rather than incur the costs of meeting the standards. According to a December 2000 Energy Information Administration study, requiring older coal units to install pollution control equipment would, by 2010, result in retirements that would reduce the nation's coal-based electricity generating capacity by 7 percent more than is otherwise projected (and the total U.S. capacity from all fuels by 3 percent), based on 1999 capacity levels. The study projected that such a requirement would cause operators of coal units to spend $73 billion dollars to install pollution control equipment by 2020. The study also concluded that electricity prices in 2010 would be 4 percent higher with a requirement to install control equipment than they would be without one. If older units had been required to meet new source standards in 2000, to the extent practicable, other units might have increased their operations-- for example, by running more hours each day--to meet the demand for electricity that would have otherwise been produced by the units that retired. Because it is not possible to determine exactly which units would have been retired or run more to meet the demand, it is not possible to quantify precisely what the emissions in 2000 would have been if all units had been required to meet the new source standards. In addition, generating units that increased production to meet the demand created by retirements could have purchased sulfur dioxide emissions allowances from the retired units. Thus, the net decrease in sulfur dioxide emissions would not have been as great as the level of additional emissions reported above. Similarly, it is difficult to predict precisely how such requirements would affect future emissions levels. Any new coal, natural gas, or oil units built to replace retired units would, at a minimum, have to meet the new source standards, which would reduce the emissions for each quantity of electricity generated. To meet the new source standards, older units would need to switch fuels, or add or upgrade pollution control equipment. Some older units already use pollution control equipment or have taken other actions to reduce their emissions of sulfur dioxide or nitrogen oxides. For example, we found that 681 older units met the sulfur dioxide standard by burning coal with low sulfur content. We also found that the use of emissions controls did not necessarily indicate that the units met the new source standards. For example, 399 older units with equipment to control their nitrogen oxide emissions still exceeded the emissions standard applicable to newer units. We provided EPA with a draft of this report for review and comment. We subsequently received comments from the Office of Air Quality Planning and Standards, and the Office of Atmospheric Programs. EPA generally agreed with the information presented. Both offices suggested technical changes to the report, which we have incorporated as appropriate. To respond to the first objective, we reviewed information from the Energy Information Administration and EPA on air emissions, electricity generation, and the age of electricity generating units. While both agencies maintain such information, the data we needed for this analysis were not readily available in a user-friendly format. For example, EPA has reliable and timely emissions data, but the 2000 data were not available with information on electricity generation and the age of each unit. Because of these limitations, we obtained alternative data from Platts/RDI, a private vendor that integrates EPA's emissions data with the Energy Information Administration's data on electricity generation and the age of generating units. Specifically, we obtained and analyzed air emissions and electricity generation data for each active fossil-fuel unit above 15 megawatts in generating capacity that started operating before 1972. For newer units, we obtained data on aggregate national emissions and electricity generation at units with a capacity above 15 megawatts. We chose 15 megawatts as the threshold capacity because units above that capacity accounted for almost all (about 99 percent) of the electricity generation from all fossil-fuel units in 2000. Because data on air emissions and the use of control equipment were available for only 1,157 of the 1,396 active units (83 percent), the data may not fully represent the total level of emissions and the number of units using control equipment. However, the units that did not report emissions data generated less than 1 percent of the electricity from older units and therefore are not likely to have produced large quantities of emissions. To respond to the second objective, we identified the applicable new source standard for each type of unit, as listed in the Code of Federal Regulations, Title 40, part 60. We then determined the difference between the actual rate of emissions at each unit, in pounds of pollutant per unit of fuel consumed, and the rate allowed under the standard that applies to newer units with the same capacity that burn the same fuel. We then multiplied the difference by the amount of fuel burned in 2000 to determine the annual level of "additional" emissions. In cases where EPA has not issued a standard for a particular type of unit, we excluded such units from our analysis of additional emissions. Regulations for some types of generating units were promulgated after 1971, but for purposes of this report we have not distinguished these units and have classified them as newer or older units based on their age. For example, EPA promulgated a regulation in 1978 requiring certain electric utility steam-generating units to meet new source standards. However, if one of these units was constructed after August 17, 1971, but before September 18, 1978, we classified it as a newer unit even though it would not have to meet the new source standard. We did not attempt to estimate the costs or benefits of requiring older units to meet the new source standards. Therefore our analysis does not allow us to comment on the economic or energy security implications of requiring older units to meet the standards. We conducted our work between October 2001 and May 2002 in accordance with generally accepted government auditing standards. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Chairman and Ranking Minority Member of the House Committee on Energy and Commerce and its Subcommittee on Energy and Air Quality; the House Committee on Government Reform and its Subcommittee on Energy Policy, Natural Resources, and Regulatory Affairs; the Ranking Minority Member of the Senate Committee on Environment and Public Works, and its Subcommittee on Clean Air, Wetlands, and Climate Change; other interested members of Congress; the Administrator, EPA; the Secretary of Energy; the Director of the 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 GAO's Web site at http://www.gao.gov. If you have any questions about this report, please contact me at (202) 512-3841. Key contributors to this report are listed in appendix II. Table 1 presents, by state, data on older units' electricity generation; emissions of sulfur dioxide, nitrogen oxides, and carbon dioxide; and aggregate emissions of these substances. In addition to the individuals named above, Michael Hix, Chase Huntley, Vincent Price, and Laura Yannayon made key contributions to this report. Important contributions were also made by Cynthia Norris, Frank Rusco, and Amy Webbink.	Although fossil fuels--coal, natural gas, and oil--account for more than two thirds of the nation's electricity, generating units that burn these fuels are major sources of airborne emissions that pose health and environmental risks. To limit emissions and protect air quality, the Environmental Protection Agency regulates emissions of sulfur dioxide and nitrogen oxides from a variety of sources including electricity generating units that burn fossil fuels, other industrial sources, and automobiles. Older electricity generating units--those that began operating before 1972--emit 59 percent of the sulfur dioxide, 47 percent of the nitrogen oxides, and 42 percent of all electricity produced by fossil-fuel units. Units that began operating in or after 1972 are responsible for the remainder of the emissions and electricity production. For equal quantities of electricity generated, older units, in the aggregate, emitted twice as much sulfur dioxide and 25 percent more nitrogen oxides than newer units which must meet the new source standards for these substances. Older and newer units emitted about the same amount of carbon dioxide for equal quantities of electricity generated. Of the older units, those in the Mid-Atlantic, Midwest, and Southeast produced the majority of the emissions, and in disproportionate quantities for the amount of electricity they generated compared with units located in other parts of the country. Older units that burned coal released a disproportionate share of emissions for the electricity they produced compared with units burning natural gas and oil. Thirty-six percent of older units, in 2000, emitted sulfur dioxide at levels above the new source standards applicable to newer units, and 73 percent emitted nitrogen oxides at levels above the standards. These "additional" emissions--those above the standards for newer units--accounted for 34 percent of the sulfur dioxide and 60 percent of the nitrogen oxides produced by older units. Coal-burning units emitted 99 percent of the additional sulfur dioxide and 91 percent of the additional nitrogen oxides, while other fossil fuel-burning units accounted for the remainder.	3,493	448
In 1975 Congress created the FEC to administer and enforce the Federal Election Campaign Act. To carry out this role, FEC discloses campaign finance information, enforces provisions of the law such as limits and prohibitions on contributions, and oversees the public funding of presidential elections. Within FEC, the Office of Election Administration (OEA) serves as a national clearinghouse for information regarding the administration of federal elections. As such, OEA assists state and local election officials by developing voluntary voting equipment standards, responding to inquiries, publishing research on election issues, and conducting workshops on all matters related to election administration. In addition, it answers questions from the public and briefs foreign delegations on the U.S. election process, including voter registration and voting statistics. FEC consists of six voting members, appointed by the President and confirmed by the Senate. To encourage nonpartisan decisions, no more than three commissioners can be members of the same political party, and at least four votes are required for most official Commission actions. FEC's budget for fiscal year 2001 is $40.4 million, and of that amount, $804,000 is allocated to support OEA functions. FEC has 357 full-time staff, of which 5 are allocated to OEA functions. The voting methods used in the United States can be placed into five categories: paper ballots, mechanical lever machines, punch cards, optical scan, and direct recording electronic. The last three methods use computer-based equipment. Three of the five--paper ballots, punch cards, and optical scan--use some kind of paper ballot to record voters' choices. Paper Ballot. Voters use a paper ballot listing the names of the candidates and issues and record their choice by placing a mark in a box next to the candidate's name or issue. After making their choices, the ballots are dropped into a sealed ballot box to be manually tabulated. Mechanical Lever. Voters pull a lever next to the candidate's name or issue and the machine records and tallies the votes using a counting mechanism. Write-in votes must be recorded on a separate document. Election officials tally the votes by reading the counting mechanism totals on each lever voting machine. Punch Card. Voters can use one of two basic types of punch cards-- Votomatic or Datavote. In both instances, voters use a computer-readable card to cast their vote. The Votomatic uses a computer-readable card with numbered boxes that correspond to a particular ballot choice. The choices corresponding to those numbered boxes are indicated to the voter in a booklet attached to a vote recording machine, with the appropriate places to punch indicated for each candidate and ballot choice. The voter uses a simple stylus to punch out the box corresponding to each candidate and ballot choice. In the Datavote, the names of the candidates and issues are printed on the card itself--there is no ballot booklet. The voter uses a stapler-like punching device to punch out the box corresponding to each candidate and ballot choice. To tally the votes in both instances, the ballots are fed into a computerized tabulation machine that records the vote by reading the holes in the ballots. Optical Scan. Voters use a computer-readable paper ballot listing the names of the candidates and issues. The voters record their choices by using an appropriate writing instrument to fill in a box or oval, or complete an arrow next to the candidate's name or issue. The ballot is then fed into a computerized tabulation machine, which senses or reads the marks on the ballot, and records the vote. Direct Recording Electronic. Voters use a ballot that is printed and posted on the voting machine or displayed on a computer screen listing the names of the candidates and issues. Voters record their choices by pushing a button or touching the screen next to the candidate's name or issue. When a voter is finished, the vote is submitted by pressing a vote button, which stores the vote in a computer memory chip. Election officials tally the votes by reading the votes totaled on each machine's computer chip. While neither FEC nor any other federal agency has explicit statutory responsibility to develop voting equipment standards, the Congress has appropriated funds for FEC to develop and update the standards. FEC first issued voting equipment standards in 1990. These standards identify minimum functional and performance requirements for punch card, optical scan, and direct recording electronic voting equipment, and specify test procedures to ensure that the equipment meet these requirements.The functional and performance requirements address what voting equipment should do and delineate minimum performance thresholds, documentation provisions, and security and quality assurance requirements. The test procedures describe three stages of testing: qualification, certification, and acceptance. According to FEC's standards document: Qualification testing is the process by which a voting equipment is shown to comply with the requirements of its own design specification and with the requirements of FEC standards. Certification testing, generally conducted by individual states, determines how well voting equipment conform to individual state laws and requirements. Acceptance testing is generally performed by the local jurisdictions procuring voting equipment and demonstrates that the equipment, as delivered and installed, satisfies all the jurisdiction's functional and performance requirements. The standards are voluntary; states are free to adopt them in whole, in part, or reject them entirely. To date, 38 states require that voting equipment used in the state meet FEC standards either in total or in part.Figure 1 shows these states. In September 1997, FEC initiated efforts to evaluate its voting equipment standards and identify areas to be updated, and in July 1999, FEC initiated efforts to revise the standards. As part of this revision, FEC has been working closely with state and local election officials and vendors to incorporate industry comments on the draft standards. FEC plans to issue the revised standards in multiple volumes: volume I is to include the functional and performance requirements for voting equipment; volume II is to provide the detailed test procedures, including information to be submitted by the vendor, tests to be conducted to ensure compliance with the standards, and the criteria to be applied to pass the individual tests. Figure 2 depicts FEC's time frames for revising the standards. Organizations such as the Department of Defense and the Institute of Electrical and Electronics Engineers have developed guidelines for various types of systems requirements and for the processes that are important to managing the development of any system throughout its life cycle. These types of systems requirements and processes include, for example: Security and Privacy Protection. Requirements defining the security/privacy environment, types of security needed (e.g., data confidentiality and fraud prevention), risks the system must withstand, safeguards required to withstand those risks, security/privacy policies that must be met, accountability (i.e., audit trails), and criteria for security certification. Human Factors. Requirements defining the usability of the system, including considerations for human capabilities and limitations, and the use and accessibility of the system by persons with disabilities. Documentation. Processes for recording information produced during the system development life cycle, which includes identifying documents to be produced; identifying the format, content, and presentation items for each document; and developing a process for reviewing and approving each document. Configuration Management. Processes to establish and maintain the integrity of work products through the system development life cycle, including developing a configuration management plan, identifying work products to be maintained and controlled, establishing a repository to maintain and control them, evaluating and approving changes to the work products, accounting for changes to the products, and managing the release and delivery of products. Quality Assurance. Processes to provide independent verification of the requirements and processes used to develop and produce the system, which include developing a quality assurance plan, determining what system development product and process standards are supposed to be followed, and conducting reviews to ensure that the product and process standards are followed. While FEC's 1990 standards satisfy most of these areas, they do not satisfy all. For example, in the area of security, the standards do not address the security/privacy environment in which the voting equipment must operate, the types of security to be provided, the risks the equipment must withstand, the security/privacy policies that must be met, or the criteria for security certification. Further, the standards do not specify requirements for voting equipment usability, taking into account human capabilities and limitations, or the use and accessibility of the voting equipment by persons with disabilities. Table 1 summarizes the types of requirements and processes satisfied in FEC's 1990 voting equipment standards. As part of FEC's current effort to revise the 1990 standards, it has made improvements in all five of the areas in which we identified missing types of requirements and processes. For example, in the area of human factors, the draft standards now include requirements for the use and accessibility of voting equipment by persons with disabilities. Further, for documentation, the draft standards include requirements for identifying documents to be produced; defining the format, content, and presentation items for each document; and developing a process for reviewing and approving each document. In addition, in the area of security, the standards now address security types, risks, safeguards, policies, accountability, and certification. While FEC has made improvements, the draft standards do not satisfy two areas--human factors and quality assurance. For example, in the area of human factors, the draft standards do not address requirements for equipment usability, including considerations for human capabilities and limitations. Finally, the draft standards do not yet specify the development of a quality assurance plan or the performance of quality assurance reviews to ensure that the equipment development process requirements are being met. Table 2 summarizes the types of requirements and processes not satisfied in FEC's 1990 voting equipment standards but satisfied in the draft standards. Appendix III provides a detailed description of the requirements and process types and our complete analysis of FEC's 1990 voting standards and draft standards. In the area of quality assurance, FEC stated in its written comments on a draft of this report that its decision to not include quality assurance process reviews in the revised standards was the result of deliberative and collaborative interaction among NASED's Voting System Committee and FEC staff. In addition, FEC did not include equipment usability because it was determined not to be an area of immediate concern by the election community during FEC's evaluation of the standards to identify areas to be updated. FEC agrees that equipment usability should be addressed in the standards and has stated that it will fully do so once resources are available. Beyond this stated commitment, FEC has not established any specific plans or allocated specific resources for doing so. Until FEC addresses these missing requirements, the voting equipment standards' value and utility will be diminished. Given the pace of today's technological advances, standards must be proactively maintained to ensure that they remain current, relevant, and complete. Standards-setting bodies, such as the American National Standards Institute and the National Institute of Standards and Technology, require that standards be revised or reaffirmed at least once every 5 years. This is particularly important with voting equipment standards, which must respond to technological developments if they are to be current, complete, and relevant, and are to be useful to state and local election officials in assuring the public that their voting equipment are reliable. FEC has not proactively maintained its voting equipment standards. As previously stated, FEC is only now updating the 1990 standards. Because FEC has not proactively maintained the standards, they have become out of date. Vendors are using new technology and expanding voting equipment functions that are not sufficiently covered by the 1990 standards. For example, the 1990 standards do not address election management systems, which are used to prepare ballots and programs for use in casting and tallying votes, and to consolidate, report, and display election results. According to a NASED committee representative and the Independent Test Authority (ITA) responsible for testing election management systems, the lack of adequate standards to address election management software has forced them to interpret the current voting equipment standards to accommodate the development of this new software. Further, according to these representatives, these interpretations have not been documented and formally shared with FEC. As mentioned earlier, FEC is updating its standards, and the draft standards now address election management systems. FEC officials acknowledge the need to actively maintain the standards, but state that they have not done so because they have not been assigned explicit responsibility. By not ensuring that voting equipment standards are current, complete, and relevant, states may choose not to follow them, resulting in states adopting disparate standards. In turn, this could drive up the cost of voting equipment being designed to multiple standards and produce unevenness among states in the capabilities of voting equipment. No federal agency, including FEC, has been assigned explicit responsibility for testing voting equipment against FEC standards, and no federal agency has assumed this role. Rather, NASED has assumed responsibility for implementing the standards. To do so, NASED established a voting systems committee, which comprises selected state and local election officials and technical advisers. This committee accredits ITAs to test and qualify voting equipment against FEC standards. Figure 3 illustrates the voting equipment standards program, from the development of voting equipment standards through the testing and qualification of voting equipment. To accredit the ITAs, the NASED committee has developed requirements and procedures, which include provisions for NASED to periodically reaccredit the ITAs and conduct on-site inspection visits, both of which are important to ensuring that the accredited laboratories continue to comply with all requirements. To date, the committee has not reaccredited or inspected ITAs because, according to NASED committee representatives, they rely on the committee's technical advisers' ongoing conversations with ITA officials and the officials' participation in committee meetings to ensure that the ITAs are fulfilling their responsibilities effectively. Currently, three ITAs are approved to test voting equipment against the FEC standards. In 1994, the NASED committee accredited Wyle Labs to test the hardware and machine-resident software components of proprietary vote cast and tally equipment. In February 2001, Metamor (previously PSINet) applied for accreditation to conduct qualification testing of vote tabulation and election management software. Also in 2001, SysTest applied for accreditation to conduct qualification testing of voting tabulation and election management software. While both Metamor and SysTest have been granted an interim approval to test voting equipment, NASED has not yet accredited either. To test voting equipment, voting equipment vendors submit requests for testing to the ITAs, who then prepare a test procedure. The test procedure details the software and hardware testing requirements that the voting equipment will be tested against and is based on both the FEC voting equipment standards and the vendors' design specifications. According to ITA officials responsible for testing voting equipment, the testing process is generally an iterative one. Vendors are provided an opportunity to correct deficiencies identified during testing and resubmit the modified voting equipment for retesting. At the end of testing, the ITA completes a test report and notifies the Election Center that the voting equipment has successfully satisfied testing requirements. The Election Center then assigns a NASED number to the specific equipment model and firmware release that was tested and maintains the list of qualified voting equipment. Each time a vendor issues a new model or software release, the vendor is to submit a request for testing to the ITAs in order to qualify the new model or release. As of July 3, 2001, NASED had qualified 21 models of voting equipment and 7 election management systems, representing 10 vendors. See table 3 for a breakout of the types of equipment qualified. The ITAs stated that the testing process generally takes about 2 to 3 months. This is contingent, however, upon the vendors having the proper documentation in order. If documentation is missing or incomplete, the process may take longer. According to the ITAs, the cost of qualification testing ranges from $40,000 for vote cast and tally equipment to $75,000 for vote tabulation and election management software. While not explicitly provided for in legislation, FEC and NASED have assumed and are performing important roles by developing voting equipment standards and testing and qualifying equipment against these standards, respectively. Given the current pace of technological change for voting equipment, the degree to which these standards are actively maintained and the extent to which they are appropriately applied, can have a direct bearing on the capabilities of voting equipment. This, in turn, can affect the successful conduct of national, state, and local elections. Therefore, it is important that responsibility for these roles be clearly assigned. By doing so, the appropriate federal role in these important areas can be deliberated, decided, and explicitly defined, thereby avoiding another situation where the standards are allowed to become out of date. It is also important that these roles be executed effectively. In the case of FEC's ongoing update of the standards, this means that requirements for equipment usability, and quality assurance should be developed. As part of the ongoing debate and deliberation over election reform in general, and the federal role in voting equipment standards in particular, the Congress may wish to consider assigning explicit federal authority, responsibility, and accountability for voting equipment standards, including proactive and continuous update and maintenance of the standards. Given that no federal or state entity has been assigned explicit authority or responsibility for testing voting equipment against the FEC standards, the Congress may wish to consider what, if any, federal role is appropriate, regarding implementation of the standards, including the accreditation of ITAs and the qualification of voting equipment. To improve the quality of FEC's voting equipment standards, we recommend that the FEC Commissioners direct the OEA Director to accelerate the development of requirements for equipment usability, including considerations for human capabilities and limitations. To improve the quality of FEC's current efforts to update the voting equipment standards, we also recommend that the FEC Commissioners direct the OEA Director to develop requirements for quality assurance, including developing a quality assurance plan and conducting quality assurance process reviews. In its written comments on a draft of this report (reprinted in appendix II), the FEC Chairman and Vice Chairman stated that FEC generally agrees with most of our observations and recommendations, including that human factors are not being addressed in the revised voting equipment standards and that FEC needs to accelerate their development in future iterations of the standards. Additionally, FEC agreed with our matter for congressional consideration. Nevertheless, FEC commented that it was concerned with the report's portrayal of the Commission as being insufficiently proactive in revising voting equipment standards, stating that its efforts have been as timely as possible given certain practical constraints, which it described in a chronology of events and circumstances. FEC also commented that it disagrees with the draft report's characterization of the Commission's ongoing efforts to update security and quality assurance standards as incomplete, describing how both areas are being addressed. Subsequent to providing us with its written comments on a draft of this report, FEC also provided us with additional draft standards that address security requirements. Accordingly, we have modified this report, including our recommendations, to reflect this new information. We do not agree with either of FEC's other two points of concern. Regarding FEC's concern with the report's portrayal of the Commission as being insufficiently proactive in revising voting equipment standards, FEC states in its comments that 7 years elapsed from the time that the standards were first issued in 1990 to the time that FEC first began evaluating them to identify areas that needed to be updated. Further, it states that another 2 years elapsed between the time FEC began evaluating the standards and the time it began updating them. We recognize that FEC is performing, through its own initiative, an important role in developing and updating the standards, and deserves credit for doing so. However, in our view, allowing 9 years to pass before beginning to update the standards, regardless of the practical circumstances that FEC cites, is too long and does not constitute a proactive maintenance process and is the primary reason that the current standards are out of date. Regarding FEC's disagreement with the report's characterization of the Commission's ongoing efforts to update quality assurance standards as incomplete, we do not question, and in fact state in this report, that the draft standards address requirements for quality assurance. However, our main concern is that important and relevant aspects of quality assurance requirements, such as quality assurance plans and process reviews, respectively, are not addressed. Concerning FEC's decision to omit quality assurance standards areas from the revised draft standards, we modified this report to reflect FEC's position that its decision resulted from deliberative and collaborative interaction among NASED and FEC staff and was not, as we were told during the course of our review by the OEA Director, areas that were overlooked. We are sending copies of this report to the Chairmen and Ranking Minority Members of the Senate Appropriations Subcommittee on Treasury and General Government and the House Appropriations Subcommittee on Treasury, Postal Service, and General Government; the Director of the Office of Management and Budget; and the Chairman and Vice Chairman of FEC. Copies will also be available at our Web site at www.gao.gov. If you have any questions, please contact me at (202) 512- 6240 or by email at [email protected]. Key contributors to this assignment were Deborah A. Davis, Richard Hung, and Eric Winter. The objectives of our review were to (1) identify Federal Election Commission's (FEC) role regarding voting equipment and assess how well FEC is fulfilling its role and (2) identify the National Association of State Election Director's (NASED) process for testing and qualifying voting equipment against FEC's voluntary voting equipment standards. To identify FEC's role regarding voting equipment, we researched FEC's statutory and legislative role in developing and maintaining voting equipment standards. To further identify FEC's role, we reviewed relevant documents, including the Plan to Update the Voting Systems Standards,the standards update project contract, project work plans, and legislative proposals, and interviewed key FEC officials, including the Director, OEA. To assess FEC's voting equipment standards, we examined relevant guidelines and procedures for the development of system requirements. Specifically, we examined the Department of Defense's Data Item Description for System/Subsystem Specifications; the Institute of Electrical and Electronics Engineers' Standard 12207 on Software Life Cycle Processes, and the Software Engineering Institute's Software Development Capability Maturity Model™️ and identified 13 types of systems requirements and 3 supporting life-cycle processes that are important in the development of any system. We then compared these types of requirements and processes against FEC's 1990 voting equipment standards to determine if all key elements were addressed. In those areas where variances were noted, we compared the types of requirements and processes against relevant sections of volumes I and II of the draft standards to determine whether FEC had addressed any of these missing requirements. We only reviewed those portions of the draft standards for which we identified missing types of requirements and processes in the 1990 standards. In addition, our review of the standards did not include validating that the requirements are correct and complete beyond determining whether the standards addressed all of the requirements and process key elements. To identify NASED's process for testing and qualifying voting equipment against FEC's voting equipment standards, we interviewed officials from NASED, the Election Center, and the two independent test authorities (ITA). We also reviewed documentation describing NASED's process, NASED's Accreditation of Independent Testing Authorities For Voting System Qualification Testing Handbook, ITAs' generic test plans, and NASED's policies, procedures, and by-laws. We also provided a copy of relevant parts of this report to the Chairman of the NASED Voting System Committee for comment. The Chairman stated that the report accurately reflected the NASED process. We also contacted officials in the State Election Director's offices in each of the 50 states and the District of Columbia to determine which states required that their voting equipment be in compliance with FEC's standards. We did not verify the officials' responses. We performed our work at FEC headquarters in Washington, D.C., NASED, the Election Center, and the independent test authorities from March 2001 through September 2001, in accordance with generally accepted government auditing standards. The following are GAO's comments on the Federal Election Commission letter dated July 18, 2001. 1. See comments 2, 5, and 6. 2. We do not dispute either the chronology of events provided in FEC's comments or its statement that it does not have explicit statutory authority to develop and revise the standards. We provide the relevant elements of this chronology in this report. Additionally, we state in this report that FEC has assumed and is performing an important role by developing and revising the standards, despite its lack of explicit statutory responsibility. We do not agree with FEC's comment that it has been proactive in updating the voting equipment standards. As FEC acknowledges in its comments, 7 years elapsed from the time the standards were first issued in 1990 to the time that FEC initiated efforts to assess the standards to identify areas that needed to be updated. During that time, considerable experience with the standards was accumulating, as vendors were developing voting equipment to meet the FEC standards and ITAs were testing against them. Since then, additional experience has been gained with the standards as vendors have continued to develop voting equipment to meet the standards, and ITAs have continued to test vendors' equipment against the standards. For example, we state in this report that ITAs have had to interpret the 1990 standards in the testing process to accommodate vendors' use of new technologies and expanded equipment functions that are not addressed in the 1990 standards. However, FEC does not formally receive these interpretations, any one of which could be the basis for prompting an update to the standards. In our view, waiting 9 years to begin updating the standards is too long, does not constitute proactive maintenance, and is the primary reason that the current standards are out of date. 3. FEC is correct in stating that we did not assess all of the revised draft standards areas. However, we disagree that this assessment approach ignores the collaborative and dynamic process of NASED's Voting Systems Committee and FEC's staff in overseeing the development of the standards for two reasons. First, this report recognizes that FEC worked closely with state and local election officials in revising the standards. Second, this joint FEC and NASED process has no relevance to our findings that certain standards areas do not address the full range of items associated with well-defined system requirements in these areas. As we state in the objectives, scope, and methodology section of this report, our approach was to assess all of the 1990 standards because they are the standards against which voting equipment are currently being developed and independently tested. In assessing drafts of the updated standards, we assumed that those areas in the 1990 standards that we found to be satisfactory would continue to be satisfactory in the updated standards. As long as our findings are limited to the standards area that we assessed, the issue of whether we assessed all or some of the draft standards is not relevant. 4. We acknowledge that FEC's position, as stated in its comments, concerning standards areas omitted from the revised draft standards is that these were based on decisions resulting from deliberative and collaborative interaction among NASED and FEC staff, and were not, as we were told during the course of our review by the OEA Director, areas that were overlooked. Accordingly, we have modified our report to reflect this position. 5. Subsequent to providing us written comments on a draft of this report, FEC provided us with a copy of volume II of the standards, which includes the tests to be conducted to ensure compliance with the voting equipment standards. Based on our review of the relevant security sections, the standards satisfy the requirement for security certification. We have modified our report, including the recommendations, to reflect this new information. 6. We do not disagree that the draft standards discuss quality assurance and have been strengthened from the 1990 standards. We acknowledge these improvements to the standards in our report. However, as we state, quality assurance includes a number of activities. While FEC's draft standards include some of these elements, they do not include all of them. Specifically, the draft standards do not address requirements for developing a quality assurance plan and conducting process reviews to ensure that the product and process standards are followed. We identified 13 types of system requirements and 3 supporting life-cycle processes that are often associated with complete system requirements. FEC's 1990 voting equipment standards satisfied 11 of the 13 system requirements areas and none of the life-cycle processes. We reviewed FEC's draft standards for those areas for which we identified variances in the 1990 standards and found that the draft standards had made improvements in all five areas. However, the draft standards still do not satisfy human factors and quality assurance. A detailed description of the system requirements areas and our complete analysis follow. Definition/analysis Required system capabilities based on the purpose of the system; also includes parameters for response times, accuracy, capacities, unexpected/unallowed conditions, error-handling, and continuity of operations. 1990 analysis: Identified areas include ballot definition, candidate/measure selection, vote casting, ballot interpretation, voting reports, accuracy and integrity, processing speed, response times, and error and status messages. Quantitative measures of quality including reliability (perform correctly and consistently), maintainability (easily serviced/repaired/corrected), and availability (accessibility to be operated when needed). 1990 analysis: All identified areas included. Requirements for maintaining a secure system and protecting data privacy, including (1) security/privacy environment in which system must operate; (2) types of security to be provided (e.g., data confidentiality and fraud prevention); (3) risks the system must withstand; (4) safeguards required; (5) security/privacy policies that must be met; (6) accountability the system must provide (i.e., audit trails); and (7) criteria for security certification. 1990 analysis: Access control identified as a security safeguard, and requirements defined for audit records produced by the system to provide accountability. The other areas, however, are not addressed. Draft analysis: In addition to access controls and audit records, the security/privacy environment, the types of security to be provided, the risks the system must withstand, safeguards necessary, security policies, and criteria for security certification are identified. Requirements defining system usability of the system that take into account human capabilities and limitations, along with use and accessibility by persons with disabilities. 1990 analysis: System usability and accessibility by persons with disabilities are not identified. Draft analysis: Requirements for the use and accessibility by persons with disabilities are identified. System usability requirements are not. Characteristics of the interface between the voting system and other systems, including data types, data formats, and timing. 1990 analysis: Removable storage media, communications devices, and printers identified as external interfaces. Draft Standards satisfied? Yes Draft Standards satisfied? Definition/analysis Requirements for system configuration to meet local operational requirements. 1990 analysis: Requirements defined for voting systems programming in accordance with ballot requirements of the election and the jurisdiction in which the equipment will be used. The natural environment that the system must withstand during transportation, storage, and operation, including (1) temperature, (2) humidity, (3) rain, and (4) motion/shock. 1990 analysis: Requirements identified for temperature, humidity, rain, transit drop, and vibration. Any commercial standards that must be used in the system's development. 1990 analysis: Vendors are instructed to design equipment in accordance with best commercial and industrial practice; software is to be designed in a modular fashion, preferably using a high-level programming language. The system's physical characteristics, including size, weight, color, nameplates, markings of parts and serial/lot numbers, transportability, and parts interchangeability. 1990 analysis: All requirements identified. Requirements for preventing or minimizing unintended hazards to personnel, property, and the physical environment. 1990 analysis: All systems shall be designed to meet the requirements of the Occupational Safety and Health Administration Requirements for who will use or support the system, such as number of workstations and built-in help/training features. 1990 analysis: Vendors instructed to include information on number of personnel and skill level required to maintain the voting system. Requirements for training devices and materials to be included with the system. 1990 analysis: Vendors instructed to document information required for system use and operator training, and orientation and training of poll workers, user maintenance technicians, and vendor personnel. Requirements for system maintenance, software support, and system transportation. 1990 analysis: Vendors instructed to document information required in these three areas. Yes Draft Standards satisfied? Definition/analysis The process of recording information produced during the life-cycle process. Describes and records information about a product, the processes used to develop the product, and provides a history of what happened during the development and maintenance of the product. Includes (1) identification of documents to be produced and delivered to customer or tester, (2) identification of format, content, and presentation items for each document, and (3) review and approval process for each document. 1990 analysis: Requirements identify products to be produced, including the content and format of the documents. Review and approval process not specified. Draft analysis: Products to be produced, including the content and format of the documents, as well as the review and approval process is identified. The process to establish and maintain the integrity of work products throughout the life-cycle process; it involves establishing product baselines and systematically controlling changes to them. The process should include (1) developing a configuration management plan, (2) identifying work products to be maintained and controlled, (3) establishing a repository to maintain and control the work products, (4) evaluating and approving changes to the products, (5) accounting for changes to the work products, and (6) managing the release and delivery of them. 1990 analysis: Includes requirements for (1) identifying work products to be maintained and controlled, (2) evaluating and approving changes to the products, and (3) managing the release and delivery of work products. The standards do not include requirements for developing a configuration management plan, establishing a repository to maintain and control the work products, and accounting for changes to the work products. Draft analysis: All areas identified. The process that provides adequate assurance of the system development process. It typically involves independent review of work products and activities to ensure compliance with applicable development standards and procedures. The process should include (1) developing a quality assurance plan, (2) determining system development product and process standards to be followed, and (3) conducting reviews to ensure that the product and process standards are followed. 1990 analysis: None of these areas specified. Draft analysis: The need to document the hardware and software development process is specified, but a quality assurance plan and quality assurance reviews are not.	Events surrounding the last presidential election raised concerns about the people, processes, and technology used to administer elections. GAO has already reported on the scope of congressional authority in election administration and voting assistance to military and overseas citizens. This report focuses on the status and use of federal voting equipment standards, which define minimum functional and performance requirements for voting equipment. The standards define minimum life-cycle management processes for voting equipment developers to follow, such as quality assurance. No federal agency has been assigned explicit statutory responsibility for developing voting equipment standards; however, the Federal Election Commission (FEC) developed voluntary standards for computer-based systems in 1990, and Congress has provided funding for this effort. No federal agency is responsible for testing voting equipment against the federal standards. Instead, the National Association of State Election Directors accredits independent test authorities who test voting equipment against the standards.	7,523	177
The key objectives of U.S. public diplomacy are to engage, inform, and influence overseas audiences. Public diplomacy is carried out through a wide range of programs that employ person-to-person contacts; print, broadcast, and electronic media; and other means. Traditionally, the State Department's efforts have focused on foreign elites--current and future overseas opinion leaders, agenda setters, and decision makers. However, the dramatic growth in global mass communications and other trends have forced a rethinking of this approach, and State has begun to consider techniques for communicating with broader foreign audiences. Since the terrorist attacks of September 11, 2001, State has expanded its public diplomacy efforts globally, focusing particularly on countries in the Muslim world considered to be of strategic importance in the war on terror. In May 2006, we reported that this trend continued with funding increases of 25 percent for the Near East and 39 percent for South Asia from 2004 to 2006. The BBG supports U.S. public diplomacy's key objectives by broadcasting news and information about the United States and world affairs and serving as a model of how a free press should operate. The BBG manages and oversees the Voice of America (VOA), Radio/TV Marti, Radio Free Europe/Radio Liberty, Radio Free Asia, Radio Farda, Radio Sawa, and the Alhurra TV Network. As shown in figure 1, State and the BBG spent close to $1.5 billion on public diplomacy programs in fiscal year 2006. As others have previously reported, in recent years anti-American sentiment has spread and intensified around the world. For example, the Pew Global Attitudes Project has found that the decline in favorable opinion of the United States is a worldwide trend. For instance, favorable attitudes toward the United States in Indonesia declined from 75 percent in 2000 to 30 percent in 2006 and from 52 percent to 12 percent over the same time period in Turkey. While individual opinion polls may reflect a snapshot in time, consistently negative polls may reflect the development of more deeply seated sentiments about the United States. Numerous experts, expert groups, policymakers, and business leaders have expressed concerns that anti-Americanism may harm U.S. interests in various ways. In its 2004 report on strategic communication, the Defense Science Board states that "damaging consequences for other elements of U.S. soft power are tactical manifestations of a pervasive atmosphere of hostility." Similarly, the Council on Foreign Relations has claimed that the loss of goodwill and trust from publics around the world has had a negative impact on U.S. security and foreign policy. Anti-American sentiments may negatively affect American economic interests, U.S. foreign policy and military operations, and the security of Americans. According to Business for Diplomatic Action, anti-Americanism can hurt U.S. businesses by causing boycotts of American products, a backlash against American brands, increased security costs for U.S. companies, higher foreign opposition to U.S. trade policies, and a decrease in the U.S.'s ability to attract the world's best talent to join the American workforce. Additionally, a report from the Princeton-based Working Group on Anti-Americanism generally echoes the possibility that anti- Americanism may harm U.S. business interests in these same areas. Further, as reported by the Travel Business Roundtable during previous hearings before this subcommittee, the U.S. travel industry has reported significant declines in the U.S. market share of the worldwide travel market and a decline in overseas visitors to the United States since 9/11. Further, the State Department's 2003 report on Patterns of Global Terrorism recorded 67 attacks on American business facilities and 7 business casualties. In 2006, the Overseas Security Advisory Council noted that more threats against the private sector occurred in 2006 than in 2004 or 2005 in most of the industries it reports on. Finally, the Working Group on Anti-Americanism also indicated that threats to American private property and personnel working overseas have become constant in some regions, especially the Middle East, and have resulted in significantly increased security costs. According to the Defense Science Board, the Brookings Institution, and others, anti-Americanism around the world may reduce the U.S.'s ability to pursue its foreign policy goals, including efforts to foster diplomatic relationships with other foreign leaders and to garner support for the global war on terror. For instance, in October 2003, the Advisory Group on Public Diplomacy for the Arab and Muslim World reported that "hostility toward the U.S. makes achieving our policy goals far more difficult." Specifically, according to a paper from the Working Group on Anti- Americanism, foreign leaders may seek to leverage anti-American sentiment in pursuit of their own political goals, which may then limit their future support for U.S. foreign policy. As these leaders achieve personal political successes based on their opposition to the United States, they may then be less likely to support U.S. foreign policy going forward. Further, the 9/11 Commission, the Council on Foreign Relations, and others have reported on the possibility that anti-Americanism may also serve as a barrier to success in the global war on terror and related U.S. military operations. Specifically, the 9/11 Commission report of July 2004 stated that perceptions of the United States' foreign policies as anti-Arab, anti-Muslim, and pro-Israel have contributed to the rise in extremist rhetoric against the United States. Further, the Council on Foreign Relations has argued that increasing hostility toward America in Muslim countries facilitates recruitment and support for extremism and terror. The Council on Foreign Relations also has identified potential consequences of anti-Americanism on the security of individual Americans, noting that Americans now face an increased risk of direct attack from individuals and small groups that wield increasingly more destructive power. According to State's Country Reports on Terrorism for 2005, 56 private U.S. citizens were killed as a result of terrorism incidents in 2005. The Working Group on Anti-Americanism suggests that there is some correlation between anti-Americanism and violence against Americans in the greater Middle East but notes that the relationship is complex. For example, they note that while increased anti-Americanism in Europe or Jordan has not led to violence against Americans or U.S. interests in those areas, it does seem to play a role in fueling such violence in Iraq. Other factors, such as the visibility of Americans overseas, particularly in Iraq; the role of the media in supporting anti-Americanism; and the absence of economic security may also contribute to this violence. While all of the topics discussed here represent areas in which anti- Americanism may have negative consequences, the empirical evidence to support direct relationships is limited. As such, we cannot confirm any causal relationships between negative foreign public opinion and specific negative outcomes regarding U.S. interests. Despite the fact that we cannot draw a direct causal link between anti-Americanism and specific outcomes in these areas, it is clear that growing negative foreign public opinion does not help the United States achieve its economic, foreign policy, and security goals, and therefore U.S. public diplomacy efforts, which seek to counter anti-Americanism sentiment, have a critical role to play in supporting U.S. interests throughout the world. Over the past 4 years, we have identified and made recommendations to State and the BBG on a number of issues related to a general lack of strategic planning, inadequate coordination of agency efforts, and problems with measuring performance and results. Among other things, we have recommended that (1) communication strategies be developed to coordinate and focus the efforts of key government agencies and the private sector, (2) the State Department develop a strategic plan to integrate its diverse efforts, (3) posts adopt strategic communication best practices, and (4) meaningful performance goals and indicators be established by both State and the BBG. Currently, the U.S. government lacks an interagency public diplomacy strategy; however, such a plan has been drafted and will be released shortly. While the department has articulated a strategic framework to direct its efforts, comprehensive guidance on how to implement this strategic framework has not yet been developed. In addition, posts generally do not pursue a campaign-style approach to communications that incorporates best practices endorsed by GAO and others. State has begun to take credible steps towards instituting more systematic performance measurement practices, consistent with recommendations GAO and others have made. Finally, although the BBG has added audience size as a key performance measure within its strategic plan, our latest review of MBN's operations call into question the potential value of this measure due to various methodological concerns. In 2003, we reported that the United States lacked a governmentwide, interagency public diplomacy strategy, defining the messages and means for communication efforts abroad. We reported since then that the administration has made a number of unsuccessful attempts to develop such a strategy. The lack of such a strategy complicates the task of conveying consistent messages and therefore increases the risk of making damaging communication mistakes. State officials have said that it also diminishes the efficiency and effectiveness of governmentwide public diplomacy efforts, while several reports have concluded that a strategy is needed to synchronize agencies' target audience assessments, messages, and capabilities. On April 8, 2006, the President established a new Policy Coordination Committee on Public Diplomacy and Strategic Communications. This committee, led by the Under Secretary for Public Diplomacy and Public Affairs, intends to better coordinate interagency activities, including the development of an interagency public diplomacy strategy. We have been told this strategy is still under development and will be issued soon. The U.S. government also lacks a governmentwide strategy and meaningful methods to ensure that recipients of U.S. foreign assistance are consistently aware that the aid comes from the United States. In March 2007, we reported that most agencies involved in foreign assistance activities had established some marking and publicity requirements in their policies, regulations, and guidelines, and used various methods to mark and publicize their activities. However, we identified some challenges to marking and publicizing U.S. foreign assistance, including the lack of a strategy for assessing the impact of marking and publicity efforts on public awareness and the lack of governmentwide guidance for marking and publicizing U.S. foreign aid. To better ensure that recipients of U.S. foreign assistance are aware that the aid is provided by the United States and its taxpayers, we recommended that State, in consultation with other U.S. government agencies, (1) develop a strategy to better assess the impact of marking and publicity programs on public awareness and (2) establish interagency agreements for marking and publicizing all U.S. foreign assistance. State indicated that the interagency public diplomacy strategy will address assessment of marking and publicity programs and will include governmentwide marking and publicity guidance. In 2005, we noted that State's efforts to engage the private sector in pursuit of common public diplomacy objectives had met with mixed success and recommended that the Secretary develop a strategy to guide these efforts. Since then, State has established an Office of Private Sector Outreach, is partnering with individuals and the private sector on various projects, and hosted a Private Sector Summit on Public Diplomacy in January 2007. However, State has not yet developed a comprehensive strategy to guide the Department's efforts to engage the private sector. In 2005, the Under Secretary established a strategic framework for U.S. public diplomacy efforts, which includes three priority goals: (1) offer foreign publics a vision of hope and opportunity rooted in the U.S.'s most basic values; (2) isolate and marginalize extremists; and (3) promote understanding regarding shared values and common interests between Americans and peoples of different countries, cultures, and faiths. The Under Secretary noted that she intends to achieve these goals using five tactics--engagement, exchanges, education, empowerment, and evaluation--and by using various public diplomacy programs and other means, including coordinating outreach efforts with the private sector. This framework partially responds to our 2003 recommendation that State should develop and disseminate a strategy to integrate its public diplomacy efforts and direct them toward achieving common objectives. State has not yet developed written guidance that provides details on how these five tactics will be used to implement the Under Secretary's priority goals. However, it should be noted that the Under Secretary has issued limited guidance regarding the goal of countering extremism to 18 posts selected to participate in a pilot initiative focusing on this objective. We have recommended that State, where appropriate, adopt strategic communication best practices (which we refer to as the "campaign-style approach") and develop country-specific communication plans that incorporate the key steps embodied in this approach. As shown in figure 2, these steps include defining the core message, identifying and segmenting target audiences, developing detailed communication strategies and tactics, and using research and evaluation to inform and re-direct efforts as needed. As noted in our May 2006 report, our review of public diplomacy operations in Nigeria, Pakistan, and Egypt in 2006 found that this approach and corresponding communication plans were absent. Rather, post public diplomacy efforts constituted an ad hoc collection of activities designed to support such broad goals as promoting mutual understanding. In a recent development, 18 posts participating in the department's pilot countries initiative have developed country-level plans focusing on the countering extremism goal. These plans were developed on the basis of a template issued by the Under Secretary that requires each post to provide a list of supporting objectives, a description of the media environment, identification of key target audiences, and a list of supporting programs and activities. We reviewed most of the plans submitted in response to this guidance. Although useful as a high-level planning exercise, these plans do not adhere to the campaign-style approach, which requires a level of rigor and detail that normally exceeds the three- to four-page plans produced by posts in pilot countries. The plans omit basic elements, such as specific core messages and themes or any substantive evidence that proposed communication programs were driven by detailed audience research--one of the key principles embodied in the campaign-style approach. In the absence of such research, programs may lack important information about appropriate target audiences and credible messages and messengers. Based on prior reports by GAO and others, the department has begun to institute a more concerted effort to measure the impact of its programs and activities. The department created (1) the Office of Policy, Planning, and Resources within the office of the Under Secretary; (2) the Public Diplomacy Evaluation Council to share best practices; and (3) a unified Public Diplomacy Evaluation Office. The Department established an expanded evaluation schedule that is designed to cover all major public diplomacy programs. The department also has called on program managers to analyze and define their key inputs, activities, outputs, outcomes, and impact to help identify meaningful performance goals and indicators. Finally, the department recently launched a pilot public diplomacy performance measurement data collection project that is designed to collect, document, and quantify reliable annual and long-term outcome performance measures to support government reporting requirements. In 2001, the BBG introduced a market-based approach to international broadcasting that sought to "marry the mission to the market." This approach was designed to generate large listening audiences in priority markets that the BBG believes it must reach to effectively meet its mission. Implementing this strategy has focused on markets relevant to the war on terrorism, in particular in the Middle East through such key initiatives as Radio Sawa and the Alhurra TV network. The Board's vision is to create a flexible, multimedia, research-driven U.S. international broadcasting system. We found that the BBG's strategic plan to implement its new approach did not include a single goal or related program objective designed to gauge progress toward increasing audience size, even though its strategy focuses on the need to reach large audiences in priority markets. The BBG subsequently created a single strategic goal to focus on the key objective of maximizing impact in priority areas of interest to the United States and made audience size a key performance measure. However, in our August 2006 review of the Middle East Broadcasting Networks, we found that methodological concerns call into question the potential accuracy of this key performance measure with regard to Radio Sawa's listening rates and Alhurra's viewing rates. Specifically, we found that weaknesses in the BBG's audience surveys create uncertainty over whether some of Radio Sawa's or Alhurra's performance targets for audience size have been met. We recommended that the BBG improve its audience research methods, including identifying significant methodological limitations. The BBG accepted our recommendation and has informed us that it is currently considering how it will do so. Public diplomacy efforts in the field face several other challenges. Beginning with our September 2003 report on State's public diplomacy efforts, post officials have consistently cited several key challenges, including a general lack of staff, insufficient administrative support, and inadequate language training. Furthermore, public diplomacy officers struggle to balance security with public access and outreach to local populations. Finally, the BBG's disparate organizational structure has been viewed as a key management challenge that significantly complicates its efforts to focus and direct U.S. international broadcasting efforts. Although several recent reports on public diplomacy have recommended an increase in U.S. public diplomacy program spending, several embassy officials stated that, with current staffing levels, they do not have the capacity to effectively utilize increased funds. According to State, the Department had 887 established public diplomacy positions (overseas and domestic) as of March 31, 2007, but 199, or roughly 22 percent, were vacant. Compounding this challenge is the loss of public diplomacy officers to temporary duty in Iraq, which, according to one State official, has drawn down field officers even further. Staffing shortages may also limit the amount of training public diplomacy officers receive. State is repositioning several public diplomacy officers as part of its transformational diplomacy initiative. However, this effort represents shifting existing public diplomacy officers and does not increase the overall number of officers, which we have noted were generally the same in fiscal years 2004 and 2006. In addition, public diplomacy officers at posts are burdened with administrative tasks, and thus have less time to conduct public diplomacy outreach activities than they did previously. One senior State official said that administrative duties, such as budget, personnel, and internal reporting, compete with officers' public diplomacy responsibilities. Another official in Egypt stated that she rarely had enough time to strategize, plan, or evaluate her programs. These statements echo comments we heard during overseas fieldwork and in a survey for our 2003 report. In that survey, officers stated that, although they manage to attend public outreach and other functions within their host country capitals, it was particularly difficult to find time to travel outside the capitals to interact with other communities. This challenge is compounded at posts with short tours of duty, including many tours in the Muslim world, as officials stated that it is difficult to establish the type of close working relationships essential to effective public diplomacy work when they are in country for only a short time. In our May 2006 report, we reported that the average length of tour at posts in the Muslim world is about 22 percent shorter than tour lengths elsewhere. Noting the prevalence of 1-year tours in the Muslim world, a senior official at State said that public affairs officers who have shorter tours tend to produce less effective work than officers with longer tours. To address these challenges, we recommended in 2003 that the Secretary of State designate more administrative positions to overseas public affairs sections to reduce the administrative burden. Officials at State said that the Management bureau is currently considering options for reducing the administrative burden on posts, including the development of centralized administrative capabilities offshore. In August 2006, GAO reported that the State Department continued to experience significant foreign language proficiency shortfalls in countries around the world. Our May 2006 report noted this problem was particularly acute at posts in the Muslim world where Arabic--classified as a "superhard" language by State--predominates. In countries with significant Muslim populations, we reported that 30 percent of language- designated public diplomacy positions were filled by officers without the requisite proficiency in those languages, compared with 24 percent elsewhere. In Arabic language posts, about 36 percent of language- designated public diplomacy positions were filled by staff unable to speak Arabic at the designated level. In addition, State officials said that there are even fewer officers who are willing or able to speak on television or engage in public debate in Arabic. The information officer in Cairo stated that his office does not have enough Arabic speakers to engage the Egyptian media effectively. Figure 3 shows the percentage of public diplomacy positions in the Muslim world staffed by officers meeting language requirements. State has begun to address these language deficiencies by increasing its overall amount of language training and providing supplemental training for more difficult languages at overseas locations. State has also made efforts to ensure that its public diplomacy staff receive appropriate language training. For example, State's Foreign Service Institute recently offered a week of intensive media training for language-qualified officers that provided guidance on how to communicate with Arabic-speaking audiences. Security concerns have limited embassy outreach efforts and public access, forcing public diplomacy officers to strike a balance between safety and mission. Shortly after the terrorist attacks of September 11, 2001, then-Secretary of State Colin Powell stated, "Safety is one of our top priorities...but it can't be at the expense of the mission." In our May 2006 reported we noted that security concerns are particularly elevated in countries with significant Muslim populations, where the threat level for terrorism is rated as "critical" or "high" in 80 percent of posts. Security and budgetary concerns have led to the closure of publicly accessible facilities around the world, such as American Centers and Libraries. In Pakistan, for example, all American Centers have closed for security reasons; the last facility, in Islamabad, closed in February 2005. These same concerns have prevented establishing a U.S. presence elsewhere. As a result, embassies have had to find other venues for public diplomacy programs, and some activities have been moved onto embassy compounds, where precautions designed to improve security have had the ancillary effect of sending the message that the United States is unapproachable and distrustful, according to State officials. Concrete barriers and armed escorts contribute to this perception, as do requirements restricting visitors' use of cell phones and pagers within the embassy. According to one official in Pakistan, visitors to the embassy's reference library have declined to as few as one per day because many visitors feel humiliated by the embassy's rigorous security procedures. Other public diplomacy programs have had to limit their publicity to reduce the risk of becoming a target. A recent joint USAID-State report concluded that "security concerns often require a 'low profile' approach during events, programs or other situations, which, in happier times, would have been able to generate considerable good will for the United States." This constraint is particularly acute in Pakistan, where the embassy has had to reduce certain speaker and exchange programs. State has responded to security concerns and the loss of publicly accessible facilities through a variety of initiatives, including American Corners, which are centers that provide information about the United States, hosted in local institutions and staffed by local employees. According to State data, there are currently 365 American Corners throughout the world, including more than 200 in the Muslim world, with another 31 planned (more than 20 of which will be in the Muslim world). However, two of the posts we visited in October 2005 were having difficulty finding hosts for American Corners, as local institutions fear becoming terrorist targets. The Broadcasting Board of Governors has its own set of public diplomacy challenges, including trying to gain large audiences in priority markets while dealing with a disparate organizational structure that contains multiple discrete broadcasters (see fig. 4). As noted in the BBG's strategic plan, "the diversity of the BBG--diverse organizations with different missions, different frameworks, and different constituencies--makes it a challenge to bring all the separate parts together in a more effective whole." As we reported in July 2003, the Board hoped to address this key challenge through two primary means. First, it planned to treat the component parts of U.S. international broadcasting as a single system with the Board in the position of actively managing resources across broadcast entities to achieve common broadcast goals. Second, it intended to realign the BBG's organizational structure to reinforce the Board's role as CEO with a host of responsibilities, including taking the lead role in shaping the BBG's overall strategic direction, setting expectations and standards, and creating the context for innovation and change. In addition, in 2006, we found that MBN, which received $79 million in funding in fiscal year 2006, faces several managerial and editorial challenges that may hinder the organization's efforts to expand in their highly competitive market. While MBN has taken steps to improve its process of program review and evaluation, it has not yet implemented our recommendations to improve its system of internal control or develop a comprehensive staff training plan. Mr. Chairman, this concludes 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 questions regarding this testimony, please contact Jess T. Ford at (202) 512-4128 or [email protected]. Individuals making key contributions to this statement include Audrey Solis, Assistant Director; Michael ten Kate; Eve Weisberg; Kate France Smiles; and Joe Carney. Foreign Assistance: Actions Needed to Better Assess the Impact of Agencies' Marking and Publicizing Efforts. GAO-07-277. Washington, D.C.: Mar. 12, 2007. U.S. International Broadcasting: Management of Middle East Broadcasting Services Could Be Improved. GAO-06-762. Washington, D.C.: Aug. 4, 2006. Department of State: Staffing and Foreign Language Shortfalls Persist Despite Initiatives to Address Gaps. GAO-06-894. Washington, D.C.: Aug. 4, 2006. U.S. Public Diplomacy: State Department Efforts to Engage Muslim Audiences Lack Certain Communication Elements and Face Significant Challenges. GAO-06-535. Washington, D.C.: May 3, 2006. U.S. Public Diplomacy: State Department Efforts Lack Certain Communication Elements and Face Persistent Challenges. GAO-06-707T. Washington, D.C.: May 3, 2006. International Affairs: Information on U.S. Agencies' Efforts to Address Islamic Extremism. GAO-05-852. Washington, D.C.: Sept. 16, 2005. U.S. Public Diplomacy: Interagency Coordination Efforts Hampered by the Lack of a National Communication Strategy. GAO-05-323. Washington, D.C.: April 4, 2005. U.S. Public Diplomacy: State Department and Broadcasting Board of Governors Expand Post- 9/11 Efforts but Challenges Remain. GAO-04- 1061T. Washington, D.C.: Aug. 23, 2004. U.S. Public Diplomacy: State Department and the Broadcasting Board of Governors Expand Efforts in the Middle East but Face Significant Challenges. GAO-04-435T. Washington, D.C.: Feb. 10, 2004. U.S. Public Diplomacy: State Department Expands Efforts but Faces Significant Challenges. GAO-03-951. Washington, D.C.: Sept. 4, 2003. U.S. International Broadcasting: New Strategic Approach Focuses on Reaching Large Audiences but Lacks Measurable Program Objectives. GAO-03-772. Washington, D.C.: July 15, 2003. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.	Since the terrorist attacks of 9/11, polling data have generally shown that anti-Americanism has spread and deepened around the world, and several groups have concluded that this trend may have harmed U.S. interests in significant ways. U.S. public diplomacy activities undertaken by the State Department (State) and the Broadcasting Board of Governors (BBG), which totaled almost $1.5 billion in fiscal year 2006, are designed to counter such sentiments. Based on our prior reports, this testimony addresses (1) the negative consequences various groups have associated with rising anti-American sentiments; (2) strategic planning, coordination, and performance measurement issues affecting U.S. public diplomacy efforts; and (3) key challenges that hamper agency activities. Numerous experts, policymakers, and business leaders have identified various potential negative consequences of growing anti-Americanism. According to these sources, anti-Americanism may have a negative impact on American economic interests, the ability of the United States to pursue its foreign policy and military goals, and the security of Americans worldwide. Our reports and testimonies have highlighted the lack of a governmentwide communication strategy, as well as the need for an integrated State Department strategy, enhanced performance indicators for State and the BBG, and improvements in the BBG's audience research methodology. We also reported in March 2007 that U.S. foreign assistance activities were not being consistently publicized and branded, and we recommended that State help develop governmentwide guidance for marking and publicizing these efforts. State has responded to our recommendations and has taken actions to develop a more strategic approach and measure the effectiveness of its programs. Likewise, the BBG has adapted its strategic plan to include additional performance indicators and is beginning to address our recommendations to adopt management improvements at its Middle East Broadcasting Networks (MBN). Nevertheless, State and the BBG continue to face challenges in implementing public diplomacy and international broadcasting. State has shortages in staffing and language capabilities, and security issues continue to hamper overseas public diplomacy efforts. For example, in 2006 we reported that State continued to experience significant foreign language proficiency shortfalls, particularly at posts in the Muslim world. The BBG faces challenges in managing a disparate collection of broadcasters. Also, MBN faces several managerial challenges involving program review, internal control, and training.	6,128	494
In each of our audits and related investigations, we found thousands of federal contractors that owed billions of dollars of federal taxes. Specifically, In February 2004, we testified that DOD and IRS records showed that about 27,000 DOD contractors owed nearly $3 billion in federal taxes. About 42 percent of this $3 billion represented unpaid payroll taxes. In June 2005, we testified that about 33,000 civilian agency federal contractors owed over $3.3 billion in federal taxes. Over a third of the $3.3 billion represented unpaid payroll taxes. In March 2006, we testified that over 3,800 GSA contractors owed about $1.4 billion in federal taxes. About one-fifth of the $1.4 billion represented unpaid payroll taxes. Because federal contractors may do business with more than one federal agency, some federal contractors that owe tax debts may be included in more than one analysis concerning DOD, GSA, and civilian federal contractors that abuse the federal tax system. In each of our audits, we found that government contractors owed a substantial amount of unpaid payroll taxes. Employers are subject to civil and criminal penalties if they do not remit payroll taxes to the federal government. When an employer withholds taxes from an employee's wages, the employer is deemed to have a fiduciary responsibility to hold these funds "in trust" for the federal government until the employer makes a federal tax deposit in that amount. To the extent these withheld amounts are not forwarded to the federal government, the employer is liable for these amounts, as well as the employer's matching Federal Insurance Contribution Act contributions for Social Security and Medicare. Individuals employed by the contractor (e.g., owners or officers) may be held personally liable for the withheld amounts not forwarded and assessed a civil monetary penalty known as a trust fund recovery penalty. Willful failure to remit payroll taxes can also be a criminal felony offense punishable by imprisonment of up to 5 years, while the failure to properly segregate payroll tax funds can be a criminal misdemeanor offense punishable by imprisonment of up to a year. The law imposes no penalties upon an employee for the employer's failure to remit payroll taxes since the employer is responsible for submitting the amounts withheld. The Social Security and Medicare trust funds are subsidized or made whole for unpaid payroll taxes by the federal government's general fund. Thus, personal income taxes, corporate income taxes, and other government revenues are used to pay for these shortfalls to the Social Security and Medicare trust funds. Although each of our estimates for taxes owed by federal contractors was a significant amount, it understates the full extent of unpaid taxes owed by these contractors. The IRS tax database reflected only the amount of unpaid federal taxes either reported on a tax return or assessed by IRS through its various enforcement programs. The IRS database did not reflect amounts owed by businesses and individuals that have not filed tax returns and for which IRS has not assessed tax amounts due. Our analysis did not attempt to account for businesses or individuals that did not file required payroll or other tax returns or that purposely underreported income and were not specifically identified by IRS as owing the additional federal taxes. According to IRS, underreporting of income accounted for more than 80 percent of the estimated $345 billion annual gross tax gap. As result of the work we performed for the Senate Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs we made numerous recommendations to DOD and civilian agencies to improve their controls over levying payments to contractors with tax debt. Many of those recommendations have been implemented and have resulted in additional collections of unpaid tax debt. We also referred 122 contractors to IRS for further investigation and prosecution. In our previous testimonies, we discussed the results of our in-depth audits and related investigations of 122 federal contractors with outstanding tax debt. For each of these 122 federal contractors, we found instances of abusive or potentially criminal activity related to the federal tax system. Many of our case study contractors were small, closely held companies that operated in wage-based industries, such as security, weapon components, space and aircraft parts, building maintenance, computer services, and personnel services. These 122 federal contractors provided goods and services to a number of federal agencies including DOD, GSA, the National Aeronautics and Space Administration, and the Departments of Homeland Security, Justice, and Veterans Affairs. The types of contracts that were awarded to these contractors also included products or services related to variety of government functions including law enforcement, disaster relief, and national security. Most of the contractors in our case studies owed payroll taxes, with some federal tax debts dating back nearly 20 years. However, rather than fulfilling their role as "trustees" and forwarding these funds to IRS, many of these federal contractors used the funds for personal gain or to fund their contractor operations. Our investigations also revealed that some owners or officers of our case study federal contractors with unpaid taxes were associated with other businesses that had unpaid federal taxes. For example, we reported that one of our case study contractors had a 20-year history of opening a business, failing to remit taxes withheld from employees to IRS, and then closing the business, only to start the cycle all over again and incur more tax debts almost immediately through a new business. We also found that a number of owners or officers of our case study contractors had significant personal assets, including a sports team, commercial properties, multimillion dollar houses, and luxury vehicles. Several owners also gambled hundreds of thousands of dollars at the same time they were not paying the taxes that their businesses owed. Despite owning substantial assets and gambling significant amounts of money, the owners or officers did not ensure the payment of the delinquent taxes of their businesses, and sometimes did not pay their own individual income taxes. Table 1 provides summary information on 10 of our 122 case study contractors that we discussed in our previous testimonies and related reports. The following provides additional detailed information from our previous testimonies on case numbers 1, 4, and 8 summarized in table 1: Case # 1: In February 2004, we testified on a business that had nearly $10 million in unpaid federal taxes, and was contracted by DOD to provide services such as trash removal, building cleaning, and security at U.S. military bases. The contractor reported that it paid the owner a six figure income and that the owner had borrowed nearly $1 million from the business. The owner bought a boat, several cars, and a home outside the country. This contractor went out of business in 2003 after state tax authorities seized its bank account for failure to pay state taxes. The contractor subsequently transferred its employees to a relative's business, which also had unpaid federal taxes, and continued submitting invoices and receiving payments from DOD on the previous contract. Case # 4: In June 2005, we testified on a case that involved many related companies that provided health care services to the Department of Veterans Affairs (VA). During fiscal year 2004, these related companies received over $300,000 in federal contract payments. The related companies had different names, operated in a number of different locations, and used several different Taxpayer Identification Numbers (TIN). However, they shared a common owner and contact address. At the time they were paid by VA, the businesses collectively owed more than $18 million in unpaid federal taxes--of which nearly $17 million was unpaid federal payroll taxes dating back to the mid-1990s. During the early 2000s, at the time when the owner's business and related companies were still incurring payroll tax debts, the owner purchased a number of multimillion dollar properties, an unrelated business, and a number of luxury vehicles. Our investigation also determined that real estate holdings registered to the owner totaled more than $30 million. Case # 8: In March 2006, we testified on a GSA contractor that provided security services for a civilian agency. Our investigative work indicated that an owner of the company made multiple cash withdrawals, totaling close to $1 million, while owing payroll taxes. In addition, the company's owner also diverted the cash withdrawals to fund an unrelated business and purchased a men's gold bracelet worth over $25,000. The company's owner has been investigated for embezzlement and fraud. Federal law and regulations, as reflected in the FAR, do not prohibit contractors with unpaid federal taxes from receiving contracts from the federal government. Although the FAR provides that federal agencies are restricted to doing business with responsible contractors, it does not require federal agencies to deny the award of contracts to contractors that abuse the federal tax system, unless the contractor was specifically debarred or suspended by a debarring official for specific actions, such as conviction for tax evasion. The FAR specifies that unless compelling reasons exist, agencies are prohibited from soliciting offers from, or awarding contracts to, contractors who are debarred, suspended, or proposed for debarment for various reasons, including tax evasion. Conviction for tax evasion is cited as one of the causes for debarment and indictment for tax evasion is cited as a cause for suspension. The deliberate failure to remit taxes, in particular payroll taxes, is a felony offense, and could result in a company being debarred or suspended if the debarring official determines it affects the present responsibility of the government contractor. Most of the contractors in our case studies owed payroll taxes, for which willful failure to remit payroll taxes, a criminal felony offense, or failure to properly segregate payroll taxes, a criminal misdemeanor offense, may apply. At the time of our review, none of the 122 federal contractors described in our previous case study work were debarred from government contracts, despite conducting abusive and potentially criminal activities related to the tax system. As part of the contractor responsibility determination for prospective contractors, the FAR also requires contracting officers to determine whether a prospective contractor meets several specified standards, including determination as to whether a contractor has adequate financial resources and a satisfactory record of integrity and business ethics. However, the FAR does not require contracting officers to consider tax debt in making this determination. Because of statutory restrictions on the disclosure of taxpayer information, even if contracting officers were required to consider tax debts in contractor qualification determinations, contracting officers do not currently have access to tax debt information unless reported by prospective contractors themselves or disclosed in public records. Consequently, unless a prospective contractor consents, contracting officers do not have ready access to information on unpaid tax debts to assist in making contractor qualification determinations with respect to financial capability, ethics, and integrity. Further, contracting officers do not routinely obtain and use publicly available information on contractor federal tax debt in making contractor qualification determinations. Federal law generally does not permit IRS to disclose taxpayer information, including tax debts. Thus, unless the taxpayer provides consent, certain tax debt information generally can only be discovered from public records when IRS files a federal tax lien against the property of a tax debtor. However, contracting officers are not required to obtain credit reports. In the instances where they are obtained, contracting officers generally focus on the contractor's credit score rather than any liens or other public information showing federal tax debts. However, while the information is available, IRS does not file tax liens on all tax debtors nor does IRS have a central repository of tax liens to which contracting officers have access. Further, the available information on tax liens may be of questionable reliability because of deficiencies in IRS's internal controls that have resulted in IRS not always releasing tax liens from property when the tax debt has been satisfied. Federal contractors who owe tax debts have an unfair competitive advantage over contractors who pay their fair share. This is particularly true for federal contractors in wage-based industries, such as security and moving services. By not paying the employee taxes, these contractors keep their payroll tax, which is typically over 15 percent of each employee's wages, thereby reducing the contractor's costs. In this way, contractors who do not pay their taxes do not bear the same costs that tax compliant contractors have when competing on contracts. As a result, tax delinquent contractors can set prices for their goods and services lower than their tax compliant competitors. In March 2006, we testified that we found some GSA contractors who did not fully pay their payroll taxes who were awarded contracts based on price over competing contractors that did not have any unpaid federal taxes. Federal contractors' tax debts were not considered in contract award decisions. For example, a GSA Schedule contractor was awarded two contracts for services related to moving office and equipment furniture. On both contracts, the contractor's offer for services was significantly less than three competing bids on the first contract and two competing bids on the second contract. The contractor owed about $700,000 in taxes (mostly payroll taxes) while its competitors did not owe any federal taxes. The Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council (councils) have proposed to amend the FAR to require prospective contractors to certify whether or not they have, within a 3-year period preceding the offer, been convicted of or had a civil judgment rendered against them for violating any tax law or failing to pay any tax, or been notified of any delinquent taxes for which they still owe the tax. In addition, the prospective contractor will be required to certify whether or not they have received a notice of a tax lien filed against them for which the liability remains unsatisfied or the lien has not been released. The proposed rule also adds the following as additional causes for suspension or debarment: delinquent taxes, unresolved tax liens, and a conviction of or civil judgment for violating tax laws or failing to pay taxes. By issuing the proposed rule on tax delinquency, the councils have acknowledged the importance of delinquent tax debts in the consideration of contract awards. The proposed rule requires offerors to certify whether they have or have not, within a 3-year period preceding the offer, been notified of any unresolved or unsatisfied tax debt or liens. Contracting officers generally cannot verify whether prospective contractors certifying that they have not received notice of unresolved or unsatisfied tax debts actually owe delinquent federal taxes, unless that information is disclosed in public records or unless the offeror provides consent for IRS to disclose its tax records. In March 2006, we testified that in one contractor file we reviewed, a GSA official did ask the prospective contractor about a federal tax lien. The prospective contractor provided documentation to GSA demonstrating the satisfaction of the tax liability covered by that lien. However, because the GSA official could not obtain information from the IRS on tax debts, this official was not aware that the contractor had other unresolved tax debts unrelated to this particular tax lien. Over the past several years, we have testified that thousands of federal contractors failed in their responsibility to pay billions of dollars of federal taxes yet continued to get federal contracts. This practice is inconsistent with the fundamental concept that those doing business with the federal government should be required to pay their federal taxes. With the serious fiscal challenges facing our nation, the status quo is no longer an option. Enhanced contractor requirements to pay their taxes would likely increase contractor tax compliance and federal revenues. Federal law seeking to achieve these objectives should provide flexibility to agencies, such as exceptions for contractors critical to national security. Due process and other safeguards should be built into the system to ensure that contractors that pay their federal taxes are not inadvertently denied federal contracts. We look forward to working with the Subcommittee on this important matter. Mr. Chairman and Members of the Subcommittee, this concludes our statement. We would be pleased to answer any questions you may have. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.	Since 1990, GAO has periodically reported on high-risk federal programs that are vulnerable to fraud, waste, and abuse. Two such high-risk areas are managing federal contracts more effectively and assessing the efficiency and effectiveness of federal tax administration. Weaknesses in the tax area continue to expose the federal government to significant losses of tax revenue and increase the burden on compliant taxpayers to fund government activities. Over the last several years, the Senate Permanent Subcommittee on Investigations requested GAO to investigate Department of Defense (DOD), civilian agency, and General Services Administration (GSA) contractors that abused the federal tax system. Based on that work GAO made recommendations to executive agencies including to improve the controls over levying payments to contractors with tax debt--many of which have been implemented--and referred 122 contractors to IRS for further investigation and prosecution. As requested, this testimony will highlight the key findings from prior testimonies and related reports. This testimony will (1) describe the magnitude of tax debt owed by federal contractors, (2) provide examples of federal contractors involved in abusive and potentially criminal activity related to the federal tax system, and (3) describe current law and proposed federal regulations for screening contractors with tax debts prior to the award of a contract. In our previous audits and related investigations, we reported that thousands of federal contractors had substantial amounts of unpaid federal taxes. Specifically, about 27,000 DOD contractors, 33,000 civilian agency contractors, and 3,800 GSA contractors owed about $3 billion, $3.3 billion, and $1.3 billion in unpaid taxes, respectively. These estimates were understated because they excluded federal contractors that understated their income or did not file their tax returns; however, some contractors may be counted in more than one of these groups. As part of this work, we conducted more in-depth investigations of 122 federal contractors and in all cases found abusive and potentially criminal activity related to the federal tax system. Many of these 122 contractors were small, closely held companies that provided a variety of goods and services, including landscaping, consulting, catering, and parts or support for weapons and other sensitive programs for many federal agencies including the departments of Defense, Justice, and Homeland Security. These contractors had not forwarded payroll taxes withheld from their employees and other taxes to IRS. Willful failure to remit payroll taxes is a felony under U.S. law. Furthermore, some company owners diverted payroll taxes for personal gain or to fund their businesses. A number of owners or officers of the 122 federal contractors owned significant personal assets, including a sports team, multimillion dollar houses, a high-performance airplane, and luxury vehicles. Several owners gambled hundreds of thousands of dollars at the same time they were not paying the taxes that their businesses owed. Federal law, as implemented by the Federal Acquisition Regulation (FAR), does not now require contractors to disclose tax debts or contracting officers consider tax debts in making contracting decisions. Federal contractors that do not pay tax debts could have an unfair competitive advantage in costs because they have lower costs than tax compliant contractors on government contracts. GAO's investigation identified instances in which contractors with tax debts won awards based on price differential over tax compliant contractors.	3,540	685
CMS calculates payment rates for each Part B drug with information on price data that manufacturers report quarterly to the agency. In reporting their price data to CMS, manufacturers are required to account for price concessions, such as discounts and rebates, which can affect the amount health care providers actually pay for a drug. The MMA defined ASP as the average sales price for all U.S. purchasers of a drug, net of volume, prompt pay, and cash discounts; charge-backs and rebates. Certain prices, including prices paid by federal purchasers, are excluded, as are prices for drugs furnished under Medicare Part D. CMS instructs pharmaceutical manufacturers to report data to CMS--within 30 days after the end of each quarter--on the average sale price for each Part B drug sold by the manufacturer. For drugs sold at different strengths and package sizes, manufacturers are required to report price and volume data for each product, after accounting for price concessions. CMS then aggregates the manufacturer-reported ASPs to calculate a national ASP for each drug category. Common drug purchasing arrangements can substantially affect the amount health care providers actually pay for a drug. Physicians and hospitals may belong to group purchasing organizations (GPO) that negotiate prices with wholesalers or manufacturers on behalf of GPO members. GPOs may negotiate different prices for different purchasers, such as physicians, suppliers of DME, or hospitals. In addition, health care providers can purchase covered outpatient drugs from general or specialty pharmaceutical wholesalers or can have direct purchase agreements with manufacturers. In these arrangements, providers may benefit from discounts, rebates, and charge-backs that reduce the actual costs providers incur. Discounts are applied at the time of purchase, while rebates are paid by manufacturers some time after the purchase. Rebates may be based on the number of several different products purchased over an extended period of time. Under a charge-back arrangement, the provider negotiates a price with the manufacturer that is lower than the price the wholesaler normally charges for the product, and the provider pays the wholesaler the negotiated price. The manufacturer then pays the wholesaler the difference between the wholesale price and the price negotiated between the manufacturer and the provider. Using an ASP-based method to set prices for Medicare Part B drugs is a practical approach compared with alternative data sources for several reasons. First, unlike AWP, ASP is based on actual transactions, making it a useful proxy for health care providers' acquisition costs. Whereas AWPs were list prices developed by manufacturers and not required to be related to market prices that health care providers paid for products, ASPs are based on actual sales to purchasers. For similar reasons, payments based on ASPs are preferable to those based on providers' charges, as charges are made up of costs and mark-ups, and mark-ups vary widely across providers, making estimates of the average costs of drugs across all providers wide-ranging and insufficiently precise. In addition, basing payments on charges does not offer any incentives for health care providers to minimize their acquisition costs. Second, ASPs offer relatively timely information for rate-setting purposes. Manufacturers have 30 days following the completion of each quarter to report new price data to CMS. Before the end of the quarter in which manufacturers report prices, CMS posts the updated Part B drug payment rates, to take effect the first day of the next quarter. Thus, the rates set are based on data from manufacturers that are, on average, about 6 months old. In comparison, rates for other Medicare payment systems are based on data that may be at least 2 years old. Third, acquiring price data from manufacturers is preferable to surveying health care providers, as the manufacturers have data systems in place that track prices, whereas the latter generally do not have systems designed for that purpose. In our survey of 1,157 hospitals, we found that providing data on drug acquisition costs made substantial demands on hospitals' information systems and staff. In some cases, hospitals had to collect the data manually, provide us with copies of paper invoices, or develop new data processing to retrieve the detailed price data needed from their automated information systems. Hospital officials told us that, to submit the required price data, they had to divert staff from their normal duties, thereby incurring additional staff and contractor costs. Officials told us their data collection difficulties were particularly pronounced regarding information on manufacturers' rebates, which affect a drug's net acquisition cost. In addition, we incurred considerable costs as data collectors, signaling the difficulties that CMS would face should it implement similar surveys of hospitals in the future. Despite its practicality as a data source, ASP remains a "black box." That is, CMS lacks detailed information about the components of manufacturers' reported price data--namely, methods manufacturers use to allocate rebates to individual drugs and the sales prices paid by type of purchaser. Furthermore, for all but SCODs provided in the HOPD setting, no empirical support exists for setting rates at 6 percent above ASP, and questions remain about setting SCOD payment rates at ASP+6 percent. These information gaps make it difficult to ensure that manufacturers' reported price data are accurate and that Medicare's ASP rates developed from this information are appropriate. Significantly, CMS has little information about the method a manufacturer uses to allocate rebates when calculating an ASP for a drug sold with other products. Unlike discounts, which are deducted at the point of purchase, rebates are price concessions given by manufacturers subsequent to the purchaser's receipt of the product. In our survey of hospitals' purchase prices for SCODs, we found that hospitals received rebate payments following the receipt of some of their drug purchases but often could not determine rebate amounts. Calculating a rebate amount is complicated by the fact that, in some cases, rebates are based on a purchaser's volume of a set, or bundle, of products defined by the manufacturer. This bundle may include more than one drug or a mixture of drugs and other products, such as bandages and surgical gloves. Given the variation in manufacturers' purchasing and rebate arrangements, the allocation of rebates for a product is not likely to be the same across all manufacturers. CMS does not specifically instruct manufacturers to provide information on their rebate allocation methods when they report ASPs. As a result, CMS lacks the detail it needs to validate the reasonableness of the data underlying the reported prices. In addition, CMS does not require manufacturers to report details on price data by purchaser type. Because a manufacturer's ASP is a composite figure representing prices paid by various purchasers, including both health care providers and wholesalers, CMS cannot distinguish prices paid by purchaser type--for example, hospitals compared with other institutional providers, physicians, and wholesalers. In particular, to the extent that some of the sales are to wholesalers that may subsequently mark up the manufacturer's price in their sales to health care providers, the ASP's representation of providers' acquisition costs is weakened. Thus, distinguishing prices by purchaser type is important, as a central tenet of Medicare payment policy is to pay enough to ensure beneficiary access to services while paying pay no more than the cost of providing a service incurred by an efficient provider. In our 2005 report on Medicare's proposed 2006 SCOD payment rates, we recommended that CMS collect information on price data by purchaser type to validate the reasonableness of ASP as a measure of hospital acquisition costs. Better information on manufacturers' reported prices--for example, the extent to which a provider type's acquisition costs vary from the CMS- calculated ASP--would help CMS set rates as accurately as possible. For most types of providers of Medicare Part B drugs--physicians, dialysis facilities, and DME suppliers--no empirical support exists for setting rates at 6 percent above ASP. In the case of HOPDs, a rationale exists based on an independent data source--our survey of hospital prices--but the process of developing rates for SCODs was not simple. In commenting on CMS's proposed 2006 rates to pay for SCODs, we raised questions about CMS's rationale for proposing rates that were set at 6 percent above ASP. CMS stated in its notice of proposed rulemaking that purchase prices reported in our survey for the top 53 hospital outpatient drugs, ranked by expenditures, equaled ASP+3 percent on average, and these purchase prices did not account for rebates that would have lowered the product's actual cost to the hospital. We noted that, logically, for payment rates to equal acquisition costs, CMS would need to set rates lower than ASP+3 percent, taking our survey data into account. In effect, ASP+3 percent was the upper bound of acquisition costs. Consistent with our reasoning, CMS stated in its notice of proposed rulemaking that "Inclusion of ... rebates and price concessions in the GAO data would decrease the GAO prices relative to the ASP prices, suggesting that ASP+6 percent may be an overestimate of hospitals' average acquisition costs." In its final rule establishing SCOD payment rates, CMS determined that our survey's purchase prices equaled ASP+4 percent, on average, based on an analysis of data more recent than CMS had first used to determine the value of our purchase prices. CMS set the rate in the final rule at ASP+6 percent, stating that this rate covered both acquisition costs and handling costs. We have not evaluated the reasonableness of the payment rate established in the final rule. Lacking detail on the components of ASP, CMS is not well-positioned to confirm ASP's accuracy. In addition, CMS has no procedures to validate the data it obtains from manufacturers by an independent source. In our 2006 report on lessons learned from our hospital survey, we noted several options available to CMS to confirm the appropriateness of its rates as approximating health care providers' drug acquisition costs. Specifically, we noted that CMS could, on an occasional basis, conduct a survey of providers, similar to ours but streamlined in design; audit manufacturers' price submissions; or examine proprietary data the agency considers reliable for validation purposes. HHS agreed to consider our recommendation, stating that it would continue to analyze the best approach for setting payment rates for drugs. Because ASP is based on actual transaction data, is relatively timely, and is administratively efficient for CMS and health care providers, we affirm the practicality of the ASP-based method for setting Part B drug payment rates. However, we remain concerned that CMS does not have sufficient information about ASP to ensure the accuracy and appropriateness of the rates. To verify the accuracy of price data that manufacturers submit to the agency, details are needed--such as how manufacturers account for rebates and other price concessions and how they identify the purchase prices of products acquired through wholesalers. Equally important is the ability to evaluate the appropriateness of Medicare's ASP-based rate for all providers of Part B drugs over time. As we recommended in our April 2006 report, CMS should, on an occasional basis, validate ASP against an independent source of price data to ensure the appropriateness of ASP- based rates. Madam Chairman, this concludes my prepared statement. I will be happy to answer any questions you or the other Subcommittee Members may have. For further information regarding this testimony, please contact A. Bruce Steinwald at (202) 512-7101 or [email protected]. Phyllis Thorburn, Assistant Director; Hannah Fein; and Jenny Grover contributed to this statement. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of 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.	In 2005, the Centers for Medicare & Medicaid Services (CMS), as required by law, began paying for physician-administered Part B drugs using information on the drugs' average sales price (ASP). Subsequently, CMS selected ASP as the basis to pay for a subset of Part B drugs provided at hospital outpatient departments. To calculate ASP, CMS uses price data submitted quarterly by manufacturers. GAO was asked to discuss its work on Medicare payment rates for Part B drugs. This testimony is based on several GAO products: Medicare Hospital Pharmaceuticals: Survey Shows Price Variation and Highlights Data Collection Lessons and Outpatient Rate-Setting Challenges for CMS, GAO-06-372 , Apr. 28, 2006; Medicare: Comments on CMS Proposed 2006 Rates for Specified Covered Outpatient Drugs and Radiopharmaceuticals Used in Hospitals, GAO-06-17R , Oct. 31, 2005; and Medicare: Payments for Covered Outpatient Drugs Exceed Providers' Costs, GAO-01-1118 , Sept. 21, 2001. Specifically, GAO's statement discusses (1) ASP as a practical and timely data source for use in setting Medicare Part B drug payment rates and (2) components of ASP that are currently unknown and implications for Medicare rate-setting. In summary, using an ASP-based method to set payment rates for Part B drugs is a practical approach compared with methods based on alternative data sources, for several reasons. First, ASP is based on actual transactions and is a better proxy for providers' acquisition costs than average wholesale price or providers' charges included on claims for payment, neither of which is based on transaction data. Second, ASPs, which manufacturers update quarterly, offer information that is relatively timely for rate-setting purposes. In comparison, rates for other Medicare payment systems are based on data that may be at least 2 years old. Finally, using manufacturers as the data source for prices is preferable to collecting such data from health care providers, as the manufacturers have data systems in place to track prices, whereas health care providers generally do not have systems designed for that purpose. CMS lacks certain information about the composition of ASP that prompted GAO, in commenting on CMS's 2006 proposed payment rates for a subset of Part B drugs, to call ASP "a black box." Significantly, CMS lacks sufficient information on how manufacturers allocate rebates to individual drugs sold in combination with other drugs or other products; this is important, as CMS does not have the detail it needs to validate the reasonableness of the data underlying the reported prices. In addition, CMS does not instruct manufacturers to provide a breakdown of price and volume data by purchaser type--that is, by physicians, hospitals, other health providers, and wholesalers, which purchase drugs for resale to health care providers. As a result, CMS cannot determine how well average price data represent acquisition costs for different purchaser types. In particular, to the extent that some of the sales are to wholesalers that subsequently mark up the manufacturer's price in their sales to providers, the ASP's representation of providers' acquisition costs is weakened. Additionally, a sufficient empirical foundation does not exist for setting the payment rate for Medicare Part B drugs at 6 percent above ASP, further complicating efforts to determine the appropriateness of the rate. Given these information gaps, CMS is not well-positioned to validate the accuracy or appropriateness of its ASP-based payment rates.	2,602	759
Navy auxiliary ships provide underway replenishment to Navy combatant ships worldwide thereby allowing combatant ships to remain at sea for extended periods. These ships deliver cargo and provide services such as towing and salvage operations. Navy auxiliary ships are crewed either by active duty military personnel or civil service mariners. Those ships crewed by civil service mariners also have a small detachment of active duty Navy personnel aboard to provide communications, ordnance handling, supply support, and technical support. As of May 1997, the Navy's auxiliary fleet consisted of 42 ships--15 oilers, 6 stores ships, 7 ammunition ships, 7 tugs, and 7 multiproduct ships. One additional multiproduct ship of a new class is currently under construction. The Navy has delegated operational control of 27 of these ships to MSC, the military's single manager for sealift, to better support Navy fleet operations. MSC crews these 27 ships with civil service mariners. The Navy's remaining 15 auxiliary ships are crewed by military personnel. Under current policy, the Navy will not permit the use of commercial crews on any auxiliary ships because it considers their mission purely military in nature. As of May 1997, the Navy had MSC operating 27 of its 42 auxiliary ships with civil service crews. The type and number of auxiliary ships operated by MSC with civil service crewing and the crew size for each ship are shown in table 1. This table also shows the size of the military detachment on these ships. Under current policy, the Navy will not permit any auxiliary ships to be crewed with commercial mariners. In an April 1995 letter to the American Maritime Officers union, the Under Secretary of the Navy stated that the mission of its auxiliary ships was purely military in nature and not considered commercial-type operations. Therefore, according to the Under Secretary, auxiliary ships would only be crewed with government employees, even if the use of commercial employees was cost-effective. In an April 1996 letter to the same union, the Assistant Secretary of the Navy for Research, Development, and Acquisition reiterated this policy, stating that the Navy's auxiliary ships would be crewed by civil service mariners due to the special nature of the auxiliary ships' operation. As of May 1997, Navy officials confirmed that this policy was still in effect. As of May 1997, the Navy was continuing to crew 15 auxiliary ships with military personnel. The types of ships are shown in table 2. The Navy plans to (1) turn over the operation of the three ammunition ships to MSC for crewing with civil service mariners and (2) decommission the five oilers in fiscal year 1999, replacing them with four oilers built to commercial standards that are currently in reduced operating status or deactivated. These latter ships would also be crewed with civil service mariners. The Navy has not decided on whether to turn over the operation of the seven multiproduct auxiliary ships to MSC. Some Navy officials believe that multiproduct ships should continue to be crewed with military crews because they are the auxiliary ships that can maintain battle group speeds and operate within the battle group formations. However, MSC officials stated that they have studied what it would take to operate the multiproduct ships and are willing to accept the transfer because they believe MSC civil service crews can operate these ships. Our work and prior studies have shown that the Navy could achieve savings by using civil service crews on auxiliary ships. According to November 1996 data, the most current available, the Navy's annual cost to operate a multiproduct ship (AOE-1 class), built in the 1960s, is $54 million compared to MSC's estimated cost of $37 million to operate the ship using a civil service crew. The savings of nearly $18 million are primarily attributable to differences in crew sizes. MSC operates its ships with a smaller crew because it hires skilled mariners, whereas Navy crews are often recruits that must be trained to replace more skilled sailors. The Navy operates this ship with 600 crewmembers while MSC would use about 247 crewmembers. Similar differences apply to the multiproduct ship (AOE-6 class), built in the 1990s, which is a smaller, modified version of the earlier ship. The Navy operates this ship for $48 million annually, with 580 crewmembers. MSC's estimated cost to operate this ship is $31 million annually with 229 crewmembers. The savings of over $17 million are also primarily attributable to differences in crew sizes. The differences in annual operating costs between the Navy and MSC to operate the two classes of multiproduct ships are shown in table 3. Using the Navy's data of the cost to operate the two classes of multiproduct ships, we estimated that if the Navy turned over the operation of the seven multiproduct ships to MSC for civil service crewing, it could save $122.5 million annually. Table 4 shows these potential savings. A fourth AOE-6 class ship is under construction at the National Steel and Shipbuilding Company in San Diego, California, and is scheduled for delivery in early 1998. If the Navy chooses to include this ship with the rest of the multiproduct ships turned over to MSC, an additional $17.1 million annually would be saved, for a total annual savings of $139.6 million. According to MSC unofficial estimates, these savings would be offset by a one-time cost of $45 million for an AOE-1 and $30 million for an AOE-6 to convert these ships to Coast Guard standards, which differ from Navy standards, that is, $180 million for all four AOE-1 ships and $120 million for all four AOE-6 ships, or $300 million for all eight ships. However, such an investment would seem advantageous considering the annual estimated savings of $139.6 million. In a 1990 study of civilian manning of auxiliary ships, the Center for Naval Analyses found that the Navy would save $265 million annually if the Navy turned over 42 support ships and tenders to MSC. The study attributed the annual savings to much smaller crew sizes on MSC ships. It reported, for example, that civil service crews on a Navy oiler would be half the crew size the Navy used on those ships. In 1993, the Institute for Defense Analyses found that the Navy could save considerable cost and personnel positions by operating more of its auxiliary ships with civil service mariners. The Institute reported that a civilian operation saves on cost by reducing the total crew size by about half for a similar ship. It concluded that the Navy could save $4 million to $15 million a year per ship, depending on the type, by reducing the number of sea-going personnel positions on auxiliary ships and crewing them with civilians. A 1994 Naval Audit Service report also found that significant cost benefits could be achieved if Navy auxiliary ships were crewed by civil service mariners. The report, which covered 45 ships, stated that by turning over the ships to MSC, crewing could be reduced 52 percent, from 19,440 crewmembers to 9,264 crewmembers. Depending on the cost method applied, the Navy could save $3.7 billion or $4.3 billion over a 5-year period. The Naval Audit Service recommended that the Navy turn over the 45 auxiliary ships to MSC for civil service crewing. Another advantage of turning over the Navy multiproduct ships to MSC is, as Navy and MSC officials pointed out, that MSC ships do not have the constraints on operating days per ship and on days at sea per crewmember that Navy ships do. It is Navy policy to assign a sailor to a ship for 3 years and not to have the sailor spend more than 6 consecutive months each year at sea, whereas MSC policy is to have MSC crews spend about 9 months out of every 12 months at sea. According to these officials, an MSC ship can operate more days per year than a comparable Navy ship--resulting in fewer MSC ships being needed to conduct underway replenishment. Further, these officials agree that additional savings could be realized because some ships could be retired, decommissioned, or deactivated. The Navy is currently conducting a study to determine whether it is more cost-effective to continue the operation of the multiproduct auxiliary ships under Navy control or turn over the operation of these ships to MSC. The objectives of the study are to (1) determine the Navy minimum crewing level, (2) compare the proposed reduced Navy crewing level with comparable MSC crewing, and (3) recommend a course of action based on a comparison of MSC and Navy crewing levels. Navy officials estimate that this study should be completed by the end of 1997. Although the Navy's current policy is not to use commercial crews, we compared the cost of crewing auxiliary ships with commercial and civil service crews. Based on our analysis, we found that crewing with commercial mariners costs more. In addition, we calculated an increase in the merchant mariner pool that could be available to crew ready reserve fleet ships in time of conflict. Historically, the United States has relied on the private sector for combat support elements in time of war or national emergency. In 1972, a joint U.S. Navy-Maritime Administration project used the SS Erna Elizabeth to test the feasibility of using commercial mariners to conduct underway replenishment. The SS Erna Elizabeth steamed about 13,000 miles and refueled 40 ships at sea. In another 1972 test, the SS Lash Italia delivered food and other consumable items to the Sixth Fleet in the Mediterranean. During Operations Desert Shield and Storm, a contract-operated tanker, the MV Lawrence H. Giannella operated by a commercial crew, provided fuel to Navy combatant ships while at sea. To analyze the annual costs between civil service and commercial crews, we obtained crewing levels and wage rates from two commercial mariner unions and MSC for the operation of a Kaiser class oiler, the most commonly used ship in the MSC fleet. We focused on labor costs and excluded other costs from the comparison because we assumed other operation costs, such as fuel, maintenance, and the small detachment of active duty Navy personnel on board ship, would continue to be incurred regardless of who operated the ship. We estimated that the annual labor cost to operate a Kaiser class oiler with a civil service crew would be $6.562 million and the cost with a commercial crew would be $6.883 million, a difference of about $321,000, or about 5 percent. The estimate with a civil service crew was based on a crew size of 82 members, the authorized crewing level of a Kaiser class oiler. The commercial crew estimate was based on a crew size of 79 members, a size with which the two commercial mariner unions believed the mission could be accomplished. The major cost elements were wages and overtime, pension, medical, vacation, and other fringe benefits and personnel support costs. The differences between the annual labor costs of civil service and commercial crews to operate a Kaiser class oiler are shown in table 5. Our cost comparison showed that the annual base wages and overtime for civil service crews were $586,000, or 14 percent, more than the annual wages and overtime for commercial crews. In addition,the civil service pension costs were $573,000, or 214 percent, higher than commercial pension costs. The higher civil service wage and pension costs were offset by higher medical, vacation, and other fringe benefits and personnel support costs for commercial mariners, which resulted in a higher overall cost for commercial operations. Commercial mariner medical costs were $418,000 higher than civil service costs primarily because, according to a union official, commercial mariners have 100 percent of their medical insurance paid for (i.e., they make no contribution directly out of their paychecks). In contrast, civil service mariners pay a part of their medical insurance costs. Commercial vacation costs were $272,000 higher than civil service costs because, according to a union official, a commercial mariner earns 1 day off for every 3 days at sea, which translates to 1 month off after 3 months at sea. By comparison, a civil service mariner earns a maximum of 26 days a year off, which is supplemented by an additional 2 days of shore leave for 30 consecutive calendar days at sea. The commercial costs for fringe benefits and personnel support costs were $790,000 higher than civil service costs. The two major components in the commercial costs were payroll taxes and training. The difference is partially attributable to the fact that the government equivalent to payroll taxes is included in the civil service pension costs. In addition, based on the MSC cost formula, MSC would allocate less money for training. We calculated that the pool of U.S. civil service mariners would increase by about 1,700 merchant mariners if the operation of the multiproduct ships were turned over to MSC (see table 6). MSC established the size of its civil service mariner workforce at a ratio of 1.25 of the shipboard positions to be filled. This crew ratio allows operations to continue while some of the mariners take vacation, undergo training, or are out sick. We calculated that the commercial mariner pool to support shipboard positions would increase by about 2,700 to 3,400 mariners if commercial firms operated the multiproduct ships (see table 7). Each commercial mariner position is established at the ratio of from 2.0 to 2.5 of the shipboard positions. This crew ratio allows operations to continue while some of the mariners take vacation, undergo training, or are out sick. The off duty mariners could be used for the ready reserve fleet in times of conflict. Given the potential savings that could result if the Navy turned over the operation of the seven active multiproduct auxiliary ships and the one ship due for delivery in early 1998 to MSC for crewing with civil service mariners, we recommend that the Secretary of Defense direct the Secretary of the Navy to devise a detailed plan for turning over, in a timely manner, the operation of the multiproduct auxiliary ships to MSC. DOD partially concurred with our recommendation to the Secretary of Defense that the Secretary of the Navy devise a plan for turning over the operation of the remaining auxiliary ships to MSC. However, DOD noted that certain operational changes, ship retirements, and other actions affecting the fleet were under consideration and that more study should be done on this matter. Accordingly, DOD suggested that we modify our recommendation to the Secretary of Defense to direct the Navy to continue a cost-benefit analysis based on the Fleet Commanders' concept of operations, crewing alternatives, and conversion costs, including indirect and additional costs. DOD stated that based on this analysis, the Navy would then either retain or turn over the operation of the multiproduct ships to MSC. We have retained our original recommendation in view of the substantial costs savings that are possible and the fact that our analysis is supported by three other major studies of this issue since 1990. All of these studies have consistently concluded that substantial savings can be achieved by turning over the operation of these ships to MSC and crewing them with civil service mariners. By developing a plan for a timely transfer of these assets to MSC as our recommendation suggests, the Navy can achieve substantial savings that might then be applied to other defense priorities. DOD's comments are presented in their entirety in appendix I. DOD also provided technical comments, which we have incorporated where appropriate. To provide information on the Navy's current and planned efforts to turn over the operation of military crewed auxiliary ships to MSC for civil service and/or commercial crewing, we analyzed data from and interviewed officials in the Office of the Chief of Naval Operations, MSC, the Center for Naval Analyses, commercial ship operating companies, and civilian maritime unions. To identify the potential cost savings that would be realized by turning over the operation of the Navy's remaining military crewed auxiliary ships to MSC, we compared actual annual operating costs provided by the Navy to estimated annual operating costs provided by MSC for both classes of multiproduct ships. We then projected the savings per ship over the number of ships in each class to arrive at a total annual savings. The offsetting costs to convert the ships to Coast Guard standards were provided by MSC. We did not validate the accuracy of the cost data provided by the Navy or the cost estimates provided by MSC. However, we discussed our analysis of these costs and potential savings with the Office of the Chief of Naval Operations and MSC officials who generally agreed with the cost data used. To analyze the costs to operate MSC's Kaiser class oiler with civil service crews and with commercial crews, we reviewed data and interviewed officials from the Maritime Administration, MSC, the American Maritime Officers union, the National Maritime Union, the Seafarers International Union, the National Marine Engineers' Beneficial Association District #1, and the International Organization of Masters, Mates, and Pilots. We obtained crew sizes based on the Navy's mission and manning requirements for Kaiser class oilers. We determined the annual labor cost of civil service crews by obtaining actual crewing levels and current wage rates, including overtime, from MSC. We obtained the overtime rate for the crew (the Master and the Chief Engineer do not receive overtime); vacation and sick leave; compensatory time and training costs; and pension, medical, and miscellaneous costs. To determine the annual labor costs for commercial mariners, we obtained proposed crewing levels and wage rates from two unions that represented all positions on the ship. While discussing issues with us, officials from the other commercial mariner unions declined to provide wage and crewing data. The Service Contract Act of 1965 (SCA), 41 U.S.C. SSSS 351 et seq., generally provides for payment of prevailing wages when operating in U.S. territorial waters as determined by the Department of Labor for service employees under government contracts. Union officials stated that SCA was not applicable to commercial crews when operating outside U.S. territorial waters. Between May 1996 and April 1997, the Kaiser Class oilers operated in U.S. territorial waters 37 percent of the time and, thus, would come under the provisions of SCA during this period. Because the Kaiser Class oilers have been solely operated by civil service crews, the Department of Labor has not made a wage determination under SCA. To estimate the impact of operating with commercial crews, we used wage and overtime rates provided by two commercial unions for civilian crews, which is the basis for the $4,116,000 figure. If, on the other hand, commercial crews were paid the MSC rate while operating in U.S. territorial waters, total labor costs would be 5 percent higher than our estimate, assuming they operated as MSC does--about 37 percent of the time in U.S. territorial waters. However, union officials told us that they would probably operate differently, spending less time in U.S. territorial waters. We did not validate the cost data obtained from MSC or the unions. We conducted our work from April 1996 to July 1997 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretaries of Defense and the Navy; the Chairman of the Senate Committee on Commerce, Science, and Transportation; and other interested congressional committees. Copies will also be made available to others upon request. Please contact me at (202) 512-5140 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix II. Roderick Moore The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.	Pursuant to a congressional request, GAO reviewed the Navy's use of alternative crewing arrangements for Navy auxiliary ships, focusing on: (1) the Navy's plans for turning over the operation of military crewed auxiliary ships to its Military Sealift Command (MSC) for civil service or commercial crewing; (2) whether cost savings would be realized if the Navy turned over the operation of the remaining military crewed auxiliary ships to MSC; (3) the relative costs of operating a Navy auxiliary ship with a civil service crew and the costs of operating the same ship with a commercial crew; and (4) the increase in the merchant mariner pool if the operation of the multiproduct ships were turned over to MSC. GAO noted that: (1) the Navy plans to turn over the operation of its remaining three ammunition ships to MSC for crewing with civil service mariners; (2) as of May 1997, the Navy had not decided on whether to turn over the operation of the remaining seven auxiliary ships as well as the single ship under construction to MSC; (3) all eight of these ships are multiproduct ships; (4) based on Navy cost data and MSC cost estimates, the Navy could save about $139.6 million annually by turning over the operation of these eight multiproduct ships to MSC for crewing with civil service mariners; (5) this savings is due primarily to a much smaller crew size than has been traditional on military crewed auxiliary ships; (6) these savings would be offset by a one-time conversion cost of $30 million to $45 million per ship, or about $300 million for all eight ships, to meet Coast Guard standards; (7) MSC might also need fewer ships to provide underway replenishment since unlike the Navy, it does not have the personnel and operating limitations on the number of operating days per ship and on days at sea per crewmember; (8) three other studies conducted since 1990 by the Center for Naval Analyses, the Institute for Defense Analyses, and the Naval Audit Service have also identified the potential for large cost savings if the Navy were to transfer additional ships to MSC; (9) these studies' projected savings were also primarily due to the smaller crew sizes on MSC ships; (10) the Navy does not intend to divert from its current policy of not using commercial mariners to crew auxiliary ships; (11) its position is that these ships must be crewed by military or civil service personnel due to their military mission; (12) however, if it were to change this policy, GAO's analysis shows that it would cost the Navy about $321,000, or about 5 percent more a year, to operate a commonly used MSC oiler ship with commercial crews than with civil service crews; (13) the difference in costs is primarily attributable to higher fringe benefit costs for commercial crews; (14) with respect to the size of the mariner pool under different crewing alternatives, GAO calculated that the pool of U.S. civil service mariners would increase by about 1,700 merchant mariners if the 8 remaining auxiliary ships were turned over to MSC and were crewed by civil service mariners; and (15) the pool of commercial merchant mariners would increase by about 2,700 to 3,400 mariners if these same ships were crewed by commercial mariners.	4,467	720
The Department of the Interior'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 relationship with and responsibility to the Indian people for educating Indian children by working with tribes to ensure that these programs are In accordance with this trust of the highest quality, among other things.responsibility, Indian Affairs is responsible for providing a safe and healthy environment for students to learn. Indian Affairs oversees multiple bureaus and offices that play a key role in managing and overseeing school facilities for Indian students (see fig. 1). These bureaus and offices have several key responsibilities, including the following: The Office of the Deputy Assistant Secretary of Management oversees a number of administrative and operational functions to help Interior meet its responsibilities for designing, planning, building, and operating Indian school facilities. Specifically, the Deputy Assistant Secretary oversees the Office of Facilities, Property and Safety Management, which includes the Division of Facilities Management and Construction. This office is responsible for developing policies 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. Regarding school facility management, BIA oversees the day-to-day implementation and administration of school facility projects through its regional field offices. Currently there are 12 regional offices that report to the BIA Deputy Bureau Director of Field Operations. Nine of these regions have facility management responsibilities, which include performing school inspections to ensure compliance with regulations and providing technical assistance to BIE-operated and tribally-operated schools on facility issues. The Bureau of Indian Education oversees various educational functions, including funding and operating BIE schools. Three Associate Deputy Directors report to the Deputy Director of School Operations and are responsible for overseeing multiple BIE education line offices that work directly with schools to provide technical assistance, including on facility matters. Some line offices have their own facility managers, and many schools--both BIE-operated and tribally operated--also have their own facility managers or other staff who perform routine maintenance and repairs. Indian Affairs collects and tracks school condition data related to facility deficiencies, capital improvements, or construction for specific inventory items, such as classrooms, sidewalks, or utility systems. It also includes information on school facility repair needs--commonly referred to as the facilities deferred maintenance backlog--which are entered into an automated information system known as the Facilities Management Information System (FMIS). Responsibility for data entry into FMIS is shared by Indian Affairs staff, school personnel, and an Indian Affairs' contractor who conducts inspections of school facilities. Indian Affairs uses a multilevel review process to examine the accuracy and completeness of backlog information in FMIS. In this process, each entry that school facility managers propose to add to the backlog list is reviewed and approved by several levels within Indian Affairs, including BIA agencies and regional offices, the Indian Affairs' facility condition assessment contractor, and with final approval by the Division of Facilities Management and Construction. Indian Affairs uses approved backlog information to make funding decisions regarding school facilities. Backlog repair projects are prioritized based on health and safety risks, among other factors. Indian Affairs also has various funding categories, including emergencies and minor improvements. Once funding for school construction and repair is approved, Indian Affairs offers three main project management options. Tribes and/or schools may choose to (1) have Indian Affairs manage the project, (2) manage the project based on a contract received from Indian Affairs, or (3) in the case of tribally- operated schools, manage the project based on a grant received from Indian Affairs. Over the past four decades, we have conducted a body of work on challenges related to Indian education, including longstanding issues regarding Indian Affairs' management of school facilities. Our work on BIE school facilities conducted in 1997 and 2003 highlighted the poor conditions of Indian schools and the need for more reliable national data to assess the condition of school facilities. Interior's Inspector General and others have also reported similar issues, including health and safety hazards at BIE schools. Our past work and other research pointed to a variety of persistent challenges Indian Affairs has encountered in maintaining complete and accurate data on the condition of BIE school facilities. For example, in 2003 we reported on inaccurate and incomplete data entry by school officials, ineffective agency guidance, limited training in using FMIS, and agency staff not being held accountable for ensuring data integrity. Similarly, in 2011, the No Child Left Behind School Facilities and Construction Negotiated Rulemaking Committee, which the Secretary of the Interior was required to establish under the No Child Left Behind Act of 2001 (NCLBA), also identified problems with the quality of FMIS data on BIE school facilities.of school-level expertise in using FMIS, inadequate training, unreliable access to FMIS, and infrequent data validation of deficiencies by Indian Affairs' contractor, among other issues. Further, the Committee reported that no Indian Affairs staff were tasked with monitoring schools' use of FMIS to ensure that school officials were entering backlog items and, if not, to provide them with technical assistance. As a result, the Committee reported that problems using FMIS at many BIE schools were unresolved, schools did not know where to turn for assistance, and data entry across schools was inconsistent. The Committee attributed the problems to a lack Our ongoing work suggests that issues with the quality of data on school conditions--such as inconsistent data entry by schools and insufficient quality controls--continues to make it difficult to determine the actual number of schools in poor condition, which impedes Indian Affairs' ability to effectively track and address school facility problems. For example, while Indian Affairs has a multilevel review process for examining the accuracy and completeness of backlog entries, we found that it does not routinely monitor whether schools are entering complete data on their facilities. For instance, an Indian Affairs internal control review of FMIS in 2010 identified inadequate controls for determining if and when all identified safety deficiencies are addressed by schools because no Indian Affairs office takes responsibility to ensure that such deficiencies are addressed by schools. According to the 2010 review, without this information Indian Affairs cannot identify and prioritize for funding for these critical deficiencies. Indian Affairs officials told us that this issue continues to be a significant challenge to FMIS data quality. We also found that some schools we visited encountered obstacles to data entry. For example, officials at one BIE-operated school noted that they did not routinely enter information into FMIS because staff lacked expertise and Indian Affairs did not provide them adequate training. As a result, they said existing information on their facilities in FMIS significantly understates their actual repair needs. According to a BIA regional officer, frequent turnover among facility staff, especially at tribally-operated schools, can exacerbate this gap in FMIS expertise. Schools can also face difficulties gaining or maintaining access to FMIS. For example, officials with one tribally operated school told us they encountered persistent problems with connecting and maintaining access to FMIS, sometimes limiting their use of the system to about 5 minutes at a time. Interior's Inspector General has recently found similar challenges with data entry at several other schools, and it continues to monitor this issue. According to Indian Affairs officials, the last centralized training on using FMIS was held in 2012. While Indian Affairs uses a contractor to address some data quality issues by validating deficiencies on schools' deferred maintenance backlogs and facility inventories, our ongoing work has found that the scope and frequency of their assessments are limited. According to Indian Affairs officials, the contractor is supposed to assess the conditions of schools by performing a visual inspection of each school once over a 3-year cycle, and inspections are grouped by region. One BIA regional official told us that in his region one field inspector was sent to conduct an onsite inspection and noted that a single inspector may not be capable of assessing a school's facilities because they may contain multiple systems--such as heating/cooling, and fire alarm and suppression systems--that require specialized expertise to assess. Officials also reported that Indian Affairs policy is for the contractor not to assess schools in a particular 3-year cycle if they are about to be replaced or undergoing major construction. At one school we visited, which had not been assessed in 5 years because of ongoing construction, we found problems with both older and newly constructed buildings, such as leaking roofs. Also, Indian Affairs' contractor is responsible for reviewing and updating information on school facility inventories during onsite inspections. However, one school facility manager suggested that the contractor's inspections may be too short for a thorough and accurate inventory of all buildings and systems. In 2012, Indian Affairs began an effort to identify and correct inaccuracies in schools' backlog and inventory data to respond to the findings and recommendations of the No Child Left Behind Negotiated Rulemaking Committee's 2011 report. Further, Interior is currently moving all school facility data from FMIS to a new Indian Affairs facility information management system based on Maximo, which is required by the agency Officials said that through this data cleanup for all departmental offices.effort, they have identified and eliminated duplicate backlog deficiencies in FMIS, and they noted that Maximo will simplify data entry. However, these officials also noted FMIS constitutes a one-stop shop for managing school facility data, and that Maximo lacks several key functions that exist in FMIS, such as project management and budget execution, among others. They said they plan to add new applications to Maximo to work around some of these limitations. Additionally, one BIA regional official said that Maximo could be cumbersome to use and will require schools to use multiple new systems. Indian Affairs has provided some training on Maximo for schools, but officials indicated that there are currently few active users in part because of frequent turnover among school staff, and requests for facility funding are not yet able to be made in Maximo. Our preliminary results suggest that Indian Affairs' data cleanup efforts and shift to Maximo will not address key challenges with school facility data, including barriers to data entry at some schools and inadequate data quality controls. As we have previously stated, incorrect and inconsistent data undermines management of the federal government's real property assets. Federal agencies should improve the quality of their data to document performance and support decision making. Further, the National Forum on Education Statistics has stated that quality data are important for making informed decisions about school facilities. We believe that inaccurate and incomplete data will continue to hinder Indian Affairs' ability to identify and prioritize schools' repair and improvement needs and effectively target limited funds. This may also worsen existing conditions at some schools and may lead to greater future costs and degraded environments that negatively affect the education of BIE students. During our ongoing work, we visited schools in three states that reported facing a variety of facility-related challenges, including remoteness of their locations, aging buildings and infrastructure, limited funding, and problems with the quality of new construction, which we believe could affect their ability to provide safe, quality educational environments for students. Several of the schools we visited during our ongoing review were located in remote, rural areas and a few encountered obstacles in maintaining their own infrastructure, such as water systems or electrical utilities. For example, the facility manager at one school described an antiquated water system that is costly to maintain and repair, does not generate enough water pressure to fill the school's water tower and cannot be used effectively to fight fires. As we have previously reported, BIE schools tend to be located primarily in rural areas and small towns and serve American Indian students living on or near reservations.that because of their isolation, these schools tend to have more extensive In particular, we found infrastructure needs than most public schools--including their own water and sewer systems, electric utilities, and other important services that are generally provided to public schools by municipalities--and maintaining them can be a considerable drain on schools' resources. Several schools we visited during our ongoing review faced challenges with aging facilities and related systems. For example, at one school built in 1959 we observed extensive cracks in concrete block walls and supports, which a local BIA agency official said resulted from soft marsh soil and a shifting foundation. According to school officials, two of their boilers are old, unreliable, and costly to maintain, and sometimes it is necessary to close the school when they fail to provide enough heat. According to school officials, these systems also reflect 1950s technology, so the costs to maintain them are high. Staff told us they also have difficulty acquiring parts for these systems and, in some cases, fabricate work-around parts to replace outmoded parts that wear out or break. School and regional BIA officials considered the boilers to be safe, but a BIE school safety specialist reported that the conditions of the school's boilers were a major health and safety concern. (See fig.2.) At another school, we observed a dormitory for elementary school students built in 1941 with cramped conditions, no space for desks, poor ventilation, and inadequate clearance between top bunks and sprinkler pipes in sleeping areas. School officials noted that students had received head injuries from bumping their heads on the pipes and some students had attempted suicide by hanging from them. (See fig. 3.) In some cases, we found that schools with older buildings did not have adequate systems for ensuring student health and safety. For example, facility staff at one tribally operated school showed us an aging telecommunications relay panel that they said did not allow phone calls between dormitory floors and other buildings, making communication difficult in the event of a campus-wide emergency, such as a fire or security issue. At another school, staff showed us exterior doors to campus buildings that did not lock properly, and as a result, needed to be chained during school lock downs. According to officials at the school, about 90 percent of building entrances also lacked exterior security cameras, and some buildings, such as student dormitories, had none. These challenges were highlighted during our visit when the school had to perform a lock down when a student made a Columbine-type threat. During our ongoing work, some school officials told us that they receive less than their current estimated funding needs for facility operations, which include fixed-cost items like fuel and electricity. For example, one school official told us that facility operations were funded at about 50 percent of the school's need. Such shortfalls in operations funds can require a school to draw from its maintenance funds to keep the lights on and buildings warm in the winter, leaving less money for building maintenance. For example, officials with one school told us they may defer maintenance or cut back maintenance staff if they do not have enough funds for their operations and maintenance. Officials with several schools noted using funds for educational purposes on facility operations. Deferring maintenance can lead to bigger problems with school facilities. For example, an official with a BIE education line office pointed out that the poorly maintained rain spouts on one building of a BIE-operated school led to water collecting behind the retaining wall, resulting in separation between the sidewalk and the building. Over time, this water intrusion may undermine the foundation. (See fig. 4.) In 2008, we reported that federal agencies' backlogs represent a fiscal exposure that may have a significant effect on future budget resources.Further, the 2011 Negotiated Rulemaking Committee report observed that without enough maintenance funds, schools' maintenance needs go unmet, deferred maintenance grows, the quality of the physical plant deteriorates far more rapidly than it should, and the cost of repairs increases. According to the 2011 report, over decades, shortchanging spending on building maintenance degrades learning environments, shortens the overall life of school buildings, and results in increased costs for the federal government to fix these schools. (See fig. 5.) During our ongoing review, several of the schools we visited reported encountering problems with new construction. For example, officials at three schools said they encountered leaks with roofs installed within the past 11 years. According to officials at one school, despite two replacements, the roof of their gymnasium--completed in 2004-- continues to leak. Officials said the company that built the gymnasium has since filed for bankruptcy. Other construction problems at the school included systems inside buildings as well as building materials. For example, in the cafeteria's kitchen at this 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. 6.) Officials at an elementary school we visited also reported problems with new construction. School officials noted that the heat pumps in their new school facility did not have the capacity to adequately heat the building, leading to cold classrooms and frequent pump failures in the winter months. They also noted that the construction did not include a backup generator, creating a risk of freezing pipes during winter power failures. After our visit, school officials reported that a large concrete fragment fell from the upper wall of a kindergarten classroom in new school building. The classroom was unoccupied at the time. Preliminary results from our work indicate that key challenges at Indian Affairs are impeding effective management of BIE school facilities. These challenges include limited staff capacity, inconsistent accountability, and poor communication. These findings are consistent with our prior BIE work, in which we found that Indian Affairs had similar challenges overseeing BIE schools in other areas, such as in financial management and workforce planning. Given Indian Affairs' school facility management challenges, a few schools in one region have developed their own facility management program to ensure their needs were met. Our ongoing work suggests that the capacity of BIA regional facilities and BIE school staff to address school facility needs is limited due to steady declines in staffing levels, gaps in technical expertise, and limited institutional knowledge. BIA regional officials and school officials we interviewed noted significant challenges with staff capacity. In addition, our prior work and other studies have cited the lack of capacity of Indian Affairs' facility staff as a longstanding agency challenge. BIA Regions. Staff in certain regions told us that they have experienced declining staffing levels for over a decade, despite key responsibilities in overseeing BIE school construction and repair projects as well as supporting schools with technical assistance. Our preliminary analysis of Indian Affairs data shows that about 40 percent of regional facility positions are currently vacant, including regional facility managers, architects, and engineers who typically serve as project managers for school construction. In one BIA region serving over 15 BIE schools-- along with additional Indian Affairs' facilities such as detention centers--the regional facility staff has decreased by about half in the past 15 years, according to the regional facility manager. As of December 2014, two project managers were tasked with overseeing a growing workload of construction projects, among other duties, and only one was a licensed professional, according to the regional facility manager. The regional facility manager also noted gaps in internal staff expertise, such as not having a mechanical engineer on staff to review designs or external engineers' assessments of systems such as heating and air conditioning. Regional staff said that hiring an in-house boiler inspector would allow them to conduct more frequent inspections and may cost less than hiring contractors to do so. Without staff with particular construction expertise, several Indian Affairs officials said that they have increasingly relied on outside contractors. As we have previously reported, risks to the federal government of extensive reliance on contractors include not building institutional expertise as well as a reduced federal capacity to manage the costs of contractors and to ensure achievement of program outcomes. Schools. Officials at several schools we visited said they face similar capacity challenges. For example, we visited an elementary school with one full-time employee for facility maintenance, along with one part-time assistant. A decade ago, the school had about six maintenance employees, according to school officials. As a result of the staffing decrease, school officials said that facility maintenance staff may sometimes defer needed maintenance. Leading facility management practices emphasize the importance of having managers with sufficient technical expertise. Staff capacity is important because 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, doing the right jobs, in the right place, at the right time. However, we have previously reported that limited staff capacity at Indian Affairs impedes its oversight and support of BIE schools and that this runs counter to effective human capital practices. recommended that Indian Affairs revise its strategic workforce plan. Specifically, we recommended that Indian Affairs revise its strategic workforce plan to ensure that 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. Indian Affairs agreed to implement the recommendation but has not yet done so. Our preliminary results suggest that Indian Affairs has not provided consistent oversight of some school construction projects, including projects it managed itself and projects managed by tribes. According to Indian Affairs and school officials we interviewed, some recent construction projects, including new roofs and buildings, have gone relatively well, while others have faced numerous problems. The problems we found with construction projects at some schools suggest that Indian Affairs is not fully or consistently applying management practices to ensure contractors perform as intended. For example, 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.7.) 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 Indian Affairs. Despite numerous subsequent repairs of roofs, school officials and regional BIA officials told us in late 2014 that the leaks 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. Indian Affairs and school officials identified another recent construction project that has faced problems. At a tribally-operated school we visited in South Dakota, the school managed a project to construct a $1.5 million building for maintenance and bus storage. According to these officials, although the project was nearly finished at the time of our visit, 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 bus is too long. 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. 8.) According to Indian Affairs officials, part of the difficulty with this project resulted from the tribally-operated 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 potential advantages such as faster project completion, 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. If problems persist with building construction, one accountability mechanism is to retain a portion of a project payment. However, certain Indian Affairs officials held conflicting views on whether withholding project payments--known in the industry as retainage--is suitable to hold contractors accountable for satisfactory completion of school construction projects. For example, officials with the Division of Facilities Management and Construction told us they usually retain 10 percent of payments until an independent inspection of a construction project has been conducted. However, officials in one BIA region said that the region tends not to use this mechanism for school construction, due partly to past practice. In prior work, we have found that retainage can be a strong motivator to encourage contractor and subcontractor performance. Although the applicability of such project accountability mechanisms may vary in amount and may depend on the particular situation or project, we have found that the federal government can be protected from poor quality construction if it appropriately uses the various tools at its disposal to manage and address problems. Our preliminary results also suggest that unclear lines of communication and confusion among BIE schools about the roles and responsibilities of the various Indian Affairs' offices responsible for facility issues hamper efforts to address school facility needs. For example, the offices involved in facility matters continue to change, due partly to two ongoing re- organizations of BIE, BIA, and the Division of Facilities Management and Construction 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 for funding by February 2014 for a needed repair in the Facilities Management Information System (FMIS) 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. Another communication challenge that our ongoing work has identified for all BIE schools and BIA regions is that BIE last updated its directory in 2011, which contains contact information for BIE and school officials. This may impair communications, especially given significant turnover of BIE and school staff. As a result, we believe that school and BIA officials may not be able to share timely information with one another, which would affect schools' funding levels and priorities for repairs. For example, 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. These preliminary findings are consistent with findings from our past work in 2013, when we testified and reported on communication challenges impeding effective operation of BIE schools. Specifically, at that time we found that several officials at schools and BIE seemed confused about whom to consult or make requests for assistance about school facilities.In addition, we found that unclear communication undermined other aspects of school operations, such as annual testing of students. Thus, at that time we recommended that Indian Affairs develop a communication strategy for BIE to inform its schools and key stakeholders of critical developments that impact instruction in a timely and consistent manner to ensure that BIE school officials receive information that is important for the operation of their schools. In early 2014, BIE developed a draft communication plan, but it has not yet been finalized, and it does not specifically address communication about school facility issues. More recently, Indian Affairs officials indicated to us that it does not plan to finalize its communication strategy until mid-2016 given that the organizational changes resulting from the two re-organizations since 2013 have not been fully implemented. While we recognize that the re- organizations have led to substantial changes in the roles and responsibilities of offices within Indian Affairs, we continue to believe that Indian Affairs needs a strategy to improve communication with BIE schools, especially given schools' confusion about which offices to contact about facilities, and other issues. During our ongoing work, we identified an alternative program that some schools developed to ensure their facility needs were met given Indian Affairs' facilities management challenges. Four tribally-operated schools in one region created their own facilities management program because according to program officials, they were dissatisfied with the amount of time it took BIA to complete facilities-related projects, including a building project that officials said took about 7 years to complete. They also said that they were frustrated that their input was not always solicited on proposed improvements to their facilities. Consequently, in 1997, the four schools--in conjunction with their tribal stakeholders--formed the Eastern Oklahoma Tribal Schools Facilities Management Program, a non-profit consortium of tribally-operated schools in Eastern Oklahoma, to meet their facility needs. According to program officials, its operations are financed primarily through administrative fees for project management services added to the schools' backlog items, which are reimbursed by Indian Affairs. Currently, the program is comprised of three professional staff--two architects and a production technician--who maintain in-house technical expertise and manage construction, project design and oversight for the schools. In addition, program officials said that they routinely enter backlog data in FMIS because schools typically do not have the time, technical expertise, or capacity to do it themselves. An official with Indian Affairs' Division of Facility Management and Construction told us that Eastern Oklahoma Tribal Schools Facilities Management Program reflects a promising approach to managing facilities, but Indian Affairs has not taken steps to disseminate information on this approach among schools. In our ongoing work, we plan to further review this approach and any others to determine how and whether Indian Affairs can leverage any promising practices to help address systematic school facility management challenges. - - - - - In conclusion, the federal government, through the Department of the Interior, has a trust responsibility for the education of Indian students, including building and maintaining school facilities. High quality school facilities are extremely important to ensure that Indian students are educated in a safe environment that is conducive to learning. However, for decades, Indian Affairs has been hampered by fundamental challenges in managing school facilities. In our previous work, we have also found significant weaknesses with Indian Affairs' oversight of BIE schools in general. In addition, our preliminary work shows that Indian Affairs continues to face challenges in ensuring that critical school facility data are collected, staffing levels and technical expertise are strengthened, construction projects are appropriately designed and managed, and roles and responsibilities are clearly defined and communicated. Unless these issues are addressed, some students will continue to be educated in poor facilities that do not support their long- term success. We will continue to monitor these issues as we complete our ongoing work and consider any recommendations that may be needed to address these issues. Chairman Calvert, Ranking Member McCollum, 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, Lisa Brown, Lara Laufer, Matthew Saradjian, and Ashanta Williams. Also, providing legal or technical assistance were James Bennett, David Chrisinger, Jean McSween, Jon Melhus, 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 oversees 185 elementary and secondary schools that serve approximately 41,000 students on or near Indian reservations in 23 states. In 2014, Interior's Office of the Assistant Secretary-Indian Affairs funded the operations, maintenance, construction, and repair of about 1,785 educational and dormitory buildings, which are worth an estimated $4.2 billion. Recent reports have raised concerns about the physical condition of these facilities and their effect on Indian students' educational outcomes. Several studies indicate that better school facilities are associated with better student outcomes. This testimony reports on ongoing GAO work related to the conditions of BIE schools. A full report will be issued later this year. Based on GAO's preliminary findings, this testimony focuses on: (1) what is known about the conditions of selected BIE schools and (2) the extent to which Indian Affairs effectively oversees and supports BIE school facilities. For this work, GAO is reviewing agency data and documentation, and relevant federal laws and regulations; interviewing agency officials; and has conducted site visits to schools in three states, which were selected based on their geographic diversity and other factors. Information on the physical condition of Bureau of Education (BIE) schools is not complete or accurate as a result of longstanding issues with the quality of data collected by the Department of the Interior's (Interior) Office of the Assistant Secretary-Indian Affairs (Indian Affairs). GAO's preliminary results indicate that issues with the quality of data on school conditions--such as inconsistent data entry by schools and inadequate quality controls--make determining the number of schools in poor condition difficult. These issues impede Indian Affairs' ability to effectively track and address school facility problems. While national information is limited, GAO's ongoing work has found that BIE schools in three states faced a variety of facility-related challenges, including problems with the quality of new construction, limited funding, remote locations, and aging buildings and infrastructure (see figure below). GAO's ongoing work also indicates that several key challenges at Indian Affairs are impeding effective management of school facilities. Specifically, GAO found declines in staffing levels and gaps in technical expertise among facility personnel in Indian Affairs. Further, GAO found that Indian Affairs did not provide consistent oversight of some school construction projects. At a school GAO visited, Indian Affairs managed a $3.5 million project to replace school roofs. Yet the replacement roofs have leaked since they were installed in 2010, causing mold and ceiling damage in classrooms. Indian Affairs has monitored this situation but has not addressed problems with the roofs. Indian Affairs' facility management is also hindered by poor communication with schools and tribes and confusion about whom to contact to address facility problems. Poor communication has led to some school facility needs not being met. For example, school officials submitted a request for funding to address their school's lack of hot water almost a year before GAO visited the school, but Indian Affairs facility officials were unaware of this until notified by GAO. GAO's preliminary results indicate that these persistent challenges diminish Indian Affairs' capability to oversee and support facilities and provide technical assistance to schools. They also run counter to federal internal control standards and leading practices on workforce planning and construction project accountability.	7,014	676
The four federal programs we examined were established from 1969 through 2000 for various purposes. The Black Lung Program was established in 1969 as a temporary federal program to provide benefits to coal miners disabled because of pneumoconiosis (black lung disease), and their dependents, until adequate state programs could be established. It has been amended several times, effectively restructuring all major aspects of the program and making it an ongoing federal program. VICP was authorized in 1986 to provide compensation to individuals for vaccine-related injury or death. According to the Department of Health and Human Services (HHS), the agency that administers the program, it was established to help stabilize manufacturers' costs and ensure an adequate supply of vaccines. Concerns expressed by various groups contributed to the program's establishment, including concerns from parents about harmful side effects of certain vaccines, from vaccine producers and health care providers about liability, and from the public about shortages of vaccines. RECP was established in 1990 to make partial restitution to on-site participants, uranium miners, and nearby populations who (1) were exposed to radiation from atmospheric nuclear testing or as a result of their employment in the uranium mining industry and (2) developed certain related illnesses. EEOICP was established in 2000 to provide payments to nuclear weapons plant workers injured from exposure to radiation or toxic substances, or their survivors. Initially, some qualifying workers were paid federal benefits and others were provided assistance in obtaining benefits from state workers' compensation programs. In 2004, the federal government assumed total responsibility for benefits paid under the program. The purpose of the four federal compensation programs we examined is similar in that they all were designed to compensate individuals injured by exposure to harmful substances. However, how the programs are structured varies significantly, including who administers the program, how they are funded, the benefits provided, and who is eligible for benefits. For example: Several federal agencies are responsible for the administration of the programs: the Department of Labor (DOL) administers the Black Lung Program and EEOICP; the Department of Justice (DOJ) administers RECP and shares administration of VICP with HHS and the Court of Federal Claims. In addition, the National Institute for Occupational Safety and Health and DOJ provide support to DOL in administering EEOICP. Responsibility for administering two of the programs has changed since their inception. Specifically, claims for the Black Lung Program were initially processed and paid by the Social Security Administration but, as designed, DOL began processing claims in 1973 and took over all Black Lung Program claims processing in 1997. In 2002, the Congress officially transferred all legal responsibility and funding for the program to DOL. In addition, administration of EEOICP was initially shared between the Departments of Energy and DOL but, in 2004, DOL was given full responsibility for administering the program and paying benefits. Funding of the four programs varies. Although initially funded through annual appropriations, the Black Lung Program is now funded by a trust fund established in 1978 that is financed by an excise tax on coal and supplemented with additional funds. The tax, however, has not been adequate to fund the program; at the time of our review, the fund had borrowed over $8.7 billion from the federal treasury. For the VICP, claims involving vaccines administered before October 1, 1988, were paid with funds appropriated annually through fiscal year 1999. Claims involving vaccines administered on or after October 1, 1988, are paid from a trust fund financed by a per dose excise tax on each vaccine. For example, the excise tax on the measles, mumps, and rubella vaccine at the time of our review was $2.25. EEOICP and RECP are completely federally funded. Although RECP was initially funded through an annual appropriation, in 2002 the Congress made funding for RECP mandatory and provided $655 million for fiscal years 2002 through 2011. EEOICP is funded through annual appropriations. Benefits also vary among the four programs. Some of the benefits they provide include lump sum compensation payments and payments for lost wages, medical and rehabilitation costs, and attorney's fees. For example, at the time of our review, when claims were approved, VICP paid medical and related costs, lost earnings, legal expenses, and up to $250,000 for pain and suffering for claims involving injuries, and up to $250,000 for the deceased's estate, plus legal expenses, for claims involving death. The Black Lung Program, in contrast, provided diagnostic testing for miners; monthly payments based on the federal salary scale for eligible miners or their survivors; medical treatment for eligible miners; and, in some cases, payment of claimants' attorney fees. The groups who are eligible for benefits under the four federal programs and the proof of eligibility required for each program vary widely. The Black Lung Program covers coal miners who show that they developed black lung disease and are totally disabled as a result of their employment in coal mines, and their survivors. Claimants must show that the miner has or had black lung disease, the disease arose out of coal mine employment, and the disease is totally disabling or caused the miner's death. VICP covers individuals who show that they were injured by certain vaccines and claimants must show, among other things, that they received a qualifying vaccine. RECP covers some workers in the uranium mining industry and others exposed to radiation during the government's atmospheric nuclear testing who developed certain diseases. Claimants must show that they were physically present in certain geographic locations during specified time periods or that they participated on-site during an atmospheric nuclear detonation and developed certain medical conditions. Finally, EEOICP covers workers in nuclear weapons facilities during specified time periods who developed specific diseases. At the time of our review, total benefits paid for two of the programs--the Black Lung Program and RECP--significantly exceeded their initial estimates. An initial cost estimate was not available for VICP. The initial estimate of benefits for the Black Lung Program developed in 1969 was about $3 billion. Actual benefits paid through 1976--the date when the program was initially to have ended--totaled over $4.5 billion and benefits paid through fiscal year 2004 totaled over $41 billion. For RECP, the costs of benefits paid through fiscal year 2004 exceeded the initial estimate by about $247 million. Table 1 shows the initial program estimates and actual costs of benefits paid through fiscal year 2004 for the four programs. Actual costs for the Black Lung Program have significantly exceeded the initial estimate for several reasons, including (1) the program was initially set up to end in 1976 when state workers' compensation programs were to have provided these benefits to coal miners and their dependents, and (2) the program has been expanded several times to increase benefits and add categories of claimants. The reasons the actual costs of RECP have exceeded the initial estimate include the fact that the original program was expanded to provide benefits to additional categories of claimants, including uranium miners who worked above ground, ore transporters, and mill workers. Although the costs of EEOICP benefits paid through fiscal year 2004 were close to the initial estimate, these costs were expected to rise substantially because of changes that were not anticipated at the time the estimate was developed. For example, payments that were originally supposed to have been made by state workers' compensation programs are now paid by the federal government. In addition, at the time of our review, a large proportion of the claims filed (45 percent) had not been finalized. At the time of our review, the annual administrative costs of the four programs varied. For fiscal year 2004, they ranged from approximately $3.0 million for RECP to about $89.5 million for EEOICP (see table 2). The number of claims filed for the three programs for which initial estimates were available significantly exceeded the initial estimates and the structure of the programs, including the approval process and the extent to which the programs allow claimants and payers to appeal claims decisions in the courts, affected the amount of time it took to finalize claims and compensate eligible claimants. The number of claims filed through fiscal year 2004 ranged from about 10,900 for VICP to about 960,800 for the Black Lung Program. The agencies responsible for processing claims have, at various times, taken years to finalize some claims, resulting in some claimants waiting a long time to obtain compensation. Table 3 shows the initial estimates of the number of claims anticipated and the actual number of claims filed for each program through fiscal year 2004. Factors that affected the amount of time it took the agencies to finalize claims include statutory and regulatory requirements for determining eligibility, changes in eligibility criteria that increase the volume of claims, the agency's level of experience in handling compensation claims, and the availability of funding. For example, in fiscal year 2000, when funds appropriated for RECP were not sufficient to pay all approved claims, DOJ ceased making payments until the following fiscal year when funds became available. The approval process and the extent to which programs allow claimants and payers to appeal claims decisions also affected the time it took to process claims. For example, it can take years to approve some EEOICP claims because of the lengthy process required for one of the agencies involved in the approval process to determine the levels of radiation to which claimants were exposed. In addition, claims for benefits provided by programs in which the claims can be appealed can take a long time to finalize. For example, claimants whose Black Lung Program claims are denied may appeal their claims in the courts. At the time of our review, a Department of Labor official told us that it took about 9 months to make an initial decision on a claim and at least 3 years to finalize claims that were appealed. The federal government has played an important and growing role in providing benefits to individuals injured by exposure to harmful substances. All four programs we reviewed have been expanded to provide eligibility to additional categories of claimants, cover more medical conditions, or provide additional benefits. As the programs changed and grew, so did their costs. Initial estimates for these programs were difficult to make for various reasons, including the difficulty of anticipating how they would change over time and likely increases in costs such as medical expenses. Decisions about how to structure compensation programs are critical because they ultimately affect the costs of the programs and how quickly and fairly claims are processed and paid. This concludes my prepared statement. I would be pleased to respond to any questions that you or the Members of the Subcommittees may have. For further information, please contact Anne-Marie Lasowski at (202) 512- 7215. Individuals making key contributions to this testimony include Revae Moran, Cady Panetta, Lise Levie, and Roger Thomas. 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. federal government has played an ever-increasing role in providing benefits to individuals injured as a result of exposure to harmful substances. Over the years, it has established several key compensation programs, including the Black Lung Program, the Vaccine Injury Compensation Program (VICP), the Radiation Exposure Compensation Program (RECP), and the Energy Employees Occupational Illness Compensation Program (EEOICP), which GAO has reviewed in prior work. Most recently, the Congress introduced legislation to expand the benefits provided by the September 11th Victim Compensation Fund of 2001. As these changes are considered, observations about other federal compensation programs may be useful. In that context, GAO's testimony today will focus on four federal compensation programs, including (1) the structure of the programs; (2) the cost of the programs through fiscal year 2004, including initial cost estimates and the actual costs of benefits paid, and administrative costs; and (3) the number of claims filed and factors that affect the length of time it takes to finalize claims and compensate eligible claimants. To address these issues, GAO relied on its 2005 report on four federal compensation programs. As part of that work, GAO did not review the September 11th Victim Compensation Fund of 2001. The four federal compensation programs GAO reviewed in 2005 were designed to compensate individuals injured by exposure to harmful substances. However, the structure of these programs differs significantly in key areas such as the agencies that administer them, their funding, benefits paid, and eligibility. For example, although initially funded through annual appropriations, the Black Lung Program is now funded by a trust fund established in 1978 financed by an excise tax on coal and supplemented with additional funds. In contrast, EEOICP and RECP are completely federally funded. Since the inception of the programs, the federal government's role has increased and all four programs have been expanded to provide eligibility to additional categories of claimants, cover more medical conditions, or provide additional benefits. As the federal role for these four programs has grown and eligibility has expanded, so have the costs. Total benefits paid through fiscal year 2004 for two of the programs--the Black Lung Program and RECP--significantly exceeded their initial estimates for various reasons. The initial estimate of benefits for the Black Lung Program developed in 1969 was about $3 billion. Actual benefits paid through 1976--the date when the program was initially to have ended--totaled over $4.5 billion and, benefits paid through fiscal year 2004 totaled over $41 billion. Actual costs for the Black Lung Program significantly exceeded the initial estimate for several reasons, including (1) the program was initially set up to end in 1976 when state workers' compensation programs were to have provided these benefits to coal miners and their dependents, and (2) the program has been expanded several times to increase benefits and add categories of claimants. For RECP, the costs of benefits paid through fiscal year 2004 exceeded the initial estimate by about $247 million, in part because the original program was expanded to include additional categories of claimants. In addition, the annual administrative costs for the programs varied, from approximately $3.0 million for RECP to about $89.5 million for EEOICP for fiscal year 2004. Finally, the number of claims filed for three of the programs significantly exceeded the initial estimates, and the structure of the programs affected the length of time it took to finalize claims and compensate eligible claimants. For the three programs for which initial estimates were available, the number of claims filed significantly exceeded the initial estimates. In addition, the way the programs were structured, including the approval process and the extent to which the programs allow claimants and payers to appeal claims decisions in the courts, affected how long it took to finalize the claims. Some of the claims have taken years to finalize. For example, it can take years to approve some EEOICP claims because of the lengthy process required for one of the agencies involved in the approval process to determine the levels of radiation to which claimants were exposed. In addition, claims for benefits provided by programs in which the claims can be appealed can take a long time to finalize.	2,374	871
The multibillion dollar AIP provides grant funds for capital development projects at airports included in the National Plan of Integrated Airport Systems (NPIAS). In administering AIP, FAA must comply with various statutory formulas and set-asides established by law, which specify how AIP grant funds are to be distributed among airports (see app. II for a list of airports that are eligible to receive AIP grant funds). FAA groups the proposed projects into one of the following seven development categories, according to each project's principal purpose: Safety and security includes development that is required by federal regulation and is intended primarily to protect human life. This category includes obstruction lighting and removal; fire and rescue equipment; fencing; security devices; and the construction, expansion, or improvement of a runway area. Capacity includes development that will improve an airport for the primary purpose of reducing delay and/or accommodating more passengers, cargo, aircraft operations, or based aircraft. This category includes construction of new airports; construction or extension of a runway, taxiway, or apron; and construction or expansion of a terminal building. Environment includes development to achieve an acceptable balance between airport operational requirements and the expectations of the residents of the surrounding area for a quiet and wholesome environment. This category includes noise mitigation measures for residences or public buildings, environmental mitigation projects, and the installation of noise- monitoring equipment. Planning includes development needed to identify and prioritize specific airport development needs. This category includes the airport master plan, airport layout plan, a state system plan study, or an airport feasibility study. Standards include development to bring existing airports up to FAA's design criteria. This category includes the construction, rehabilitation, or expansion of runways, taxiways, or aprons; the installation of runway or taxiway lighting; the improvement of airport drainage; and the installation of weather reporting equipment. Reconstruction includes development to replace or rehabilitate airport facilities, primarily pavement and lighting systems that have deteriorated due to weather or use. This category includes the rehabilitation or reconstruction of runways, taxiways, apron pavement, and airfield lighting. Other includes all other development necessary for improving airport capacity and the safe and efficient operations. This category includes people movers, airport ground access projects, parking lots, fuel farms, and training systems. It also includes development for converting military airfields to civilian use, such as those authorized by the military airport program. FAA has traditionally assigned the highest priority to safety and security projects that are mandated by law or regulation. Shortly after September 11, in response to increased security requirements and in exercising the authority granted under the Federal Aviation Reauthorization Act of 1996, FAA reviewed its AIP eligibility requirements and made several changes to permit the funding of more security projects that previously had not been funded by AIP. For example, FAA broadened the list of eligible projects to include explosives detection canines, cameras in terminals, and blast proofing of terminals. According to officials in FAA's Airport Planning and Programming Division, the types of security projects eligible for AIP funding were expanded because the perceived threat area at an airport grew from those areas immediately surrounding an aircraft to terminal areas where large numbers of people congregated. Table 1 summarizes significant eligibility changes since September 11, 2001. In November 2001, eligibility for AIP funding was further broadened by the passage of ATSA, P.L. 107-71. The act amended 49 U.S.C. Section 47102(3) to extend eligibility for AIP funding to any additional security-related activity required by law or the Secretary of Transportation after September 11, 2001, and before October 1, 2002. ATSA also created the Transportation Security Administration (TSA) within the Department of Transportation (DOT), and assigned it primary responsibility for ensuring security in all modes of transportation. As such, TSA is now responsible for funding some airport security-related projects, a limited number of which FAA had previously funded through AIP grant funds. These projects include preboard screening devices and baggage screening equipment, such as explosives detection systems. In fiscal year 2002, FAA awarded a total of $561 million in AIP grant funds for airport security projects, which represents about 17 percent of the $3.3 billion available for obligation. As illustrated in figure 1, the $561 million is the largest amount awarded for security projects in a single year and contrasts sharply with past funding trends. Since the program's inception in 1982, security projects have accounted for an average of less than 2 percent of the total AIP grant funds awarded each year. During fiscal years 1982 through 2001, AIP grant funds awarded to airports for security projects ranged from $2 million in fiscal year 1982 to $122 million in fiscal year 1991, when airports implemented new security requirements governing access controls. The $561 million FAA awarded to airports for security projects in fiscal year 2002 represents more than 800-percent increase over the $57 million for security projects awarded in fiscal year 2001. As shown in table 2, among airport types, nearly all of the $561 million awarded in fiscal year 2002 for security projects was awarded to large, medium, small, and nonhub airports, which is consistent with where FAA has received the largest number of requests for AIP grants for security projects. General aviation and reliever airports received about 1 percent of the $561 million awarded in fiscal year 2002. Based on data provided by FAA, all security projects awarded AIP grants since September 11, 2001, have met legislative and program eligibility requirements. Most of these projects would have qualified for AIP funding under eligibility requirements in place prior to September 11, 2001. For example, as shown in table 3, perimeter fencing, surveillance and fingerprinting equipment, and access control systems, which together accounted for almost half of AIP funding for security projects, qualified under traditional eligibility regulations. Other projects that would not have qualified for AIP funding prior to September 11, 2001, such as explosives detection canines and kennels, are now eligible under legislative and administrative changes implemented since then. Section 119(a) of ATSA amended 49 U.S.C. Section 47102(3) to permit funding of any security-related activity required by law or the Secretary of Transportation after September 11, 2001, and before October 1, 2002. In addition, ATSA also amended 49 U.S.C. Section 47102(3) to make the replacement of baggage conveyor systems and terminal modifications that the Secretary determines are necessary to install explosives detection systems eligible for AIP grants. In addition to the AIP eligibility changes in ATSA, FAA issued a series of program guidance letters in the winter of 2002 that either restated or clarified project eligibility requirements as defined under 49 U.S.C. Section 47102(3). Under FAA's Program Guidance Letter 02-2, requests for AIP grant funds for security projects after September 11, 2001, are divided into the following three categories: Unquestionably eligible projects include those that are intended to prevent unauthorized individuals from accessing the aircraft when it is parked on aprons, taxiways, runways, or any other part of the airport's operations area. Projects eligible with additional justification include automated security announcements over public address systems and terminal improvements for checked baggage or passenger screening. Projects that appear to exceed known requirements include those related to areas of a police facility, command and control or communications centers that support general law enforcement duties, and equipment federal screeners use to screen passengers and baggage. The unprecedented increase in AIP grant funds awarded to airports for security projects in fiscal year 2002 has affected the amount of funding available for some airport development projects, in comparison with fiscal year 2001. FAA Airport Planning and Programming officials stated that they were able to fully fund many program priorities, including: all set-aside requirements, such as the noise mitigation and reduction program and the military airport program; all safety projects, including those related to FAA's initiatives to improve runway safety and reduce runway incursions; all phased projects that had been previously funded with AIP grant funds, including the 10 runway projects which are being built at primary airports. According to FAA Planning and Programming officials, a variety of factors enabled them to reduce the impact of awarding $561 million in AIP grant funds for security projects. Most notable was the record level of carryover apportionments, which totaled $355 million, and the $84 million in grant funds that FAA recovered from prior-year projects. FAA subsequently converted these funds into discretionary funds and used $333 of the $439 million to offset the discretionary funds that were provided for security projects. The remaining $106 million was used to fund other airport development projects, such as some new capacity, standards, and reconstruction projects, which FAA initially believed it would not be able to fund because of the need to ensure that security projects were given the highest priority for AIP funding. However, when comparing grant award amounts for fiscal years 2001 and 2002, the $504-million increase in AIP grant funds for security projects in fiscal year 2002 contributed to a decrease in the amount of funding available for nonsecurity development projects. For example, as shown in table 4, the greatest reduction occurred in standards, which decreased by $156 million, from almost 30 percent of AIP funding in fiscal year 2001 to 25 percent of AIP funding in fiscal year 2002. The next largest reduction occurred in reconstruction, which decreased by $148 million, from almost 23 percent of AIP funding in fiscal year 2001 to 18 percent in fiscal year 2002. Environment, safety, and capacity projects also decreased by $97 million, $66 million, and $40 million, respectively. Airport Council International also stated that the increase in AIP funding for security has affected other airport development projects. It reported that airports have delayed almost $3 billion in airport capital development, most of which dealt with terminal developments, because of new security requirements. According to FAA Airport Planning and Programming officials, the decreases in AIP funding for the nonsecurity categories cannot be attributed solely to the increase in funding for security. For example, they stated that the decrease in the safety category occurred because the types of projects identified as necessary to comply with Part 139 safety regulations vary from year to year based on a number of factors, including the results of airport certification inspections and individual airports' equipment retirement policies. The decline in the environment category, which includes noise mitigation, occurred, in part, because the amount of discretionary funds available in fiscal year 2002 was lower than in fiscal year 2001, according to FAA Airport Planning and Programming officials. The noise mitigation and reduction program is required by statute to receive 34 percent of available discretionary funds. The increase in AIP funding for security also affected the distribution of AIP grant funds by airport type. As shown in table 5, in comparison with fiscal year 2001, large and small hub airports received increases in AIP funding, while all other airports experienced decreases in fiscal year 2002. AIP funding to large hub airports increased by almost $111 million, or almost 4 percent of total AIP funding, while funding to small hub airports increased by almost $32 million, or 1 percent, in fiscal year 2002. In contrast, the greatest reductions in AIP funding were among nonhub airports, which decreased from almost $650 million in fiscal year 2001 to almost $510 million in fiscal year 2002, followed by reliever airports, which decreased from $213 million in fiscal year 2001 to almost $164 million in fiscal year 2002. The increase in AIP funding for security projects contributed to the decreases in the amount of funding available for some airports. For example, the increase in AIP funding to large hub airports can be attributed to their proportionally higher security needs. In the case of the decrease in AIP funding to nonhub airports, FAA Airport Planning and Programming officials said that their security needs were much lower than those of large hub airports, accounting for only $44 million, or 8 percent, of the $561 million awarded in fiscal year 2002. The unprecedented $504 million increase in funding for security also affected the LOI payment schedules that FAA planned to issue in fiscal year 2002. FAA deferred three LOI payments that were under consideration prior to September 11, 2001, that totaled $28 million, until fiscal year 2003 or later. Letters of intent are an important source of long- term funding for capacity projects at large airports. These letters represent a nonbinding commitment from FAA to provide multiyear funding to airports beyond the current authorization period. As a result, airports are able to proceed with projects without waiting for future AIP grant funds with the understanding that allowable costs will be reimbursed. The following three airports did not have discretionary funds included in their scheduled LOI payments for fiscal year 2002: Hartsfield International Airport in Atlanta, Georgia, which is the busiest airport in the country, with almost 40 million enplanements per year. It also was one of the most delayed airports in 2000 and 2001, and had $10 million for a runway extension deferred. Cincinnati/Northern Kentucky Airport in Covington, Kentucky, a large airport with 11 million enplanements per year, had $10 million deferred. Indianapolis Airport in Indianapolis, Indiana, a medium-sized airport with almost 4 million enplanements per year, had $7.5 million for a new apron and taxiway deferred. According to FAA Airport Planning and Programming officials, prior to September 11, 2001, the agency had planned to include discretionary funding in fiscal year 2002 for the LOI payments scheduled to these three airports. However, their funding has been deferred until fiscal year 2003 or later because of the need to ensure that adequate funds would be available for security projects. Nontheless, these officials stated that for each of these three airports, the letters of intent were adjusted upward to compensate the airports for the additional carrying costs they incurred because the payments were deferred. Moreover, FAA Airport Planning and Programming officials believe that reduced funding for capacity projects in fiscal year 2002 will not have dramatic consequences in the immediate future because of the current decline in passenger traffic. However, they stated that if capacity projects continue to be underfunded, the congestion and delay problems that plagued the system in 2000 and 2001 could return when the economy recovers. Similarly, FAA officials stated that although a 1-year reduction in AIP funding for reconstruction projects would not have a dramatic impact on runway pavement conditions, a sustained reduction could cause significant deterioration in pavement conditions. Finally, the effect of increasing AIP grant funds for security projects in fiscal years 2003 and beyond cannot currently be estimated with any certainty. Nonetheless, preliminary indications suggest that the total amount of funding needed for security projects in fiscal years 2003 and beyond could be substantially higher than in fiscal year 2002 and previous years. For example, security projects in the 1998 through 2002 NPIAS report to Congress totaled $143 million, while security requests in the current NPIAS, 2001 through 2005, have increased to $1.6 billion. Most of the uncertainty over how much funding is needed is dependent on pending decisions by Congress in conjunction with DOT, TSA, and FAA regarding how TSA plans to fund the terminal modifications needed to install and deploy explosives detection systems and the extent to which AIP grant funds might be needed to help cover these costs. DOT's Inspector General testified that capital costs associated with deploying the new explosives detection systems alone could exceed $2.3 billion. Representatives of Airport Council International and the American Association of Airport Executives stated that the costs for modifying terminals and baggage conveyor system to accommodate explosives detection systems could be as high as $7 billion. In P. L. 107-206, Congress appropriated $738 million to the Transportation Security Administration for terminal modifications to install explosives detection systems. To determine how the amount of AIP grant funds awarded to airports for security projects before September 11, 2001, compared with funds awarded after September 11, we obtained AIP expenditure data for fiscal years 1982 through 2002 from FAA's AIP database that showed the amounts of AIP grant funds awarded, the types of projects funded, and the types of airports that received the funds. To identify funding trends, we compared the amount of AIP funding awarded for security-related projects with other airport development projects for fiscal years 1998 through 2002. To develop a more realistic comparison of how much AIP funding has increased over time, we converted nominal dollar figures into constant 2002 dollars, using fiscal year price indexes constructed from gross domestic product price indexes prepared by the U.S. Department of Commerce. We subsequently discussed the data and our findings with FAA Airport Planning and Programming officials. While we verified the accuracy of the AIP expenditure data, we did not independently review the validity of FAA's AIP database, from which the data were derived. To determine whether the new security projects met legislative and program eligibility requirements, we reviewed title 49 of U.S.C., ATSA, and FAA's regulations and recently issued program guidance for eligibility requirements. We also interviewed FAA Airport Planning and Programming officials to clarify questions regarding eligibility requirements and to obtain additional information on the distribution of AIP grant funds. To assess how the use of AIP grant funds for security projects affected other airport development projects, we compared the amount of AIP grant funds awarded in fiscal years 2001 and 2002 by development category and airport type. We also interviewed FAA, TSA, and Airport Council International officials and reviewed the preliminary results of the Council's survey of its members regarding changes to the status of their capital development projects due to the events of September 11, 2001. We provided the Department of Transportation with a copy of the draft report for its review and comment. FAA and TSA officials agreed with information contained in this report and provided some clarifying and technical comments that we made where appropriate. We performed our work from June through October 2002 in accordance with generally accepted government auditing standards. Unless you publicly announce its contents earlier, we plan no further distribution of this report until 10 days from the date of this letter. At that time, we will send copies to interested congressional committees; the Secretary of Transportation; the Administrator, FAA; and the Administrator, TSA. 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. Please contact me or Tammy Conquest at (202) 512-2834 if you have any questions. In addition, Jean Brady, Jay Cherlow, David Hooper, Nancy Lueke, and Richard Swayze made key contributions to this report. Statutory provisions require that AIP funds be apportioned by formula each year to specific airports or types of airports. Such funds are available to airports in the year they are first apportioned and they remain available for the 2 fiscal years immediately following (or 3 fiscal years for nonhub airports). Recipients of apportioned funds are primary airports, cargo service airports, states and insular areas, and Alaska. The paved part of an airport's airfield immediately adjacent to terminal areas and hangars. Grants that are to be used for preserving or enhancing the capacity, safety, security, and carrying out noise compatibility planning and programs at primary and reliever airports. Airports that, in addition to any other air transportation services that may be available, are served by aircraft providing air transportation only of cargo with a total annual landing weight (the weight of aircraft transporting only cargo) of more than 100 million pounds. Funds apportioned for primary or cargo service airports, states, and Alaskan airports remain available for obligation during the fiscal year for which the amount was apportioned and the 2 fiscal years immediately after that year (or the 3 fiscal years immediately following that year in the case of nonhub airports). When such funds are not used in the fiscal year of the apportionment, they are carried over to following year(s). Airports that handle regularly scheduled commercial airline traffic and have at least 2,500 annual passenger enplanements. Those funds generally remaining after apportionment funds are allocated, but a number of statutory set-asides are established to achieve specified funding minimums. Passenger boardings. Airports that have no scheduled commercial passenger service. Primary airports that have at least 1 percent of all annual enplanements. A letter FAA issues to airports stating that it will reimburse them for the costs associated with an airport development project according to a defined schedule when funds become available. FAA uses this letter when its current obligating authority is not timely or adequate to meet an airport's planned schedule for a project. Primary airports that have between .25 percent and 1 percent of all annual enplanements. Under this program, a special set-aside of the discretionary portion of AIP is to be used for capacity and/or conversion-related projects at up to 15 current and former military airports. Such airports are eligible to participate in the program for 5 fiscal years and may be extended for 5 more years if approved by the Secretary of Transportation. The airports are designated as a civil commercial service or reliever airport in the national airport system. Approved projects must be able to reduce delays at an existing commercial service airport that has more than 20,000 hours of annual delays in commercial passenger aircraft takeoffs and landings. The set of airports designated by FAA as providing an extensive network of air transportation to all parts of the country. It is comprised of commercial service airports and general aviation airports. AIP projects that reduce airport-related noise or mitigate its effects. Eligible noise projects generally fall into the following categories: land acquisition, noise insulation, runway and taxiway construction (including associated land acquisition, lighting, and navigational aids), noise- monitoring equipment, noise barriers, and miscellaneous. Primary airports that have over 10,000 annual enplanements, but less than .05 percent of all annual enplanements. An obligation occurs when FAA makes an award to an airport sponsor, thereby obligating FAA to fund a project under AIP. Airports that have between 2,500 and 10,000 annual passenger enplanements from scheduled commercial service. Airports that have 10,000 or more annual passenger enplanements from scheduled commercial service. Airports designated by FAA to relieve congestion at a commercial service airport and to provide improved general aviation access to the overall community. Only general aviation airports have been designated as reliever airports. The portion of discretionary funds set-aside designed to achieve specified funding minimums established by Congress. The passenger facility charge program requires large and medium hub airports participating in the program to return a portion of their AIP apportionment funds. Airports charging a passenger facility charge of $3.00 or less must return up to one-half of their AIP apportionment funds, and airports charging over a $3.00 passenger facility charge must return up to 75 percent of their AIP apportionment fund's. Congress requires most of the returned AIP funds to be put in the small airport fund, which FAA redistributes to small airports. Primary airports that have from .05 percent to .25 percent of all annual enplanements. States assume responsibility for administration of AIP grants at airports classified as other than primary (other commercial service, reliever, and general aviation airports). Each state is responsible for determining which locations within its jurisdiction will receive funds and for ongoing project administration. This program is available only to selected states. AIP grants for the purpose of studying aspects of a regional or statewide airport system. These studies usually include primary and nonprimary airports. Most system planning grants are issued to metropolitan planning organizations or state aviation agencies. Paved sections of an airport's airfield that connect runways with aprons.	The events of September 11, 2001 created several new challenges for the aviation industry in ensuring the safety and security of the national airport system. Chief among them is deciding to what extent Airport Improvement Program (AIP) grant funds should be used to finance the new security requirements at the nation's airports. Although many in the aviation industry believe that funding security projects has become even more important in the aftermath of September 11, they also recognize the need to continue funding other airport development projects, such as those designed to enhance capacity in the national airport system. During fiscal year 2002, the Federal Aviation Association (FAA) awarded a total of $561 million, 17 percent of the $3.3 billion available for grants, in AIP grant funds to airports for security projects related to the events of September 11, 2001. This amount is the largest amount awarded to airports for security projects in a single year since the program began in 1982. Based on data provided by FAA, all of the security projects funded with AIP grants since the events of September 11, 2001, met the legislative and program eligibility requirements. The projects, which range from access control systems to terminal modifications, qualified for AIP funding either under eligibility requirements in effect before September 11, 2001, or under subsequent statutory and administrative changes. Although FAA Airport Planning and Programming officials stated that they were able to comply with statutory requirements, set-asides, and other program priorities, the $504 million increase in AIP grand funds for new security projects in fiscal year 2002 has affected the amount of funds available for some airport development projects in comparison with the distribution of AIP grand funds awarded in fiscal year 2001. FAA was able to fully fund these projects, in part, because of a record level of carryover apportionments, which totaled $355 million, and the $84 million in grant funds that were recovered from prior-year projects. However, there were reductions in AIP funding awarded to nonsecurity projects in fiscal year 2002, as compared with fiscal year 2001.	5,121	423
Mitigation efforts are often characterized as structural--for example, building codes and flood control projects, such as dams and levees--and nonstructural--for example, land use planning, zoning, or other methods of minimizing the development of hazardous areas. A well-designed disaster mitigation program is perceived as a good way to reduce the overall exposure to risk from a disaster. For example, building codes that incorporate seismic design provisions can reduce earthquake damage. Additionally, floodplain management and building standards required by the National Flood Insurance Program may reduce future costs from flooding. For example, FEMA estimates that the building standards that apply to floodplain structures annually prevent more than $500 million in flood losses. In addition to FEMA, other federal agencies have a role in natural hazard mitigation. The Army Corps of Engineers' major role in disaster mitigation includes providing assistance in constructing structural flood control facilities and maintaining them. According to its records, the Corps' levees found in areas affected by the Midwest floods of 1993 prevented $7.4 billion in damage. The Tennessee Valley Authority provides information, technical data, and other assistance to promote the wise use of flood-prone areas. The Department of the Interior has mitigation responsibilities in a number of areas, including programs that help to develop scientific and technical information and procedures for reducing potential casualties and damage from earthquakes and volcanos, and a geologic-related hazards warning program that provides states and local governments with technical assistance to help ensure the timely warning of various geological disasters. The Departments of Agriculture and Commerce have roles in mitigation through their respective programs designed to conserve and develop soil and water resources and to assist states in setting up coastal management programs. As we reported in 1995, mitigation is one of three general approaches that have been proposed for reducing the costs of federal disaster assistance.For a number of reasons, including a sequence of unusually large and costly disasters, federal disaster assistance costs have soared in recent years. Obligations from the Disaster Relief Fund totaled some $3.6 billion in fiscal year 1996 and about $4.3 billion in fiscal year 1997. FEMA can influence program costs by establishing and enforcing procedures and criteria for assistance within the eligibility parameters established in statutes. We have recommended that FEMA improve program guidance and eligibility criteria in part to help control these costs. Historically, hazard mitigation has been considered primarily a responsibility of local and state governments as well as private citizens. These entities often control the decisions affecting hazard mitigation. For example, building code enforcement and land-use planning are generally under local jurisdictions. However, research suggests that, for a number of reasons, state and local governments may be reluctant to take actions to mitigate natural hazards. The reasons include local sensitivity to such measures as building code enforcement and land-use planning, conflict between hazard mitigation and development goals, the lack of an understanding of mitigation and political support, and the perception that mitigation is costly and involves solutions that are overly technical and complex. Also, while increased mitigation can be justified only to the extent to which averted losses exceed the increased costs of mitigation, mitigation policies often do not systematically compare the costs of mitigation with the losses expected to be averted, and data on which to base cost-effective mitigation may be incomplete and/or inaccurate. Individuals may also lack incentives to take mitigation measures. Studies have shown that increasing the awareness of the hazards associated with living in a certain area or previous experience with disasters do not necessarily persuade individuals to take preventive measures against future disasters. Residents of hazard-prone areas tend to treat the possibility of a disaster's occurrence as sufficiently low to permit them to ignore the consequences. Finally, some research suggests that the availability of federal relief inhibits actions that would mitigate losses from disasters. For example, we noted in a 1980 report that the greater the degree of federal subsidization of disaster losses, the less the incentive for individuals to take action to minimize damage from natural disasters. The National Performance Review found that the availability of post-disaster federal funds may reduce incentives for mitigation. FEMA's 1993 review of the National Earthquake Hazards Reduction Program (NEHRP) concluded that at the state level there is "the expectation that federal disaster assistance will address the problem after the event." There are a number of approaches for addressing state and /or local governments' reluctance to take actions to mitigate natural hazards. Our March 1995 testimony discussed recommendations by FEMA, the National Research Council, and the National Performance Review promoting the use of federal incentives to encourage hazard mitigation. For example, specific initiatives for improving earthquake mitigation included linking mitigation actions with the receipt of federal disaster and other assistance and prohibiting federally insured lenders from issuing conventional mortgages to households or businesses in an earthquake-prone area unless state or local governments have adopted or enforced appropriate seismic building standards. FEMA provides state and local governments with hazard mitigation grants and training in support of the agency's endeavors to instill a community-based approach to implementing disaster mitigation efforts. FEMA is allowing more flexibility in targeting the agency's grants to communities' actual disaster risks through its agreements--called Performance Partnership Agreements--with the states. Recently, FEMA has introduced the concept of "disaster-resistant communities" through its Project Impact initiative. FEMA funds or otherwise promotes hazard mitigation through a number of programs. Under section 404 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act, as amended, FEMA administers a hazard mitigation grant program. Subject to certain dollar limits, the act generally allows the President to contribute grants of up to 75 percent of the cost of hazard mitigation measures within communities that have been affected by a disaster (the states or local governments pay the remaining portion of the costs). The communities' measures must be cost-effective and substantially reduce the risks of future damage or loss in a community. Also, under section 406 of the act, communities recovering from disasters can utilize federal funds to mitigate damaged public facilities in accordance with certain standards--such as floodplain management standards. Furthermore, section 409 of the act helps establish the requirements for a comprehensive state hazard mitigation plan. As authorized by the National Flood Insurance Act of 1968, as amended, FEMA attempts to reduce future flood losses by providing federally backed flood insurance to communities as part of its National Flood Insurance Program (NFIP). The NFIP pays for claims and operating expenses with revenues from policyholder premiums, augmented when necessary by borrowing from the Department of the Treasury. Communities are eligible for the program only if they adopt and enforce floodplain management ordinances to reduce future flood losses. As of August 1997, over 3.7 million home and business flood insurance policies were in force in more than 18,000 participating communities, representing over $403 billion worth of coverage. NFIP also funds a flood mitigation assistance program which provides funding to states and communities. In 1997, FEMA reported that it distributed $16 million in 1997 to states and communities for planning and implementing cost-effective measures to reduce future flood damage to homes and other properties that had experienced repeated losses from flooding. Eligible projects under this program include elevating structures and flood-proofing properties. FEMA also attempts to reduce flood losses through buying-out flood-prone properties throughout the country and converting the properties to open spaces. Since 1993, FEMA reports that it has committed more than $204 million to relocate 19,000 properties out of flood hazard areas in 300 communities. To help mitigate the potential loss of life and property from earthquakes, the Earthquake Hazards Reduction Act of 1977, as amended, authorizes FEMA's provision of earthquake hazards reduction grants to states under NEHRP. (FEMA shares administration of this program with the U.S. Geological Survey, the National Science Foundation, and the National Institute of Standards and Technology.) These project grants are available only to states with moderate or higher seismic hazard and the funds can be used for a number of purposes, including implementing mitigation measures to prevent or reduce the risks of earthquakes. To conduct training, public education, and research programs in subjects related to fire protection technologies, FEMA operates the U.S. Fire Administration under the Fire Prevention and Control Act of 1974, as amended. The agency's efforts support the nation's fire service and emergency medical service communities through such services as the national fire incident reporting system, which collects and analyzes fire incident data. This information is then utilized to help mitigate the loss of life and damage from fires--the United States has historically had one of the highest fire loss rates (in deaths and dollar loss) of the industrialized world. In 1995, FEMA published its National Mitigation Strategy, which stresses two 15-year national goals of substantially increasing public awareness of natural hazard risk and significantly reducing the risk of loss of life, injuries, economic costs, and disruption of families and communities caused by natural hazards. The strategy calls for strengthening partnerships among all levels of government and the private sector and sets forth major initiatives, along with timelines, in the areas of (1) hazard identification and risk assessment, (2) applied research and technology transfer, (3) public awareness, training, and education, (4) incentives and resources, and (5) leadership and coordination. In 1997, FEMA began its Project Impact initiative--an effort to help protect communities, residents, organizations, businesses, infrastructure, and the stability and growth of local economies from the impact of natural disasters before they happen. The program was based on the premise that consistently building safer and stronger buildings, strengthening existing infrastructures, enforcing building codes, and making proper preparations prior to a disaster would save lives, reduce property damage, and accelerate economic recovery. The initiative intended to build "disaster-resistant communities" through public-private partnerships, and it included a national awareness campaign, the designation of pilot communities showcasing the benefits of disaster mitigation, and an outreach effort to community and business leaders. Project Impact received an appropriation of $30 million in the fiscal year 1998 budget. FEMA's Director has stated that his goal for 1998 is to designate at least one Project Impact disaster-resistant community in each of the 50 states--expanding the list of the initial seven communities selected during 1997 to serve as pilots for the initiative. Under the Government Performance and Results Act of 1993, federal agencies must set goals, measure performance, and report on their accomplishments. FEMA's September 1997 strategic plan, entitled "Partnership for a Safer Future," states that the agency is concentrating its activities on reducing disaster costs through mitigation because "no other approach is as effective over the long term." One of the strategic plan's three goals is to "protect lives and prevent the loss of property from all hazards." The strategic objectives under this goal are to reduce, by fiscal year 2007, (1) the risk of loss of life and injury from hazards by 10 percent and (2) the risk of property loss and economic disruption from hazards by 15 percent. To achieve these objectives, FEMA established a number of 5-year operational objectives (covering fiscal years 1998 through 2003). FEMA expects that these strategic goals and objectives will be reflected in its future performance partnership agreements with the states. To encourage the states to help meet these goals, FEMA has consolidated the mitigation programs' grant funds into two funding streams--one for programs supported by flood policyholders' fees (the NFIP) and another for programs supported by FEMA's Emergency Management Planning and Assistance appropriation. Prior to fiscal year 1997, separate funding was provided for earthquake, hurricane, and state hazard mitigation programs. We have not comprehensively reviewed the implementation of FEMA's hazard mitigation programs or analyzed the agency's recent initiatives. However, on the basis of our past work, we believe that a number of issues are pertinent to the Congress' consideration of the cost-effective use of federal dollars for hazard mitigation. As noted above, our work has identified a variety of approaches with potential for increasing mitigation. These include regulatory and financial incentives proposed by FEMA, the National Research Council, and the National Performance Review. Furthermore, to the extent that the availability of federal relief inhibits mitigation, amending post-disaster federal financial assistance could help prompt cost-effective mitigation. The National Performance Review, for example, recommended providing relatively more disaster assistance to states that had adopted mitigation measures than to states that had not. These or other proposals would require analysis to determine their relative costs and effectiveness. Among existing programs, it is uncertain that, collectively, federal funds are effectively targeted to projects where the risk of loss is greatest. First, it is often difficult to determine the cost-effectiveness of specific actions because of limited data concerning risks. By definition, natural hazard mitigation reduces the loss of life and property below the levels that could be expected without mitigation; however, it is impossible to know with certainty what losses would occur in the absence of mitigation. Estimating these losses requires assessments of the risks, or probabilities, of the incidence and the severity of various natural occurrences--such as tornadoes, earthquakes, hurricanes--in specific geographic areas. Such risk assessments depend on historical data that may not exist or may be difficult or costly to obtain and analyze. For example, to measure its performance in achieving its strategic objective of reducing risk by 2007, FEMA plans to use a model of the probable future loss of life and injury; risk will be measured in terms of direct and indirect dollar costs and also through assessing state and local capabilities in emergency management. Due to limited data availability, however, the model results initially will be confined to probable loss of life and injury from earthquakes. Second, federal hazard mitigation funds are provided through a number of different programs and agencies--some limited to particular hazards. Even if risks, and therefore expected benefits, could be determined more precisely, ensuring that federal dollars collectively are directed at the greatest potential benefits would require comparing alternative investments among different agencies and/or programs. Finally, it is important to note that the extent to which mitigation projects will result in federal dollar savings is uncertain; savings depend upon the actual incidence of future disaster events and the extent to which the federal government would bear the resulting losses. Without any policy change, the latter could be affected by, for example, whether the losses result from events that trigger a presidential "declaration" under the Stafford Act; if not, then the federal government may not directly bear the losses. Furthermore, policies affecting the federal share of disaster costs could change in the future. Disaster Assistance: Guidance Needed for FEMA's "Fast Track" Housing Assistance Process (GAO/RCED-98-1, Oct. 17, 1997). Disaster Assistance: Improvements Needed in Determining Eligibility for Public Assistance (GAO/T-RCED-96-166, Apr. 30, 1996). Disaster Assistance: Improvements Needed in Determining Eligibility for Public Assistance (GAO/RCED-96-113, May 23, 1996). Natural Disaster Insurance: Federal Government's Interests Insufficiently Protected Given Its Potential Financial Exposure (GAO/T-GGD-96-41, Dec. 5, 1995). Disaster Assistance: Information on Declarations for Urban and Rural Areas (GAO/RCED-95-242, Sept. 14, 1995). Disaster Assistance: Information on Expenditures and Proposals to Improve Effectiveness and Reduce Future Costs (GAO/T-RCED-95-140, Mar. 16, 1995). GAO Work on Disaster Assistance (GAO/RCED-94-293R, Aug. 31, 1994). 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.	GAO discussed the Federal Emergency Management Agency's (FEMA) disaster mitigation efforts, focusing on: (1) the reasons why disaster mitigation efforts are not always undertaken by state and local governments and individuals; (2) FEMA's efforts to encourage mitigation; and (3) issues that GAO believes are pertinent to ensuring the cost-effective use of federal dollars for hazard mitigation. GAO noted that: (1) hazard mitigation is primarily the responsibility of state and local governments, and individuals; however, mitigation actions are not always taken; (2) the reasons for this include local sensitivity to such measures as: (a) building code enforcement and land use planning; (b) conflict between mitigation and developmental goals; and (c) individuals' perceptions that the possibility of a disaster's occurrence is low; (3) FEMA's hazard mitigation efforts include grants and training for state and local governments, funding for mitigating damage to public facilities and purchasing and converting flood-prone properties to open space, federal flood insurance, and programs targeted at reducing the loss of life and property from earthquakes and fires; (4) in recent years, FEMA has taken a strategic approach to mitigation by publishing a 15-year national mitigation strategy and establishing 5-year mitigation objectives in its strategic plan pursuant to the Government Performance and Results Act; (5) FEMA expects to reflect its strategic goal and objectives in future performance partnership agreements with states; (6) GAO's work has identified several issues pertinent to ensuring the cost-effective use of federal dollars for hazard mitigation; (7) studies have shown a variety of approaches with the potential for increasing the level of mitigation, including regulatory and financial incentives proposed by FEMA, the National Research Council, and the National Performance Review; however, these and other proposals require analysis to determine their relative costs and benefits; (8) under existing approaches, it is uncertain that, collectively, federal funds are effectively targeted to projects where the risk of loss is greatest because: (a) limitations on data needed to estimate risks often make it difficult to determine the cost-effectiveness of specific actions; and (b) federal hazard mitigation funds are provided through a number of different programs and agencies--some limited to particular hazards; and (9) the extent to which cost-effective mitigation projects will result in federal dollar savings is uncertain, depending upon the actual incidence of future disaster events and the extent to which the federal government would bear the resulting losses.	3,597	516
For about 30 years, TCMP has been IRS' primary program for gathering comprehensive and reliable taxpayer compliance data. It is IRS' only program to measure noncompliance on a random basis, allowing IRS to make statistically reliable estimates of compliance nationwide. IRS uses the data for measuring compliance levels, estimating the tax gap, identifying compliance issues, developing formulas for objectively selecting returns for audit, and allocating audit resources. Congress and federal and state agencies have used TCMP data for policy analysis, revenue estimating, and research. The 1994 TCMP survey is planned to be the most comprehensive TCMP effort ever undertaken. That is because IRS is undertaking four surveys at once to collect comparable information on businesses organized in different ways. Currently planned to include about 153,000 tax returns, this TCMP was designed to obtain compliance information for individuals (including sole proprietors); small corporations (i.e., those with assets of $10 million or less); S corporations; and partnerships. This TCMP was also designed to obtain information at the national level as well as for smaller geographical areas across the country. About 120,000 of the sample returns are to cover businesses; about 33,000 are to cover individuals. This is to be the first time that IRS will conduct a TCMP audit for all four types of taxpayers at the same time. The 1994 TCMP sample is stratified by market segments, as opposed to type of return, income amount, and asset size, which were the characteristics used to stratify samples in prior surveys. A market segment represents a group of taxpayers with similar characteristics, such as taxpayers engaged in manufacturing. IRS plans to stratify taxpayers into 23 business and 4 nonbusiness (individual) market segments. IRS will also have one market segment for foreign-controlled corporations. IRS believes that stratifying in this manner would allow it to more effectively use TCMP data for identifying noncompliance trends and selecting cases for audit. To assure comparability with previous TCMP surveys, the sample can also be stratified into the traditional groupings (i.e., type of return). As planned, in the 1994 TCMP, IRS would audit about 40,000 more returns than the aggregate for all entity types from the latest TCMP surveys conducted on these entities. IRS' primary reasons for this increase are the use of market segments and ensuring statistical validity for IRS' 31 District Office Research and Analysis sites, which are located throughout the country. IRS considers the 1994 TCMP effort to be particularly important because it would be the first comprehensive effort to validate its current market segment compliance strategy for identifying and correcting noncompliance, and also because existing compliance data are getting old.IRS expects to have completed audits on about 30 percent of the sample returns by October 1996 and to have final TCMP data in late 1998. IRS plans to collect data on the reasons for noncompliance and the specific tax issues associated with the noncompliance. IRS also plans to place greater emphasis on quality audits to ensure that accurate data are collected. Finally, in its TCMP training for auditors, IRS plans to emphasize the need to make effective use of internal data to reduce the amount of information requested from taxpayers, thus reducing the burden imposed on those taxpayers. Our objectives were to (1) determine how IRS addressed the problems discussed in our 1994 TCMP status report and, if the problems persist, how they will affect final TCMP results; (2) identify informational resources other than TCMP that IRS could use to target its audits more effectively; and (3) assess the value of TCMP data for alternative tax system proposals. To determine the actions IRS took on the concerns we raised in our 1994 report, we reviewed TCMP documents and discussed the actions taken with IRS officials responsible for designing and implementing the program. To determine whether other information sources could be used to replace TCMP, we relied on work we had done on TCMP and we discussed with IRS officials how IRS could use other potential data sources, including state and nongovernment sources. To determine the relevancy of TCMP data for new tax system proposals, we reviewed various published documents on these systems and compared them to the current income tax system. Our observations in this report are based in large part on the work we have done over the years on IRS' compliance programs in general as well as specific work on TCMP. We issued a report in May 1994 on all such work. We did our work in September 1995 in accordance with generally accepted government auditing standards. On September 29, 1995, we obtained oral comments on a draft of this report from officials responsible for planning and implementing TCMP in IRS' Compliance Research Division, including the National Director of Compliance Research. We have incorporated their comments where appropriate. Our 1994 TCMP report discussed concerns dealing with various aspects of IRS' plans for the upcoming TCMP. Basically, these concerns centered on IRS being able to (1) meet major milestones for starting audits, (2) collect audit adjustment data on partners and S corporation shareholders, (3) collect data on potentially misclassified workers, (4) develop data collection systems, (5) make it easier for researchers to access TCMP audit workpapers, and (6) develop a TCMP research plan. In our 1994 report, we raised a concern about IRS' ability to meet its October 1, 1995, milestone for starting the TCMP audits. Our concern was based on the amount of work that had to be done to design and test the TCMP data collection system, develop training material, train auditors, and produce case file information. In early September 1995, IRS postponed the start of its TCMP audits from October 1, 1995, to December 1, 1995. IRS attributed the delay to the uncertainties about its fiscal year 1996 budget. IRS does not expect the delay in starting the audits to affect the March 31, 1998, date for completing all 153,000 TCMP audits. The delay in the start of the audits could allow IRS to complete various TCMP database testing, which has not been completed as originally scheduled. For example, IRS has not completed all its tests of the consistency of reported business return data, which were scheduled to be completed by August 31, 1995. The tests are designed to identify and eliminate inconsistencies in the data and need to be completed before audit cases can be sent to the field. According to IRS officials, the tests associated with reported return data on individual taxpayers (i.e., Form 1040 information) have been completed and returns are ready to be sent to field offices for audit. IRS expects to complete all tests of the business portion (i.e., corporations and partnerships) of the database by November 30, 1995. We are concerned that if major modifications have to be made to the data, the December 1, 1995, date to start audits of business taxpayers could be delayed. In our 1994 report, we raised concern about whether the amount of information IRS would be collecting on partnerships and S corporations would be adequate to measure the compliance levels for these two entities. In response to the report, IRS officials said they would collect more data on partnerships and S corporations but would not collect data on partners and shareholders. IRS has since decided that it would capture data on partners and shareholders. This additional data could increase the value of TCMP data for determining tax impacts of partnership and S corporation audits and measuring the tax gap associated with these entities. In our 1994 report, we were concerned that IRS would not be collecting sufficient information on businesses that misclassified their workers as independent contractors instead of as employees. We were also concerned that IRS would not be gathering data on taxpayers who file returns as sole proprietors, but who potentially may be employees and not independent contractors. According to IRS officials, IRS will be capturing tax data on referrals made to employment tax specialists on classification cases. Also, IRS has developed a detailed employment tax data collection instrument to gather in-depth data on the results of those employment tax issues that are identified in the TCMP audits. In our 1994 report, we commented on IRS' concurrent development of two data collection systems for use by auditors to directly enter their audit results onto computers. We were concerned that IRS had not made a decision on which of these two systems to use. Our concern related to the time IRS would need to test the selected system, develop training materials, and train auditors on how to use it. IRS stated that it needed a back-up system to the primary system, which is the Totally Integrated Examination System (TIES), as an insurance plan in case TIES proves less than satisfactory. TIES was being developed for use in IRS' regular audit program and is being modified to meet TCMP specifications. According to IRS officials, complete system acceptability tests will be done on both data collection systems. IRS officials said that they expect the tests to be done by November 22, 1995, and that TIES will be available for use by the time audits are scheduled to start. If major modifications need to be made to the systems as a result of the tests, we are concerned that IRS may not meet its December 1, 1995, revised milestone for starting audits. In our 1994 report, we suggested that IRS find ways to make TCMP audit workpapers available through electronic media so that the workpapers would be readily available for compliance research. In commenting on our report, IRS agreed to explore the feasibility of retaining the computer disks for those cases where the workpapers are generated by computer. IRS officials subsequently informed us that it is not technically feasible to automate all audit workpapers. However, IRS has included a 100-line comment section in the TCMP data collection systems and in the TCMP database to capture clarifying information on complicated cases, which could provide researchers with some of the additional information found in the audit workpapers. Adding the comment section to the TCMP database could enhance the overall value of the TCMP data and may be a good substitute, in some cases, for the audit workpapers. Therefore, it is important that auditors be instructed in the types of information to include in the comment section. The automated comment feature also provides IRS with an opportunity to collect information on issues that cannot be analyzed using the data elements currently planned to be on the TCMP database. For example, one criticism of TCMP audits has been that the audits are burdensome or overly intrusive for taxpayers. IRS could use the automated comment section to gather information on taxpayer burden, such as the time taxpayers estimate they spent preparing for the audit and the types of documents auditors had to get from taxpayers in order to verify tax return data. In our 1994 report, we pointed out that IRS did not have a research plan that defines the research questions and the data to be collected that would answer the questions. IRS still does not have a research plan. In response to our 1994 report, IRS officials stated that from past TCMP surveys they know what elements are needed to do compliance estimation, measure the tax gap, and develop return selection formulas. They said that since virtually all the data from sampled returns are collected, IRS will have appropriate and comprehensive information to meet its research needs. While the lack of a research plan may not directly lessen the value of final TCMP results, such a plan could put IRS in a better position to quickly analyze final TCMP data. One criticism of prior TCMP surveys has been that useable TCMP data were not produced in a timely fashion. To help formulate research questions, IRS could analyze preliminary TCMP results. For example, IRS expects to complete about 46,000 TCMP audits by the end of fiscal year 1996, which could be enough cases to formulate research questions. IRS is reluctant to use preliminary unweighted or partially weighted TCMP data because the data are not statistically valid. Even though preliminary data may not be statistically valid, these data could provide early information on possible noncompliance trends and other problems, such as complexity issues, which could be useful to both IRS and Congress when they are examining potential modifications to the tax system. IRS uses TCMP data to develop objective, mathematical formulas, which it uses to score returns for audit selection. As a result, IRS can make more efficient use of its audit resources and avoid unnecessarily burdening compliant taxpayers. For example, in 1969, the year before IRS started using this scoring system, about 46 percent of IRS' audits resulted in no change to an individual's tax liability. By using TCMP-based formulas, IRS has been able to more accurately select tax returns requiring changes, thus reducing the no-change rate to less than 15 percent in 1994. We are not aware of any other available data that can be used to develop return selection formulas that would allow IRS to target its audits as effectively as TCMP data. IRS is attempting to develop an Automated Issue Identification System that has the potential of selecting returns that should be audited. The system is being tested on individual tax returns in two IRS locations, and, according to IRS officials, the preliminary results are promising. However, this system would be dependent in part on the TCMP-developed return selection formula to identify the returns that should be audited. Also, this system would require that almost all tax return data be transcribed onto computers similar to the amount of data transcribed from returns that are selected for TCMP audits. IRS does not expect to have the technological capability to have all return information on computer until after the turn of the century. There are third-party databases that potentially could be used to supplement the compliance data that IRS obtains from its TCMP surveys. However, these databases cannot be used to develop return selection formulas because they either contain just aggregate data on businesses and individuals or have information just on specific tax issues. For example, Bureau of Labor Statistics and U.S. Census data can be used to make aggregate profiles of the population based on various income characteristics, such as average household earnings. Some states have databases that IRS could use to supplement its audit and other compliance activities, such as state sales tax data. Commercial sources for information on industry norms are also available to supplement IRS compliance activities. IRS currently uses these data sources in some of its compliance research projects. There are a number of proposals to change the current tax system. The proposals are as follows: A Flat Tax would levy a single-rate wage tax on individuals and a single-rate cash-flow tax on businesses. An Unlimited Savings Allowance (USA) Tax would provide for a three-bracket individual income tax, with a full deduction for income saved rather than consumed. On the business side, a single rate would apply to income from both corporate and noncorporate businesses, with an immediate deduction for capital investment and purchases of inventory. A Simplified Income Tax would broaden the tax base, lower the tax rate, and eliminate most current deductions and credits. A Value Added Tax (VAT), a consumption tax, would be collected at each stage of the production process. A Retail Sales Tax, a consumption tax, would be collected at the retail level in the form of a sales tax. To determine the relevancy of TCMP data to these alternative tax systems, we analyzed the tax return elements IRS plans to examine in its tax year 1994 TCMP and published documents on the systems. (See app. I for the results of this analysis.) In doing our analysis, we did not consider the TCMP costs and benefits or taxpayer burden for each of the proposals. Generally, we found that TCMP data could have some relevancy for each alternative tax system. The degree of relevancy depended on the number of current tax elements that would be retained under an alternative tax system--the more elements that are retained, the more relevant the TCMP data would be. Potentially, data obtained from TCMP audits could be used to guide both the final design and administration of a new tax system. While complete 1994 TCMP data would not be available until late in 1998, data on about 46,000 sample cases should be available by the end of fiscal year 1996. As questions arise during the process of drafting new tax laws, data from some of the 46,000 cases, while not statistically valid at the district level, may indicate obvious trends in nationwide data that could be used in making decisions on changes to tax law. With respect to the administration of tax laws, each of the current proposals would require that tax administrators implement some form of compliance strategy. Any such strategy would likely be dependent on compliance data. The 1994 TCMP should be able to provide much of the information necessary for implementing such a compliance strategy. For example, any new tax system would likely continue to rely on audits to ensure compliance. Accordingly, auditors would continue to need compliance information on business income and expenses and, for some of the proposals, compliance information on individual income and deductions. For the most part, this data could be provided by the 1994 TCMP. Some TCMP data would be useful in the design of all the proposed tax systems. For example, gross receipts, a key area of noncompliance in past TCMP audits, would be important in each of the new tax proposals. For this potential problem area, TCMP should show the compliance levels, provide specific tax issues associated with the identified noncompliance, and provide reasons for the noncompliance. The compliance data should help Congress to determine the potential extent of noncompliance that could be expected under the new tax system proposals. This would be important in setting tax rates. Similarly, data on the reasons why the noncompliance occurred and the specific tax issue involved could provide clues to legislative actions that may be needed to help prevent noncompliance under the new system or to help tax administrators identify noncompliant taxpayers more readily. Knowing these weak spots would be useful so that Congress could attempt to overcome these problems as it considers designs for new tax systems. To the extent that the proposals for tax reform retain elements of the current system, such as properly determining business receipts and expenses, TCMP data could play a prominent role in helping to evaluate and design those parts of the proposed new tax system. To the extent that a new tax system is adopted that differs radically from the existing system, TCMP data would still be useful. For example, TCMP information on gross receipts of retail businesses would be useful for designing and administering a retail sales tax system. Under this system, information on all business income and expenses could be relevant for profiling those retailers who would be more likely to underreport their gross receipts. Also, if a federal retail sales tax included consumer services not now covered by state sales taxes, TCMP could be the only source of information on underreporting of gross receipts by the sellers of these services. It must be recognized that the results from TCMP would reflect noncompliance under the income tax law and the administrative practices in place today. Incentives or opportunities to evade tax on certain transactions may increase or decrease under a new system. For example, if a business taxpayer fails to report a sale of an asset under the current income tax, the business might avoid paying tax on a capital gain, a fraction of the selling price. Under many consumption tax proposals, all the proceeds of an asset sale are taxable, but at a lower rate. The incentive to not report the sale may increase or decrease relative to the current system, depending on the circumstances. In addition, opportunities to not comply in some areas may change significantly depending on whether administrative tools such as withholding and information reporting were included as part of the system. In order to effectively select returns for audit under a new tax system, tax administrators may be able to use 1994 TCMP results in combination with information on the relative incentives and opportunities to avoid tax under that system, until direct measures of noncompliance under the new system became available. The preceding discussion dealt only with the usefulness of TCMP results for administering each of the proposed tax systems once the new system had been fully implemented. The results of the planned TCMP would also be of use in administering the current income taxes in the interim period before a new system would be completely phased in and the old system completely phased out. The 1994 TCMP data would become increasingly important if it proves impossible to fully implement a new tax system until after the turn of the century. This is because IRS would need to continue to audit returns under the current tax law, and existing return selection criteria are based on past TCMP survey data, which are growing older every year. The usefulness of the forthcoming TCMP during the interim would depend on the effective date of the replacement system and on the extent to which the enacting legislation would include transition provisions. The 1994 TCMP data used to develop audit selection formulas for the current tax system are not scheduled to be developed before late 1998. However, if a new tax system became effective before that time and had few transition provisions, IRS could still use interim TCMP data on noncompliance issues to direct audits of tax returns filed under current rules. If tax reform legislation were to take longer to pass, if the legislation provided for a significant period of time between the date of enactment and the effective date of the new system, or if the legislation contained numerous transition provisions, then the value of the planned TCMP would be greater. Items such as unused tax credits and deductions for depreciation, depletion, and net operating losses might be subject to transition rules. For example, it has been suggested that if a flat tax were enacted, businesses might be allowed to claim depreciation deductions during a transition period of several years for assets they purchased under the old system. Others have suggested that taxpayers could be subject to both the current income tax and a new consumption tax for a period of years, with the income tax rate declining as the consumption tax rate increases. If the planned TCMP were cancelled and the current income taxes were not completely phased out before the next century, then IRS would be compelled to select income tax returns for audit on the basis of compliance information that was over 10 years old. Administrators of the new tax system also would have only this same dated compliance information to guide their enforcement efforts for several years before data from any future TCMP became available. IRS has taken action on most of the concerns we raised in our December 1994 report. The delay in starting the TCMP audits because of budgetary concerns is fortuitous because IRS had not completed testing all the tax return database or data collection systems for the TCMP. These tests have to be completed before audits can start. If the tests show that major modifications have to be made to the database or data collection systems, then IRS may not meet its December 1, 1995, revised date for starting audits. There is still time for IRS to develop a research plan so that it could analyze final TCMP results more quickly. IRS could begin now to formulate research questions and could also use preliminary TCMP data as they become available to develop other questions. It is important that there are no further delays because the existing TCMP data are old, and, to our knowledge, there are no other data sources that IRS could use to develop formulas for selecting returns for audit. IRS is attempting to develop a system that could be used for selecting returns, but this system would not be operational until after the turn of the century. TCMP data could also be of value for helping with the design and administration of alternative tax systems. The value of the data would depend on how much of the current tax system would be retained under the new system. On September 29, 1995, we discussed a draft of this report with IRS Compliance Research Division representatives, including the National Director of Compliance Research. They generally agreed with our assessment of the actions taken on the concerns we raised in our 1994 report, the availability of other information sources to replace TCMP, and the relevancy of TCMP data for new tax system proposals. Copies of this report are being sent to various interested congressional committees, the Director of the Office of Management and Budget, the Secretary of the Treasury, the Commissioner of Internal Revenue, and other interested parties. It will also be made available to others upon request. Major contributors to this report are listed in appendix II. Please contact me on (202) 512-9044 if you or your staff have any questions about the report. This appendix discusses some ways the individual and business segments of the 1994 TCMP could be used to evaluate the design and administration of the five alternative tax system proposals. The proposals are described below. A Flat Tax would levy a single-rate wage tax on individuals and a single-rate cash-flow tax on businesses. An Unlimited Savings Allowance (USA) Tax would provide for a three-bracket individual income tax, with a full deduction for income saved rather than consumed. On the business side, a single rate would apply to income from both corporate and non-corporate businesses, with an immediate deduction for capital investment and purchases of inventory. A Simplified Income Tax would broaden the tax base, lower the tax rate, and eliminate most current deductions and credits. A Value Added Tax (VAT), a consumption tax, would be collected at each stage of the production process. A Retail Sales Tax, a consumption tax, would be collected at the retail level in the form of a sales tax. Under the VAT and Retail Sales Tax proposals, individuals would bear taxes as they consume goods and services, but, unless they were sole proprietors, they would not file tax returns. Therefore, the nonbusiness (e.g., individuals who are not sole proprietors) portion of the TCMP (about 18 percent of the sample) has no relevancy for these two types of taxes. The flat tax, the USA tax, and the simplified income tax would require returns for individual taxpayers who do not own businesses. Thus, TCMP data should have some relevancy in evaluating these alternative tax systems. Table I.1 shows the TCMP data elements for individuals that could be relevant to policymakers and tax administrators in developing and administering the flat tax, USA tax, and simplified tax systems. The TCMP data elements are essentially the same as the line items found on the Form 1040, Individual Income Tax Return. The "yes" in the columns in table I.1 indicates that the TCMP element would be relevant for evaluating the proposals. Those columns in table I.1 that do not contain "yes" indicate that TCMP data collected for these elements would not be relevant for that particular tax system. The sample sizes shown in table I.1 are the number of individual returns IRS plans to audit in the TCMP. Wages, salaries, and tips Taxable refunds or credits of state and local income taxes Capital gain or (loss) Income from rental real estate, partnerships, S corporationsIRA deductions for self and spouse One-half of self employment taxKeogh retirement plan and SEP deductionPenalty on early withdrawal of savings State and local income taxes (continued) Child and dependent care expenses Credit for the elderly or disabled Social Security tax on tip income Tax on qualified retirement plans (Table notes on next page) As indicated in table I.1, some of the TCMP individual tax elements should be relevant for evaluating the flat tax proposal. However, there would be no need to evaluate the compliance associated with investment-type income or deductions, such as charitable contributions or state and local taxes, because these elements are not part of the proposal. The relevant individual tax elements are filing status, exemptions, wages and salaries, pension income, and unemployment compensation. TCMP data could be used to determine how accurately taxpayers have reported these elements and the reasons why taxpayers have failed to comply under the current tax system. For example, the TCMP data may indicate that even under a flat tax, current requirements are too complex for many taxpayers to determine their proper filing status. The TCMP data could provide information on ways current law could be simplified to reduce complexity and improve compliance. As indicated in table I.1, almost all TCMP income elements for individuals would be included in the USA tax system and, thus, should be useful for evaluating this system. Under the USA system, taxpayers would be allowed unlimited deductions for net increases to savings; however, except for IRA deductions, taxpayers are not currently required to report these data. Therefore, TCMP data would not be useful for determining whether taxpayers would accurately report all investment deposits. On the other hand, TCMP data should be useful for determining the reporting accuracy of investment proceeds. Under the USA system, all deductions under the current income tax, except for mortgage interest and charitable contributions, would be eliminated. TCMP data should be useful in developing compliance statistics and programs for these two items. However, TCMP could not be used to evaluate the postsecondary education deduction allowed under the USA proposal. Similarly, TCMP data could not be used to evaluate the fringe benefits that would be taxable under the USA proposal because these benefits, such as employer paid medical insurance, are currently not taxable and would not be studied in the TCMP survey of individuals. However, data on fringe benefits would be gathered on the business portion of the TCMP. As indicated in table I.1, almost all of the TCMP elements should be relevant for evaluating compliance with income reporting requirements. On the deduction side, only TCMP data on mortgage interest would be relevant for evaluating this system. Like the USA tax system, fringe benefits would be taxed; thus, the individual portion of the TCMP would not be useful for evaluating this type of income. All five alternative tax systems cover businesses, which include sole proprietorships, corporations, S corporations, and partnerships. About 82 percent of the TCMP sample covers businesses. Table I.2 indicates the TCMP data elements that should be useful for developing and administrating the flat tax, USA, VAT, and retail sales tax systems. Table I.2 does not contain information on the simplified income tax system because we were not able to obtain any information on the business portion of this tax system. However, on the basis of information available on the individual portion, it would appear that almost all business income and deduction items in the current system would be relevant under the simplified income tax system. Income and cost of goods sold Net gain or (loss) from sale of business property(continued) Relevant TCMP data by proposal Information gathered on businesses includes small corporations, S corporations, partnerships, and sole proprietorships. Under the flat tax proposal, businesses would be assessed a tax on gross receipts less the costs of providing the goods or services. Therefore, as indicated in table I.2, almost all of the TCMP tax elements dealing with business gross receipts and deductions should be relevant for administering a flat tax, such as designing compliance strategies, identifying returns for audit, and estimating the tax gap. If this proposal were implemented, TCMP data on business investment income and interest expenses would not be relevant. As indicated in table I.2, many of the income and deduction items currently reported on business returns would still be reported on returns under the USA tax proposal. Thus, the TCMP data would be relevant for developing compliance programs, selecting returns for audit, and estimating the tax gap. Items that would not be relevant include investment type income (e.g., interest and dividends); and deductions for wages and salaries, interest payments, and contributions to employee pension programs. As indicated in table I.2, if a VAT were adopted as a replacement for the existing income tax, TCMP data on business gross receipts and purchases would be relevant for looking at potential compliance problems with VAT reporting. Thus, TCMP information would continue to be useful in developing compliance programs, selecting returns for audit, and estimating the tax gap. As indicated in table I.2, return information on gross receipts should be relevant for evaluating compliance problems under a retail sales tax system. A retail sales tax would generally apply only to businesses in the retail trade market segments. This group comprises about 24 percent of the planned 1994 TCMP sample. Lou Roberts, Evaluator-in-Charge The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.	Pursuant to a congressional request, GAO provided information on the Internal Revenue Service's (IRS) Taxpayer Compliance Measurement Program (TCMP) for tax year 1994, focusing on: (1) how IRS addressed the problems identified in a previous GAO report; (2) how persistent problems affect final TCMP results; (3) other informational sources that IRS could use to target its audits more effectively; and (4) the relevancy of TCMP data for alternative tax system proposals. GAO found that: (1) IRS has taken appropriate actions to correct the previously identified problems in the implementation of TCMP; (2) due to uncertainties about its fiscal year 1996 budget, IRS has delayed TCMP audits until December 1, 1995; (3) the audit delay will allow IRS to complete testing of TCMP database components and data collections systems; (4) the audits could be further delayed if the tests reveal additional problems; (5) IRS plans to collect data on partners, shareholders, and misclassified workers which should allow it to better measure compliance levels and TCMP audit results; (6) computerized auditor comments should make it easier for researchers to analyze TCMP results and allow IRS to collect data on other tax issues that are not a part of TCMP; (7) IRS still needs to develop a research plan that would allow it to more timely analyze TCMP data; (8) no alternative information sources exist that could help IRS better target its audits; (9) IRS is developing a new identification system for tax return audits, but it will not be available until after year 2000; and (10) TCMP could be useful in designing and administering a new tax system and identifying compliance trends.	7,152	358
ILOVEYOU is both a "virus" and "worm." Worms propagate themselves through networks; viruses destroy files and replicate themselves by manipulating files. The damage resulting from this particular hybrid-- which includes overwhelmed e-mail systems and lost files-is limited to users of the Microsoft Windows operating system. ILOVEYOU typically comes in the form of an e-mail message from someone the recipient knows with an attachment called LOVE-LETTER- FOR-YOU.TXT.VBS. The attachment is a Visual Basic Script (VBS) file.As long as recipients do not run the attached file, their systems will not be affected and they need only to delete the e-mail and its attachment. When opened and allowed to run, however, ILOVEYOU attempts to send copies of itself using Microsoft Outlook (an electronic mail software program) to all entries in all of the recipient's address books. It attempts to infect the Internet Relay Chat (IRC) programso that the next time a user starts "chatting" on the Internet, the worm can spread to everyone who connects to the chat server. It searches for picture, video, and music files and attempts to overwrite or replace them with a copy of itself. In addition, the worm/virus further attempts to install a password-stealing program that would become active when the recipient opened Internet Explorerand rebooted the computer. However, Internet accounts set up to collect to stolen passwords were reportedly disabled early in the attack. The worm/viruses also appeared in different guises-labeled as "Mother's Day," "Joke," "Very Funny," among others. These variants retriggered disruptions because they allowed the worm/virus to bypass filters set up earlier to block ILOVEYOU. At least 14 different versions of the virus have been identified, according to the Department of Defense's (DOD) Joint Task Force-Computer Network Defense. One, with the subject header "VIRUS ALERT!!!", was reportedly even more dangerous than the original because it was also able to overwrite system files critical to computing functions. The difference between ILOVEYOU and other recent viruses, such as the Melissa virus, which surfaced about this time last year, is the speed at which it spread. Soon after initial reports of the worm/virus surfaced in Asia on May 4, ILOVEYOU proliferated rapidly throughout the rest of the world. By 6 p.m. the same day, Carnegie Mellon's CERT Coordination Center (CERT-CC)had received over 400 direct reports involving more than 420,000 Internet hosts. One reason ILOVEYOU multiplied much faster than Melissa was that it came during the work week, not the weekend. Moreover, ILOVEYOU sent itself to everyone on the recipient's e-mail lists, rather than just the first 50 addressees as Melissa did. The following two figures provide a more detailed overview of the timelines associated with the introduction of the virus and the subsequent discovery and notification actions taken by various entities. In addition to hitting most federal agencies--discussed later in my statement--the worm/virus affected large corporations, such as AT&T, TWA, and Ford Motor Company; media outlets, such as the Washington Post, Dow Jones, and ABC news; state governments; school systems; and credit unions, among many others, forcing them to take their networks off- line for hours. Internationally, the virus affected businesses, organizations, and governments, including the International Monetary Fund, the British Parliament, Belgium's banking system, and companies in the Baltics, Denmark, Italy, Germany, Norway, the Netherlands, Sweden, and Switzerland. The bottom line in terms of damage is still uncertain. Initial estimates of damage from the outbreak ranged from $100 million to over $10 billion globally. We do not have a basis for commenting on overall loss. While press reports are full of anecdotal accounts from disparate sectors of the economy, it is difficult to reliably and precisely estimate factors such as loss of productivity, lost opportunity costs, reductions in customer confidence, slow down of technical staff, and loss of information. Furthermore, as with most security incidents, companies affected are not likely to fully disclose the true extent of their losses. Recognizing the increasing computer-based risks to our nation's critical infrastructures, the federal government has taken steps over the past several years to create capabilities for effectively detecting, analyzing, and responding to cyber-based attacks. However, the events and responses spawned by ILOVEYOU demonstrate both the challenge of providing timely warnings against information-based threats and the increasing need for the development of national warning capabilities. The National Infrastructure Protection Center (NIPC), located in the Federal Bureau of Investigation, is responsible for serving as the focal point in the federal government for gathering information on threats as well as facilitating and coordinating the federal government's response to incidents affecting key infrastructures. Presidential Decision Directive 63 (PDD 63) which was signed in May 1998, also specifically charged the NIPC with issuing attack warnings as well as alerts to increases in threat condition. This includes warnings to private sector entities. Developing the capability to provide early warning of imminent cyber- based threats is complex and challenging but absolutely essential to the assigned NIPC mission. Data on possible threats--ranging from viruses, to hoaxes, to random threats, to news events, and computer intrusions-- must be continually collected and analyzed from a wide spectrum of globally distributed sources. Moreover, once an imminent threat is identified, appropriate warnings and response actions must be effectively coordinated among federal agencies, the private sector, state and local governments, and even other nations. It is important that this function be carried out as effectively, efficiently, and quickly as possible in order to ensure continuity of operations as well as minimize disruptions. To date, the NIPC has had some success in providing early warning about impending threats. For example, in December 1999, it posted warnings about a rash of denial-of-service attacks prominently on its website and it offered a tool that could be downloaded to scan for the presence of the denial-of-service code. Two months later, the attack arrived in full force, compromising the services of Yahoo, E-Bay, and other Internet companies. However, the NIPC had less success with the ILOVEYOU virus. As noted earlier (in figure 1), the NIPC first learned of the virus at 5:45 a.m. EDT from an industry source. Over the next 2 hours, the NIPC checked other sources in attempts to verify the initial information with limited success. According to NIPC officials, no information had been produced by intelligence, Defense, and law enforcement sources, and only one reference was located in open sources, such as Internet websites. The NIPC considers assessment of virus reports to be an important step before issuing an alert because most viruses turn out to be relatively harmless or are detected and defeated by existing antivirus software. According to the NIPC, the commercial antivirus community identifies about 20 to 30 new viruses every day, and more than 53,000 named viruses have been identified to date. At 7:40 a.m., two DOD sources notified the NIPC that the virus was spreading through the department's computer systems, and the NIPC immediately notified the Federal Computer Incident Response Center (FedCIRC), at GSA, and CERT-CC. FedCIRC then undertook a rigorous effort to notify agency officials via fax and phone. For many agencies, this was too late. In fact, only 2 of the 20 agencies we spoke with reported that they first learned of the virus from FedCIRC. Twelve first found out from their own users, three from vendors, two from news reports, and one from colleagues in Europe. NIPC did not issue an alert about ILOVEYOU on its own web page until 11 a.m., May 4--hours after many federal agencies were reportedly hit. This notice was a brief advisory; the NIPC website did not offer advice on dealing with the virus until 10 p.m. that evening. For the most part, agencies themselves responded promptly and appropriately once they learned about the virus. In some cases, however, getting the word out was difficult. At DOD, for example, the lack of teleconferencing capability slowed the JTF-CND response because Defense components had to be called individually. At the Department of Commerce, cleanup and containment efforts were delayed because many of the technical support staff had not yet arrived at work when users began reporting the virus. The National Aeronautics and Space Administration (NASA) also had difficulty communicating warnings when e-mail services disappeared. And while backup communication mechanisms are in place, NASA officials told us that they are rarely tested. Justice officials similarly learned that the department needed better alternative methods for communicating when e-mail systems are down. Additionally, many agencies initially tried to filter out reception of the malicious "ILOVEYOU" messages. However, in doing so, some also filtered out e-mail alerts and communications regarding incident handling efforts that referred to the virus by name. Lastly, we found that the few federal components that either discovered or were alerted to the virus early did not effectively warn others. For example, Treasury told us that the U.S. Customs Service received an Air Force Computer Emergency Response Team (AFCERT) advisory early in the morning of May 4, but that Customs did not share this information with other Treasury bureaus. The lack of more effective early warning clearly affected most federal agencies. Only 7 of the 20 agencies we contacted were spared widespread infection, and this was largely because they relied on e-mail software other than Microsoft Outlook. Of the remaining agencies, the primary impact was e-mail disruption, which, in turn, slowed some agency operations and required agencies to divert technical staff toward stemming the virus' spread and cleaning "infected" computers. Of course, if an agency's business depends on e-mail for decision-making and service delivery, then the virus/worm probably had a significant impact on day-to-day operations in terms of lost productivity. While most agencies experienced disruptions of e-mail service for a day or less, eight agencies or agency components reported experiencing disruptions of longer than 1 day. I would like to offer some highlights of our discussions with officials at individual agencies since they further complete the picture of the response efforts and damage resulting from ILOVEYOU. The Department of Health and Human Services (HHS) was inundated with about 3 million malicious messages. Departmental components experienced disruptions in e-mail service ranging from a few hours to as many as 6 days, and departmentwide e-mail communication capability was not fully restored until May 9. An HHS official observed that "if a biological outbreak had occurred simultaneously with this 'Love Bug' infestation, the health and stability of the Nation would have been compromised with the lack of computer network communication." At DOD, enormous efforts were expended containing and recovering from this virus. Military personnel from across the department were pulled from their primary responsibilities to assist. One DOD official noted that if such an attack were to occur over a substantial amount of time, reservists would have to be called for additional support. Some DOD machines required complete software reloads to overcome the extent of the damage. At least 1,000 files at NASA were damaged. While some files were recovered from backup media, others were not. At the Department of Labor, recovery required over 1,600 employee hours and over 1,200 contractor hours. The Social Security Administration required 5 days to become fully functional and completely remove the virus from its systems. The Department of Energy experienced a slowdown in external e-mail traffic, but suffered no disruption of mission-critical systems. Ten to 20 percent of DOE's machines nationwide required active cleanup. A vendor's 7:46 a.m. EDT warning to the Federal Emergency Management Agency enabled officials there to mitigate damage by restricting the packet size allowed through its firewalls until the necessary virus prevention software could be upgraded. As of May 10, the Veterans Health Administration (VHA) had received 7,000,000 "ILOVEYOU" messages, compared to a total of 750,000 received during the Melissa virus episode. VHA spent about 240 man hours to recover from the virus. The Department of Justice estimated spending 80 regular labor hours and 18 overtime hours for cleanup. Some of Treasury's components required manual distribution of updated virus signature files because automated means for rollout of software updates were not in place. The Department of Agriculture could not obtain the updated antivirus product it needed until after 1 p.m., in part because it had to compete with all of the vendor's other customers worldwide to obtain the updates. Effective user awareness programs were cited at the Department of Commerce, Treasury's Bureau of Public Debt, and the Department of Justice, where many infected messages were received but few were executed because users tended to be suspicious of unexpected and unusual e-mail messages and were not likely to open them. Mr. Chairman, in many respects the federal government has been lucky. Even though ILOVEYOU and Melissa were disruptive, key government services remained largely operational through the events. However, the potential for more catastrophic damage is significant. Official estimates show that over 100 countries already have or are developing computer attack capabilities. Hostile nations or terrorists could use cyber-based tools and techniques to disrupt military operations, communications networks, and other information systems or networks. The National Security Agency has acknowledged that potential adversaries are developing a body of knowledge about U.S. systems and about methods to attack these systems. According to Defense officials, these methods, which include sophisticated computer viruses and automated attack routines, allow adversaries to launch untraceable attacks from anywhere in the world. According to a leading security software designer, viruses in particular are becoming more dangerous to computer users. In 1993 only about 10 percent of known viruses were considered destructive, harming files and hard drives. But now about 35 percent are regarded as harmful. Such concerns highlight the need to improve the government's capacity and capability for responding to virus attacks. Clearly, more needs to be done to enhance the government's ability to collect, analyze, and distribute timely information that can be used by agencies to protect their critical information systems from possible attack. In the ILOVEYOU incident, NIPC and FedCIRC, despite their efforts, had only a limited impact on agencies being able to mitigate the attack. At the same time, agencies can also take actions that would improve their ability to combat future virus attacks. For example, they can act to increase user awareness and understanding regarding unusual and suspicious e-mail and other computer-related activities. In particular, agencies can teach computer users that e-mail attachments are not always what they seem and that they should be careful when opening them. Users should never open attachments whose filenames end in ".exe" unless they are sure they know what they are doing. Users should also know that they should never start a personal computer with an unscanned floppy disk or CD-ROM in the computer drive. Strengthening intrusion detection capabilities may also help. Clearly, it is difficult to sniff out a single virus attached to an e-mail coming in but if 100 e-mails with the same configuration suddenly arrive, an alert should be sounded. Furthermore, agencies can clarify policies and procedures for reporting and responding to unusual events and conduct "dry runs" on these procedures. They can ensure that up-to-date virus detection software has been installed on their systems. They can establish effective alternative communication mechanisms to be used when e-mail systems are not operating properly. And they can participate in interagency efforts to prepare for and share information on cyber threats, such as those sponsored by FedCIRC. While such actions can go a long way toward helping agencies to ward off future viruses, they will not result in fully effective and lasting improvements unless they are supported by strong security programs on the part of individual agencies and effective governmentwide mechanisms and requirements. As noted in previous testimonies and reports, almost every federal agency has poor computer security. Federal agencies are not only at risk from computer virus attacks, but are also at serious risk of having their key systems and information assets compromised or damaged from both computer hackers as well as unauthorized insiders. We have recommended that agencies address these concerns by managing security risks on an entitywide basis through a cycle of risk management activities that include assessing risks and determining protection needs, selecting and implementing cost-effective policies to meet those needs, promoting awareness of policies and controls, and implementing a program of routine tests and examinations for evaluating the effectiveness of these tools. At the governmentwide level, this involves conducting routine periodic independent audits of agency security programs; developing more prescriptive guidance regarding the level of protection that is appropriate for their systems; and strengthening central leadership and coordination of information security related activities across government. Mr. Chairman, this concludes my statement. The ILOVEYOU virus attack will not be our last incident. We hope it will provide an opportunity to examine our processes for developing threat assessments and providing warnings as well as an opportunity to examine our overall security posture. We performed our review from May 8 through May 17, 2000, in accordance with generally accepted government auditing standards. For information about this testimony, please contact Jack L. Brock, Jr., at (202) 512-6240. Jean Boltz, Cristina Chaplain, Nancy DeFrancesco, Mike Gilmore, Danielle Hollomon, Paul Nicholas, and Alicia Sommers made key contributions to this testimony. (511999)	Pursuant to a congressional request, GAO discussed the ILOVEYOU computer virus, focusing on measures that can be taken to mitigate the effects of future attacks. GAO noted that: (1) ILOVEYOU is both a virus and a worm; (2) worms propagate themselves through networks, and viruses destroy files and replicate themselves by manipulating files; (3) the damage resulting from this hybrid is limited to users of the Microsoft Windows operating system; (4) ILOVEYOU typically comes in the form of an electronic mail (e-mail) message from someone the recipient knows; (5) when opened and allowed to run, the virus attempts to send copies of itself to all entries in all of the recipient's address books; (6) soon after initial reports of the virus surfaced in Asia, the virus proliferated rapidly throughout the rest of the world; (7) recognizing the increasing computer-based risks to the nation's critical infrastructures, the federal government has taken steps over the past several years to create capabilities for effectively detecting, analyzing, and responding to cyber-based attacks; (8) however, the events and responses spawned by ILOVEYOU demonstrate both the challenge of providing timely warnings against information based threats and the increasing need for the development of national warning capabilities; (9) the National Infrastructure Protection Center (NIPC) is responsible for serving as the focal point in the federal government for gathering information on threats as well as facilitating and coordinating the federal government's response to incidents impacting key infrastructures; (10) once an imminent threat is identified, appropriate warnings and response actions must be effectively coordinated among federal agencies, the private sector, state and local governments, and other nations; (11) NIPC has had some success in providing early warnings on threats, but had less success with the ILOVEYOU virus; (12) for over 2 hours after NIPC first learned of the virus, it checked other sources in attempts to verify the initial information, with limited success; (13) NIPC did not issue an alert about ILOVEYOU on its own web page until hours after federal agencies were reportedly hit; (14) agencies themselves responded promptly and appropriately once they learned about the virus; (15) GAO found that the few federal components that either discovered or were alerted to the virus early did not effectively warn others; (16) to prevent future virus attacks, agencies can teach computer users that e-mail attachments are not always what they seem and that they should be careful when opening them; and (17) agencies can ensure that up-to-date virus detection software has been installed on their systems.	3,850	560
VA provides nursing home care for some veterans, as required, and makes these services available to other veterans on a discretionary basis, as resources permit. Specifically, VA is required by law to provide nursing home care to any veteran who needs it for a service-connected disability and to any veteran who needs it and has a service-connected disability rated at 70 percent or greater. However, VA provides most of its nursing home care to veterans on a discretionary basis, as resources permit. VA's policy on nursing home eligibility requires that VA networks provide nursing home care to veterans with 60 percent service-connected disability ratings who are either unemployable or who have been determined by VA to be permanently and totally disabled. For all other veterans, VA's policy is to provide nursing home care on a discretionary basis, with certain veterans having higher priority, including veterans who require care following a hospitalization. CLCs provide both short-stay (90 days or less) and long-stay (more than 90 days) services. According to VA data, almost 94 percent of the residents admitted to CLCs in fiscal year 2010 were short-stay. Short-stay care in CLCs includes skilled nursing care, rehabilitation, restorative care, maintenance care for those awaiting alternative placement, hospice, and respite care. The remaining admissions, about 6 percent, were long-stay. Long-stay care includes dementia care, maintenance care, and care for those with spinal cord injury and disorders. Responsibility for VA's medical facilities, including CLCs, rests with both VA's networks and VA headquarters. Almost all of VA's 132 CLCs, located throughout VA's 21 networks, are colocated with or in close proximity to a VA medical center (VAMC). While networks are charged with the day-to-day management of the VAMCs within their network, VA headquarters maintains responsibility for establishing national policy and overseeing both networks and VAMC operations. Within VA headquarters, Geriatrics and Extended Care is responsible for developing VA's policies and other national actions related to the quality of care and quality of life in VA's CLCs. The Office of the Deputy Under Secretary for Health for Operations and Management, through each network, ensures that VAMCs, including CLCs, comply with VA's policies and implement other national actions. The LTCI contract, which began in September 2010, is for 1 year, and provides for LTCI to conduct reviews between September 2010 and August 2011. VA may exercise an option to renew for each of 4 additional years through August 2015. Officials from both Geriatrics and Extended Care and the Office of the Deputy Under Secretary for Health for Operations and Management share responsibility for administering VA's contract with LTCI. LTCI uses the Centers for Medicare & Medicaid Services' scope and severity scale for classifying nursing home deficiencies. There are four severity classifications, with the least serious deficiencies rated as having the potential for minimal harm and the most serious deficiencies rated as immediate jeopardy situations--in which residents are potentially or actually at risk of dying or being seriously injured. The remaining two severity classifications are actual harm and potential for more than minimal harm. The scope of deficiencies--or the number of residents potentially or actually affected by the deficient care--may be rated as isolated, pattern, or widespread. VA policy requires that all VAMCs be accredited by The Joint Commission. As part of the accreditation process for a VAMC, which occurs on average every 3 years, The Joint Commission surveys and accredits any CLC associated with the VAMC. VA requires CLCs to meet The Joint Commission long-term care standards. CLCs are also subject to periodic reviews by VA's OIG. VA headquarters established a process for responding to deficiencies identified at CLCs during the 2007 and 2008 reviews. This process, which requires CLCs to submit corrective action plans addressing LTCI- identified deficiencies--such as how CLCs will address a lack of competent nursing staff and a failure to provide a sanitary and safe living environment--is also being used during the 2010 and 2011 LTCI reviews. However, because of weaknesses in the process, VA headquarters cannot provide reasonable assurance that deficiencies that could potentially affect the quality of care and quality of life of residents are resolved. VA headquarters established a process for responding to LTCI-identified deficiencies that requires each CLC to develop a corrective action plan addressing all deficiencies identified and submit it to VA headquarters within 30 days of receiving an LTCI report. The plans may include actions such as training CLC staff on clinical policies and procedures or implementing nursing and interdisciplinary rounds to monitor the clinical issues related to the deficiencies. VA headquarters officials review each corrective action plan to determine whether the actions can be expected to correct all identified deficiencies and whether the time frames for completing the actions are reasonable. The officials then provide each CLC feedback by telephone, discussing any revisions to the corrective action plans that may be necessary. The officials document these discussions using hand-written notes on hard copies of CLCs' corrective action plans, which are not shared with VA networks and CLCs. VA headquarters officials told us they may schedule additional telephone calls with CLCs when significant revision of a corrective action plan is necessary or if the officials want an update on the implementation of the plan. For deficiencies identified in the 2007 and 2008 LTCI reviews, the documentation showed that officials had at least two telephone calls with 29 of the 116 CLCs reviewed. Three of these 29 CLCs received more than two follow-up calls. When additional calls were made, VA headquarters required the CLCs to submit an updated corrective action plan. While VA's process requires that all deficiencies identified be addressed, it gives priority to deficiencies at the immediate jeopardy or actual harm levels. When LTCI review teams identify such deficiencies during a survey, they are required to notify VA headquarters and the relevant VAMC. LTCI identified immediate jeopardy or actual harm deficiencies at 25 of the 116 CLCs (about 22 percent) reviewed in 2007 and 2008, and at 10 of the 67 CLCs (about 15 percent of the CLCs) reviewed in 2010 and 2011 as of March 31, 2011. After the 2007 and 2008 LTCI reviews, VA headquarters officials analyzed the deficiencies from the 116 reviews and from the analysis developed eight clinical high-risk categories. According to these officials, the eight categories, which included medication management, infection control, and peripherally inserted central catheter (PICC) lines, posed the greatest risk to residents' health and safety. (See table 1.) The officials then implemented a national training and education initiative to address the eight categories. VA headquarters convened a workgroup that developed national training guidelines and checklists for evaluating CLC staff competencies in each of the eight categories. The workgroup included representatives from Geriatrics and Extended Care, the Office of Nursing Services, Nutrition and Food Services, and the Infectious Diseases Program Office. A VA headquarters official told us that the workgroup included the last three offices because the majority of LTCI-identified deficiencies were related to nursing, nutrition, and infection control issues. VA headquarters provided the VA networks and CLCs with the national guidelines and checklists and required CLCs to incorporate them into their training and education policies. VA headquarters required CLCs to report whether they had met the following four requirements for each of the eight clinical high-risk categories: (1) establish CLC policies, (2) adopt procedures for implementing the policies, (3) design an assessment to observe staff proficiency in providing care matching the established procedure, and (4) establish a plan for ongoing training and assessment of staff, including new staff. In addition, CLCs were required to directly observe staff providing care to CLC residents and report the percentage of staff that had been observed as being proficient in the procedures necessary to comply with CLCs' policies for each of the eight clinical high-risk categories. If CLCs did not meet all four requirements for each category or had observed less than 90 percent of their staff as proficient in providing care in any one of the clinical high-risk categories, they were to develop and submit corrective action plans to VA headquarters. According to the documentation we reviewed, in most categories, the majority of CLCs indicated that they had met the requirements of the national training and education initiative. However, in every category there were CLCs that did not meet these requirements and had to submit a corrective action plan. For example, for the medication management clinical high-risk category, 14 of the 132 CLCs submitted a corrective action plan because they either were not in compliance with the four requirements or had not observed at least 90 percent of their staff as being proficient in providing care. After LTCI's 2010 and 2011 reviews of VA's CLCs are complete, VA headquarters plans to analyze the deficiencies identified by LTCI. To facilitate the analysis, VA headquarters is working with LTCI to track and note trends with regard to deficiencies on a quarterly basis. LTCI provides quarterly reports to VA headquarters, which include data on which deficiencies are the most frequently identified nationally. For each CLC, these reports include data on the total number of deficiencies identified and the categories in which the identified deficiencies fall. VA headquarters officials expect that these quarterly reports will facilitate the identification of national areas for improvement as well as help them review CLCs' performance on the LTCI reviews over time. When responding to LTCI-identified deficiencies, VA headquarters does not always maintain clear and complete documentation of the feedback it provides to CLCs regarding their corrective action plans. In addition, VA headquarters does not require VA networks to report on the status of CLCs' implementation of their corrective action plans or to verify CLCs' self-reported compliance with the requirements of the national training and education initiative. Without the ability to determine whether CLCs appropriately responded to feedback, fully implemented their corrective action plans from the 2007 and 2008 LTCI reviews, or fully complied with requirements of the national training and education initiative, and without the ability to determine the status of corrective action plans that CLCs are implementing during LTCI's 2010 and 2011 reviews, VA headquarters does not have reasonable assurance that LTCI-identified deficiencies are resolved. Lack of clear and complete documentation of feedback. VA headquarters does not always maintain clear and complete documentation of the feedback it provides CLCs about their corrective action plans, which is not consistent with good management practices as outlined in federal internal control standards. According to these standards, internal control activities, such as VA headquarters' feedback, should be clearly and completely documented in a manner that is accurate, timely, and helps provide reasonable assurance that program objectives are being achieved. VA headquarters uses an unsystematic approach for documenting the feedback it provides to CLCs regarding their corrective action plans. The approach relies solely on hard copies of CLCs' action plans that have hand-written notes on them, which are not shared with the VA networks and CLCs, to document the feedback provided during VA headquarters' telephone calls with CLCs. We found that this approach did not always result in clear--that is, understandable to anyone not involved in the telephone feedback calls--and complete documentation. In particular, the documentation we reviewed did not always clearly and completely indicate the specific feedback provided to CLCs, including actions VA headquarters advised CLCs to take to address weaknesses with their corrective action plans. For example, for one CLC we obtained two corrective action plans from VA headquarters. One was an older action plan and the other was a revised action plan. The older action plan contained no notes or any indication of the content of VA headquarters' feedback that resulted in the revised action plan, so we were unable to independently determine whether the revised action plan addressed VA headquarters' feedback. In addition, we found that the plans for 19 of the 50 2007 and 2008 CLC corrective action plans that we reviewed--or about 38 percent of the plans--lacked any notes documenting the feedback that VA headquarters gave CLCs on the telephone calls. Lack of reporting requirement for VA networks. VA headquarters does not require its networks to report on the status of CLCs' implementation of their corrective action plans, and VA headquarters does not routinely schedule additional telephone calls with CLCs following the submission of initial corrective action plans and VA's initial telephone calls. For example, VA headquarters held additional telephone calls with only 25 percent of CLCs following the 2007 and 2008 LTCI reviews, and 15 percent of the CLCs following the 2010 and 2011 LTCI reviews, as of March 31, 2011. Therefore, VA headquarters does not know whether CLCs fully implemented their plans and corrected all LTCI-identified deficiencies. Federal standards for internal control state that the findings of reviews should be promptly resolved and that information on the status of the findings should be communicated to management so that management can provide reasonable assurance that a program is achieving its objectives--in this case, that CLCs are providing quality care and maintaining veterans' quality of life. VA headquarters officials told us that beyond the initial telephone calls with CLCs, VA headquarters does not receive any additional information from CLCs regarding the implementation status of their corrective action plans. Rather, VA headquarters officials expect the findings of the 2010 and 2011 LTCI reviews will help them determine whether CLCs resolved all deficiencies identified by LTCI in 2007 and 2008--2 or 3 years after the deficiencies were first identified. Lack of verification requirement for national initiative. We found that VA headquarters relied on self-reported information from CLCs regarding (1) compliance with all four requirements for each of the eight clinical high-risk categories and (2) the percentage of staff that were observed to be proficient in treatments and procedures associated with the categories. VA headquarters did not specify to its networks that they should verify the accuracy of CLCs' self-reported information. Reliance on self-reported information is inconsistent with federal standards for internal control specifying that management should be able to provide reasonable assurance about the accuracy of data--in this case, that VA networks verify the accuracy of CLCs' self-reported information. Although we cannot generalize to all networks, neither of the two VA networks we visited requested documentation to verify CLCs' self-reported information for the national training and education initiative. Further, the 2010 and 2011 LTCI reviews indicate that some CLCs are not in compliance with the requirements for the eight clinical high-risk categories stemming from the 2007 and 2008 reviews. For example, a CLC reported to VA headquarters that by June 2009 it would have a policy in place for training and educating its staff on PICC lines--one of the eight clinical high-risk categories. However, when LTCI reviewed this CLC in 2010, it found that this CLC had failed to provide proper care and treatment when administering medication to a resident through a PICC line. When LTCI asked to see the CLC's policy related to PICC lines, the CLC's staff stated that the CLC did not have one. In addition to LTCI reviews, VA headquarters obtains information about CLCs from a variety of other sources that could be used to more comprehensively identify risks associated with the care and quality of life of CLC residents. VA headquarters does not analyze all of these sources, and for those sources it does analyze, VA evaluates each source in isolation without comparing the information it receives across all available sources to identify major or commonly cited risks and trends. As a result, VA headquarters' current approach to identifying risks in CLCs may result in missed opportunities to detect patterns and trends in information about the quality of care and quality of life within a CLC or across many CLCs. Without considering information from all available sources and comparing it across different sources, VA headquarters cannot adequately identify and manage risks in CLCs. We found that VA headquarters receives information about the quality of care and quality of life in CLCs from at least nine different sources. The type of information VA headquarters receives from each of these sources, and how often the agency receives it, varies. The nine sources of information about CLCs are the following: LTCI. Conducts annual unannounced reviews that assess the extent to which CLCs follow 176 federal long-term care standards. LTCI review teams observe the delivery of care for a sample of residents in order to examine such areas as medication management, infection control practices, and respect for residents' rights and dignity. LTCI provides VA headquarters a report of all deficiencies identified. VA headquarters then shares the report with the network and the reviewed CLC. The CLC is expected to correct identified deficiencies. The Joint Commission. Performs accreditation surveys every 3 years, on average, assessing CLCs' compliance with 227 long-term care standards, such as infection control practices and resident assessments. When The Joint Commission surveyors find noncompliance, they determine whether a systemic problem exists by assessing the CLC's established policies and processes. This determination is the basis for whether CLCs are found deficient in a long-term care standard. VA networks and CLCs receive survey reports from The Joint Commission, which identify specific deficiencies. CLCs are required to resolve the deficiencies within certain time frames in order to maintain accreditation. OIG. Performs its Combined Assessment Program reviews at VAMCs, including CLCs, about every 3 years. Under this program, OIG reviews selected VAMC activities, including CLC activities, to assess the effectiveness of patient care administration (the process of planning and delivering patient care) and quality management (the process of monitoring quality of care to identify and correct harmful and potentially harmful practices and conditions). CLCs typically are part of each Combined Assessment Program review. Upon completion of each review, OIG issues a report to VA headquarters, the network, and the VAMC, which identifies the VAMC's deficiencies, including any deficiencies identified in the CLC. VA requires VAMCs, including CLCs, to fully resolve deficiencies within a year of the completion of a Combined Assessment Program review. VA Office of the Medical Inspector (OMI). Conducts investigations to determine the validity of allegations made by complainants regarding the care provided to veterans, including residents of CLCs. If an allegation is validated, the VAMC, including the CLC, is required to address any recommendations made by OMI. System-wide Ongoing Assessment and Review Strategy (SOARS). Performs reviews of VAMCs, including CLCs, every 3 years to evaluate readiness for some external and internal reviews, such as those by The Joint Commission and OIG. It is a consultative program within VA designed to identify programmatic weaknesses in VAMCs, including CLCs. SOARS teams issue reports to VA networks and VAMCs, including CLCs, with recommendations based on identified deficiencies, and VAMCs and CLCs are expected to implement the recommendations. Quality Measures and Quality Indicators. Report the percentage of residents in a CLC who have certain conditions, such as a pressure ulcer, or residents who are at risk for developing certain conditions, such as CLC residents who have limited mobility and are at risk of developing a pressure ulcer. CLCs periodically assess residents and enter information about their conditions into a database, which automatically calculates percentage scores for 24 categories of quality measures and quality indicators. Data are available on an ongoing basis. Artifacts of Culture Change Tool. Reports the extent to which CLCs provided resident-centered care. Using a standard self-assessment tool, CLCs score their own performance in certain areas, such as allowing residents to choose when they eat meals, bathe, and sleep. CLCs report their scores to VA headquarters every 6 months. Issue Briefs. Provide specific information to VA headquarters officials regarding unusual incidents, such as deaths, disasters, or anything else that happens at a VAMC, including a CLC, that might generate media interest or affect care. Complaints. Provide information from veterans or their representatives about the quality of care or the quality of life in VAMCs, including CLCs. VA headquarters' approach for identifying risks associated with the quality of care and quality of life of CLC residents is deficient in two respects--it does not comprehensively analyze information from all available sources, and it does not compare findings across these sources. Without analyzing information from all available sources and comparing the results, VA headquarters' assessments of risks in CLCs are incomplete. According to federal internal control standards, management should assess the risks the agency may face from both external and internal sources. The standards state that a risk management process includes (1) comprehensively identifying risks associated with achieving an agency's goals (for example, providing quality of care and quality of life in CLCs); (2) estimating the significance of the risks; and (3) determining actions to mitigate the risks, such as developing or clarifying policies or targeting reviews of noncompliant CLCs. VA headquarters' current approach relies significantly on the analysis of findings from LTCI reviews of CLCs. VA headquarters also relies on analysis of the findings from The Joint Commission accreditation surveys and the Artifacts of Culture Change tool. (See app. I for a detailed description of these analyses.) While these three separate analyses enable VA headquarters to identify trends in each source of information, such as the most frequently cited deficiencies across all CLCs or the average number of deficiencies per CLC, they do not provide a complete assessment of the risks that would be identified by evaluating all nine sources. Information VA headquarters receives about the quality of care and the quality of life in CLCs from the remaining six sources--OIG, OMI, SOARS, quality measures and quality indicators, issue briefs, and complaints--could also be valuable in identifying patterns in CLC-related findings. VA headquarters officials we interviewed said they do not typically analyze information they receive about CLCs from these six sources because they do not always believe that doing so would be valuable for identifying trends and patterns regarding the quality of care and quality of life in CLCs. For example, VA headquarters officials said that they do not extract CLC-related findings from OIG Combined Assessment Program reviews because the reviews typically do not include enough CLC-related findings to warrant analysis. However, when we analyzed findings from the 77 OIG Combined Assessment Program reviews that were completed at VAMCs that have CLCs between October 1, 2009, and June 20, 2011, we found that 49 of the reviews--or about 64 percent--included at least one finding related to the quality of care or quality of life in a CLC. Without analyzing information from all available sources about the quality of care and quality of life in CLCs, VA headquarters' assessments of risks in CLCs are incomplete. VA headquarters does not compare information across all sources to identify patterns of findings for an individual CLC, CLCs within a network, or all CLCs nationwide. Rather, VA headquarters analyzes the findings from three sources separately to identify trends in the findings. However, it does not compare the findings from one source to the findings from the other sources. One source's findings, in isolation, may not present the significance of certain risks, especially those that may suggest immediate risks for residents within a given CLC or across all CLCs. However, if related information that VA headquarters receives was compared across different sources concurrently, VA headquarters officials would be better positioned to recognize the risks to CLC residents. One example we identified of the benefit from considering the usefulness of multiple information sources is in the area of pain management. In this regard, we found that in fiscal years 2009 and 2010, VA headquarters' quality indicator and quality measure data showed that about 25 percent of all long-stay CLC residents and 40 percent of all short-stay CLC residents experienced moderate to severe pain. In June 2007, OMI investigated allegations about the quality of care for a resident at one CLC and found, among other things, that the CLC had failed to adequately manage the resident's pain. Three months later, in September 2007, LTCI conducted a review of the same CLC and found that staff were not performing assessments after administering pain medications to determine whether the medication had been effective. In November 2009, the OIG visited the same CLC as part of a Combined Assessment Program review and found that staff had not documented pain medication effectiveness within the required time frames nearly two-thirds of the time that pain medications were administered. If VA had comprehensively analyzed OMI information--which it does not analyze--along with LTCI information that was available in 2007 and compared this information with the information from the 2009 OIG review and quality indicator and quality measure data, VA headquarters would have been better informed about the significance of the risks and what actions might have helped to mitigate the risks of pain medication management problems at this CLC. The 46,000 elderly and disabled veterans annually who are residents in VA's CLCs depend on VA to provide them with quality care and maintain their quality of life. The weaknesses in VA headquarters' process for resolving LTCI-identified deficiencies put veterans at risk of persistent deficiencies that could become more serious over time. VA headquarters officials told us that they intend to use the findings of the 2010 and 2011 LTCI reviews to determine whether deficiencies that were first identified by LTCI 2 to 3 years earlier have been resolved. However, VA headquarters cannot provide reasonable assurance of resolution of deficiencies because it does not (1) clearly document the feedback that it provides to CLCs about corrective action plans for LTCI-identified deficiencies, (2) require VA networks to report on the status of CLCs' implementation of action plans, and (3) verify CLCs' self-reported information about their implementation of the requirements of the national training and education initiative. Unaddressed, these weaknesses in VA headquarters' process for responding to LTCI-identified deficiencies may compromise the quality of care and quality of life of veterans in CLCs. Even though VA headquarters receives information about the quality of care and quality of life in CLCs from LTCI and a variety of other sources, the agency does not comprehensively analyze all available information to identify and manage risks in CLCs. Because VA headquarters does not analyze information from all available sources, it may be missing opportunities to detect trends and patterns in findings from different information sources for a CLC, CLCs within a network, or all CLCs. Without comprehensively analyzing information from all available sources, VA headquarters cannot fully identify risks in CLCs, estimate the significance of the risks, or take actions to mitigate them. To provide reasonable assurance that LTCI-identified deficiencies are resolved and that veterans receive quality care and maintain their quality of life in VA CLCs, we recommend that the Secretary of Veterans Affairs direct the Under Secretary for Health to take the following two actions: For reviews conducted by LTCI under the current contract and any similar future contracts, (1) clearly and completely document the feedback provided to CLCs about their corrective action plans, (2) require VA networks to provide periodic reports on the status of CLCs' implementation of their corrective action plans, and (3) develop and implement a process for verifying any information reported directly to VA headquarters by CLCs. Develop and implement a process to comprehensively identify, estimate, and mitigate risks in CLCs by analyzing and comparing all available information regarding the quality of care and quality of life in CLCs. In its comments on a draft of this report, VA concurred with our recommendations and described the department's planned actions to implement them. VA did not provide technical comments on the draft report. VA's comments are included in appendix II. To address our recommendation that, for reviews conducted by LTCI, VA headquarters should document the feedback provided to CLCs about their corrective action plans, require VA networks to report periodically on the status of CLCs' implementation of corrective action plans, and implement a process for verifying information CLCs report directly to VA headquarters, VA stated that it plans to develop and implement a national feedback process by the end of the second quarter of fiscal year 2012 as part of its response to results from the LTCI reviews. VA stated that the process will include having VA networks work with VAMC leadership to develop a comprehensive action plan to address areas of concern highlighted in the LTCI reviews, using a standardized template for CLCs' corrective action plans, and requiring VAMCs to post corrective action plans on a secure database and provide updated corrective action plans at least monthly. VA indicated that the process will provide access to the status of action plans at any time and that officials from VA headquarters will provide oversight to ensure completion of action plans, including requiring VA networks to validate completion of all action items. VA, however, did not specify in its comments whether its process would include a step to document the feedback provided to CLCs about their corrective actions plans. We believe it is important for VA to document feedback provided to CLCs as part of its process To address our recommendation that VA headquarters develop and implement a process to comprehensively identify, estimate, and mitigate risks in CLCs by analyzing and comparing all available information regarding quality of care and quality of life, VA stated that it plans to design a process that will use all available information about the quality of care and quality of life in CLCs. VA indicated that this process would allow officials to analyze and compare information for individual CLCs, for CLCs within a VA network, and across all CLCs nationwide. VA intends to design this process during the first quarter of fiscal year 2012 and plans to use the process to analyze and compare CLC information and begin reporting it during the second quarter of fiscal year 2012. We commend this effort and encourage VA to proceed with these plans. 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 Veterans Affairs, 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 III. Description of VA headquarters analysis Identify the most frequently cited deficiencies nationally. Identify the total number of deficiencies per community living center (CLC). Classify deficiencies identified in each CLC into 1 of 17 different groups (e.g., activities, environment, infection control, medication, etc.). Use these groups to track trends in deficiencies by VA network and by CLC. Determine whether each CLC was substantially compliant with federal long-term care standards. Identify most frequently cited findings for two areas: 1. Direct impact: includes findings that are likely to present an 2. immediate risk to residents' safety or quality of care; for example, resident assessment and pain management. Indirect impact: includes findings that pose less immediate risk to residents' safety or quality of life, but could become more serious over time; for example, care planning and ensuring that corridors, hallways, and doors remain free from obstructions that would prevent exit in the event of a fire. Calculate average number of findings per CLC. Calculate average performance on 30 measures and indicators, by VA network and nationally; for example, percentage of long-stay residents who have experienced moderate to severe pain. Calculate average scores, by VA network and nationally, for areas such as care practices (e.g., allowing residents to choose when they eat, bathe, and sleep) and leadership (e.g., holding regular community meetings that encourage the participation of staff, residents, and families). In addition to the contact named above, Mary Ann Curran, Assistant Director; Stella Chiang; Julie Flowers; Alison Goetsch; Aaron Holling; Alexis MacDonald; Elizabeth Morrison; and Lisa Motley were major contributors to this report. VA Long-Term Care: Trends and Planning Challenges in Providing Nursing Home Care to Veterans. GAO-06-333T. Washington, D.C.: January 9, 2006. VA Long-Term Care: Oversight of Nursing Home Program Impeded by Data Gaps. GAO-05-65. Washington, D.C.: November 10, 2004.	The Department of Veterans Affairs (VA) annually provides care to more than 46,000 elderly and disabled veterans in 132 VA-operated nursing homes, called community living centers (CLC). After media reports of problems with the care delivered to veterans in CLCs, VA contracted with the Long Term Care Institute, Inc. (LTCI), a nonprofit organization that surveys nursing homes, to conduct in-depth reviews of CLCs in 2007-2008 and again in 2010-2011. GAO was asked to evaluate VA's approach to managing veterans' quality of care and quality of life in CLCs. This report examines (1) VA's response to and resolution of LTCI-identified deficiencies and (2) information VA collects about the quality of care and quality of life in CLCs and how VA uses it to identify and manage risks. To do this work, GAO interviewed officials from VA headquarters, examined all 116 2007-2008 and 67 2010-2011 LTCI reviews, and analyzed 50 CLCs' corrective action plans for 2007-2008 and 23 such plans for 2010-2011. VA headquarters established a process for responding to deficiencies identified at CLCs during the 2007 and 2008 LTCI reviews. VA is using the process, which requires CLCs to submit corrective action plans addressing LTCI-identified deficiencies--such as how CLCs will address a lack of competent nursing staff and a failure to provide a sanitary and safe living environment--during the 2010 and 2011 LTCI reviews. On the basis of its analysis of the deficiencies identified in 2007 and 2008, VA headquarters also developed a national training and education initiative. VA headquarters officials told GAO that they plan to analyze the deficiencies identified during the 2010 and 2011 reviews and identify national areas for improvement. However, GAO found weaknesses in VA's process for responding to and resolving LTCI-identified deficiencies. First, VA headquarters does not maintain clear and complete documentation of the feedback it provides to CLCs regarding their corrective action plans. Second, VA headquarters does not require VA's networks, which oversee the operations of VA medical facilities, including CLCs, to report on the status of CLCs' implementation of corrective action plans or to verify CLCs' self-reported compliance with the requirements of the national training and education initiative. Because of these weaknesses, VA headquarters cannot provide reasonable assurance that LTCI-identified deficiencies are resolved. For example, without requiring networks to report on the status of CLCs' implementation of their corrective action plans, VA headquarters cannot determine whether CLCs' corrective action plans are fully implemented. Unaddressed, weaknesses in VA headquarters' process for responding to LTCI-identified deficiencies may compromise the quality of care and quality of life of veterans in CLCs. VA headquarters' current approach to identifying risks associated with the quality of care and quality of life of CLC residents does not comprehensively analyze information from all available sources, and for the sources VA does analyze, it does not compare findings across sources. VA's approach relies significantly on the analysis of findings from LTCI reviews of CLCs. However, in addition to LTCI reviews, VA headquarters obtains information about CLCs from a variety of other sources, such as VA's Office of Inspector General (OIG), but does not analyze the information from all these other sources. Further, for the sources it does analyze, VA headquarters evaluates each source in isolation and does not compare the findings from one source with findings from the other sources. Therefore, VA headquarters' current approach to identifying risks in CLCs may result in missed opportunities to detect patterns and trends in information about the quality of care and quality of life within a CLC or across many CLCs. For example, in comparing findings from VA's Office of the Medical Inspector, OIG, LTCI, and VA's quality indicator and quality measure data for one CLC, GAO found a pattern of deficiencies related to pain management. Without considering information from all available sources and comparing it across sources, VA headquarters cannot fully identify risks in CLCs, estimate the significance of the risks, or take actions to mitigate them. GAO recommends that VA document feedback to CLCs and require periodic status reports about corrective action plan implementation, and implement a process to comprehensively identify and manage risks to residents in CLCs by analyzing and comparing information about residents' quality of care and quality of life. In its comments on a draft of this report, VA concurred with these recommendations.	7,049	979
Medicare provides health insurance for about 37 million elderly and disabled individuals. This insurance is available in two parts: Part A covers inpatient hospital care and is financed exclusively from a payroll tax. Part B coverage includes physician services, outpatient hospital services, and durable medical equipment. Part B services are financed from an earmarked payroll tax and from general revenues. The Social Security Act requires that Medicare pay only for services that are reasonable and necessary for the diagnosis and treatment of a medical condition. HCFA contracts with private insurers such as Blue Cross and Blue Shield plans, Aetna, and CIGNA insurance companies to process Medicare claims and determine whether the services are reasonable and necessary. The program was designed this way in part to protect against undue government interference in medical practice. Thus, despite Medicare's image as a national program, each of the 29 Medicare contractors that process part B claims for physicians' services generally establishes its own medical necessity criteria for deciding when a service is reasonable and necessary. Contractors do not review each of the millions of Medicare claims they process each year to determine if the services are medically necessary. Instead, contractors review a small percentage of claims, trying to focus on medical procedures they consider at high risk for excessive use. Contractor budgets limit the number of claims contractors can review, and over the last several years, both contractor budgets and HCFA requirements for prepayment review have been decreasing. In 1991, HCFA required contractors to review 15 percent of all claims before payment, while in 1995, contractors are only required to review 4.6 percent. Since 1993, HCFA has required contractors to use a process called focused medical review (FMR) to help them decide which claims to review. Under the FMR process, each contractor analyzes its claims to identify procedures where local use is aberrant from the national average use. Beginning in fiscal year 1995, HCFA has required each contractor to select at least 10 aberrant procedures identified through FMR and develop medical policies for those procedures. The contractors are required to work with their local physician community to define appropriate medical necessity criteria. This arrangement allows contractors to take local medical practices into consideration when establishing criteria for reviewing claims. Once physicians have had an opportunity to comment on a medical policy, the contractor publishes the final criteria. Each contractor generally decides which medical procedures to target for review and what types of corrective actions to implement to prevent payments for unnecessary services. Contractors currently concentrate on educating physicians about local medical policies, hoping to decrease the number of claims submitted that do not meet the published medical necessity criteria. Contractors also use computerized prepayment reviews, called screens, to check claims against the medical necessity criteria in medical policies. When screens identify claims that do not meet the criteria, two alternative actions are possible: first, autoadjudicated screens may deny the claim automatically; second, all other screens may suspend the claim for review by claims examiners, who may request additional documentation from the physician before deciding to pay or deny the claim. Autoadjudicated screens usually compare the diagnosis on the claim with the acceptable diagnostic conditions specified in the corresponding medical policy. For example, an autoadjudicated screen for a chest X ray would pay the claim if the patient diagnosis was pneumonia but deny the claim if the only patient diagnosis was a sprained ankle. Because this type of screen is entirely automated, it can be applied to all the claims for a specific procedure at a lesser cost than reviewing claims manually. This type of screen is most effective for denying claims that do not meet some basic set of medical necessity criteria. Claims denied by these screens can be resubmitted by providers or appealed. As shown in figure 1, claims that pass these basic criteria may be further screened against more complex medical criteria to identify claims that warrant manual review. Most of the contractors we surveyed routinely pay claims for procedures suspected to be widely overused without first screening those claims against medical necessity criteria. We looked at six groups of procedures that providers frequently perform on patients who lack medical symptoms appropriate for the procedures. These procedures also rank among the 200 most costly services in terms of total Medicare payments and accounted for almost $3 billion in Medicare payments in 1994. (See table 1 below.) Four of the procedures--echocardiography, eye examinations, chest X rays, and duplex scans of extracranial arteries--are noninvasive diagnostic tests. Colonoscopy can be either diagnostic or therapeutic, and YAG laser surgery is sometimes used to correct cloudy vision following cataract surgery. In the first quarter of fiscal year 1995 (Oct. 1-Dec. 31, 1994), we surveyed 17 contractors to determine whether they were using any type of medical necessity prepayment screens to review claims for these six groups of procedures. As shown in table 2, the use of prepayment screens among the contractors was not uniform, and for each of the six procedures fewer than half the 17 contractors were using such screens. For each group of products in our study, we found the following: Only 7 of the 17 contractors we surveyed had prepayment screens to review echocardiography for medical necessity, even though echocardiography is often performed on patients with no specific cardiovascular disorders. Ten contractors lacked such screens, even though echocardiography is the most costly diagnostic test in terms of total Medicare payments and despite an increase of over 50 percent in the use of the echocardiography procedures listed in table 1 between 1992 and 1994. Only 6 of the 17 contractors used prepayment screens to prevent payment for medically unnecessary eye examinations. These contractors have medical necessity criteria to deny claims for routine eye examinations and to allow payments only for certain conditions, such as cataracts, diabetes, and hypertension. Only 6 of the 17 contractors had prepayment screens to review chest X ray claims for medical necessity, although HCFA had alerted Medicare contractors that providers frequently bill for chest X rays that are not warranted by medical symptoms and are thus medically unnecessary. Only 6 of the 17 contractors had medical necessity prepayment screens to review colonoscopy claims. In 1991, HHS' OIG reported that nationwide almost 8 percent of colonoscopies paid by Medicare were not indicated by diagnosis or medical documentation. Only 3 of the 17 contractors had prepayment screens for YAG laser surgery even though federal guidelines exist that indicate the diagnostic conditions for performing this surgery. Also, at a national meeting of Medicare contractors in 1994, HCFA officials discussed the need to avoid paying for unnecessary YAG laser surgery following cataract removal. Only 8 of the 17 contractors had implemented prepayment screens for duplex scans even though HCFA had alerted Medicare contractors that providers commonly bill for noninvasive vascular tests such as duplex scans without adequately documenting the patient's medical symptoms. A primary reason all contractors do not screen claims for nationally overused procedures is that, following HCFA's instructions for FMR, contractors have been targeting procedures that are overused locally, based on comparisons with national average use. The shortcomings of this approach are discussed later in this report. Our survey of the 17 contractors represents a snapshot of the use of prepayment screens for these procedures in the first quarter of fiscal year 1995. Typically, contractors turn screens on and off depending on their local circumstances. For example, one contractor began using a screen for echocardiography in March 1995, and another contractor implemented screens for chest X rays and eye examinations in January 1995 because these procedures were overused locally. By contrast, one contractor discontinued using an autoadjudicated screen for eye examinations in February 1995 because the diagnostic criteria for payment in the screen were considered too narrow. Nonetheless, these fluctuations in contractors' use of screens do not reflect a coordinated approach to screening nationally overused procedures. Seven large Medicare contractors paid millions of dollars in claims for services that may have been unnecessary. These contractors did not use diagnostic medical criteria to screen claims for some of the six groups of procedures in our study. The claims paid for these services included a range of patient diagnoses that did not meet the criteria established by other contractors. For example, a chest X ray was paid for a patient with a diagnosis of injuries to the hand and wrist, an echocardiogram was paid for a patient with a diagnosis of chronic conjunctivitis, and a therapeutic colonoscopy examination was paid for a patient with a mental health diagnosis of hysteria. If the seven contractors had used autoadjudicated diagnostic screens for the six groups of procedures, they would have denied between $38 million and $200 million in claims for services in 1993, as shown in table 3. The range of estimated payments for claims that would have been denied reflects differences among contractors' criteria for identifying medically unnecessary services. Although different contractors had screens for the same procedure, they used different diagnoses to determine medical necessity. For example, a colonoscopy screen we used from one contractor paid claims with a diagnosis of gastritis, while another contractor's screen denied such claims. Because of these differences among the contractors' screens, we applied screens from two or three different contractors for each group of procedures, except for YAG laser surgery. Thus, our test results show a range of estimated payments for claims that would have been denied, depending on the medical necessity criteria used. The tables in appendix II list the estimated payments for claims that would have been denied by each of the tested screens. The seven contractors we reviewed were among the largest in terms of the number of claims processed, accounting for about 37 percent of all Medicare part B claims, and almost 38 percent of all the claims for the six groups of procedures in our study. To estimate the paid claims that would have been denied, we applied autoadjudicated screens developed by several contractors in our survey to a sample of the 1993 claims paid by the seven contractors. We only applied these screens if the tested contractor did not have a medical necessity diagnostic screen of its own in place in 1993 for the specific procedure tested. We used autoadjudicated screens because decisions to pay and deny claims based on medical necessity criteria are automated and, therefore, do not require additional medical judgment. Appendix I provides additional details on our methodology. When claims are denied by prepayment screens, the billing physician can (1) resubmit the claim with additional or corrected information or (2) appeal the denial. In either case, the contractors may ultimately pay claims that they have initially denied. Contractors' claims processing systems generally do not track the claims denied by autoadjudicated prepayment screens to determine if they are resubmitted or appealed and then paid. However, based on a limited analysis of claims denied by contractors with autoadjudicated screens, we estimate that about 25 percent of the denied claims were ultimately paid. Assuming that the 25-percent rate is typical for autoadjudicated screens, about 75 percent of the payments in table 3, or between $29 million and $150 million, were for services that would be considered unnecessary using the criteria established by various contractors. Our estimates of payments for unnecessary services involve only six groups of procedures and cannot be statistically generalized beyond the 7 contractors included in our analysis. However, all 29 contractors--not just the 7 whose claims we reviewed--operate under FMR requirements designed to correct local rather than national overutilization problems. Therefore, the other 22 contractors also may lack screens for some of these procedures and, hence, may have paid millions of dollars in claims for services that should have been denied. For widely overused procedures such as the six we tested, autoadjudicated screens can be a low-cost, efficient way to screen millions of claims against basic medical necessity criteria. Contractor officials said that these screens are much less expensive to implement than screens that suspend claims for manual review. Consequently, as funding for program safeguards declines, autoadjudicated screens can be used to maintain or even increase the number of claims reviewed. Moreover, for procedures where the medical review decisions can be automated, autoadjudicated screens can quickly identify and deny claims where the patient diagnosis is inconsistent with the procedure performed. In contrast, when claims examiners manually review claims, the risk exists that the medical necessity criteria may be misinterpreted and applied inconsistently. However, for certain procedures or medical policies, autoadjudicated screens may not be appropriate. For example, some medical policies are not easily defined with diagnostic codes and require manual review of documentation, such as medical records, to determine if a service is medically necessary. Denying claims using autoadjudicated or other prepayment screens can increase administrative costs if providers frequently resubmit denied claims or appeal the denials. Contractor officials said that these costs can be minimized if providers are educated to bill appropriately in the first place. By combining direct provider education with screens that enforce agreed upon medical criteria, contractors can, over time, reduce the number of claims submitted for unnecessary services. HCFA does not have a national strategy for using prepayment screens to deny payments for unnecessary services among Medicare's most highly overused procedures. HCFA does periodically alert contractors about some of these procedures at semiannual national contractor meetings and through occasional bulletins. However, the agency does not identify widely overused procedures in a systematic manner. Moreover, the agency does not ensure that contractors implement prepayment screens or other corrective actions for these procedures. Medicare legislation does not preclude HCFA from requiring its contractors to screen claims for nationally overused procedures. However, HCFA has chosen to avoid the appearance of interfering in local medical practice. HCFA usually does not establish medical policies or tell the contractors which procedures warrant medical policies or prepayment screens.Instead, HCFA relies primarily on the contractors' local FMR efforts to identify and prevent Medicare payments for unnecessary services. This process, according to HCFA officials, allows contractors to take medical practice into consideration when making medical necessity determinations. Although FMR can work well for overutilization problems that are truly local, the process is not designed to address nationwide overutilization of a medical procedure. The national average use of a procedure generally serves as a benchmark for identifying local overutilization problems, but the benchmark itself may already be inflated by millions of dollars in payments for unnecessary services. For example, in several states the use of echocardiograms greatly exceeded the 1992 national average of 101 services per 1,000 beneficiaries. Some of the contractors servicing those states have designed and implemented prepayment screens for this procedure. Meanwhile, other contractors targeted different procedures and allowed unconstrained use of echocardiograms. This focus on local overuse may be one of the factors that led to a national 12-percent increase in echocardiography use by 1994--and a new benchmark of 113 echocardiograms per 1,000 beneficiaries. HCFA can take a more active role in controlling spending for widely overused procedures without intruding on the contractors' responsibilities to establish their own prepayment screens. HCFA has an oversight responsibility to monitor and evaluate contractors' screens and other efforts to prevent payments for unnecessary services. Yet HCFA does not know (1) which contractors have diagnostic screens for which medical procedures, (2) the medical necessity criteria used in these screens, or (3) the effectiveness of the screens in denying claims for unnecessary services. Furthermore, without this information HCFA cannot identify best practices and promote approaches such as autoadjudicated medical necessity screens where they can be a cost-effective alternative or complement to screens that flag claims for manual review. HCFA funded a central database on local medical policies, but this resource is not being effectively used. HCFA has encouraged the contractors to use the database to research other contractors' medical policies before drafting their own. However, according to some contractors, the usefulness of the database is limited because it is not regularly updated. Moreover, HCFA has not taken the initiative to use the database to evaluate the contractors' medical policies and identify those worthy of consideration by all contractors for controlling widely overused procedures. HCFA can also encourage greater use of medical necessity criteria for widely overused procedures by providing contractors with more model medical policies. About 2 years ago, HCFA established clinical workgroups composed of contractor medical directors to develop model medical policies that the contractors can adapt for local use. Specifically, contractors can work with their local medical community to review model policies, adapt them to reflect local medical practice, and implement them in prepayment screens. This has been an important step in promoting greater efficiency in developing local medical policies. However, since the workgroups' inception, only one model policy has been published.According to HCFA and contractor officials, progress has been limited in part because HCFA often takes longer to review draft model policies than its goal of 45 days. HCFA officials said that they are considering provisions for greater use of autoadjudicated screens in a new, national claims processing system. However, full implementation of that system is scheduled for late in 1999. In addition, what types of screens will be included in the system remains unclear, as well as how the contractors will chose which screens to modify, implement, and use and how HCFA will monitor and evaluate the effectiveness of the screens. Meanwhile, HCFA continues to allow contractors to pay millions of dollars for services that may be unnecessary. While the rapid increase in Medicare costs threatens the long-term viability of the Medicare program, many Medicare part B contractors continue to routinely pay claims for widely overused services, without first determining if the services are reasonable and necessary. Even when evidence indicates that problems with payments for specific medical procedures are widespread, HCFA has not ensured that contractors help correct national problems as well as local aberrancies. More specifically, HCFA policies do not encourage contractors to reduce a national norm already inflated by millions of dollars in payments for unnecessary services. Our tests of paid claims against criteria used by some of the contractors show that millions of dollars are being paid for services that do not meet basic medical necessity criteria. Although our tests were limited to seven contractors, our survey of 17 contractors indicates that nationally, additional millions of Medicare dollars may have been paid for claims that should have been denied. Prepayment screens are an important tool in preventing payments for unnecessary services. Funding for program safeguards, such as medical policies and prepayment screens, has been declining, however, while the volume of Medicare claims is increasing. In this environment, autoadjudicated diagnostic screens offer a low-cost way to ensure that all claims for selected procedures pass a basic medical necessity test before payment. Greater use of autoadjudicated screens could complement, rather than replace, the contractors' efforts to use FMR and other types of prepayment screens to address local overutilization problems. To forestall widespread overuse of specific medical procedures, HCFA can help the contractors much more than it has. HCFA has begun to capitalize on the knowledge and skills of the contractor medical directors by using contractor workgroups to develop model medical policies. More model policies can help contractors control spending for nationally overused procedures by providing them with generally accepted criteria for identifying and denying claims for unnecessary services. However, HCFA needs to support the efforts of the workgroups and review model policies on a more timely basis so that these efforts can succeed. Also, to exercise stronger leadership by promoting best practices, HCFA needs to collect and evaluate information on the medical criteria and prepayment screens now being used by the contractors. To help prevent Medicare payments for unnecessary services, we recommend that the Secretary of HHS direct the Administrator of HCFA to systematically analyze national Medicare claims data and use analyses conducted by HHS' OIG and Medicare contractors to identify medical procedures that are subject to overuse nationwide; gather information on all contractors' local medical policies and prepayment screens for widely overused procedures, evaluate their cost and effectiveness, and disseminate information on model policies and effective prepayment screens to all the contractors; and hold the contractors accountable for implementing local policies, prepayment screens (including autoadjudicated screens), or other corrective actions to control payments for procedures that are highly overused nationwide. We provided HHS an opportunity to comment on our draft report, but it did not provide comments in time to be included in the final report. However, we did discuss the contents of this report with HCFA officials from the Bureau of Program Operations, including the Director of Medical Review and the Medical Officer. In general, they agreed with our findings. We obtained written comments on our draft report from several part B contractor medical directors who serve on the Contractor Medical Director Steering Committee. We selected this committee as a focal point for obtaining contractor comments because of its role as a liaison between the contractors and HCFA and the communication network for the contractor medical directors. Their comments support our conclusions (see app. III). In summary, they suggested the development of contractor workgroups to rapidly produce model medical policies for the six groups of procedures in our study. As agreed with your office, unless you release its contents earlier, we plan no further distribution of this report for 30 days. At that time, we will send copies to other congressional committees and members with an interest in this matter, the Secretary of Health and Human Services, and the Administrator of the Health Care Financing Administration. We will also make copies available to others upon request. This report was prepared by William Reis, Assistant Director; Teruni Rosengren; Stephen Licari; Michelle St. Pierre; and Vanessa Taylor under the direction of Jonathan Ratner, Associate Director. Please call me on (202) 512-7119 or Mr. Reis on (617) 565-7488 if you or your staff have any questions about this report. We reviewed HCFA's statutory authority and responsibilities for administering the Medicare program and HCFA's regulations and guidance to contractors on the development of local medical policies and the implementation of prepayment screens. We also discussed HCFA's oversight of these functions with officials at its Bureau of Program Operations. Before selecting the six groups of medical procedures included in our study, we reviewed previous GAO and HHS OIG reports, HCFA guidance, and other studies on overused medical services. We also reviewed HCFA's list of 200 medical procedure codes, ranked by total Medicare-allowed charges, and obtained Medicare contractors' views on procedures that are likely to be overused. Based on the information gathered from these sources, we selected six groups of procedures generally considered widely overused. Because little centralized information exists on Medicare contractors' use of prepayment screens or the medical necessity criteria included in those screens, we contacted 17 of the 29 contractors that process Medicare part B claims for physician services. We also visited three of the Medicare contractors and attended two of the semiannual contractor medical director conferences. In the course of these contacts, we decided to limit our collection of detailed information on medical necessity criteria and prepayment screens to 17 contractors who could provide us the information we needed. To estimate the Medicare payments for unnecessary services that could be prevented by broader use of prepayment screens, we tested autoadjudicated prepayment screens on claims paid by seven contractors in six states. The seven contractors in our analysis were among the largest contractors in terms of the number of claims processed in 1993 and they did not use a medical necessity prepayment screen for some of the six groups of procedures in our study. We based our tests on data from the Medicare Physician Supplier Component of the 1993 HCFA 5 Percent Sample Beneficiary Standard Analytic File. The Physician Supplier Component contains all Medicare part B claims for a random sample of beneficiaries. Our analysis is based on all paid claims in the database for the seven contractors and the six groups of procedures in our review. For each screen and tested contractor, we estimated the services and payments that would have been denied by simulating the screen using a computer algorithm to determine the number of services in the sample that would have been denied by the screen, weighing this number to reflect the universe of services, and multiplying this weighted number by the average Medicare allowance for the procedure at the contractor. The average Medicare-allowed amount for each procedure code at each contractor in 1993 was calculated based on data from HCFA's part B Extract Summary System. For five of the procedures, we applied two or three different autoadjudicated diagnostic screens currently used by other contractors in order to illustrate the impact of using different screens. By applying multiple screens, we were able to examine the range of services that would have been denied depending on the medical necessity criteria used. For example, one of the colonoscopy screens paid claims with a diagnosis of gastritis, while another did not. For YAG laser surgery, however, we only applied the one screen that we had identified at the time we began our analysis. We only applied a particular screen to a contractor's claims if that contractor did not have a medical necessity diagnostic screen in place in 1993 for the specific procedure being tested. We obtained our tested screens from several of the 17 contractors in our initial survey. Some of the screens we used were obtained from one of the seven contractors that we subsequently tested. Because our estimates were based on a sample of claims, our estimates are subject to sampling error. We calculated 95-percent confidence intervals for each of our estimated payments for services that would have been denied by the tested screens. This means the chances are about 19 out of 20 that the actual payments for services that would have been denied at each of the tested contractors would fall within the range covered by our estimate, plus or minus the sampling error. Sampling errors for our estimates are included in appendix II. Some of the payments that would have been denied by the tested screens would eventually be paid if they were resubmitted with corrected or additional information or successfully appealed. Because contractors' claims processing systems generally do not track claims denied by autoadjudicated screens to determine how many are ultimately paid, we developed our own estimates. Using the 1993 HCFA 5 Percent Sample Beneficiary Standard Analytic File, we analyzed echocardiography claims processed by one contractor and duplex scan claims processed by another contractor. In each case, the contractors used autoadjudicated screens for these services. For each contractor, we used computer programs to identify claims for the services that were denied for medical necessity in a 3-month period in 1993. We then determined whether another claim was submitted and paid for the same service, provided on the same day, for the same beneficiary, and by the same provider. Our analysis showed that 23 to 25 percent of the echocardiography and duplex scan claims denied for medical necessity were subsequently paid. Based on these results we used 25 percent as our estimate of claims denied that would ultimately be paid. The actual percentage will likely vary by type of medical procedure and the diagnostic criteria used in the screen. However, because of the costs and inefficiencies associated with denying a large percentage of services and then later reprocessing and paying those services, we believe that contractors would not be likely to continue using a prepayment screen that inappropriately denies more than 25 percent of the services. The estimated number of and payments for denied services were derived from a 5-percent beneficiary sample of 1993 claims for each contractor. The estimated number of and payments for denied services were derived from a 5-percent beneficiary sample of 1993 claims for each contractor. The estimated number of and payments for denied services were derived from a 5-percent beneficiary sample of 1993 claims for each contractor. The estimated number of and payments for denied services were derived from a 5-percent beneficiary sample of 1993 claims for each contractor. The estimated number of and payments for denied services were derived from a 5-percent beneficiary sample of 1993 claims for each contractor. The estimated number of and payments for denied services were derived from a 5-percent beneficiary sample of 1993 claims for each contractor. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.	GAO provided information on Medicare payments for unnecessary medical services, focusing on the: (1) extent to which Medicare contractors employ medical necessity prepayment screens for procedures that are likely to be overused; (2) potential impact of autoadjudicated prepayment screens on Medicare spending; and (3) federal government's role in reducing overused medical procedures billed to Medicare. GAO found that: (1) Medicare spending for unnecessary medical services is widespread; (2) more than half of the 17 contractors surveyed do not use prepayment screens to check whether claimed services are necessary; (3) seven of the contractors paid between $29 and $150 million for unnecessary medical services; (4) many Medicare claims are paid because contractors' criteria for identifying unnecessary medical services vary; and (5) the Health Care Financing Administration (HCFA) needs to take a more active role in promoting local medical policies and prepayment screens for overused medical procedures.	6,200	189
When developing its annual budget submission, BOP uses three general steps to estimate costs for its two budget accounts--the Salaries and Expenses account (known as its operational budget) and its Buildings and Facilities account. First, BOP estimates cost increases for maintaining the current level of services for operations as provided in the prior year's enacted budget. These include costs to address mandatory staff pay raises and benefit increases, inmate medical care, and utilities. BOP primarily analyzes historical obligations from the past five years to identify average annual operating cost increases. BOP also considers economic indicator information to estimate general inflationary cost increases, using data from the Bureau of Labor Statistics Consumer Price Index, among other sources. Second, BOP projects inmate population changes for the budget year and for several years into the future. BOP uses a modeling program that identifies each inmate as a unique record tied to variables such as conviction year, sentence term, and conviction type, with data obtained from a variety of sources, including the Administrative Office of the U.S. Courts, the U.S. Sentencing Commission, and the Executive Office for U.S. Attorneys. The model identifies the number of inmates currently in BOP's system and the length of those inmates' sentences, as well as the number of inmates estimated to enter the BOP system and the length of their sentences. For example, for the fiscal year 2010 annual budget submission, BOP projected a net growth in its inmate population of 4,500 inmates. Third, BOP estimates costs to both house the projected number of new inmates, including building and facility requirements, and fund any new initiatives. According to BOP, a rising inmate population is the primary driver of new service costs (see figure 1 for graph showing federal inmate population growth from fiscal years 2000 through 2009). Thus, for any budget year, BOP uses inmate population projections to determine the necessary bedspace to house additional inmates. BOP estimates these associated incarceration costs by (1) determining how to distribute the incoming prisoners across newly activated facilities, existing facilities, or contract facilities; and (2) calculating staffing and other operational costs to manage the additional inmates at its facilities. BOP also identifies and estimates costs for new initiatives, such as the activation of a new BOP facility, by reviewing the proposals submitted by its divisions and regional offices, as well as historical data on costs for implementing such initiatives. For its Buildings and Facilities account, BOP identifies new program costs associated with new construction and maintenance and repair of existing facilities. Using its long-term inmate population projections, BOP considers new construction proposals based on need, funding, and the anticipated speed of construction. BOP estimates construction costs largely by using analogous building costs for similar security level facilities, as well as considering assumptions, such as the rate of inflation and when potential construction would begin. BOP ranks maintenance and repair proposals by assigning safety the highest priority and estimates costs based on information it obtains from a construction cost estimation company. BOP's methods for estimating costs in its annual budget requests to DOJ largely reflect the best practices outlined in GAO's Cost Estimating and Assessment Guide. Specifically, BOP followed a well-defined process for developing a mostly comprehensive, well documented, accurate, and credible cost estimate for fiscal year 2008. For example, BOP used relevant historical cost data and considered adjustments for general inflation when estimating costs for its budget request to DOJ. Moreover, BOP's methods for projecting inmate population changes have been largely accurate. For example, we found BOP's projections were accurate, on average, to within 1 percent of the actual inmate population growth from fiscal year 1999 through August 20, 2009. We identified two areas where BOP could strengthen its methods for estimating costs in its annual budget submission. First, according to best practices described in GAO's Cost Estimating and Assessment Guide, it is better for decision makers to know the range of potential costs that surround an estimate and the reasons behind what drives that range rather than just having a point estimate from which to make their decision. An uncertainty analysis provides a range of costs that span a best and worst case spread. While not required by OMB or DOJ in annual budget development guidance, conducting an uncertainty analysis of this kind is a best practice. BOP has not conducted an uncertainty analysis, and therefore has not quantified the level of confidence associated with its cost estimate. By providing the results of such analysis to DOJ, BOP officials could share advance information on the probability and associated risks of operating expenses exceeding enacted funding levels-- a situation BOP faced in fiscal year 2008. Second, during our review of documentation for BOP's fiscal year 2008 cost estimate, we sometimes required the guidance of BOP budget analysts to identify backup support. This was because the documentation BOP provided was insufficient to allow someone unfamiliar with the budget to locate detailed corroborating data. For example, in reviewing BOP's fiscal year 2008 cost estimate for a health service initiative related to expanding kidney dialysis treatment for inmates, we required a budget official's assistance in locating supporting formulas used to calculate the estimate. Best practices for cost estimation include providing enough detail so that the documentation serves as an audit trail that allows for clear tracking of cost estimates over time. By documenting all steps for developing its budget cost estimate, BOP would be better positioned to recreate its estimates in the event of attrition within its budget office among those who developed initial budget cost estimates. In providing feedback on our initial findings, BOP budget officials indicated that taking these steps would strengthen their methods for estimating costs in their annual budget submission to DOJ. BOP's costs for key operations to maintain basic services, such as those for inmate medical care and utilities, exceeded the funding levels requested in the President's budget from fiscal years 2004 through 2008, limiting BOP's ability to manage its growing inmate population. During this period, BOP's annual non-salary inmate medical care and utilities costs exceeded funding levels in the President's budget request by a total of about $131 million and $55 million, respectively, largely due to inflation and inmate population growth. According to BOP, from fiscal years 2004 through 2008, BOP's annual non-salary inmate medical care costs increased by a total of about $146.5 million. In contrast, during this period, the President's budget requested funding increases for non-salary inmate medical care totaling approximately $15.4 million. According to BOP, from fiscal years 2004 through 2008, BOP's annual utilities costs increased by a total of $87 million. In contrast, during this period, the President's budget requested funding increases for utilities totaling approximately $31.6 million. Table 1 compares BOP's rates of annual cost growth due to inflation and inmate population growth with the President's budget requests for funding for non-salary inmate medical care and utilities from fiscal years 2004 through 2008. When BOP has not received funding to cover the operational cost increases it has incurred, in some years it has used Salaries and Expenses funding planned for other areas to cover these costs. For example, one of BOP's highest priorities is to increase staffing levels of corrections officers. However, BOP officials reported using Salaries and Expenses account funds initially planned for hiring additional corrections officers in fiscal years 2008 and 2009 to instead cover base operations cost increases related to inmate medical care, utilities, and personnel salary and benefit adjustments that were unfunded in the President's budget requests. As with any other DOJ component, BOP's budget requests are governed by DOJ and OMB budget development guidance. For example, DOJ budget development guidance for fiscal years 2008 and 2009 required components to limit cost growth for current services to no more than 4 percent greater than prior year levels. DOJ reported that this guidance was a general instruction given to all components, but recognized that BOP is different because its costs are less discretionary since BOP does not control the number of inmates for which it must care. In this way, DOJ reported that it did not automatically reject budget submissions from BOP that exceeded the cap, but instead required BOP to submit substantive information to justify need. DOJ also reported that OMB does not automatically provide funds for inflationary cost increases. DOJ cited OMB policy stating that inflationary adjustments for discretionary costs (such as utilities) can include some, all, or no allowance for inflation. DOJ officials reported that OMB typically does not include general inflationary adjustments that DOJ submits on behalf of BOP. Nonetheless, DOJ has reported to OMB that other DOJ components could reduce operations, implement across-the-board hiring freezes, and implement policy changes that would reduce costs if faced with funding shortfalls similar to what BOP has faced in its operations budget. However, DOJ reported that BOP has already implemented significant reductions to programs and streamlined and centralized administrative functions to eliminate 2,300 positions. DOJ also reported that BOP has limited flexibility because almost all of BOP's operational costs are devoted to staff salaries and provision of services. According to BOP data, in fiscal years 2007 and 2008, 99.5 percent of BOP's Salaries and Expenses budget was fixed for its operations for paying staff salaries and providing services to house and care for the inmate population. In each of the last 2 fiscal years, BOP has needed additional funding to meet its operating costs for managing its growing inmate population. However, we found that BOP's cost estimation methods largely reflect GAO's cost estimating best practices. Furthermore, BOP officials reported, and DOJ officials acknowledged, that BOP has already implemented significant reductions in operations costs, such as by eliminating positions and centralizing administrative functions. Given BOP's unique responsibility for managing this population, and its limited discretion when costs for key operations exceed funding levels, it is especially important for BOP to develop accurate cost estimates and clearly convey to decision makers the potential risk of costs exceeding funding levels. In light of these circumstances, BOP's budget cost estimation practices could be strengthened in two ways. First, although BOP is not required to report in its annual budget submission the extent to which actual costs may be expected to vary from cost estimates, we have identified the provision of an uncertainty analysis as a best practice. If BOP identified its level of cost estimation confidence and provided this information to DOJ, DOJ could more fully understand the range of potential costs--and the potential need for more funding--if estimating assumptions for key cost drivers, such as inmate population growth, do not hold true. Second, by improving documentation of all steps for developing its cost estimate, BOP would be better positioned to re-create its estimates in the event of attrition within its budget office among those who developed initial cost estimates. To improve transparency in BOP's cost estimation process, as well as DOJ's annual budget formulation and justification process, and to provide DOJ with more detailed information to consider when deliberating its budget proposal for BOP, we recommend that the Attorney General take the following two actions: instruct the BOP Director to require the BOP budget staff to conduct an uncertainty analysis quantifying the extent to which operations costs could vary due to changes in key cost assumptions and submit the results along with budget documentation to DOJ so that DOJ could be aware of the range of likely costs and BOP's associated confidence levels; and instruct the BOP Director to require the BOP budget staff to improve documentation of calculations used to estimate its costs. We provided a draft of this report to DOJ for its review and comment. The BOP Director provided written comments on this draft and concurred with our findings and recommendations. BOP stated that including the results of an uncertainty analysis in the budget document would provide DOJ, OMB, and Congress better context for decision making and stated that it would include such analysis in preparation of its 2012 budget submission. BOP also stated that if time permits, it would work with DOJ and OMB to incorporate an uncertainty analysis into the President's 2011 budget. BOP's comments are reproduced in appendix II. We are sending copies of this report to the Attorney General and interested congressional committees. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. Should you or your staff have any questions concerning this report, please contact me at (202) 512-9627 or by e-mail at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. methods for estimating costs for its annual budget submission, we compared the documents BOP provided supporting its budget estimates for fiscal years 2004 to 2008 with information contained in the President's budget request for BOP for those years to determine the consistency of the information. We also interviewed agency officials knowledgeable about controls in place to maintain the integrity of (1) inmate population and sentenced offender data BOP used to populate its inmate population projection model for fiscal years 1999 to 2009 and (2) data on annual operations costs BOP reported between 2004 and 2008, including inmate medical care and utilities. As a result, we determined that the data were sufficiently reliable for the purposes of this report. 1. instruct the BOP Director to require BOP budget staff to conduct an uncertainty analysis quantifying the extent to which operational costs could vary due to changes in key cost assumptions--and submit the results, along with budget documentation, to DOJ so that DOJ can be aware of the range of possible costs and BOP's confidence levels associated with each point along the range; 2. instruct the BOP Director to require the budget staff to improve documentation of calculations used to estimate its costs. DOJ and BOP generally agreed with our findings and provided technical comments, which we integrated into our findings as appropriate. The S&E account--known as BOP's operations budget--includes sub-accounts covering costs for staffing; medical care; food; and utilities, such as water and gas. In fiscal year 2009, staffing costs for employee salaries comprised about 60 percent of this account. The B&F account has sub-accounts covering costs for design and construction of new facilities and modernization and repair (M&R) of existing facilities. S&E expenses have accounted for the vast majority of BOP's annual enacted budget from fiscal years 1999 through 2008--averaging about 90 percent. The President's fiscal year 2010 budget request for BOP's S&E and B&F accounts totals $6.1 billion, which is 23 percent of DOJ's $26.7 billion budget. Figure 2 compares the President's request for BOP to its enacted funding levels from fiscal year 1999 through 2009, and figure 3 shows the composition of the President's request (S&E versus B&F) for BOP over the same period. staff ratios leads to an increase in serious violence among inmates.8 As of August 1, 2009, BOP reported being staffed at 34,829--about 88 percent of its authorized Full Time Equivalent (FTE) staffing level of 39,692. About half of its authorized positions are for corrections officers. Figure 4 compares BOP S&E staffing levels to its inmate population beginning in fiscal year 2000. Department of Justice, Federal Bureau of Prisons, The Effects of Crowding and Staffing Levels in Federal Prisons on Inmate Violence Rates (Washington, D.C., 2005). These costs include adjustments to address mandatory staff pay raises and benefit increases, inmate medical care, and utilities across BOP's 115 facilities. BOP primarily analyzes historical obligations from the last 5 years to identify average annual operating cost increases. BOP also considers economic indicator information to estimate general inflationary cost increases, using data from the Bureau of Labor Statistics Consumer Price Index and other sources. BOP uses a modeling program that identifies each inmate as a unique record tied to variables such as conviction year, sentence term, and conviction type. BOP's model uses data and information from a variety of sources, including the Administrative Office of the U.S. Courts, the U.S. Sentencing Commission, and the Executive Office for U.S. Attorneys to identify Number of inmates currently in prison and the length of their sentences, and Number of inmates estimated to enter prison and the length of their sentences. For the fiscal year 2010 annual budget submission, BOP projected a net growth of 4,500 inmates. According to BOP, a rising inmate population is the primary driver of new service costs. For the budget year, BOP uses inmate projections to determine necessary bedspace to house additional inmates. For future years, BOP uses inmate projections to plan for long term capacity needs, including new construction and arrangements for contract confinement. BOP estimates the associated incarceration costs by (1) determining how to distribute incoming prisoners across newly activated facilities, existing facilities, or privately operated facilities, and (2) calculating staff and other operational costs at each facility type. BOP identifies and estimates costs for new initiatives/program increases, such as activation of a new BOP prison facility, by reviewing the proposals submitted by its divisions and regional offices, and historical data. proposals based on need, funding, and the anticipated speed of construction. BOP estimates construction costs (for new prisons or expansions to existing facilities) largely by using analogous building costs for similar security level facilities. Cost estimates are also based on assumptions, including the rate of inflation and when construction will begin. M&R project proposals are ranked by assigning safety the highest priority, with lesser importance given to improving accessibility and updating facilities more than 50 years old. BOP estimates costs for replacement values through information it obtains from a construction cost estimation company. Since fiscal year 2005, OMB has placed a moratorium on new BOP prison construction because OMB has focused on contracting with private prisons to address bedspace needs. However, BOP has identified new construction plans and included proposals for new construction as part of its capacity plan. one and substantially met three of these four practices. The following explains the definitions we used in assessing BOP's methods for estimating costs in its annual budget submission to DOJ: Met - BOP provided complete evidence that satisfies the entire criterion; Substantially Met - BOP provided evidence that satisfies a large portion of the criterion; Partially Met - BOP provided evidence that satisfies about half of the criterion; Minimally Met - BOP provided evidence that satisfies a small portion of the criterion; Not Met - BOP provided no evidence that satisfies any of the criterion. DOJ officials reported being satisfied with BOP's cost estimation methods, noting that they could not identify any area needing improvement. Satisfied? The cost estimates should discuss any limitations in the analysis performed due to uncertainty surrounding data or assumptions. Further, the estimates' derivation should provide for varying any major assumptions and recalculating outcomes based on sensitivity analyses, and their associated risks/uncertainty should be disclosed. Also, the estimates should be verified based on cross-checks using other estimating methods and by comparing the results with independent cost estimates. The cost estimates should include both government and contractor costs over the program's full life cycle, from the inception of the program through design, development, deployment, and operation and maintenance to retirement. They should also provide an appropriate level of detail to ensure that cost elements are neither omitted nor double counted and include documentation of all cost-influencing ground rules and assumptions. Non-salary inmate medical care costs refer to the amount BOP spent on pharmaceuticals, medical supplies, and outside medical care (community hospital services and a portion of guard escort service and a portion of salaries (overtime). documentation and found budget officials had documented the formulas they used to calculate cost elements for new initiatives, such as activation-related costs for a new prison facility planned to open in the budget year. In some cases, however, we required the guidance of BOP budget analysts to identify backup support because the documentation was insufficient to allow someone unfamiliar with the budget to locate detailed corroborating data. For example, in reviewing BOP's fiscal year 2008 cost estimate for a health service initiative related to expanding kidney dialysis, we required a budget official's assistance in locating supporting formulas used to calculate the estimate. Best practices include providing enough detail so that the documentation serves as an audit trail to allow for clear tracking of cost estimates over time. Documenting all steps for developing its cost estimate would better position BOP to recreate its estimates in the event of attrition within its budget office among those who have developed initial cost estimates. BOP performed cross-checks by benchmarking new estimates against historical data, such as by estimating medical care costs based on cost obligations in recent years and developed numerous risk analyses and impact scenarios of funding cuts. Although not required to do so by OMB or DOJ annual budget development guidelines, BOP did not perform an uncertainty analysis consistent with best practices to quantify the risk associated with changes to various assumptions that drive its cost estimates.Major assumptions include the inmate population projection; inflation indices for medical care and utilities; and annual salary increases. Such an analysis would help provide DOJ, Congress, and other stakeholders with information to determine the probability that costs for key operations, such as inmate medical care and utilities, may exceed funding levels requested in the President's budget. Consistent with best practices, BOP detailed pertinent costs related to its S&E and B&F accounts across sub-accounts. This level of detail helped ensure that no cost elements were omitted or double counted in its budget request submission to DOJ, and that BOP's calculations and results substantially met characteristics for comprehensiveness. BOP relied on ground rules and assumptions, such as using inmate population projections to drive cost estimates for capacity needs and using historical obligation trends to estimate growth for utilities and inmate medical care costs. However, as noted earlier, BOP did not determine risk distributions for all assumptions, which would enable it to perform an uncertainty analysis for key cost elements. exceeded requested funding levels in the President's budget in the last five fiscal years, and how has this affected BOP's ability to manage its growing inmate population? Costs for key operations to maintain basic services, such as those for inmate medical care and utilities, have exceeded the funding levels requested in the President's budget over the past five fiscal years, and this has limited BOP's ability to manage its growing inmate population. From fiscal years 2004 through 2008, the funding levels requested in the President's budget for BOP have been insufficient to cover annual cost growth for maintaining existing services, including inmate medical care and utilities. Moreover, population adjustment funding--necessary to cover expenses associated with housing a growing inmate population in BOP- operated facilities--has not consistently been included in the President's budget, with BOP receiving no funding adjustments in some years. As a result, BOP has faced funding gaps in its operations account that has left it with limited flexibility to manage its continually growing inmate population. Medical care costs: From fiscal year 2004 through 2008, BOP's annual non-salary inmate medical care costs increased by about $146.5 million. In contrast, during this period, the President's budget requested funding cost adjustments for non-salary inmate medical care totaling about $15.4 million. In fiscal year 2008, non-salary inmate medical care and utilities costs were $430.5 million and $234 million, respectively. Utilities costs: From fiscal year 2004 through 2008, BOP's annual utilities costs increased by a total of $87 million. In contrast, during this period, the President's budget requested funding cost adjustments for utilities costs totaling about $31.6 million. Table 3 compares the rates of BOP's average annual cost growth for non- salary inmate medical care and utilities to average rates of annual funding adjustments requested in the President's budget, from fiscal year 2004 through 2008. Inmate medical care (non-salary) standard DOJ and OMB budget development guidance. For example, DOJ budget development guidance for fiscal years 2008 and 2009 instructed components to limit cost growth for current services to no more than 4 percent greater than prior year levels. DOJ reported that the 4 percent cap guidance is a general instruction given to all components but recognizes that BOP is different because its costs are less discretionary. Furthermore, DOJ reported that it did not automatically reject budget submissions from components that exceeded the cap, but instead required components to submit substantive information to justify need. to meet its operating costs. However, we found that BOP's cost estimation methods either met or substantially met GAO's cost estimating best practices. Further, BOP officials report, and DOJ officials acknowledged, that BOP has already implemented significant reductions in programs by eliminating positions and centralizing administrative functions. In addition, the current level of overcrowding within BOP facilities presents an already serious safety challenge. Given BOP's unique responsibility for managing this population, it has limited discretion when costs for key operations exceed funding levels. estimate, BOP would be better positioned to recreate its estimates in the event of attrition within its budget office among those who have developed initial cost estimates. annual budget formulation and justification process, and to provide DOJ with more detailed information to consider when deliberating its budget proposal for BOP, we recommend that the Attorney General of the United States take the following two actions: instruct the BOP Director to require the BOP budget staff to conduct an uncertainty analysis quantifying the extent to which operations costs could vary due to key cost assumptions changing and submit the results along with budget documentation to DOJ so that DOJ could be aware of the range of likely costs and associated confidence levels; and instruct the BOP Director to require the BOP budget staff to improve documentation of calculations used to estimate its costs. DOJ and BOP generally agreed with the findings. DOJ and BOP will formally review our recommendations when we submit our final product in fall 2009. We made several requests to meet with OMB, but we were unable to schedule a meeting during our review. In addition to the contact named above, Joy Gambino, Assistant Director, and Jay Berman, Analyst-in-Charge, managed this assignment. Pedro Almoguera, Tisha Derricotte, Geoffrey Hamilton, Marvin McGill, Karen Richey, Adam Vogt, and Melissa Wolf made key contributions to this report.	The Department of Justice's (DOJ) Federal Bureau of Prisons (BOP) is responsible for the custody and care of about 209,000 federal inmates--a population which has grown by 44 percent over the last decade. In fiscal years 2008 and 2009, the President requested additional funding for BOP because costs for key operations were at risk of exceeding appropriated funding levels. Government Accountability Office (GAO) was congressionally directed to examine (1) how BOP estimates costs when developing its annual budget request to DOJ; (2) the extent to which BOP's methods for estimating costs follow established best practices; and (3) the extent to which BOP's costs for key operations exceeded requested funding levels identified in the President's budget in recent years, and how this has affected BOP's ability to manage its growing inmate population. In conducting our work, GAO analyzed BOP budget documents, interviewed BOP and DOJ officials, and compared BOP's cost estimation documentation to criteria in GAO's Cost Estimating and Assessment Guide. BOP uses three general steps to estimate costs for its annual budget submission: (1) estimating cost increases to maintain service levels, such as inmate medical care and utilities; (2) projecting inmate population changes for the budget year and for several years into the future using a modeling program that incorporates data on the current inmate population and estimated incoming population and associated sentences; and (3) estimating costs to both provide additional capacity to house projected inmate population growth and implement new programs, such as activating new prisons. BOP's methods for cost estimation largely reflect best practices outlined in GAO's Cost Estimating and Assessment Guide. BOP followed a well-defined process for developing a mostly comprehensive, well documented, accurate, and credible cost estimate for fiscal year 2008. For example, BOP used relevant historical cost data and considered adjustments for general inflation when estimating costs for its budget request to DOJ. Moreover, BOP's methods for projecting inmate population changes were accurate, on average, to within 1 percent of the actual inmate population growth from fiscal year 1999 to August 2009. Still, BOP could strengthen its methods in two ways. First, BOP has not quantified the level of confidence associated with its cost estimate. While not required by the Office of Management and Budget or DOJ, conducting an uncertainty analysis of this kind is a best practice. By providing the results of such analysis to DOJ, BOP officials could share advance information on the probability and associated risks of operating expenses exceeding enacted funding levels. Second, during our review of documentation for BOP's fiscal year 2008 cost estimate, in some cases we required the guidance of BOP budget analysts to identify backup support because the documentation was insufficient to allow someone unfamiliar with the budget to locate detailed corroborating data. By documenting all steps, BOP would be better positioned to recreate its budget cost estimates in the event of attrition among those who initially developed them. According to BOP, from fiscal years 2004 through 2008, costs for non-salary inmate medical care and utilities exceeded funding levels in the President's budget request by about $131 million and $55 million, respectively. As a result, BOP has faced funding gaps in its operations account that has left it with limited flexibility to manage its continually growing inmate population.	5,831	708
Since its founding in 1718, the city of New Orleans and its surrounding areas have been subject to numerous floods from the Mississippi River and hurricanes. The greater New Orleans metropolitan area, composed of Orleans, Jefferson, St. Charles, St. Bernard, and St. Tammany parishes, sits in the tidal lowlands of Lake Pontchartrain and is bordered generally on its southern side by the Mississippi River. Lake Pontchartrain is a tidal basin about 640 square miles in area that connects with the Gulf of Mexico through Lake Borgne and the Mississippi Sound. While the area has historically experienced many river floods, a series of levees and other flood control structures built over the years were expected to greatly reduce that threat. The greatest natural threat posed to the New Orleans area continues to be from hurricane-induced storm surges, waves, and rainfalls. Several hurricanes have struck the area over the years including Hurricane Betsy in 1965, Hurricane Camille in 1969, and Hurricane Lili in 2002. The hurricane surge that can inundate coastal lowlands is the most destructive characteristic of hurricanes and accounts for most of the lives lost from hurricanes. Hurricane surge heights along the Gulf and Atlantic coasts can range up to 20 feet or more and there is growing concern that continuing losses of coastal wetlands and settlement of land in New Orleans has made the area more vulnerable to such storms. Because of such threats, a series of control structures, concrete floodwalls, and levees, was proposed for the area along Lake Pontchartrain in the 1960s. Congress first authorized construction of the Lake Pontchartrain and Vicinity, Louisiana Hurricane Protection Project in the Flood Control Act of 1965 to provide hurricane protection to areas around the lake in the parishes of Orleans, Jefferson, St. Bernard, and St. Charles. Although federally authorized, it was a joint federal, state, and local effort with the federal government paying 70 percent of the costs and the state and local interests paying 30 percent. The Corps was responsible for project design and construction and local interests were responsible for maintenance of levees and flood controls. The original project design, known as the barrier plan, included a series of levees along the lakefront, concrete floodwalls along the Inner Harbor Navigation Canal, and control structures, including barriers and flood control gates located at the Rigolets and Chef Menteur Pass areas. These structures were intended to prevent storm surges from entering Lake Pontchartrain and overflowing the levees along the lakefront. The original lakefront levees were planned to be from 9.3 feet to 13.5 feet high depending on the topography of the area directly in front of the levees. This project plan was selected over another alternative, known as the high-level plan, which excluded the barriers and flood control gates at the Rigolets and Chef Menteur Pass complexes and instead employed higher levees ranging from 16 feet to 18.5 feet high along the lakefront to prevent storm surges from inundating the protected areas. In the 1960s, the barrier plan was favored because it was believed to be less expensive and quicker to construct. As explained later in my statement, this decision was reversed in the mid-1980s. The cost estimate for the original project was $85 million (in 1961 dollars) and the estimated completion date was 1978. The original project designs were developed to combat a hurricane that might strike the coastal Louisiana region once in 200-300 years. The basis for this was the standard project hurricane developed by the Corps with the assistance of the United States Weather Bureau (now the National Weather Service). The model was intended to represent the most severe meteorological conditions considered reasonably characteristic for that region. The model projected a storm roughly equivalent to a fast-moving Category 3 hurricane. A Category 3 hurricane has winds of 111-130 miles per hour and can be expected to cause some structural damage from winds and flooding near the coast from the storm surge and inland from rains. Even before construction began on the project, it became evident that some changes to the project plan were needed. Based on updated Weather Bureau data on the severity of hurricanes, the Corps determined that the levees along the three main drainage canals, that drain water from New Orleans into Lake Pontchartrain, would need to be raised to protect against storm surges from the lake. The need for this additional work became apparent when Hurricane Betsy flooded portions of the city in September 1965. During the first 17 years of construction on the barrier plan, the Corps continued to face project delays and cost increases due to design changes caused by technical issues, environmental concerns, legal challenges, and local opposition to various aspects of the project. For example, foundation problems were encountered during construction of levees and floodwalls which increased construction time; delays were also encountered in obtaining rights-of-ways from local interests who did not agree with all portions of the plan. By 1981, cost estimates had grown to $757 million for the barrier plan, not including the cost of any needed work along the drainage canals, and project completion had slipped to 2008. At that time, about $171 million had been made available to the project and the project was considered about 50 percent complete, mostly for the lakefront levees which were at least partially constructed in all areas and capable of providing some flood protection although from a smaller hurricane than that envisioned in the plan. More importantly, during the 1970s, some features of the barrier plan were facing significant opposition from environmentalists and local groups who were concerned about environmental damages to the lake as well as inadequate protection from some aspects of the project. The threat of litigation by environmentalists delayed the project and local opposition to building the control complexes at Rigolets and Chef Menteur had the potential to seriously reduce the overall protection provided by the project. This opposition culminated in a December 1977 court decision that enjoined the Corps from constructing the barrier complexes, and certain other parts of the project until a revised environmental impact statement was prepared and accepted. After the court order, the Corps decided to change course and completed a project reevaluation report and prepared a draft revised Environmental Impact Statement in the mid-1980s that recommended abandoning the barrier plan and shifting to the high- level plan originally considered in the early 1960s. Local sponsors executed new agreements to assure their share of the non-federal contribution to the revised project. These changes are not believed to have had any role in the levee breaches recently experienced as the high-level design selected was expected to provide the same level of protection as the original barrier design. In fact, Corps staff believe that flooding would have been worse if the original proposed design had been built because the storm surge would likely have gone over the top of the barrier and floodgates, flooded Lake Pontchartain, and gone over the original lower levees planned for the lakefront area as part of the barrier plan. As of 2005, the project as constructed or being constructed included about 125 miles of levees and the following major features: New levee north of Highway U.S. 61 from the Bonnet Carre Spillway East Guide Levee to the Jefferson-St. Charles Parish boundary Floodwall along the Jefferson-St. Charles Parish boundary Enlarged levee along the Jefferson Parish lakefront Enlarged levee along the Orleans Parish lakefront Levees, floodwalls, and flood proofed bridges along the 17th Street, Orleans Avenue and London Avenue drainage canals Levees from the New Orleans lakefront to the Gulf Intracoastal Waterway Enlarged levees along the Gulf Intracoastal Waterway and the Mississippi New levee around the Chalmette area. The project also includes a mitigation dike on the west shore of Lake Pontchartrain. The current estimated cost of construction for the completed project is $738 million with the federal share being $528 million and the local share $210 million. The estimated completion date as of May 2005 for the whole project was 2015. The project was estimated to be from 60-90 percent complete in different areas. The work in Orleans Parish was estimated to be 90 percent complete with some work remaining for bridge replacement along the Orleans Avenue and London Avenue drainage canals. The floodwalls along the canals, where the recent breaches occurred, were complete. Jefferson Parish work was estimated to be 70 percent complete with work continuing on flood proofing the Hammond Highway bridge over 17th Street and two lakefront levee enlargements. Estimated completion for that work was 2010. In the Chalmette area work was estimated to be 90 percent complete with some levee enlargement work and floodwall work remaining. In St. Charles Parish work was 60 percent complete with some gaps still remaining in the levees. Closure of these gaps was scheduled by September 2005. Federal allocations for the project totaled $458 million as of the enactment of the fiscal year 2005 federal appropriation. This represents 87 percent of the Federal government's responsibility of $528 million with about $70 million remaining to complete the project in 2015. Over the last 10 fiscal years (1996-2005), federal appropriations have totaled about $128.6 million and Corps reprogramming actions resulted in another $13 million being made available to the project. During that time, appropriations have generally declined from about $15-20 million annually in the earlier years to about $5-7 million in the last three fiscal years. While this may not be unusual given the state of completion of the project, the Corps' project fact sheet from May 2005 noted that the President's Budget request for fiscal years 2005 and 2006 and the appropriated amount for fiscal year 2005 were insufficient to fund new construction contracts. Among the construction efforts that could not be funded, according to the Corps, were the following: Levee enlargements in all four parishes Pumping station flood protection in Orleans Parish Floodgates and a floodwall in St. Charles Parish Bridge replacement in Orleans Parish. The Corps had also stated that it could spend $20 million in fiscal year 2006 on the project if the funds were available. The Corps noted that several levees had settled and needed to be raised to provide the design- level of protection. For the last few years, the project generally received the amount of funds appropriated to it and was not adversely affected by any Corps reprogramming actions. In recent years, questions have been raised about the ability of the project to withstand larger hurricanes than it was designed for, such as a Category 4 or 5, or even a slow-moving Category 3 hurricane that lingered over the area and produced higher levels of rainfall. Along this line, the Corps completed in 2002 a reconnaissance or pre-feasibility study on whether to strengthen hurricane protection along the Louisiana coast. A full feasibility study was estimated to take at least five years to complete and cost about $8 million. In March 2005, the Corps reported that it was allocating $79,000 to complete a management plan for the feasibility study and a cost-share agreement with local sponsors. The President's fiscal year 2006 budget request did not include any funds for the feasibility project. In closing, the Lake Pontchartrain hurricane project has been under construction for nearly 40 years, much longer than originally envisioned and at much greater cost, although much of that can be attributed to inflation over these years, and the project is still not complete. Whether the state of completion of the project played a role in the flooding of New Orleans in the wake of Hurricane Katrina in August 2005 is still to be determined as are issues related to whether a project designed to protect against Category 4 or 5 hurricanes would or could have prevented this catastrophe. Mr. Chairman, this concludes my prepared testimony. We would be happy to respond to any questions that you or Members of the Subcommittee may have. 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 greatest natural threat posed to the New Orleans area is from hurricane-induced storm surges, waves, and rainfalls. A hurricane surge that can inundate coastal lowlands is the most destructive characteristic of hurricanes and accounts for most of the lives lost from hurricanes. Hurricane surge heights along the Gulf and Atlantic coasts can exceed 20 feet. The effects of Hurricane Katrina flooded a large part of New Orleans and breached the levees that are part of the U.S. Army Corps of Engineers (Corps) Lake Pontchartrain, and Vicinity, Louisiana Hurricane Protection Project. This project, first authorized in 1965, was designed to protect the lowlands in the Lake Pontchartrain tidal basin from flooding by hurricane-induced sea surges and rainfall. GAO was asked to provide information on (1) the purpose and history of the Lake Pontchartrain, and Vicinity, Louisiana Hurricane Protection Project and (2) funding of the project. GAO is not making any recommendations in this testimony. Congress first authorized the Lake Pontchartrain and Vicinity, Louisiana Hurricane Protection Project in the Flood Control Act of 1965. The project was to construct a series of control structures, concrete floodwalls, and levees to provide hurricane protection to areas around Lake Pontchartrain. The project, when designed, was expected to take about 13 years to complete and cost about $85 million. Although federally authorized, it was a joint federal, state, and local effort. The original project designs were developed based on the equivalent of what is now called a fast-moving Category 3 hurricane that might strike the coastal Louisiana region once in 200-300 years. As GAO reported in 1976 and 1982, since the beginning of the project, the Corps has encountered project delays and cost increases due to design changes caused by technical issues, environmental concerns, legal challenges, and local opposition to portions of the project. As a result, in 1982, project costs had grown to $757 million and the expected completion date had slipped to 2008. None of the changes made to the project, however, are believed to have had any role in the levee breaches recently experienced as the alternative design selected was expected to provide the same level of protection. In fact, Corps officials believe that flooding would have been worse if the original proposed design had been built. When Hurricane Katrina struck, the project, including about 125 miles of levees, was estimated to be from 60-90 percent complete in different areas with an estimated completion date for the whole project of 2015. The floodwalls along the drainage canals that were breached were complete when the hurricane hit. The current estimated cost of construction for the completed project is $738 million with the federal share being $528 million and the local share $210 million. Federal allocations for the project were $458 million as of the enactment of the fiscal year 2005 federal appropriation. This represents 87 percent of the federal government's responsibility of $528 million with about $70 million remaining to complete the project. Over the last 10 fiscal years (1996-2005), federal appropriations have totaled about $128.6 million and Corps reprogramming actions resulted in another $13 million being made available to the project. During that time, appropriations have generally declined from about $15-20 million annually in the earlier years to about $5-7 million in the last three fiscal years. While this may not be unusual given the state of completion of the project, the Corps' project fact sheet from May 2005 noted that the President's budget request for fiscal years 2005 and 2006, and the appropriated amount for fiscal year 2005 were insufficient to fund new construction contracts. The Corps had also stated that it could spend $20 million in fiscal year 2006 on the project if the funds were available. The Corps noted that several levees had settled and needed to be raised to provide the level of protection intended by the design.	2,635	836
EMS systems are designed to provide a quick, coordinated response of emergency medical care resources for traumatic incidents and medical emergencies. Persons who need such a response may need help for a variety of medical conditions, such as cardiac arrest, diabetes, seizures, or behavioral disorders, or they may have injuries such as burns, wounds, or severe head or spinal damage. The major components of an emergency medical system often include the following: A public access system. This is generally a 911 emergency telephone line used to contact and dispatch emergency medical personnel. Emergency medical response. The goal for the initial response is to have medically trained personnel available to the patient as quickly as possible and to provide early stabilizing care. The level of care provided can be either basic life support or advanced life support. Because most EMS agencies operate independently of other medical facilities and have relatively few physicians among their providers, the ability of field personnel to talk with a physician is important in ensuring appropriate medical care. Such a link to "medical oversight" ensures that field personnel at the scene or during transport have immediately available expert direction that can authorize and guide the care of their patients. Emergency medical transport or transfer. This involves getting the patient to a hospital or other medical facility. Although an important component of the system, emergency transport does not apply in all cases. Officials responding to a recent survey of urban EMS systems indicated, for example, that an average of 37 percent of emergency requests do not result in emergency transport. EMS systems are typically managed and operated by local communities and jurisdictions, such as counties or fire districts. Entities involved in providing EMS for a particular community may include fire departments with paid or volunteer personnel trained in both fire suppression and EMS or EMS alone, for-profit or not-for-profit ambulance companies, volunteer ambulance services or rescue squads, hospitals, and government-based EMS organizations. The extent of involvement of each type of entity in local EMS systems nationwide is not fully known. While some systems provide both emergency response and emergency transportation within the same agency or organization, others may use multiple organizations. For example, a fire department may provide the first emergency response while a private ambulance company provides most emergency transport. Varied sources of EMS funding also exist, such as local taxes, billing for services provided, private-sector donations, subscription services, and government grants. At the state level, EMS agencies generally do not provide direct services but rather regulate and oversee local and regional EMS systems and EMS personnel. In most states, state laws and regulations govern the scope, authority, and operations of local EMS systems. While the state's authority and role varies from state to state, the agencies typically license and certify EMS personnel and ambulance providers and establish testing and training requirements. Some establish standard protocols for treatment, triage, and transfer of patients. State EMS agencies may also be responsible for approving statewide EMS plans, allocating federal EMS resources, and monitoring performance. At the local level, the needs reported by EMS systems are wide-ranging and diverse, reflecting the different environments in which they operate. However, the available data allow a better understanding about the kinds of problems reported than about their effects. At the state level, the reported needs centered on the lack of information and systems for evaluating the performance of EMS systems and deciding how best to make improvements. At the local level, the challenges faced by individual systems are often associated with variations in such factors as the characteristics of the population served and the geography of the area. The area served by an EMS system can range from isolated rural settings in mountainous terrain to sprawling and densely populated urban settings with high-rise buildings and traffic gridlock. Such differences tend to be reflected in certain aspects of the EMS system itself. For example, according to officials, rural areas are less likely than urban areas to have 911 emergency dialing (requiring callers to use a 7- or 10-digit number instead), and their communication between dispatchers or medical facilities and emergency vehicles are more likely to suffer from "dead spots"--areas where messages cannot be heard. Rural areas are also more likely to rely on volunteers rather than paid staff, and these volunteers may have fewer opportunities to maintain skills or upgrade their skills with training. These differing characteristics affect what officials perceive and report as key needs. For example, officials from national associations representing EMS physicians have indicated that long distances and potentially harsh weather conditions in rural areas can accelerate vehicle wear and put vehicles out of service more often. By contrast, an urban area may be less concerned with vehicle wear and more concerned with traffic problems. A 1994 study, for example, compared New York City's EMS response time for cardiac arrest patients with response times reported from other locations. In New York City, the time interval from patient collapse to arrival of EMS personnel at the patient's side was about 11.4 minutes, nearly half of which (5.5 minutes) was spent negotiating city traffic. This interval was similar to ambulance driving time reported in another large city, Chicago, but was significantly longer than the 3.3 minutes of driving time required in a suburban county in the state of Washington. The variety of EMS needs can be seen in the various categories of needs reported by EMS officials. Far-reaching needs were identified in a March 2000 national survey on rural EMS needs, from our own fieldwork involving urban and rural EMS systems, from our review of the professional literature, and in our conversations with EMS experts. Recruitment and retention of EMS personnel. In rural systems, personnel needs reflected these systems' heavy dependence on volunteers. Rural systems reported that it was getting more difficult to recruit volunteers, especially for daytime shifts, and that inadequate staffing was a major problem affecting the ability to quickly respond to emergencies. For example, one predominantly volunteer EMS squad reported having difficulty responding to early-morning calls because most of its volunteers also had full-time jobs. Officials reported that in the past year, the service had been unable to immediately respond to two early-morning calls involving critically ill patients. Rural EMS systems also report encountering problems with staff attrition due to increased demand on personal time for training and calls, stress from treating relatives and neighbors, and poor working conditions. For example, in one instance, closure of a local hospital increased demands on staff by doubling the amount of time personnel had to spend transporting patients. In another example, a state reported concerns about the ability to retain volunteer staff because they had to use antiquated and unreliable equipment, such as ambulances that frequently stranded them in remote areas or that had unreliable lighting, requiring them to provide care by flashlight. In urban systems, where there is less reliance on volunteers, experts report that job stresses may involve very different concerns, such as a higher possibility of encounters with violent situations. Training and Education. Rural systems reported training and education needs that focus on retention of infrequently used medical skills, as well as training in management, budgeting, personnel, and organizational issues. EMS officials said that in rural areas, the sparsity of staff and distances were major impediments to providing in-person training. One local system reported that some personnel certified to provide advanced care had never performed certain advanced procedures, such as airway intubation. This system is currently trying to partner with a local hospital to provide the necessary clinical experience. By contrast, some urban systems we consulted reported needing specially trained staff to respond to patients with mental disorders and personnel trained in different languages so they could better communicate with the diverse populations they serve. Equipment. In the March 2000 survey, a wide range of equipment needs was reported for rural systems, including communication equipment (73 percent of respondents), medical equipment (68 percent of respondents), ambulances (54 percent of respondents), and buildings (34 percent of respondents). For example, one survey respondent cited a rural county that had one operational ambulance for 6,500 residents (the state average was 1 per 4,600 residents) and only three hand-held portable radios were available for the six medical personnel on call. Asked to estimate the costs of addressing the capital needs for rural EMS systems in their states, only 28 of the 41 state EMS directors responding to the survey said they had enough information to provide an estimate. The average state cost, based on the figures from 27 of these states, was $12.2 million. For urban systems, no similar survey or set of estimates is available. Officials we spoke with indicated that urban systems also face equipment needs. Financing. Both urban and rural systems reported examples of tenuous financing. In rural areas, officials reported that it is difficult to fully support the high fixed cost of operating around-the-clock EMS services because the number of calls is generally smaller in sparsely populated areas, limiting the opportunities to bill for services. This difficulty has resulted in some communities going without local EMS coverage. For example, one county reported going without the services of a dedicated EMS provider for the past several years and instead relied on ambulance response from other communities that may be located as far as 20 miles away. According to officials, this county--with a population less than 3,000, no industry, and a relatively small number of businesses--has an insufficient tax base to support such services. Other states have reported increased response times in their rural areas due to lack of funds to maintain greater capacity. Urban systems reported financing problems caused by a growing demand for services combined with tight community budgets. Officials of systems that relied heavily on local government funds and levies to support their operations said they were considering billing health insurers to supplement the income of their EMS services. At the same time, some systems that were relying on income from billing health insurers reported concerns about declining reimbursement levels from these sources due to possible changes in reimbursement rules. Medical oversight. Both rural and urban EMS officials we spoke with expressed a need for improved medical oversight, but this need took different forms. Officials from two urban systems pointed to the need to centralize and standardize medical direction. One official said his system was trying to provide consistent medical direction to EMS providers in the field by centralizing the medical direction in one location, rather than having it provided by six different hospitals. Systems in other locations may face different challenges. For example, a rural state reported that in most communities, physicians providing medical direction were as far as 100 miles away. In addition, they were not always available. While surveys and assessments give some indication of EMS needs, the full picture remains incomplete. For instance, a survey on urban EMS needs has not been conducted. In addition, the extent and impact of these reported needs and problems in particular locations, relative to other local and state systems, is unknown because systems are localized and thus there is little standard and quantifiable information that can be used to compare systems. The Institute of Medicine has noted that without reliable information, it is hard for emergency care providers, administrators, and policymakers to determine in a systematic way (1) the extent to which systems are providing appropriate, timely care or (2) what they ought to do to improve performance and patient outcomes. At the state level, reported needs tend to revolve around basic components for coordinating EMS programs, such as information about the activities of local EMS systems and methods to evaluate the care being provided. These reported needs come mainly from state-level assessments conducted by NHTSA. This agency has a program that allows states to request federal assistance in assessing the effectiveness of their EMS systems. In this process, NHTSA assembles a team that evaluates states-- based on in-depth briefings from, for example, state EMS officials, public and private sector partners, and members of the medical community--on 10 standard components such as medical direction, human resources, training, and evaluation systems. A 1999 compilation summarizing the findings of a decade of NHTSA assessments in 46 states showed that most states were missing important management components. For example, at the time of assessment none of the 46 states had established EMS performance standards (such as the percentage of response times that should fall within an established time frame), 91 percent did not have a functional system for collecting and analyzing data from EMS providers, and 89 percent did not have a statewide system to evaluate patient care. Table 1 documents 10 areas identified by the assessments that were in need of greatest improvement. All of these areas were cited then as a need in at least 80 percent of the 46 states evaluated. These assessments are subject to some limitations in that time has elapsed since they were conducted, they reflect the views of many different assessment teams, and there are no data showing the negative effects that resulted from the reported deficiencies. There are indications that some improvement has occurred--but also that many problems continue. For example, a preliminary update conducted by NHTSA in 2001 found that because enough states had implemented a statewide quality assurance program and a state EMS plan, the percentage of states still in need of improvement in these areas was less than 50 percent. However, a NHTSA official provided information that showed that most states still have significant needs in most of these areas. For areas of improvement other than the quality assurance programs and state EMS plans, the preliminary assessment found that 50 percent or more of states remained in need of improvement. While no single federal agency has lead responsibility for EMS activities, four federal agencies help support and promote EMS improvements, acting primarily as facilitators through activities such as technical assistance. In 1995, two of these agencies facilitated an effort to gain EMS stakeholder consensus on a comprehensive national strategy to improve EMS, called the "EMS Agenda for the Future." While progress in implementing the Agenda has been made, federal EMS officials told us that a 1999 effort to revisit the Agenda goals and set major priorities for achieving them highlighted a need for improved EMS information and information systems. While this need had been a longstanding issue for years within the EMS community, officials told us that the process of setting priorities resulted in a growing focus on this gap. This information gap was further highlighted when HCFA changed the manner in which it reimbursed EMS providers for ambulance services. Federal officials said progress in implementing the Agenda has been affected by the lack of consistent information about EMS systems, and as part of their attempts to act as facilitators, they have all attempted to collect EMS data or promote consistency in the data. Several local agencies we contacted also reported needing improved EMS data and information to monitor and improve performance, but they recognized that data collection and reporting is sometimes a low priority and an administrative burden in the face of competing demands on EMS providers' time. Federal agencies, in different ways, are working to collect and promote improvement of EMS data with available resources. Four different federal agencies are involved in supporting and promoting EMS improvements. None imposes standards or enforces requirements on how EMS systems should operate. Instead, the agencies undertake activities such as providing technical support and guidance, providing funding for EMS initiatives through various grant programs to states, and exploring avenues for developing a consensus among EMS providers on policy needs and changes. The agencies and their major activities are as follows: National Highway and Traffic Safety Administration. NHTSA's EMS division, with a budget of $1.4 million in fiscal year 2000, has several activities that support the development and improvement of EMS care. A core goal is to enhance the quality of EMS services, in part by developing national curricula for training and certifying EMS responders. Other activities include providing technical guidance to state EMS agencies through such venues as seminars on designing and implementing information systems and state assessments to identify system development needs and strategies; conducting training for medical directors and administrators of EMS systems; publishing educational and instructional materials on how to improve EMS; and funding research and demonstration projects to promote EMS improvement. According to NHTSA officials, the EMS division became involved in standardizing emergency medical services in the 1960s after recognition at the federal level of a need to improve and monitor the quality of EMS. NHTSA also provides grants to states and territories for highway traffic safety. In fiscal year 2000, about $4.9 million of this money was used for EMS improvements. Health Resources and Services Administration. Two components of HRSA are involved in EMS: the Maternal and Child Health Bureau's EMS for Children program and the Office of Rural Health Policy. The EMS for Children program provides strategic planning to enhance the pediatric capabilities of EMS systems, provides financial support to NHTSA for EMS projects and conferences, and funds resource centers that provide technical assistance to state EMS agencies. In fiscal year 2000, the EMS for Children program provided approximately $9.8 million to states in the form of grants. The Office of Rural Health Policy sponsored grants to states to strengthen rural health and grants to rural health providers to expand access, coordinate services, control the costs of care, and improve the quality of essential health care services. Each of these grant types can be used to support emergency services. HRSA officials estimate that states and providers received $4.2 million in fiscal year 2000 to promote the development of EMS systems in rural areas. For example, one project established a partnership between a trauma foundation, a university telecommunication center, and the state department of health to provide distance learning opportunities for rural EMS providers, helping them obtain new knowledge, skills, and clinical competency. HRSA is also a leading and coordinating agency for national objectives related to access to quality health services, including emergency services, developed in the Healthy People 2010 initiative for improving the nation's health. One such objective is to increase the proportion of people who can be reached by EMS rapidly, in particular the proportion who can be reached by EMS within 5 minutes in urban areas and within 10 minutes in rural areas. Centers for Disease Control and Prevention. CDC administers the Preventive Health and Health Services Block Grant program that provides funds to states for preventive health programs and projects, including projects to plan, establish, expand, or improve EMS systems. In fiscal year 2000, 20 states elected to use $11.1 million from their allocated grants to fund EMS activities. CDC is also a leading agency for HHS' Healthy People 2010 objectives related to heart disease and EMS, such as increasing the proportion of adults who are aware of the early warning signs of a heart attack and the importance of accessing emergency care by calling 911. U.S. Fire Administration. USFA supports EMS systems operated by fire departments. Approximately 80 percent of fire departments in the United States provide some EMS services. USFA publishes guidance for EMS administrators and provides training for managers and personnel through the agency's National Fire Academy. This agency also maintains a voluntary database that captures fire and some EMS information, such as amount of time spent at the emergency scene, and information about the types of medical conditions seen and the procedures performed. Beginning in fiscal year 2001, USFA administers a grant program for fire departments, which could include some funding for EMS. Federal funding through these four agencies for local and state EMS needs totaled about $30 million in fiscal year 2000. However, half of these funds are subject to federal restrictions that limit the amount that can be spent on equipment or other capital needs. Many states use federal grant moneys to fund their basic regulatory functions. For example, several states used Preventive Health and Health Services block grants from CDC to pay for improvements to basic state administrative processes, such as licensing, certifying, and inspecting ambulance operators and EMS personnel. As part of their work as facilitators, federal agencies have assumed a significant role in identifying and highlighting strategies for improving EMS systems. A major effort in this regard occurred in 1995, when NHTSA and HRSA facilitated a multi-disciplinary group to create an overall strategic plan for improving EMS systems. This group comprised more than 100 EMS stakeholders, including representatives of federal agencies, 19 national organizations, and state and local EMS providers. The resulting strategic plan, known as the EMS Agenda for the Future, identified 14 areas requiring continued development for EMS systems to be maximally effective. These areas encompass such matters as the need for continuous and comprehensive EMS program evaluation, communication systems that result in the most effective course of action, qualified medical direction for all EMS providers and activities, a prepared work force, and a finance system that supports EMS systems so they are prepared to meet the demands placed on them. In 1999, NHTSA and HRSA issued a second key document after reconvening EMS local, state, and national agencies and stakeholders to develop a list of priorities for implementing the Agenda, which was published in 1996. This document, the EMS Agenda for the Future: Implementation Guide, identified over 90 objectives for implementing the Agenda's goals. Ten of these objectives, shown in table 2, were highlighted as priorities because, among other things, they addressed major pressing problems and had the potential to improve EMS systems and patient outcomes. Officials at NHTSA and HRSA told us that some progress in these areas has been achieved. For example, federal agencies had convened a workgroup to develop an EMS research agenda and worked with the American College of Emergency Physicians and the National Association of EMS Physicians on a 2-year process to develop a new set of guidelines on medical direction. These agencies also had other activities designed to identify and address EMS needs for specific concerns. For example, HRSA and NHTSA have also joined with EMS experts to develop a 5-year strategic plan to address the many gaps in emergency services available to children, most recently to cover 2001 through 2005. This national blueprint serves as a road map for many states and organizations and addresses issues parallel to those identified in the Agenda such as need for including a pediatric component in the development of EMS information systems. Another area in which federal agencies have acted as facilitators has been in developing a framework for promoting EMS information systems. In 1993, HHS, NHTSA, and USFA sponsored a comprehensive project to address the need for more consistently collected EMS data. This effort produced a model set of EMS data elements and definitions that states and local systems could use as the basis for creating their own information systems. Data elements--including the location of the medical emergency, the patient's vital signs, treatments provided, and information on EMS response times--were selected based on their usefulness for several purposes, including documenting the medical care provided; billing for services; evaluating, monitoring, and improving the delivery of EMS care; operating EMS systems; and allocating resources locally. Gaining consensus on what these data elements should be has not translated into substantial progress in putting them in place. Federal officials told us that gaps in EMS data has been a longstanding concern and problem area that emerged as major priority when objectives for implementing the Agenda for the Future were discussed in 1999. In part, gaps in data grew as a focus of concern because it is an underpinning to other Agenda for the Future goals, such as determining the costs and benefits of EMS to the community and improving research on EMS. The need for more and better data on EMS services was also highlighted, they said, in HCFA's development of a new Medicare fee schedule for ambulance services in 1999 and 2000. During this process, HCFA had difficulties determining how to target payments so that EMS providers serving isolated areas could be appropriately reimbursed. In part because of the limited data available on rural ambulance services, such as the number of ambulance trips made, the agency had difficulty developing a payment adjuster for ambulance providers that serve isolated areas. Such an adjuster was needed to reflect potential differences in the volume of services and unit service costs. Our work looking at this process also found problems with the adequacy of data reported on ambulance claims. Claims for reimbursement were being denied at varying rates across payers because providers were not completing forms correctly and because of gaps in information on the beneficiaries' health conditions linked to the appropriate level of EMS service. Along with their federal counterparts, state, and local EMS officials we contacted reiterated an interest and need for improved EMS data collection. They said better, more consistent information was needed for such purposes as the following: Improving EMS performance at the local level. Local EMS agencies and providers often lack data to justify budget requests, answer questions about patient outcomes, or support ongoing quality improvement and surveillance. All nine local and six state systems we consulted indicated that information and information systems were needed to monitor performance and to justify and quantify needs at the local level for the public and for decisionmakers. At the state level--where resource allocation decisions are often made--officials reiterated the need for basic EMS data collected statewide to help them determine how to set priorities for allocating scarce resources. For example, one state is trying to identify different funding scenarios and sources to reinvigorate its EMS agencies. In doing so, the state is using data to quantify equipment needs to more accurately estimate potential costs. Setting and monitoring national policy. In addition to data needs for determining a Medicare ambulance fee schedule, the absence of national EMS data is considered a major impediment to monitoring national health priorities. Two goals under the national Healthy People 2010 initiative involve improving response times and access to EMS services. However, HHS officials told us that sources have not been identified or developed to provide data for measuring the status and progress towards achieving these goals. Lack of uniform definitions for data elements across data sources compounds the difficulty of monitoring these goals. For example, while many systems collect data on their response times, they often collect data differently or use different definitions, making comparisons between systems impossible. A survey of EMS systems conducted in 2000 involving the largest 200 cities across the country found that 45 percent of the cities started the response-time clock when the EMS vehicle was dispatched to the scene, while about one-third started the clock when the 911 call for help was received. In addition, researchers found that the systems defined "dispatch" differently. Improving researchers' ability to assess EMS outcomes. Officials from state and local EMS systems told us that the best-documented example of EMS treatments affecting outcomes is for cardiac arrests, in which the expediency of treatment is critical to the survival of the victim. Research has documented the wide variation of cardiac arrest survival rates across locations, but determining the reasons for these variations is hampered because of inconsistent collection methods for EMS data on response times, treatments, and other variables. For example, 1990 research on the survival rates (discharged alive from the hospital) for out- of-hospital cardiac arrest showed rates ranging from 2 percent to 25 percent in 29 separate EMS service areas. The researchers, however, were unable to determine whether these differences were actual differences in outcomes or the result of inconsistencies in data collection. In addition to the 1993 effort to gain consensus on EMS data elements, federal agencies, in their role as facilitators, have in different ways acted to promote the collection of uniform EMS data. For example, since 1995 HRSA's EMS for Children program has promoted EMS data collection by funding a data analysis resource center. Staffed with three full-time employees, the center provides technical assistance to states on EMS data collection and systems development. Also, USFA expanded its voluntary National Fire Incident Reporting database in 1999 to include the full range of fire department activities, including EMS. Despite these efforts, a survey performed in 2000 indicates that few states are currently able to collect statewide data uniformly and consistently. Recognizing the increasing need for such data, the National Association of State EMS Directors, with support from HRSA, conducted this survey to assess the collection of information at the state and local levels. State EMS directors were asked whether they collected EMS data statewide and whether their systems collected data in line with the model data set definitions. Eighteen of the 46 states responding did not collect any data statewide. Of the 28 states that collected some EMS data at the state level, 18 said their data were compliant with this uniform data set, but 9 of those 18 states reported that they had not received information from all EMS systems in the state. According to state EMS officials, data improvement efforts are limited because in the face of constrained resources and competing demands for staff time, local systems have little incentive to collect and report electronic data or to adopt a uniform data format that may differ from their own. EMS officials told us that it is very challenging for state agencies to convince local EMS providers, particularly volunteer agencies, to contribute to the state EMS data pool. Officials said that an important component for improving data collection is for local providers to see value in the data they are collecting for improving their services. Officials told us that creating information systems that allow providers to access the data would help providers to see this value, and will be important to enhancing the ability to collect data and to aggregate it at a national level. Surveys and assessments of EMS systems have identified broad categories of limitations and needs, showing that basic issues in such areas as staffing, training and equipment, and financing are considered to be day- to-day challenges of local EMS systems and state efforts to coordinate these systems. Determining the magnitude of these problems and how to resolve them, however, is itself a challenge because of the lack of information on which to base an understanding of how these systems perform. Federal agencies have played a significant role in gaining consensus on the long-term national strategic goals and priorities for EMS. With available resources, they are attempting to develop strategies for addressing information needs. Progress in this area, however, is likely to remain slow because EMS systems and providers have many competing demands and few incentives to devote limited resources to data collection efforts. We provided a copy of the draft report to HHS, the Federal Emergency Management Agency, and the Department of Transportation for review and comment. In its written comments, HHS stated that the report accurately reflected its programs and activities. (See appendix II). Similarly, in oral comments, the agency liaison at the Federal Emergency Management Agency told us that the report accurately reflected the agency's programs and activities. The Department of Transportation said it had no comments. In its comments, HHS also stressed that, given the terrorist attacks of September 11, the key themes and findings of the report were even more relevant. We agree that EMS systems are a critical part of the public health safety net, both in responding to day-to-day emergencies of citizens and in responding to disasters. We have modified our report to clarify that our scope was to capture information on the stated needs of EMS systems apart from issues related to disaster preparedness. HHS also expressed that its Emergency Medical Services for Children, 5-year strategic plans should be mentioned in the report. We believe the EMS consensus plan supported by HHS, NHTSA and others--the EMS Agenda for the Future-- better represents the EMS needs for the general population, but we have added information about HHS' latest strategic plan for children. HHS also provided technical or clarifying comments related to its grant programs and other areas, which we incorporated as appropriate. As we agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. We will then send copies to the Secretary of Health and Human Services, the Director of the Federal Emergency Management Agency, the Secretary of Transportation, appropriate congressional committees, and other interested parties. If you or your staff have any questions about this report, please contact me at (202) 512-7119 or Katherine Iritani at (206) 287-4820. Other major contributors to this report were Tim Bushfield, Leslie Spangler, and Stan Stenersen. In conducting our work, we consulted officials from national and state organizations and other experts to obtain their views on EMS systems and care. We also consulted officials from six state EMS agencies and nine local EMS systems to obtain more detailed information. We selected these agencies to obtain information from EMS systems with differing system characteristics such as population (rural/urban), level of EMS service (state/county/local), type of staffing (paid/volunteer), and service organization (fire department/private ambulance services/contracted).	Local emergency medical systems (EMS) have reported substantial needs in such areas as personnel, training, equipment, and the availability of doctors to advise emergency personnel in the field. Federal agencies have supported EMS improvements by acting as facilitators rather then by establishing requirements or providing significant funding. The agencies provide technical assistance, set voluntary standards for licensing EMS providers, and administer limited grant funding. The four federal agencies GAO studied have separately begun to collect EMS data or promote data consistency. However, progress in developing this information has been slow. State and local EMS officials attributed the lack of progress to the many competing demands on their time and said that EMS providers and local systems have few incentives to collect and report EMS information.	6,941	150
VA's disability compensation claims process starts when a veteran submits a claim to VA (see fig. 1). A claim folder is created at 1 of VA's 57 regional offices, and a Veterans Service Representative (VSR) then reviews the claim and helps the veteran gather the relevant evidence needed to evaluate the claim. Such evidence includes the veteran's military service records, medical examinations, and treatment records from Veterans Health Administration (VHA) medical facilities and private medical service providers. Also, if necessary to provide support to substantiate the claim, VA will provide a medical examination for the veteran. Once VBA has gathered the supporting evidence, a Rating Veterans Service Representative (RVSR)--who typically has more experience at VBA than a VSR--evaluates the claim and determines whether the veteran is eligible for benefits. If so, the RVSR assigns a percentage rating. A veteran may subsequently reopen a claim to request an increase in disability compensation from VA if, for example, a service-connected disability worsens or a new disability arises. If the veteran disagrees with VA's decision regarding a claim, he or she can submit a written Notice of Disagreement to the regional office handling the claim. In response to such a notice, VBA reviews the case and provides the veteran with a written explanation of the decision-- known as a Statement of the Case--if VBA does not grant all appealed issues. If the veteran further disagrees with the decision, he or she may appeal to the Board of Veterans' Appeals (the Board) which conducts a hearing at the veteran's request, then grants benefits, denies the appeal, or returns the case to VBA to obtain additional evidence necessary to decide the claim. If the veteran is dissatisfied with the Board's decision, he or she may appeal, in succession, to the U.S. Court of Appeals for Veterans Claims, to the Court of Appeals for the Federal Circuit, and finally to the Supreme Court of the United States. In recent years, VA compensation claims processing timeframes have increased. Specifically, the average days pending increased from 116 days in fiscal year 2009 to 254 days in fiscal year 2012. During the same time period, the average days to complete increased from 161 to 260 days. VBA also collects data on the timeliness of the different phases of the claims process, which is used to identify trends and bottlenecks throughout the process. In fiscal year 2011, each phase took longer on average than its stated agency timeliness target (see fig. 2). In fiscal year 2011, the national averages for the initiating development, gathering evidence, and rating decision phases were 44, 72, and 57 days, respectively, over their timeliness targets. In recent years, VA's claims processing production has not kept pace with the substantial increase in incoming claims. In fiscal year 2011, VA completed over 1 million compensation rating claims, a 6 percent increase from fiscal year 2009. However, the number of VA compensation rating claims received had grown 29 percent--from 1,013,712 in fiscal year 2009 to 1,311,091 in fiscal year 2011 (see fig. 3). As a result, the number of backlogged claims--defined as those claims awaiting a decision for more than 125 days--has increased substantially since 2009. As of August 2012, VA had 856,092 pending compensation rating claims, of which 568,043 (66 percent) were considered backlogged. One factor that contributed to the substantial increase in claims received was the commencement in October 2010 of VBA's adjudication of 260,000 previously denied and new claims when a presumptive service connection was established for three additional Agent Orange diseases. VBA gave these claims a high priority and assigned experienced claims staff to process and track them. VBA officials said that 37 percent of its claims processing resources nationally were devoted to adjudicating Agent Orange claims from October 2010 to March 2012. VBA officials in one regional office we spoke to said that all claims processing staff were assigned solely to developing and rating Agent Orange claims for 4 months in 2011, and that no other new and pending claims in the regional office's inventory were processed during that time. Also during this time period, special VBA teams--known as brokering centers--which previously accepted claims and appeals from regional offices experiencing processing delays, were devoted exclusively to processing Agent Orange claims. According to VBA, other factors that contributed to the growing number of claims include an increase in the number of veterans from the military downsizing after 10 years of conflict in Iraq and Afghanistan, improved outreach activities and transition services to servicemembers and veterans, and difficult financial conditions for veterans during the economic downturn. Similar to claims processing, VA regional office appeals processing has not kept pace with incoming appeals received. For example, in fiscal year 2012, VA received 121,786 Notices of Disagreement. However, the number of Statements of the Case that were processed by VBA was only 76,685. As a result, the number of Notice of Disagreements awaiting a decision grew 76 percent from fiscal years 2009 to 2012 and, during that period, the time it took VA to process a Statement of the Case increased 57 percent--from 293 days to 460 days on average. According to VBA officials, staff shortages represent a primary reason that appeals timeliness at VA regional offices has worsened. For example, VBA officials at each of the five regional offices we met with stated that over the last several years appeals staff have also had to train and mentor new staff, conduct quality reviews, as well as develop and rate disability claims to varying degrees. A 2012 VA OIG report noted that VA regional office managers did not assign enough staff to process appeals, diverted staff from processing appeals, and did not ensure that appeals staff acted on appeals promptly because, in part, they were assigned responsibilities to process initial claims, which were given higher priority. According to VA officials, federal laws and court decisions over the past decade have expanded veterans' entitlement to benefits but have also added requirements that can negatively affect claims processing times. For example, the Veterans Claims Assistance Act of 2000 (VCAA) added a requirement that VA assist a veteran who files a claim in obtaining evidence to substantiate the claim before making a decision. This requirement includes helping veterans obtain all relevant federal and non-federal records. VA is required to continue trying to obtain federal records, such as VA medical records, military service records, and Social Security records, until they are either obtained or the associated federal entity indicates the records do not exist. VA may continue to process the claim and provide partial benefits to the veteran, but the claim cannot be completed until all relevant federal evidence is obtained. Because VA must consider all evidence submitted throughout the claims and appeals process, if a veteran submits additional evidence or adds a condition to a claim late in the process it can require rework and may subsequently delay a decision, according to VBA central office officials. VBA officials at regional offices we spoke to said that submitting additional evidence may add months to the claims process. New evidence must first be reviewed to determine what additional action, if any, is required. Next, another notification letter must be sent to the veteran detailing the new evidence necessary to redevelop the claim. VA may also have to obtain additional records or order another medical examination before the claim can be rated and a decision made. Furthermore, while VA may continue to process the claim and provide partial benefits to the veteran, a claim is not considered "complete" until a decision is made on all submitted conditions. Moreover, a veteran has up to 1 year, from the notification of VA's decision, to submit additional evidence in support of the claim before the decision is considered final. Similarly, for an appeal, veterans may submit additional evidence at any time during the process. If the veteran submits additional evidence late in the process after VA completes a Statement of the Case, VA must review the new evidence, reconsider the appeal, and provide another written explanation of its decision--known as a Supplemental Statement of the Case. Congress recently passed a law allowing VA to waive review of additional evidence submitted after the veteran has filed a substantive appeal and instead have the new evidence reviewed by the Board to expedite VA's process of certifying appeals to the Board. According to VBA officials, delays in obtaining military service and medical treatment records, particularly for National Guard and Reserve members, have significantly lengthened the evidence gathering phase. According to VBA officials, 43 percent of Global War on Terror veterans are National Guard and Reserve members. Department of Defense (DOD) guidance requires military staff to respond to VA requests for National Guard and Reserve records in support of VA disability compensation claims. However, VBA area directors and officials at all five regional offices we met with acknowledged that delays in obtaining these records are system-wide. Military records of National Guard or Reserve members can often be difficult to obtain, in particular, because these servicemembers typically have multiple, non-consecutive deployments with different units and their records may not always be held with their reserve units and may exist in multiple places. Moreover, according to VBA officials, National Guard and Reserve members may be treated by private providers between tours of active duty and VA may have to contact multiple military personnel and private medical providers to obtain all relevant records, potentially causing delays in the evidence gathering process. Difficulties obtaining SSA medical records can also lengthen the evidence gathering phase. Although VBA regional office staff have direct access to SSA benefits payment histories, they do not have similar access to medical records held by SSA. If a veteran submits a disability claim and reports receiving SSA disability benefits, VA is required to help the veteran obtain relevant federal records, including certain SSA medical records, to process the claim. VBA's policy manual instructs claims staff to fax a request for medical information to SSA and if no reply is received, to wait 60 working days before sending a follow-up request. If a response is not received after 30 days, claims staff are instructed to send an email request to an SSA liaison. VBA officials at four of the five regional offices we reviewed told us that when following this protocol, they have had difficulty obtaining SSA medical records in a timely fashion. Moreover, they reported having no contact information for SSA, beyond the fax number, to help process their requests. In complying with VA's duty to assist requirement, VBA staff told us they continue trying to retrieve SSA records by sending follow-up fax requests until they receive the records or receive a response that the records do not exist. VBA area directors said some regional offices have established relationships with local SSA offices and have better results, but obtaining necessary SSA information has been an ongoing issue nationally. For example, officials at one regional office said a response from SSA regarding a medical records request can sometimes take more than a year to receive. VBA's work processes, stemming mainly from its reliance on a paper- based claims system, can lead to misplaced or lost documents, and contribute to lengthy processing times. VBA officials at three of the five regional offices we met with noted that errors and delays in handling, reviewing, and routing incoming mail to the correct claim folder can delay the processing of a claim or cause rework. For example, VBA officials at one regional office said that claims may be stalled in the evidence gathering phase if mail that contains outstanding evidence is misplaced or lost. In addition, claims staff may rate a claim without knowledge of the additional evidence submitted and then, once the mail is routed to the claim folder, have to rerate the claim in light of the new evidence received. Furthermore, VBA officials told us that processing can also be delayed if mail staff are slow to record new claims or appeals into IT systems. As of August 2012, VBA took 43 days on average to record Notices of Disagreement in the appeals system--36 days longer than VBA's national target. VBA area directors said that mail processing timeliness varies by regional office and that the more efficient offices in general do a better job of associating mail with the correct claims folder. VBA officials also said that moving physical claims folders among regional offices and medical providers contributes to lengthy processing times. According to a 2011 VA OIG report, processing delays occurred following medical examinations because staff could not match claims- related mail with the appropriate claim folders until the folders were returned from the VA Medical Center. In addition, processing halts while a claim folder is sent to another regional office or brokering center. Based on a review of VA documents and interviews with VBA officials, we identified 15 efforts with a stated goal of improving claims and appeals timeliness. We selected 9 for further review--primarily based on interviews with VBA officials and a review of recent VA testimonies--that have the purpose of reducing disability claims and appeals processing times. VBA has several ongoing efforts to leverage internal and external resources to better manage its workload (see fig. 4). For example, VBA began the Veterans Benefits Management Assistance Program (VBMAP) in late fiscal year 2011 to obtain contractor support for evidence gathering for approximately 279,000 disability claims. Under VBMAP, the contractor gathers evidence in support of a claim and then sends the claim file back to the originating regional office, which reviews the claim for completeness and quality and then assigns a rating. Contractor staff are required to complete their work within 135 days of receiving the file and provide VBA with status reports that include several measures of timeliness, including the time it took to receive medical evidence from providers and to return a claim to VBA for rating. As of June 2012, VBA regional offices we spoke with were awaiting the first batch of claims that were to be sent to the contractors. To help speed up the claims and appeals processes, VBA also has several efforts that modify program requirements or change procedures (see fig. 4). The Fully Developed Claims (FDC) program began as a pilot in December 2008 and was implemented nationwide in June 2010. Normally, once a veteran submits a claim, VBA will review the claim and then send the veteran a letter detailing additional evidence required to support it. The FDC program eliminates this step because the required notification is provided to the veteran directly on the FDC form, thus reducing the time VBA would normally spend gathering evidence for the veteran. In exchange for expedited processing, veterans participating in the FDC program send VBA any relevant private medical evidence with the claim and certify that they have no additional evidence to provide. According to VBA officials, in the first 2 years of the program, VBA processed 33,001 FDC claims, taking an average of about 98 days to complete--8 days longer than the goal of 90 days for these claims. However, as of July 2012, veteran participation in the FDC program had been low--only 4 percent of all compensation rating claims submitted in 2012. The Claims Organizational Model initiative is aimed at streamlining the overall claims process (see fig. 4). For this initiative, VBA created specialized teams that process claims based on their complexity. Specifically, an "express team" processes claims with a limited number of conditions or issues; a "special operations" team processes highly complex claims, such as former prisoners of war or traumatic brain injury cases; and a core team works all other claims. Each of these teams is staffed with both development and ratings staff, which VBA believes will lead to better coordination and knowledge-sharing. Under this model, VBA also redesigned the procedures that mailrooms use to sort and process incoming claims. As of December 2012, VBA had implemented the initiative at 51 regional offices. According to VA, the remaining regional offices will be transitioned to the Claims Organizational Model by the second quarter of fiscal year 2013. In 2010, VBA began to develop the Veterans Benefits Management System (VBMS), a paperless claims processing system that is intended to help streamline the claims process and reduce processing times (see fig. 4). According to VBA officials, VBMS is intended to convert existing paper-based claims folders into electronic claims folders and allow VBA employees electronic access to claims and evidence. Once completed, VBMS is also expected to allow veterans, physicians, and other external parties to submit claims and supporting evidence electronically. In August 2012, VA officials told us that VBMS was still not ready for national deployment, citing delays in scanning claims folders into VBMS as well as other software performance issues. A recent VA OIG report also concluded that VBMS has experienced some performance issues and the scanning and digitization of claims lacked a detailed plan. However, according to VA, as of December 2012, 18 regional offices were piloting VBMS and all regional offices are expected to implement VBMS by the end of calendar year 2013. We have noted that VA's ongoing efforts should be driven by a robust, comprehensive plan; however when we reviewed VBA's plan documents, we found that they fell short of established criteria for sound planning. Specifically, VBA provided us with several documents, including a PowerPoint presentation and a matrix that provided a high-level overview of over 40 initiatives, but, at the time of our review, could not provide us with a robust plan that tied together the group of initiatives, their inter- relationships, and subsequent impact on claims and appeals processing times. Although there is no established set of requirements for all plans, components of sound planning are important because they define what organizations seek to accomplish, identify specific activities to obtain desired results, and provide tools to help ensure accountability and mitigate risks. In our December 2012 report, we recommended that VBA seek improvements for partnering with relevant federal and state military officials to reduce the time it takes to gather military service records from National Guard and Reserve sources. We also recommended that VBA develop improvements for partnering with Social Security Administration officials to reduce the time it takes to gather medical records. Lastly, we recommended that VBA develop a robust backlog reduction plan for its initiatives that, among other best practice elements, identifies implementation risks and strategies to address them and performance goals that incorporate the impact of individual initiatives on processing timeliness. VA generally agreed with our conclusions and concurred with our recommendations, and summarized efforts that are planned or underway to address them. For example, VA stated it has recently initiated several interagency efforts to the timeliness of record exchanges between VBA and DOD. In addition, VA stated that it is working with SSA to pilot a web- based tool to provide VA staff a secure, direct communication with SSA and to automate VA's requests for SSA medical records. VA also agreed with our recommendation to develop a robust backlog plan for VBA's initiatives and, subsequent to our report, published the Department of Veterans Affairs (VA) Strategic Plan to Eliminate the Compensation Claims Backlog. This plan includes implementation risks and performance metrics used to track the cumulative effect of its initiatives on processing times but still lacks individual performance goals and metrics for all initiatives. In conclusion, for years, VA's disability claims and appeals processes have received considerable attention as VA has struggled to process disability compensation claims in a timely fashion. Despite this attention, VA continues to wrestle with several ongoing challenges--some of which VA has little or no control over--that contribute to lengthy processing timeframes. For instance, the number and complexity of VA claims received has increased. VBA is currently taking steps to improve the timeliness of claims and appeals processing; however, prospects for improvement remain uncertain because timely processing remains a daunting challenge. Chairman Sanders, Ranking Member Burr, and Members of the Committee, this concludes my prepared statement. I am pleased to answer any questions you may have. For further information about this testimony, please contact Daniel Bertoni 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 testimony include Lucas Alvarez, James Bennett, Michelle Bracy, Brett Fallavollita, Dan Meyer, James Rebbe, Ryan Siegel, Walter Vance, and Greg Whitney. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.	This testimony discusses the Department of Veterans Affairs' (VA) disability benefits program, which provides monetary support to veterans with disabling conditions that were incurred or aggravated during military service. In fiscal year 2013, VA estimates it will provide $59.6 billion in compensation benefits to 3.98 million veterans and their families. For years, the disability claims process has been the subject of concern and attention by VA, Congress, and Veterans Service Organizations (VSO), due in part to long waits for decisions and the large number of pending claims. For example, the average length of time to complete a claim increased from 161 days in fiscal year 2009 to 260 days in fiscal year 2012. Moreover, VA's backlog of claims--defined as claims awaiting a decision for over 125 days--has more than tripled since September 2009. In August 2012, approximately two-thirds of the 568,043 compensation rating claims--which include pension and disability rating claims--were backlogged. In addition, timeliness of appeals processing at VA regional offices has also slowed by 56 percent over the last several years. This testimony is based on a GAO report released on December 21, 2012, titled Veterans' Disability Benefits: Timely Processing Remains a Daunting Challenge, and, also include information updated to reflect the status of improvement efforts. This testimony focuses on (1) factors that contribute to lengthy disability claims and appeals processing times at VA regional offices and (2) status of the Veterans Benefits Administration's (VBA) recent improvement efforts. GAO found a number of factors--both external and internal to VBA--have contributed to the increase in processing times and subsequent growth in the backlog of veterans' disability compensation claims. For example, the number of claims received by VBA has increased as the population of new veterans has swelled in recent years. Moreover, due to new regulations that established eligibility for benefits for new diseases associated with Agent Orange exposure, VBA adjudicated 260,000 previously denied and new claims for related impairments. Beyond these external factors, issues with the design and implementation of the program have also contributed to timeliness challenges. For example, the law requires VA to assist veterans in obtaining records that support their claim. However, VBA officials said that delays in obtaining military records--particularly for members of the National Guard and Reserve--and Social Security Administration (SSA) medical records impact VA's duty to assist, possibly delaying a decision on a veteran's disability claim. Further, VBA's paper-based claims processing system involves multiple hand-offs, which can lead to misplaced and lost documents and cause unnecessary delays. Concerning timeliness of appeals, VBA regional offices have in recent years shifted resources away from appeals and towards claims, which has led to lengthy appeals timeframes. VBA has a number of initiatives underway to improve the timeliness of claims and appeals processing. Such efforts include leveraging VBA staff and contractors to manage workload, modifying and streamlining procedures, improving records acquisition, and redesigning the claims and appeals processes. According to VBA officials, these efforts will help VA process all veterans' claims within VA's stated target goal of 125 days by 2015. However, the extent to which VA is positioned to meet its ambitious processing timeliness goal remains uncertain. VBA provided us with several planning documents, but, at the time of our review, could not provide us with a plan that met established criteria for sound planning, such as articulating performance measures for each initiative, including their intended impact on the claims backlog. GAO has recommended that VBA (1) partner with military officials to reduce timeframes to gather records from National Guard and Reserve sources, (2) work with SSA to reduce timeframes to gather SSA medical records, and (3) develop a robust plan for its improvement initiatives that identifies performance goals that include the impact of individual initiatives on processing timeliness. VA generally agreed with our conclusions and concurred with our recommendations, and identified efforts that it has planned or underway to address them.	4,520	880
In October 1998, the EPA Administrator announced plans to create an office with responsibility for information management, policy, and technology. This announcement came after many previous efforts by EPA to improve information management and after a long history of concerns that we, the EPA Inspector General, and others have expressed about the agency's information management activities. Such concerns involve the accuracy and completeness of EPA's environmental data, the fragmentation of the data across many incompatible databases, and the need for improved measures of program outcomes and environmental quality. The EPA Administrator described the new office as being responsible for improving the quality of information used within EPA and provided to the public and for developing and implementing the goals, standards, and accountability systems needed to bring about these improvements. To this end, the information office would (1) ensure that the quality of data collected and used by EPA is known and appropriate for its intended uses, (2) reduce the burden of the states and regulated industries to collect and report data, (3) fill significant data gaps, and (4) provide the public with integrated information and statistics on issues related to the environment and public health. The office would also have the authority to implement standards and policies for information resources management and be responsible for purchasing and operating information technology and systems. Under a general framework for the new office that has been approved by the EPA Administrator, EPA officials have been working for the past several months to develop recommendations for organizing existing EPA personnel and resources into the central information office. Nonetheless, EPA has not yet developed an information plan that identifies the office's goals, objectives, and outcomes. Although agency officials acknowledge the importance of developing such a plan, they have not established any milestones for doing so. While EPA has made progress in determining the organizational structure of the office, final decisions have not been made and EPA has not yet identified the employees and the resources that will be needed. Setting up the organizational structure prior to developing an information plan runs the risk that the organization will not contain the resources or structure needed to accomplish its goals. Although EPA has articulated both a vision as well as key goals for its new information office, it has not yet developed an information plan to show how the agency intends to achieve its vision and goals. Given the many important and complex issues on information management, policy, and technology that face the new office, it will be extremely important for EPA to establish a clear set of priorities and resources needed to accomplish them. Such information is also essential for EPA to develop realistic budgetary estimates for the office. EPA has indicated that it intends to develop an information plan for the agency that will provide a better mechanism to effectively and efficiently plan its information and technology investments on a multiyear basis. This plan will be coordinated with EPA 's agencywide strategic plan, prepared under the Government Performance and Results Act. EPA intends for the plan to reflect the results of its initiative to improve coordination among the agency's major activities relating to information on environment and program outcomes. It has not yet, however, developed any milestones or target dates for initiating or completing either the plan or the coordination initiative. In early December 1998, the EPA Administrator approved a broad framework for the new information office and set a goal of completing the reorganization during the summer of 1999. Under the framework approved by the EPA Administrator, the new office will have three organizational units responsible for (1) information policy and collection, (2) information technology and services, and (3) information analysis and access, respectively. In addition, three smaller units will provide support in areas such as data quality and strategic planning. A transition team of EPA staff has been tasked with developing recommendations for the new office's mission and priorities as well as its detailed organizational and reporting structure. In developing these recommendations, the transition team has consulted with the states, regulated industries, and other stakeholders to exchange views regarding the vision, goals, priorities, and initial projects for the office. One of the transition team's key responsibilities is to make recommendations concerning which EPA units should move into the information office and in which of the three major organizational units they should go. To date, the transition team has not finalized its recommendations on these issues or on how the new office will operate and the staff it will need. Even though EPA has not yet determined which staff will be moved to the central information office, the transition team's director told us that it is expected that the office will have about 350 employees. She said that the staffing needs of the office will be met by moving existing employees in EPA units affected by the reorganization. The director said that, once the transition team recommends which EPA units will become part of the central office, the agency will determine which staff will be assigned to the office. She added that staffing decisions will be completed by July 1999 and the office will begin functioning sometime in August 1999. The funding needs of the new office were not specified in EPA's fiscal year 2000 budget request to the Congress because the agency did not have sufficient information on them when the request was submitted in February 1999. The director of the transition team told us that in June 1999 the agency will identify the anticipated resources that will transfer to the new office from various parts of EPA. The agency plans to prepare the fiscal year 2000 operating plan for the office in October 1999, when EPA has a better idea of the resources needed to accomplish the responsibilities that the office will be tasked with during its first year of operation. The transition team's director told us that decisions on budget allocations are particularly difficult to make at the present time due to the sensitive nature of notifying managers of EPA's various components that they may lose funds and staff to the new office. Furthermore, EPA will soon need to prepare its budget for fiscal year 2001. According to EPA officials, the Office of the Chief Financial Officer will coordinate a planning strategy this spring that will lead to the fiscal year 2001 annual performance plan and proposed budget, which will be submitted to the Office of Management and Budget by September 1999. The idea of a centralized information office within EPA has been met with enthusiasm in many corners--not only by state regulators, but also by representatives of regulated industries, environmental advocacy groups, and others. Although the establishment of this office is seen as an important step in improving how EPA collects, manages, and disseminates information, the office will face many challenges, some of which have thwarted previous efforts by EPA to improve its information management activities. On the basis of our prior and ongoing work, we believe that the agency must address these challenges for the reorganization to significantly improve EPA's information management activities. Among the most important of these challenges are (1) obtaining sufficient resources and expertise to address the complex information management issues facing the agency; (2) overcoming problems associated with EPA's decentralized organizational structure, such as the lack of agencywide information dissemination policies; (3) balancing the demand for more data with calls from the states and regulated industries to reduce reporting burdens; and (4) working effectively with EPA's counterparts in state government. The new organizational structure will offer EPA an opportunity to better coordinate and prioritize its information initiatives. The EPA Administrator and the senior-level officials charged with creating the new office have expressed their intentions to make fundamental improvements in how the agency uses information to carry out its mission to protect human health and the environment. They likewise recognize that the reorganization will raise a variety of complex information policy and technology issues. To address the significant challenges facing EPA, the new office will need significant resources and expertise. EPA anticipates that the new office will substantially improve the agency's information management activities, rather than merely centralize existing efforts to address information management issues. Senior EPA officials responsible for creating the new office anticipate that the information office will need "purse strings control" over the agency's resources for information management expenditures in order to implement its policies, data standards, procedures, and other decisions agencywide. For example, one official told us that the new office should be given veto authority over the development or modernization of data systems throughout EPA. To date, the focus of efforts to create the office has been on what the agency sees as the more pressing task of determining which organizational components and staff members should be transferred into the new office. While such decisions are clearly important, EPA also needs to determine whether its current information management resources, including staff expertise, are sufficient to enable the new office to achieve its goals. EPA will need to provide the new office with sufficient authority to overcome organizational obstacles to adopt agencywide information policies and procedures. As we reported last September, EPA has not yet developed policies and procedures to govern key aspects of its projects to disseminate information, nor has it developed standards to assess the data's accuracy and mechanisms to determine and correct errors. Because EPA does not have agencywide polices regarding the dissemination of information, program offices have been making their own, sometimes conflicting decisions about the types of information to be released and the extent of explanations needed about how data should be interpreted. Likewise, although the agency has a quality assurance program, there is not yet a common understanding across the agency of what data quality means and how EPA and its state partners can most effectively ensure that the data used for decision-making and/or disseminated to the public is of high quality. To address such issues, EPA plans to create a Quality Board of senior managers within the new office in the summer of 1999. Although EPA acknowledges its need for agencywide policies governing information collection, management, and dissemination, it continues to operate in a decentralized fashion that heightens the difficulty of developing and implementing agencywide procedures. EPA's offices have been given the responsibility and authority to develop and manage their own data systems for the nearly 30 years since the agency's creation. Given this history, overcoming the potential resistance to centralized policies may be a serious challenge to the new information office. EPA and its state partners in implementing environmental programs have collected a wealth of environmental data under various statutory and regulatory authorities. However, important gaps in the data exist. For example, EPA has limited data that are based on (1) the monitoring of environmental conditions and (2) the exposures of humans to toxic pollutants. Furthermore, the human health and ecological effects of many pollutants are not well understood. EPA also needs comprehensive information on environmental conditions and their changes over time to identify problem areas that are emerging or that need additional regulatory action or other attention. In contrast to the need for more and better data is a call from states and regulated industries to reduce data management and reporting burdens. EPA has recently initiated some efforts in this regard. For example, an EPA/state information management workgroup looking into this issue has proposed an approach to assess environmental information and data reporting requirements based on the value of the information compared to the cost of collecting, managing, and reporting it. EPA has announced that in the coming months, its regional offices and the states will be exploring possibilities for reducing paperwork requirements for EPA's programs, testing specific initiatives in consultation with EPA's program offices, and establishing a clearinghouse of successful initiatives and pilot projects. However, overall reductions in reporting burdens have proved difficult to achieve. For example, in March 1996, we reported that while EPA was pursuing a paperwork reduction of 20 million hours, its overall paperwork burden was actually increasing because of changes in programs and other factors. The states and regulated industries have indicated that they will look to EPA's new office to reduce the burden of reporting requirements. Although both EPA and the states have recognized the value in fostering a strong partnership concerning information management, they also recognize that this will be a challenging task both in terms of policy and technical issues. For example, the states vary significantly in terms of the data they need to manage their environmental programs, and such differences have complicated the efforts of EPA and the states to develop common standards to facilitate data sharing. The task is even more challenging given that EPA's various information systems do not use common data standards. For example, an individual facility is not identified by the same code in different systems. Given that EPA depends on state regulatory agencies to collect much of the data it needs and to help ensure the quality of that data, EPA recognizes the need to work in a close partnership with the states on a wide variety of information management activities, including the creation of its new information office. Some partnerships have already been created. For example, EPA and the states are reviewing reporting burdens to identify areas in which the burden can be reduced or eliminated. Under another EPA initiative, the agency is working with states to create data standards so that environmental information from various EPA and state databases can be more readily shared. Representatives of state environmental agencies and the Environmental Council of the States have expressed their ideas and concerns about the role of EPA's new information office and have frequently reminded EPA that they expect to share with EPA the responsibility for setting that office's goals, priorities, and strategies. According to a Council official, the states have had more input to the development of the new EPA office than they typically have had in other major policy issues and the states view this change as an improvement in their relationship with EPA. Collecting and managing the data that EPA requires to manage its programs have been a major long-term challenge for the agency. The EPA Administrator's recent decision to create a central information office to make fundamental agencywide improvements in data management activities is a step in the right direction. However, creating such an organization from disparate parts of the agency is a complex process and substantially improving and integrating EPA's information systems will be difficult and likely require several years. To fully achieve EPA's goals will require high priority within the agency, including the long-term appropriate resources and commitment of senior management. 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 Environmental Protection Agency's (EPA) information management initiatives, focusing on the: (1) status of EPA's efforts to create a central office responsible for information management, policy, and technology issues; and (2) major challenges that the new office needs to address to achieve success in collecting, using, and disseminating environmental information. GAO noted that: (1) EPA estimates that its central information office will be operational by the end of August 1999 and will have a staff of about 350 employees; (2) the office will address a broad range of information policy and technology issues, such as improving the accuracy of EPA's data, protecting the security of information that EPA disseminates over the Internet, developing better measures to assess environmental conditions, and reducing information collection and reporting burdens; (3) EPA recognizes the importance of developing an information plan showing the goals of the new office and the means by which they will be achieved but has not yet established milestones or target dates for completing such a plan; (4) although EPA has made progress in determining the organizational structure for the new office, it has not yet finalized decisions on the office's authorities, responsibilities, and budgetary needs; (5) EPA has not performed an analysis to determine the types and the skills of employees that will be needed to carry out the office's functions; (6) EPA officials told GAO that decisions on the office's authorities, responsibilities, budget, and staff will be made before the office is established in August 1999; (7) on the basis of GAO's prior and ongoing reviews of EPA's information management problems, GAO believes that the success of the new office depends on EPA addressing several key challenges as it develops an information plan, budget, and organizational structure for that office; and (8) most importantly, EPA needs to: (a) provide the office with the resources and the expertise necessary to solve the complex information management, policy, and technology problems facing EPA; (b) empower the office to overcome organizational challenges to adopting agencywide information policies and procedures; (c) balance EPA's need for data on health, the environment, and program outcomes with the call from the states and regulated industries to reduce their reporting burdens; and (d) work closely with its state partners to design and implement improved information management systems.	3,191	511
While Native American veterans are geographically dispersed throughout the United States, the West and South regions contain the majority of the Native American veteran population, according to Census data. Some Native American veterans are members of the 566 federally recognized tribes that are distinct, independent political communities that possess certain powers of self-government, which we refer to as tribal sovereignty. Specifically, federally recognized tribes have government-to-government relationships with the United States, and are eligible for certain funding and services provided by the United States. In addition, some Native American veterans are members of the more than 400 Indian groups that are not recognized by the federal government (which we refer to in this report as non-federally recognized tribes). Many--but not all--Native American veterans are dually eligible for health care services in VA and IHS. For example, a veteran who is a member of a non-federally recognized tribe may be eligible for VA health care services, but would not be eligible for IHS health care services. VA is charged with providing health care services to the nation's veterans, and estimates that it will serve 6.3 million patients in fiscal year 2013. VA's fiscal year 2012 budget for medical care was approximately $54 billion. The department provides health care services at VA-operated Veterans who facilities and through agreements with non-VA providers.served in the active military, naval or air service and who were discharged or released under conditions other than dishonorable are generally eligible for VA health care. IHS is charged with providing health care to the approximately 2.1 million eligible Native Americans. IHS's fiscal year 2012 budget for medical care was approximately $3.9 billion. Similarly to VA, IHS provides health care services at IHS-operated facilities through direct care and pays for services from external providers through contract health services. In addition to IHS-operated facilities, some federally recognized tribes choose to operate their own health care facilities, which receive funding from IHS. Like their IHS-operated counterparts, tribally operated facilities provide direct care services and pay for contract health services. IHS also provides funding through grants and contracts to nonprofit urban Native American organizations through the Urban Indian Health program in order to provide health care services to Native Americans living in urban areas. In 2003, VA and IHS signed an MOU to facilitate collaborative efforts in serving Native American veterans eligible for health care in both systems. In 2010, the agencies developed a more detailed MOU to further these efforts. The 2010 MOU contains provisions related to several areas of collaboration, including actions related to the following: Joint contracts and purchasing agreements: Development of standard, preapproved language for inclusion of one agency into contracts and purchasing agreements developed by the other agency; and processes to share information about sharing opportunities in early planning stages. Sharing staff: Establishment of joint credentialing and privileging, sharing specialty services, and arranging for temporary assignment of IHS Public Health Service commissioned officers to VA. Electronic Health Record (EHR) access: Establishment of standard mechanisms for VA providers to access records in IHS and tribally operated facilities, and vice versa, for patients receiving care in both systems. Reimbursement: Development of payment and reimbursement policies and mechanisms to support care delivered to dually eligible Native American veterans. Executive Order 13175, issued on November 6, 2000, required federal agencies to establish regular and meaningful consultation and collaboration with Indian tribe officials in the development of federal policies that have tribal implications. IHS issued a tribal consultation policy in 2006 to formalize the requirement to seek consultation and participation by Indian tribes in policy development and program activities. According to the policy, IHS will consult with Indian tribes to the extent practicable and permitted by law before any action is taken that will significantly affect Indian tribes. In November 2009, a Presidential Memorandum directed federal agencies to develop plans, after consultation with Indian tribes and tribal officials, for implementing the policies and directives of Executive Order 13175. VA's plan included development of a tribal consultation policy, which the agency released in February 2011. VA's tribal consultation policy asserts that VA will establish meaningful consultation to develop, improve, or maintain partnerships with tribal communities. The policy states that consultation should be conducted before actions are taken but acknowledges there may not always be "sufficient time or resources to fully consult" on an issue. In past work we have reported on key practices to enhance and sustain interagency collaboration including agreeing on roles and responsibilities; establishing compatible policies, procedures, and other means to operate across agency boundaries; and developing mechanisms to monitor, evaluate, and report on results. Additionally, our past work has identified a range of mechanisms that the federal government uses to lead and implement interagency collaboration. We found that regardless of the mechanisms used, there are key actions the government can take, including (1) having clear goals; (2) ensuring relevant participants are included in collaboration; and (3) specifying the resources--human, information, technology, physical, and financial--needed to initiate or sustain the collaboration. We have also found in past work on leading public-sector organizations and agency strategic planning that it is important to (1) define clear missions and desired outcomes; (2) use performance measures that are tangible, measurable, and clearly related to goals to gauge progress; and (3) use performance information as a basis for decision making. Finally, internal control standards emphasize the importance of effective external communications that occur with groups that can have a serious effect on programs, projects, operations, and other activities, including budgeting and financing. VA and IHS have documented common goals in their MOU, created 12 workgroups that are tasked with developing strategies to address the goals of the MOU, and created a Joint Implementation Task Force to coordinate tasks, develop implementation policy, and develop performance metrics and timelines--actions that are consistent with those we have found enhance and sustain agency collaboration. However, most of the performance metrics developed by VA and IHS to monitor the implementation of the MOU need to be more clearly related to the goals of the MOU in order to allow the agencies to gauge progress toward MOU goals. Consistent with our past work on practices that can enhance and sustain collaboration, VA and IHS have defined common goals for implementing the MOU and developed specific strategies the agencies plan to take to achieve them. Table 1 summarizes the five goals in the 2010 MOU and selected strategies for implementing them. VA and IHS have created two mechanisms to implement the MOU-- workgroups and a Joint Implementation Task Force. We have reported that MOUs are most effective when they are regularly updated and monitored, actions that can be achieved by workgroups and task forces. VA and IHS created 12 workgroups tasked with responsibility for implementing and developing strategies to address the goals of the MOU, such as interoperability of health information technology; developing payment and reimbursement agreements; and sharing of care processes, programs, and services. Each workgroup includes members from VA and IHS, a step that can foster mutual trust across diverse agency cultures and facilitate frequent communication across agencies to enhance shared understanding of collaboration goals, according to our previous work on interagency collaboration. According to VA and IHS officials, most of the workgroup members volunteered to serve on the workgroups and were self-selected, and VA officials told us that they have consulted with tribes on how to increase tribal participation in the workgroups. The agencies also told us that some workgroup members were asked to participate because of their subject-matter expertise. Goals established by each workgroup appear to be aligned with MOU goals. Specifically, all eight of the workgroups we interviewed described goals that were consistent with the MOU goals. workgroup we interviewed and provides a crosswalk between workgroup goals and the corresponding MOU goal or strategy. We did not interview 4 workgroups because they did not directly relate to our objectives: (1) Services and Benefits; (2) New Technologies; (3) Cultural Competency and Awareness; and (4) Emergency and Disaster Preparedness. VA and IHS created the Joint Implementation Task Force to oversee the overall implementation of the MOU. This task force comprises officials from both agencies including from the Office of the Secretary of Veterans Affairs, the IHS Chief Medical Officer, and the director of VA's Office of Tribal Government Relations, and is scheduled to meet quarterly. It develops implementation policy and procedures for policy-related issues identified by the workgroups; creates performance metrics and timelines, evaluates progress; and compiles an annual report on progress in MOU implementation. Creating a mechanism, such as a task force, intended not only to address issues arising from potential incompatibility of standards and policies across agencies but also to monitor, evaluate, and report on MOU results, can help to facilitate collaboration, according to our previous work on interagency collaboration. The process developed by the Joint Implementation Task Force to monitor the implementation of the MOU includes obtaining data on three performance metrics; however, two of the three metrics do not allow the agencies to measure progress toward the MOU's goals. Our previous work has found that successful performance metrics should be tangible and measureable, clearly aligned with specific goals, and demonstrate the degree to which desired results are achieved. Although all three of the performance metrics are tangible and measurable, only one is also clearly aligned with a specific goal and defined in a manner that would allow the agencies to adequately measure the degree to which desired results are achieved. The other two metrics are inadequate because their connection to a specific goal is not clear and they lack qualitative measures that would allow the agencies to measure the degree to which desired results are achieved. For example, one MOU goal is to increase access to and improve quality of health care services, but none of the metrics mention any targets specifically linked to increased access or improved quality of care. Another goal is to establish effective partnerships and sharing agreements among the agencies and the tribes in support of Native American veterans. Although one of the metrics appears to be related to this goal, in that it is focused on measuring the number of outreach activities that are a result of partnerships, it lacks measures to determine how well the outreach activities are meeting the goal of establishing effective partnerships or other potential goals to which the outreach may contribute, such as facilitating communication among VA, IHS, veterans, and tribally operated facilities. The metrics would therefore not enable VA and IHS to determine how well these specific goals are being achieved. Table 3 describes the performance metrics and performance measures and our evaluation of them. Using these metrics, the agencies have issued MOU progress reports, but the metrics included in the reports generally are not clearly tied specifically to the goals of the MOU, nor do they allow the agencies to determine how well MOU goals have been achieved. Leading public- sector organizations have found that metrics that are clearly linked to goals and allow determination of how well goals are achieved are key steps to becoming more results-oriented. For example: According to the agencies' fiscal year 2011-2012 metrics report,Metric 1 (programs increased or enhanced as a result of the MOU), more than 15 programs were enhanced or increased as the result of the MOU, and 440 events and activities occurred that increased or enhanced the programs. The report then provides examples of programs that have been enhanced, such as a care coordination program in which a registered nurse "works with Indian Health, Tribal Programs, and other agencies and hospitals through direct meetings at various facilities to ensure communication and improved care." However, the report does not always describe information that would allow the agencies to determine how well each activity contributes to meeting MOU goals. For instance, in the description of an enhanced care coordination program noted above, the report does not indicate how the agencies determined that communication has improved among participants. Absent this information, it is not clear how the agencies could draw conclusions about whether improved communication has actually been facilitated and therefore how well the activity contributed to meeting the MOU goal of promoting patient- centered collaboration and facilitating communication. According to the metrics report, for Metric 2 (outreach activities increased or enhanced as a result of MOU partnerships), eight types of activities were increased or enhanced. However, the report lists only seven types of outreach and does not include enough information to determine how well the outreach contributes to meeting MOU goals. For example, one outreach activity cited in the report, "Outreach to promote implementation of new technologies," includes the activity "VA Office of Telehealth Services (OTS) Coordinator participated in Web-ex sessions with IHS on use of technology to improve patient care." Although not stated in the report, this activity appears to help implement the MOU strategy of enhancing access through the development and implementation of new models of care using new technologies, including telehealth, related to the MOU goals of promoting patient-centered care and increasing access to care. However, while outreach activities are measurable and tangible, and might help to achieve goals of the MOU, the report does not state how the agencies will determine whether the sessions actually were effective in improving patient care or increasing access, information that is necessary to allow the agencies to tell how well the activity helps achieve the MOU goals. For each metric, the agencies report whether the activities "met the purpose of the MOU," "met the intent of the MOU," and whether the "level of VA-IHS-Tribal participation" was poor, fair, good, or excellent. While determining whether the agencies' activities meet the purpose and intent of the MOU is a critical step, and obtaining tribal participation is consistent with MOU goals, the report does not describe how these determinations were made. Agency officials told us that these determinations were made subjectively by each workgroup while keeping in mind the goals and strategies in the MOU. The weaknesses we found in these performance metrics could limit the ability of VA and IHS managers to gauge progress and make decisions about whether to expand or modify programs or activities, because the agencies will not have information on how well programs are supporting MOU goals. VA and IHS officials told us that they developed these performance metrics because the initial performance metrics, drafted by the workgroups themselves and other VA and IHS staff, varied in quality. The three metrics and measures were intended to provide some simple, measurable ways for workgroups to report on their progress. However, they also acknowledged that there were weaknesses in the measures and told us that refining these performance metrics is a priority. According to the officials, they plan to revise workgroup metrics by April 2013 and on a continuous basis going forward. In doing so, they plan to consult subject-matter experts and existing VA and IHS performance metrics, for example, prevention of hospital admissions in home-based primary care programs. Mainly because of the large number of diverse tribal communities and tribal sovereignty, VA and IHS face unique challenges associated with coordinating and communicating to implement the MOU. VA and IHS have processes in place for consulting with tribes, but these measures fall short in several respects and do not ensure such consultation is effective. VA and IHS officials told us the large number (566) of federally recognized tribes and differing customs and policy-making structures present logistical challenges in widespread implementation of the MOU within tribal communities. For instance, according to some VA officials, in some tribes as a matter of protocol, an agency must be invited on tribal lands or be sponsored by a council member in order to address a tribal council. Such a policy could add administrative processes that might delay implementation and require greater sensitivity from agency officials, adding to the challenge of consulting with tribes. As another example, the title or position of the tribal person designated to make decisions regarding health care may differ from tribe to tribe, complicating the decision-making process among VA, IHS, and tribes. VA officials told us in some tribes, for example, a tribal leader may have several roles, only one of which is making decisions on health care, whereas in other tribes there may be a tribal health director whom the tribal leader has designated to manage health care in the tribal community. Potentially, these differences can affect the speed and degree at which collective decisions can be made. In addition, VA and IHS officials noted that tribal sovereignty further adds to the logistical complexity of the efforts of the agencies to implement the MOU. Tribal sovereignty includes the inherent right to govern and protect the health, safety, and welfare of tribal members. Indian tribes have a legal and political government-to-government relationship with the federal government, meaning federal agencies interact with tribes as governments, not as special interest groups or individuals. VA and IHS officials told us that because of tribal sovereignty, tribally operated facilities may choose whether or not to participate in a particular opportunity for collaboration related to the MOU, which makes it challenging to achieve some of the goals of the MOU. VA and IHS can inform tribes of an opportunity but cannot require them to participate. For example: In order to meet the MOU goal to establish standard mechanisms for access to electronic health record (EHR) information for shared patients, VA and IHS have coordinated to adapt their information technology systems to allow them both to participate in the eHealth Exchange, a national effort led by the Department of Health and Human Services for sharing EHR information. However, EHR workgroup members told us that some tribally operated facilities have opted to use an off-the-shelf product in place of the IHS system, which the workgroup members do not have the resources to support. In another instance, as a part of their efforts to meet the MOU goal to establish effective partnerships and sharing agreements, VA and IHS are working to implement VA's Consolidated Mail Outpatient Pharmacy (CMOP) throughout IHS. Workgroup members assigned to these activities said they plan to implement the program in all IHS- operated facilities by spring 2013 but cannot require tribally operated facilities to participate. Some smaller tribal communities with more limited postal access are not interested in using the CMOP program, according to the workgroup members. VA and IHS communicate MOU-related information with the tribes through written correspondence, in-person meetings, and other steps, as is consistent with internal controls calling for effective external communications with groups that can have a serious effect on programs and other activities; however, according to tribal stakeholders we interviewed, these methods for consultation have not always met the needs of the tribal communities, and the agencies have acknowledged that effective consultation has been challenging. VA and IHS send written correspondence (known as "Dear Tribal Leader" letters) regarding the MOU to tribal communities. However, the agencies have acknowledged that because of the large and diverse nature of the tribes, they have struggled to reach the tribal member designated to make health care decisions with information about the MOU. Both VA officials and members of tribal communities told us that, because tribal leaders are not always the tribal person designated to make decisions regarding health care, the "Dear Tribal Leader" letters may not always make their way to tribal members designated to take action on health care matters. VA officials told us that their formal consultation is conducted with tribal leaders. However, these officials also noted that, in addition to the letters sent to tribal leaders, they have a network of contacts within each tribe that includes, among others, tribal health directors, and this network receives concurrent notice of communication with tribal leaders via conference calls, listservs, and newsletters. IHS officials said sometimes, in addition to the tribal leader, they may also send letters to, or otherwise communicate directly with, tribal health program directors if they know of them. However, they also noted they do not maintain a specific record-- such as a listserv--of tribal health program directors. Without reaching the tribal members responsible for decision-making on healthcare matters, VA and IHS may not always be effectively communicating with tribes about the status of the MOU and its related activities nor be obtaining tribal feedback that is critical with respect to implementation of the MOU. Likewise, seven tribal stakeholders we spoke with noted similar concerns regarding the "Dear Tribal Leader" letters as VA and IHS. For example, one tribal stakeholder said letters should go to a specific person, such as a tribal health director, to ensure that the information is seen by the right people in a timely manner. It may take the tribes time to pass along letters sent only to tribal leaders to the tribal health director or other appropriate people, by which point any deadlines included in the correspondence could be missed. Once the information has reached the tribal leader, tribes bear the responsibility to ensure it is passed on to the appropriate audience in a timely manner. Another specific concern tribal stakeholders that we spoke with expressed relating to written correspondence was that the agencies sometimes use the letters to simply inform them of steps the agencies have taken without consulting the tribes, as called for by the agencies' tribal consultation policies. For example, some tribal stakeholders said VA and IHS did not include them in the original development of the 2010 MOU, even though the goals and activities in the MOU could directly affect them. According to 10 of the tribal stakeholders we spoke with, tribes should have been included in developing the MOU, which addresses proposed plans, policies, and programmatic actions that may affect tribes. For example, the MOU seeks to improve delivery of health care by developing and implementing new models of care using new technologies, including telehealth services such as telepsychiatry. Instead, the agencies solicited tribal comments after the agencies had signed the MOU. According to two tribal stakeholders, the agencies were not responsive to the comments provided on the MOU. One stakeholder said their comments were not acknowledged upon receipt nor did IHS ever follow up on the issues raised by their comments. The stakeholder suggested IHS designate a point person to track feedback and ensure follow-up. VA and IHS officials told us that they did not hold tribal consultation meetings before the signing of the MOU because they viewed the MOU as an agency-to-agency agreement rather than as an agreement between the agencies and the various tribes. VA and IHS officials said they hold quarterly meetings with tribal communities and also attend events, such as conferences held by Native American interest organizations. Three tribal stakeholders told us that when the agencies have held consultation meetings, the meetings are not interactive enough--stating that agency officials speak for the majority of the time--and that VA does not provide enough information prior to these meetings. These tribal stakeholders said providing information ahead of time could allow tribes to better prepare for meetings, discuss issues as a tribe beforehand, and determine which tribal members should attend. If tribal officials with the authority and desire to work with VA and IHS do not receive needed information on opportunities because of an ineffective consultation process, local facility leadership may not have readily available access to information necessary to examine which collaborative opportunities are present, and thus VA and IHS may be hindered in their efforts to coordinate health care for Native American veterans. VA and IHS are undertaking other efforts designed to enhance consultation with tribes. These include the following steps: In January 2011, VA established the Office of Tribal Government Relations (OTGR) to serve as the point of contact for tribes. According to VA officials, this office conducted four consultation meetings in 2012 and employed five field staff to help manage communication with tribal communities and to work with IHS on local MOU implementation efforts. In February 2011, VA released the agency's tribal consultation policy. VA officials said they are developing a report that will explain the process for evaluating comments from tribes and making decisions based on them. The officials expect the report to be released to the public in the spring of 2013. The agencies have made more local efforts to communicate with tribes, which have led to some success. For example, agency officials and tribal stakeholders noted that the workgroup assigned to implement MOU activities in Alaska used successful methods for working with tribes. The Alaska workgroup told us they cultivated a relationship with an Alaskan tribal health organization in order to get advice on the appropriate customs for consulting with individual tribes there. In addition, the workgroup said they scheduled consultation meetings in conjunction with other meetings, which would limit the amount of travel tribal community members would need to undertake. VA employees also took cultural awareness training, and VA officials visited Alaska to demonstrate the agency's dedication to providing care to Native American veterans, which, according to the workgroup, led to buy-in from tribal communities. VA and Alaskan tribes have signed 26 reimbursement agreements. Some tribal stakeholders that we spoke with have acknowledged the steps taken by the agencies thus far as positive but in some cases expressed concerns regarding tribal consultation. In the case of the tribes working with the Alaska workgroup, one stakeholder praised VA's efforts to work with tribal health organizations to communicate with tribes. In another example, two tribal stakeholders said they approved of OTGR's establishment as an office dedicated to Native American veterans' issues. However, four tribal stakeholders expressed concerns that, despite the creation of OTGR, VA still has not always been effective in its efforts to consult with tribes or be responsive to tribal input provided during consultation. For example, one stakeholder questioned whether consultation was done with every tribe and described VA's consultation process as sporadic. This stakeholder's concern implies that VA's outreach efforts may not be systematically reaching all tribal communities. However, VA officials told us that, in addition to issuing notices in the Federal Register and Dear Tribal Leader letters, they have a systematic process of hosting training summits for tribes and scheduling regular conference calls and presentations to tribal leadership. In another instance, one tribal community member said OTGR lacks--and thus cannot disperse to tribes--the technical knowledge necessary for tribes to partner with VA on activities such as negotiating reimbursement agreements. VA officials noted that OTGR staff may not always be technical experts on a given topic but said they are able to identify those experts and play a key role in linking tribes with them. Coordination between VA and IHS is essential to ensuring that high- quality health care is provided to dually eligible Native American veterans. While the 2010 MOU includes common goals that should facilitate agency coordination, and the agencies have created workgroups tasked to implement the MOU, we found that a critical mechanism for monitoring the implementation of the MOU, the agreement's performance metrics, has weaknesses. Specifically, the inadequacies we found in performance metrics could limit the agencies' ability to measure progress towards MOU goals and ultimately make decisions about programs or activities. Overcoming the challenges related to working with a large number of diverse, sovereign tribes is also essential to successfully achieving the goals of the MOU. Although steps have been taken to consult with tribes regarding the MOU and related activities, consultation has not always been effective in assuring that the people designated to make health care decisions in each tribe are reached and tribes are included in planning and implementation efforts. Ineffective consultation with tribal communities could delay or limit potential VA, IHS, and tribal community partnerships to achieve the goals of the MOU and could hinder agency efforts to gain support for MOU activities and address the health care needs of Native American veterans. To ensure the health care needs of Native American veterans are addressed most efficiently and effectively, we recommend that the Secretary of Veterans Affairs and Secretary of Health and Human Services take the following two actions: As the agencies move forward with revising the MOU's performance metrics and measures, ensure that the revised metrics and measures allow decision makers to gauge whether achievement of the metrics and measures supports attainment of MOU goals. Develop processes to better ensure that consultation with tribes is effective, including the following: A process to identify the appropriate tribal members with whom to communicate MOU-related information, which should include methods for keeping such identification up-to-date. A process to clearly outline and communicate to tribal communities the agencies' response to tribal input, including any changes in policies and programs or other effects that result from incorporating tribal input. A process to establish timelines for releasing information to tribal communities to ensure they have enough time to review and provide input or, in the case of meetings, determine the appropriate tribal member to attend the event. We provided draft copies of this report to VA and the Department of Health and Human Services for review. Both agencies concurred with our recommendations. In addition, VA provided us with comments on the draft report, which we have reprinted in appendix I, as well as general and technical comments, which were incorporated in the draft as appropriate. We are sending copies of this report to appropriate congressional committees; the Secretary of Veterans Affairs; the Secretary of Health and Human Services; and other interested parties. In addition, the report is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 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 II. In addition to the contact named above, Gerardine Brennan, Assistant Director; Jennie Apter; Lori Fritz; Hannah Marston Minter; and Lisa Motley made key contributions to this report.	Native Americans who have served in the military may be eligible for health care services from both VA and IHS. To enhance health care access and the quality of care provided to Native American veterans, in 2010, these two agencies renewed and revised an MOU designed to improve their coordination and resource sharing related to serving these veterans. GAO was asked to examine how the agencies have implemented the MOU. This report examines: (1) the extent to which the agencies have established mechanisms through which the MOU can be implemented and monitored; and (2) key challenges the agencies face in implementing the MOU and the progress made in overcoming them. To conduct this work, GAO interviewed VA and IHS officials and reviewed agency documents and reports. GAO also obtained perspectives of tribal communities through attendance at two tribal conferences; interviews with tribal leaders and other tribal members, including veterans; and interviews with other stakeholders, such as health policy experts and consultants. The Department of Veterans Affairs (VA) and the Indian Health Service (IHS) have developed mechanisms to implement and monitor their memorandum of understanding (MOU); however, the performance metrics developed to assess its implementation do not adequately measure progress made toward its goals. VA and IHS have defined common goals for implementing the MOU and developed strategies to achieve them. They have also created two mechanisms to implement the MOU--12 workgroups with members from both agencies to address the goals of the MOU, and a Joint Implementation Task Force, comprised of VA and IHS officials, to oversee the MOU's implementation. These steps are consistent with practices that GAO has found enhance and sustain agency collaboration. The agencies have also developed three metrics aimed at measuring progress toward the MOU's goals. However, two of the three metrics are inadequate because their connection to any specific MOU goal is not clear and, while they include quantitative measures that tally the number of programs and activities increased or enhanced as a result of the MOU, they lack qualitative measures that would allow the agencies to assess the degree to which the desired results are achieved. The weaknesses in these metrics could limit the ability of VA and IHS managers to gauge progress and make decisions about whether to expand or modify their programs and activities. VA and IHS face unique challenges associated with consulting with a large number of diverse, sovereign tribes to implement the MOU, and lack fully effective processes to overcome these complexities. VA and IHS officials told us the large number (566 federally recognized tribes) and differing customs and policy-making structures present logistical challenges in widespread implementation of the MOU within tribal communities. They also told us that tribal sovereignty--tribes' inherent right to govern and protect the health, safety, and welfare of tribal members--adds further complexity because tribes may choose whether or not to participate in MOU-related activities. Consistent with internal controls, VA and IHS have processes in place to consult with tribes on MOU-related activities through written correspondence and in-person meetings. However, according to tribal stakeholders GAO spoke with, these processes are often ineffective and have not always met the needs of the tribes, and the agencies have acknowledged that effective consultation has been challenging. For example, one tribal community expressed concern that agency correspondence is not always timely because it is sent to tribal leaders who are sometimes not the tribal members designated to take action on health care matters. Similarly, some tribal stakeholders told GAO that the agencies have not been responsive to tribal input and that sometimes they simply inform tribes of steps they have taken without consulting them. VA and IHS have taken steps to improve consultation with tribes. For example, VA has established an Office of Tribal Government Relations, through which it is developing relationships with tribal leaders and other tribal stakeholders. Additionally, in Alaska, VA has been consulting with a tribal health organization for insight on reaching tribes. However, given the concerns raised by the tribal stakeholders GAO spoke with, further efforts may be needed to enhance tribal consultation to implement and achieve the goals of the MOU. GAO recommends that the agencies take steps to improve the performance metrics used to assess MOU implementation and to develop better processes to consult with tribes. VA and the Department of Health and Human Services agreed with these recommendations.	6,250	888
The federal government collects, generates, and uses large amounts of information in electronic form, from enormous geographic databases to individual e-mails. Much of that information can constitute official federal records, and agencies must have ways to manage such records. Under the Federal Records Act, each federal agency is required 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. If these records are not effectively managed, individuals might lose access to benefits for which they are entitled, the government could be exposed to legal liabilities, and historical records of vital interest could be lost forever. In addition, agencies with poorly managed records risk increased costs when attempting to search their records in response to Freedom of Information Act requests or litigation-related discovery actions. Finally, without effective management of the documentation of government actions, the ability of the people to hold the government accountable is jeopardized. Effective records management is also an important tool for efficient government operation. Without adequate and readily accessible documentation, agencies may not have access to important operational information to make decisions and carry out their missions. Accordingly, to ensure that they have appropriate recordkeeping systems with which to manage and preserve their records, agencies are required 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. Among the activities of a records management program are identifying records and sources of records and providing records management guidance, including agency-specific recordkeeping practices that establish what records need to be created in order to conduct agency business. Under the Federal Records Act and the regulations issued by NARA, records must be effectively managed throughout their life cycle, which includes records creation or receipt, maintenance and use, and disposition. Agencies create records to meet the business needs and legal responsibilities of federal programs and (to the extent known) the needs of internal and external stakeholders who may make secondary use of the records. To maintain and use the records created, agencies are to establish internal recordkeeping requirements for maintaining records, consistently apply these requirements, and establish systems that allow them to find records that they need. Disposition involves transferring records of permanent, historical value to NARA for archiving and destroying all other records that are no longer needed for agency operations. One key records management process is scheduling, the means by which NARA and agencies identify federal records and determine time frames for disposition. Creating records schedules involves identifying and inventorying records, appraising their value, determining whether they are temporary or permanent, and determining how long records should be kept before they are destroyed or turned over to NARA for archiving. For example, one general records schedule permits civilian agencies to destroy case files for merit promotions (2 years after the personnel action is completed, or after an audit by the Office of Personnel Management, whichever is sooner). No record may be destroyed or permanently transferred to NARA unless it has been scheduled, so the schedule is of critical importance. Without schedules, agencies would have no clear criteria for when to dispose of records and, to avoid disposing of them unlawfully, would have to maintain them indefinitely. Scheduling records, electronic or otherwise, 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 (metadata) to help it find and use records during their useful lives and dispose of those no longer needed. Records schedules are based on content and are media-neutral; that is, electronic records are classified on the same basis--by content-- as physical records. In addition, agencies are to compile inventories of their information systems, after which the agency is required to develop a schedule for the electronic records maintained in those systems. NARA also has responsibilities related to scheduling records. NARA works with agencies to help schedule records, and it must approve all agency records schedules. It also develops and maintains general records schedules covering records common to several or all agencies. According to NARA, records covered by general records schedules make up about a third of all federal records. For the other two thirds, NARA and the agencies must agree upon agency-specific records schedules. Under the Federal Records Act, NARA is given general oversight responsibilities for records management as well as general responsibilities for archiving--the preservation in the National Archives of the United States of permanent records documenting the activities of the government. Of the total number of federal records, less than 3 percent are permanent. (However, under the act and other statutes, some of the responsibilities for oversight over federal records management are divided across several agencies. Under the Federal Records Act, NARA shares a number of records management responsibilities and authorities with the General Services Administration (GSA). The Office of Management and Budget (OMB) also has records management oversight responsibilities under the Paperwork Reduction Act and the E- Government Act.) For records management, NARA is responsible for issuing guidance; 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. The act also gives NARA the responsibility for conducting inspections or surveys of agency records and records management programs. Historically, despite the requirements of the Federal Records Act, records management has received low priority within the federal government. As early as 1981, in a report entitled Federal Records Management: A History of Neglect, we stated that "persistent records management shortcomings" had been attributed to causes that included "lack of commitment by top management, emphasis on agency missions, and the low priority of records management." Almost 30 years later, the priority problem has remained remarkably persistent. For instance, a 2001 study prepared for NARA by SRA International, Inc., on perceptions in the federal government with respect to records management, concluded that recordkeeping and records management in general receive low priority, as evidenced by lack of staff or budget resources, absence of up-to-date policies and procedures, lack of training, and lack of accountability. This assessment also concluded that although agencies were creating and maintaining records appropriately, most electronic records remained unscheduled, and records of historical value were not being identified and provided to NARA for archiving. In 2002, drawing on the 2001 study, we reported that the low priority given to records management programs was a factor in program weaknesses. We noted that records management is generally considered a "support" activity. Because support functions are typically the most dispensable in agencies, resources for and focus on these functions are often limited. In 2008, we reported on weaknesses in federal e-mail management at four agencies. The four agencies reviewed generally managed e- mail records through paper-based processes, rather than using electronic recordkeeping. (A transition to electronic recordkeeping was under way at one of the four agencies, and two had long-term plans to use electronic recordkeeping.) We attributed weaknesses in agency e-mail management (such as senior officials not conforming to regulations) to factors including insufficient training and oversight regarding recordkeeping practices (as well as the onerousness of handling large volumes of e-mail)--similar to the effects of low priority described by SRA. Accordingly, we recommended that agencies with weaknesses in oversight, policies, and practices develop and apply oversight practices, such as reviews and monitoring of records management training and practices, that would be adequate to ensure that policies were effective and that staff were adequately trained and were implementing policies appropriately. Further evidence of the persistence of the priority issue was provided in 2008, when NARA surveyed federal senior managers about their perception of records management. According to the survey, only 64 percent of managers saw records management as a useful tool for mitigating risk. In April 2010, NARA released a report on its first annual records management self-assessment, which analyzed responses to a survey sent in September 2009 to 245 federal cabinet-level agencies, agency components, and independent agencies. According to NARA, the survey results showed that almost 80 percent of agencies were at moderate to high risk of improper disposition of records. For example, the survey found that not all agencies had appropriate policies in place for handling e-mail, and that only a little over half of the responding agencies had training in place for high-level executives and political appointees on how to manage e-mail; this is consistent with the finding in our 2008 report on e-mail practices regarding insufficient training and oversight regarding recordkeeping practices. NARA rated almost half of the responding agencies (105 of 221) as high risk in the area of e-mail. NARA's survey also indicated, among other things, that a large proportion of agencies have not scheduled existing systems that contain electronic records. In December 2005, NARA issued a bulletin requiring agencies to have NARA-approved records schedules for all records in existing electronic information systems by September 30, 2009. 27 percent of agencies responding to NARA's September 2009 agency self-assessment survey indicated that fewer than half of their electronic systems were scheduled. Such large numbers of unscheduled systems are a problem for agencies because their records cannot legally be disposed of, with the consequences for increased cost and risk mentioned earlier. NARA concluded that the varying levels of agency compliance with its records management regulations and policies have implications for the government's effectiveness and efficiency in conducting its business, protecting citizens' rights, assuring government accountability, and preserving our national history. The Federal Records Act gave NARA responsibility for oversight of agency records management programs by, among other functions, making it responsible for conducting inspections or surveys of agencies' records and records management programs and practices; conducting records management studies; and reporting the results of these activities to the Congress and OMB. We have made recommendations to NARA in previous reports that were aimed at improving NARA's insight into the state of federal records management as a basis for determining where its attention is most needed. In 1999, in reporting on the substantial challenge of managing and preserving electronic records in an era of rapidly changing technology, we noted that NARA did not have governmentwide data on the electronic records management capabilities and programs of all federal agencies. Accordingly, we recommended that NARA conduct a governmentwide survey of these programs and use the information as input to its efforts to reengineer its business processes. However, instead of doing a governmentwide baseline assessment survey as we recommended, NARA planned to obtain information from a limited sample of agencies, stating that it would evaluate the need for such a survey later. In 2002, we reported that because NARA did not perform systematic inspections of agency records management, it did not have comprehensive information on implementation issues and areas where guidance needed strengthening. We noted that in 2000, NARA had suspended agency evaluations (inspections) because it considered that these reached only a few agencies, were often perceived negatively, and resulted in a list of records management problems that agencies then had to resolve on their own. However, we concluded that the new approach that NARA initiated (targeted assistance) did not provide systematic and comprehensive information for assessing progress over time. (Only agencies requesting assistance were evaluated, and the scope and focus of the assistance were determined not by NARA but by the requesting agency.) Accordingly, we recommended that it develop a strategy for conducting systematic inspections of agency records management programs to (1) periodically assess agency progress in improving records management programs and (2) evaluate the efficacy of NARA's governmentwide guidance. In response to our recommendations, NARA devised a strategy for a comprehensive approach to improving agency records management that included inspections and identification of risks and priorities. Subsequently, it also developed an implementation plan that included undertaking agency inspections based on a risk-based model, government studies, or media reports. In 2008, we reported that under its oversight strategy, NARA had performed or sponsored six records management studies in the previous 5 years, but it had not conducted any inspections since 2000, because it used inspections only to address cases of the highest risk, and no recent cases met its criteria. In addition, NARA's reporting to the Congress and OMB did not consistently provide evaluations of responses by federal agencies to its recommendations, as required, or details on records management problems or recommended practices that were discovered as a result of inspections, studies, or targeted assistance projects. Accordingly, we recommended that NARA develop and implement an oversight approach that provides adequate assurance that agencies are following NARA guidance, including both regular assessments of agency records and records management programs and reporting on these assessments. NARA agreed with our recommendations and devised a strategy that included annual self- assessment surveys, inspections, and reporting. It has now begun implementing that strategy, having released the results of its first governmentwide self-assessment survey, as mentioned earlier. As we have previously reported, electronic records pose major management challenges: their volume, their complexity, and the increasingly decentralized environment in which they are created. E- mail epitomizes the challenge, as it is not only voluminous and complex, but also ubiquitous. * Huge volumes of electronic information are being created. Electronic information is increasingly being created in volumes that pose a significant technical challenge to our ability to organize it and make it accessible. An example of this growth is provided by the difference between the digital records of the George W. Bush administration and that of the Clinton administration: NARA has reported that the Bush administration transferred 77 terabytes of data to the Archives on leaving office, which was about 35 times the amount of data transferred by the Clinton administration. Another example is the Department of Energy's National Energy Research Scientific Computing Center, which said that, as of January 2009, it had over 3.9 petabytes of data (that is, about 4,000,000,000,000,000 bytes) in over 66 million files and that the volume of data in storage doubles almost every year. * Electronic records are complex. Electronic records have evolved from simple text-based files to complex digital objects that may contain embedded images (still and moving), sounds, hyperlinks, or spreadsheets with computational formulas. Some portions of electronic records, such as the content of dynamic Web pages, are created on the fly from databases and exist only during the viewing session. Others, such as e-mail, may contain multiple attachments, and they may be threaded (that is, related e-mail messages are linked into send-reply chains). They may depend heavily on context. For example, to understand the significance of an e-mail, we may need to know not only the identity but the position in the agency of the sender and recipients. (Was it sent by an executive or a low-level employee?) In addition, new technologies, such as blogs, wikis, tweets, and social media, continue to emerge, posing new challenges to records managers. * Identification and classification of electronic records are difficult in a decentralized computing environment. The challenge of managing electronic records significantly increases with the decentralization of the computing environment. In the centralized environment of a mainframe computer, it is comparatively simple to identify, assess, and manage electronic records. However, in the decentralized environment of agencies' office automation systems, every user can create electronic files of generally unstructured data that may be formal records and thus should be managed. Documents can be created on individuals' desktop computers and stored on local hard drives. E-mail can come from outside the agency. In cases like these, the agency generally depends on the individual to identify the document or the e-mail as a record, and, through placing it in a recordkeeping system, associate it with its appropriate schedule, make it searchable and retrievable, and preserve it until it is due for disposal. As we reported in 2008, e-mail is especially problematic. E-mail embodies several major challenges to records management: * It is unstructured data, and it can be about anything, or about several subjects in the same message, making it difficult to classify by content. * There is a very large volume of it: one study estimates that a typical corporate user sends or receives around 110 messages a day. Further, there may be many copies of the same e-mail, which can increase storage requirements or require a means of determining which copy to keep. Keeping large numbers of messages potentially increases the time, effort, and expense needed to search for information in response to a business need or an outside inquiry, such as a Freedom of Information Act request. * It is complex: e-mail records may have multiple attachments in a variety of formats, they may include formatting that is important for meaning, and they include information about senders, recipients, and time of sending. Recordkeeping systems must be able to capture all this information and must maintain the association between the e-mail and its attachment(s). * Its relevance depends on context. It may be part of a message thread that is necessary to understand its content, or it may discuss other documents or issues that are not well identified. An e-mail that says "I agree. Let's do it" may be about a major decision or about going to lunch next week. * It may not be obvious who is responsible for identifying an e-mail as a record and at what point. NARA regulations require that both senders and recipients may be responsible for identifying records. However, an e-mail may have multiple recipients and be forwarded to still other recipients. As NARA has pointed out, the decision to move to electronic recordkeeping is inevitable, but as we and NARA have previously reported, implementing such systems requires that agencies commit the necessary resources for planning and implementation, including establishing a sound records management program as a basis. Further, automation will not, at least at the current state of the technology, solve the "end user problem"--relying on individual users to make sound record decisions. Nor will automation solve the problem of lack of priority, which, as our previous work has shown, is of long standing. However, several developments could lead to increased senior-level attention to records management: NARA's use of public ratings as a spur to agency management, growing recognition of risks entailed in poor information and records management, the requirements and emphasis of the recent Open Government Directive, and the influence of congressional oversight. Senior management commitment, if followed through with effective implementation, could improve the governmentwide management of electronic and other records. Moving to electronic recordkeeping is not a simple or easy process. Agencies must balance the potential benefits against the costs of redesigning business processes and investing in technology. Our previous work has shown that such investments, like any information technology investment, require careful planning in the context of the specific agency's circumstances, in addition to well- managed implementation. In 2007, a NARA study team examined the experiences of five federal agencies (including itself) with electronic records management applications, with a particular emphasis on how these organizations used these applications to manage e-mail. Among the major conclusions was that although the functionality of the software product itself is important, other factors are also crucial, such as agency culture and the quality of the records management program in place. With regard to e-mail in particular, the survey concluded that for some agencies, the volume of e-mail messages created and received may be too overwhelming to be managed at the desktop by thousands of employees across many sites using a records management application alone. A follow-up study in 2008 added that although a records management application offers compliant electronic recordkeeping, "it can be expensive to acquire, time consuming to prepare for and implement, requires user intervention to file records, and can be costly over the long haul for data migration and system upgrades." NARA found that in most instances agencies had to work to overcome user resistance to using the system. This user challenge has led records management experts to believe that end users cannot be relied on to manage e-mail records, or indeed any other types of records. A recent Gartner study concluded that user-driven classification of records, especially e-mail, has failed and will continue to fail; a study by the Association for Information and Image Management (AIIM) stated "it is simply not plausible to expect all creators of records to perform accurate, manual declaration and classification." According to Gartner, "What enterprises really need (and want) is a mechanism that automatically classifies messages by records management type ... without user intervention." At the time of writing (August 2007), Gartner described such technology as "in its infancy," but expected it to mature rapidly because of high demand. This technology, automated records classification (sometimes called "autocategorization"), might help address the user problem. (The Air Force is currently working with autocategorization projects.) However, like other information technology, it requires resources for setup and maintenance to be effective, and it is not simple to implement. Further, according to AIIM, autocategorization might not work for an agency's particular documents or file plan, and might not be sufficiently accurate or cost effective. Some proposals have been made to simplify the e-mail problem. Gartner recommends treating e-mail as a separate issue from general records management, perhaps by putting all e-mail in a single category of temporary records with a uniform retention period. Similarly, the Director of Litigation in NARA's Office of General Counsel has suggested keeping all e-mail created by key senior officials (with some additional designations by agency components) as permanent and treating all the rest as temporary. Both proposals would make managing e-mail simpler, but could increase the risk that significant information will not be preserved. Raising the priority of records management has been and continues to be an uphill battle. As we have reported, government needs to prioritize the use of resources, and records management has not been a high priority. Further, records management can also be time- and resource-consuming and technically difficult to implement. NARA can influence this situation by providing effective guidance and assistance to agencies, as well as through its oversight and reporting activities. With its recently initiated annual self- assessment survey, NARA is responding to our earlier recommendations on oversight by beginning an effort to develop a comprehensive view of the state of federal records management as a basis for determining where its attention is most needed. Reporting the results of the survey, with scores for individual agencies and components, to the Congress, OMB, and the public is one way to help bring the records management issue to the attention of senior agency management. Another factor that could help raise awareness of the value of records management is the growing recognition of the risks of weak electronic records and information management, as a result of fear of potentially large costs to organizations that have to produce electronically stored information to respond to litigation, as well as well-publicized incidents of lost records, including e-mail. This recognition of risk is coupled with increased awareness of the value of organizations' information assets; according to AIIM, the field of enterprise content management (which includes records management) has been accepted, driven by the need to control the content chaos that pervades local drives, file shares, email systems, and legacy document stores. As a result, according to an AIIM survey, the highest current priorities for ECM activity are electronic records management and managing e-mails as records. Further, recent Open Government initiatives, which emphasize the importance of making information available to the public for transparency and accountability, could be an additional impetus to addressing electronic records management. OMB's Open Government Directive makes a direct link between open government and records management by requiring that each agency's Open Government Plan include a link to a publicly available Web site that shows how the agency is meeting its existing records management requirements. More generally, the directive urges agencies to use modern technology to disseminate useful information. According to an Administration official, records management plays a crucial role in open government by ensuring accountability through proper documentation of government actions. Increased attention to information and records management could provide another spur encouraging agencies to devote resources to managing their electronic records more effectively. Finally, the priority that agencies give to addressing weaknesses may be increased by hearings such as this, which show that the Congress recognizes the importance of good records management for the efficient, effective, and accountable operations of government. In summary, federal records management has been given low priority for many years. However, the explosion of electronic information and records is an increasing risk to agencies, and could even become a drag on agencies' ability to perform their missions if not brought under control. Raising visibility, as NARA is doing by publishing the results of its self-assessment survey, can raise the perception among senior agency officials of the importance of records management. Also significant is the push for Open Government, which, by heightening the importance of agencies' providing information to the public, makes information a more central part of their missions and could help highlight the actual importance to agencies of actively managing their information. Strong indications from the Congress that records management needs more attention could also raise the priority among agency management. Mr. Chairman, this completes my prepared statement. I would be pleased to respond to any questions you or other Members of the Subcommittee may have at this time. If you should have questions about this testimony, please contact me at (202) 512-6304 or [email protected]. Other major contributors include Barbara Collier, Lee McCracken, J. Michael Resser, and Glenn Spiegel. 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.	Federal agencies are increasingly using electronic means to create, exchange, and store information, and in doing so, they frequently create federal records: that is, information, in whatever form, that documents government functions, activities, decisions, and other important transactions. As the volume of electronic information grows, so does the challenge of managing electronic records. Both federal agency heads and the National Archives and Records Administration (NARA) have responsibilities for managing federal records. As requested, after providing some context about records management in the federal government and the roles of federal agencies and NARA, this testimony describes the challenges of electronic records management and potential means of addressing these challenges. In preparing this testimony, GAO relied primarily on its previous work, supplemented by analysis of publicly available documents. Under the Federal Records Act, agencies are to manage the creation, maintenance, use, and disposition of records in order to achieve adequate and proper documentation of the policies and transactions of the federal government and effective and economical management of agency operations. If records are poorly managed, individuals might lose access to benefits for which they are entitled, the government could be exposed to legal liabilities, and records of historical interest could be lost forever. NARA is responsible, among other things, for providing records management guidance, assistance, and oversight. However, as GAO has previously reported, records management has received low priority within the federal government. Prior reports have identified persistent weaknesses in federal records management, including a lack of policies and training. GAO's most recent report, in 2008, found weaknesses in e-mail management at the four agencies reviewed due in part to insufficient oversight and training. This year, NARA published the results of its first annual agency records management self-assessment survey, indicating that almost 80 percent of agencies were at moderate to high risk of improper disposition of records. Electronic records are challenging to manage, especially as electronic information is being created in volumes that pose a significant technical challenge to the ability to organize and make it accessible. Further, electronic records range in complexity from simple text files to highly complex formats with embedded computational formulas and dynamic content, and new formats continue to be created. Finally, in a decentralized environment, it is difficult to ensure that records are properly identified and managed by end users on individual desktops (the "user challenge"). E-mail is particularly problematic, because it combines all these challenges and is ubiquitous. Technology alone cannot solve the problem without commitment from agencies. Electronic recordkeeping systems can be challenging to implement and can require considerable resources for planning and implementation, including establishing a sound records management program as a basis. In addition, the "user problem" is not yet solved, particularly for e-mail messages. Further, automation will not solve the problem of lack of priority, which is of long standing. However, several developments may lead to increased senior-level attention to records management: NARA's use of public ratings as a spur to agency management, growing recognition of risks entailed in poor information and records management, the requirements and emphasis of the recent Open Government Directive, and the influence of congressional oversight. Senior management commitment, if followed through with effective implementation, could improve the governmentwide management of electronic and other records.	5,646	671
Many firms of varying sizes make up the U.S. petroleum industry. While some firms engage in only limited activities within the industry, such as exploration for and production of crude oil and natural gas or refining crude oil and marketing petroleum products, fully vertically integrated oil companies participate in all aspects of the industry. Before the 1970s, major oil companies that were fully vertically integrated controlled the global network for supplying, pricing, and marketing crude oil. However, the structure of the world crude oil market has dramatically changed as a result of such factors as the nationalization of oil fields by oil-producing countries, the emergence of independent oil companies, and the evolution of futures and spot markets in the 1970s and 1980s. Since U.S. oil prices were deregulated in 1981, the price paid for crude oil in the United Stated has been largely determined in the world oil market, which is mostly influenced by global factors, especially supply decisions of the Organization of Petroleum Exporting Countries (OPEC) and world economic and political conditions. The United States currently imports over 60 percent of its crude oil supply. In contrast, the bulk of the gasoline used in the United States is produced domestically. In 2001, for example, gasoline refined in the United States accounted for over 90 percent of the total domestic gasoline consumption. Companies that supply gasoline to U.S. markets also post the domestic gasoline prices. Historically, the domestic petroleum market has been divided into five regions: the East Coast region, the Midwest region, the Gulf Coast region, the Rocky Mountain region, and the West Coast region. (See fig. 1.) These regions are known as Petroleum Administration for Defense Districts (PADDs). Proposed mergers in all industries, including the petroleum industry, are generally reviewed by federal antitrust authorities--including the Federal Trade Commission (FTC) and the Department of Justice (DOJ)--to assess the potential impact on market competition. According to FTC officials, FTC generally reviews proposed mergers involving the petroleum industry because of the agency's expertise in that industry. FTC analyzes these mergers to determine if they would likely diminish competition in the relevant markets and result in harm, such as increased prices. To determine the potential effect of a merger on market competition, FTC evaluates how the merger would change the level of market concentration, among other things. Conceptually, the higher the concentration, the less competitive the market is and the more likely that firms can exert control over prices. The ability to maintain prices above competitive levels for a significant period of time is known as market power. According to the merger guidelines jointly issued by DOJ and FTC, market concentration as measured by HHI is ranked into three separate categories: a market with an HHI under 1,000 is considered to be unconcentrated; if HHI is between 1,000 and 1,800 the market is considered moderately concentrated; and if HHI is above 1,800, the market is considered highly concentrated. While concentration is an important aspect of market structure--the underlying economic and technical characteristics of an industry--other aspects of market structure that may be affected by mergers also play an important role in determining the level of competition in a market. These aspects include barriers to entry, which are market conditions that provide established sellers an advantage over potential new entrants in an industry, and vertical integration. Over 2,600 merger transactions occurred from 1991 through 2000 involving all three segments of the U.S. petroleum industry. Almost 85 percent of the mergers occurred in the upstream segment (exploration and production), while the downstream segment (refining and marketing of petroleum) accounted for about 13 percent, and the midstream segment (transportation) accounted for over 2 percent. The vast majority of the mergers--about 80 percent--involved one company's purchase of a segment or asset of another company, while about 20 percent involved the acquisition of a company's total assets by another so that the two became one company. Most of the mergers occurred in the second half of the decade, including those involving large partially or fully vertically integrated companies. Petroleum industry officials and experts we contacted cited several reasons for the industry's wave of mergers in the 1990s, including achieving synergies, increasing growth and diversifying assets, and reducing costs. Economic literature indicates that enhancing market power is also sometimes a motive for mergers. Ultimately, these reasons mostly relate to companies' desire to maximize profit or stock values. Mergers in the 1990s contributed to increases in market concentration in the downstream (refining and marketing) segment of the U.S. petroleum industry, while the upstream segment experienced little change. Overall, the refining market experienced increasing levels of market concentration (based on refinery capacity) in all five PADDs during the 1990s, especially during the latter part of the decade, but the levels as well as the changes of concentration varied geographically. In PADD I--the East Coast--the HHI for the refining market increased from 1136 in 1990 to 1819 in 2000, an increase of 683 (see fig. 2). Consequently, this market went from moderately concentrated to highly concentrated. Compared to other U.S. PADDs, a greater share of the gasoline consumed in PADD I comes from other supply sources--mostly from PADD III and imports--than within the PADD. Consequently, some industry officials and experts believe that the competitive impact of increased refiner concentration within the PADD could be mitigated. For PADD II (the Midwest), the refinery market concentration increased from 699 to 980 --an increase of 281--between 1990 and 2000. However, as figure 3 shows, this PADD's refining market remained unconcentrated at the end of the decade. According to EIA's data, as of 2001, the quantity of gasoline refined in PADD II was slightly less than the quantity consumed within the PADD. The refining market in PADD III (the Gulf Coast), like PADD II, was unconcentrated as of the end of 2000, although its HHI increased by 170-- from 534 in 1990 to 704 in 2000 (see fig. 4). According to EIA's data, much more gasoline is refined in PADD III than is consumed within the PADD, making PADD III the largest net exporter of gasoline to other parts of the United States. The HHI for the refining market in PADD IV--the Rocky Mountain region--where gasoline production and consumption are almost balanced--increased by 95 between 1990 and 2000. This increase changed the PADD's refining market from 1029 in 1990 to 1124 in 2000, within the moderate level of market concentration (see fig. 5). The refining market's HHI for PADD V--the West Coast--increased from 937 to 1267, an increase of 330, between 1990 and 2000 and changed the West Coast refining market, which produces most of the gasoline it consumes, from unconcentrated to moderately concentrated by the end of the decade (see fig. 6). We estimated a high and statistically significant degree of correlation between merger activity and the HHIs for refining in PADDs I, II, and V for 1991 through 2000. Specifically, the corresponding correlation numbers are 91 percent for PADD V (West Coast), 93 percent for PADD II (Midwest), and 80 percent for PADD I (East Coast). While mergers were positively correlated with refining HHIs in PADDs III and IV--the Gulf Coast and the Rocky Mountains--the estimated correlations were not statistically significant. In wholesale gasoline markets, market concentration increased broadly throughout the United States between 1994 and 2002. Specifically, we found that 46 states and the District of Columbia had moderately or highly concentrated markets by 2002, compared to 27 in 1994. Evidence from various sources indicates that, in addition to increasing market concentration, mergers also contributed to changes in other aspects of market structure in the U.S. petroleum industry that affect competition--specifically, vertical integration and barriers to entry. However, we could not quantify the extent of these changes because of a lack of relevant data. Vertical integration can conceptually have both pro- and anticompetitive effects. Based on anecdotal evidence and economic analyses by some industry experts, we determined that a number of mergers that have occurred since the 1990s have led to greater vertical integration in the U.S. petroleum industry, especially in the refining and marketing segment. For example, we identified eight mergers that occurred between 1995 and 2001 that might have enhanced the degree of vertical integration, particularly in the downstream segment. Concerning barriers to entry, our interviews with petroleum industry officials and experts provide evidence that mergers had some impact on the U.S. petroleum industry. Barriers to entry could have implications for market competition because companies that operate in concentrated industries with high barriers to entry are more likely to possess market power. Industry officials pointed out that large capital requirements and environmental regulations constitute barriers for potential new entrants into the U.S. refining business. For example, the officials indicated that a typical refinery could cost billions of dollars to build and that it may be difficult to obtain the necessary permits from the relevant state or local authorities. According to some petroleum industry officials that we interviewed, gasoline marketing in the United States has changed in two major ways since the 1990s. First, the availability of unbranded gasoline has decreased, partly due to mergers. Officials noted that unbranded gasoline is generally priced lower than branded. They generally attributed the decreased availability of unbranded gasoline to one or more of the following factors: There are now fewer independent refiners, who typically supply mostly unbranded gasoline. These refiners have been acquired by branded companies, have grown large enough to be considered a brand, or have simply closed down. Partially or fully vertically integrated oil companies have sold or mothballed some refineries. As a result, some of these companies now have only enough refinery capacity to supply their own branded needs, with little or no excess to sell as unbranded. Major branded refiners are managing their inventory more efficiently, ensuring that they produce only enough gasoline to meet their current branded needs. We could not quantify the extent of the decrease in the unbranded gasoline supply because the data required for such analyses do not exist. The second change identified by these officials is that refiners now prefer dealing with large distributors and retailers because they present a lower credit risk and because it is more efficient to sell a larger volume through fewer entities. Refiners manifest this preference by setting minimum volume requirements for gasoline purchases. These requirements have motivated further consolidation in the distributor and retail sectors, including the rise of hypermarkets. Our econometric modeling shows that the mergers we examined mostly led to higher wholesale gasoline prices in the second half of the 1990s. The majority of the eight specific mergers we examined--Ultramar Diamond Shamrock (UDS)-Total, Tosco-Unocal, Marathon-Ashland, Shell-Texaco I (Equilon), Shell-Texaco II (Motiva), BP-Amoco, Exxon-Mobil, and Marathon Ashland Petroleum (MAP)-UDS--resulted in higher prices of wholesale gasoline in the cities where the merging companies supplied gasoline before they merged. The effects of some of the mergers were inconclusive, especially for boutique fuels sold in the East Coast and Gulf Coast regions and in California. For the seven mergers that we modeled for conventional gasoline, five led to increased prices, especially the MAP-UDS and Exxon-Mobil mergers, where the increases generally exceeded 2 cents per gallon, on average. For the four mergers that we modeled for reformulated gasoline, two-- Exxon-Mobil and Marathon-Ashland--led to increased prices of about 1 cent per gallon, on average. In contrast, the Shell-Texaco II (Motiva) merger led to price decreases of less than one-half cent per gallon, on average, for branded gasoline only. For the two mergers--Tosco-Unocal and Shell-Texaco I (Equilon)--that we modeled for gasoline used in California, known as California Air Resources Board (CARB) gasoline, only the Tosco-Unocal merger led to price increases. The increases were for branded gasoline only and exceeded 6 cents per gallon, on average. For market concentration, which captures the cumulative effects of mergers as well as other competitive factors, our econometric analysis shows that increased market concentration resulted in higher wholesale gasoline prices. Prices for conventional (non-boutique) gasoline, the dominant type of gasoline sold nationwide from 1994 through 2000, increased by less than one-half cent per gallon, on average, for branded and unbranded gasoline. The increases were larger in the West than in the East--the increases were between one-half cent and one cent per gallon in the West, and about one- quarter cent in the East (for branded gasoline only), on average. Price increases for boutique fuels sold in some parts of the East Coast and Gulf Coast regions and in California were larger compared to the increases for conventional gasoline. The wholesale prices increased by an average of about 1 cent per gallon for boutique fuel sold in the East Coast and Gulf Coast regions between 1995 and 2000, and by an average of over 7 cents per gallon in California between 1996 and 2000. Our analysis shows that wholesale gasoline prices were also affected by other factors included in the econometric models, including gasoline inventories relative to demand, supply disruptions in some parts of the Midwest and the West Coast, and refinery capacity utilization rates. For refinery capacity utilization rates, we found that prices were higher by about an average of one-tenth to two-tenths of 1 cent per gallon when utilization rates increased by 1 percent. We found that prices were higher because higher refinery capacity utilization rates leave little room for error in predicting short-run demand. During the period of our study, refinery capacity utilization rates at the national level averaged about 94 percent per week. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or other Members of the Subcommittee may have. For further information about this testimony, please contact me at (202) 512-3841. Key contributors to this testimony included Godwin Agbara, John A. Karikari, and Cynthia Norris. 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.	Gasoline is subject to dramatic price swings. A multitude of factors affect U.S. gasoline markets, including world crude oil costs and limited refining capacity. Since the 1990s, another factor affecting U.S. gasoline markets has been a wave of mergers in the petroleum industry, several between large oil companies that had previously competed with each other. For example, in 1999, Exxon, the largest U.S. oil company, merged with Mobil, the second largest. This testimony is based primarily on Energy Markets: Effects of Mergers and Market Concentration in the U.S. Petroleum Industry ( GAO-04-96 , May 17, 2004). This report examined mergers in the industry from the 1990s through 2000, the changes in market concentration (the distribution of market shares among competing firms) and other factors affecting competition in the industry, how U.S. gasoline marketing has changed since the 1990s, and how mergers and market concentration in the industry have affected U.S. gasoline prices at the wholesale level. To address these issues, GAO purchased and analyzed a large body of data and developed state-of-the art econometric models for isolating the effects of eight specific mergers and increased market concentration on wholesale gasoline prices. Experts peer-reviewed GAO's analysis. Mergers have altered the structure of the U.S. petroleum industry, including the refining market. Over 2,600 mergers have occurred in the U.S. petroleum industry since the 1990s, mostly later in the period. Industry officials cited various reasons for the mergers, particularly the need for increased efficiency and cost savings. Economic literature also suggests that firms sometimes merge to enhance their ability to control prices. Partly because of the mergers, market concentration has increased in the industry, mostly in the downstream (refining and marketing) segment. For example, market concentration in refining increased from moderately to highly concentrated in the East Coast and from unconcentrated to moderately concentrated in the West Coast. Concentration in the wholesale gasoline market increased substantially from the mid-1990s so that by 2002, most states had either moderately or highly concentrated wholesale gasoline markets. Anecdotal evidence suggests that mergers also have changed other factors affecting competition, such as the ability of new firms to enter the market. Two major changes have occurred in U.S. gasoline marketing related to mergers, according to industry officials. First, the availability of generic gasoline, which is generally priced lower than branded gasoline, has decreased substantially. Second, refiners now prefer to deal with large distributors and retailers, which has motivated further consolidation in distributor and retail markets. Based on data from the mid-1990s through 2000, GAO's econometric analyses indicate that mergers and increased market concentration generally led to higher wholesale gasoline prices in the United States. Six of the eight mergers GAO modeled led to price increases, averaging about 1 cent to 2 cents per gallon. Increased market concentration, which reflects the cumulative effects of mergers and other competitive factors, also led to increased prices in most cases. For example, wholesale prices for boutique fuels sold in the East and Gulf Coasts--fuels supplied by fewer refiners than conventional gasoline--increased by about 1 cent per gallon, while prices for boutique fuels sold in California increased by over 7 cents per gallon. GAO also identified price increases of one-tenth of a cent to 7 cents that were caused by other factors included in the models, particularly low gasoline inventories relative to demand, supply disruptions in some regions, and high refinery capacity utilization rates. For example, we found that a 1 percent increase in refinery capacity utilization rates resulted in price increases of one-tenth to two-tenths of a cent per gallon. FTC disagreed with GAO's methodology and findings. However, GAO believes its analyses are sound.	3,278	857
Among the pre-Medicare population, the primary source of health insurance is private coverage. In the first half of 2012, nearly 69 percent of individuals in this population were privately insured. An additional 13 percent of individuals obtained coverage through government programs such as Medicaid. However, a significant portion--more than 18 percent--was uninsured. Previous research has demonstrated that individuals with health insurance coverage tend to be in better health than individuals without coverage. However, research regarding the extent to which having prior health insurance coverage affects spending and use of medical services after enrolling in Medicare has produced inconsistent results. For example, one group of researchers found that having prior insurance was linked to lower spending and lower rates of hospitalization after enrolling in Medicare, while another group of researchers found that having prior insurance had no effect on beneficiaries' spending or rates of hospitalization after Medicare enrollment.researchers found, however, that beneficiaries without prior insurance were less likely to visit physician offices and more likely to visit hospital emergency and outpatient departments after enrolling in Medicare, which could indicate that beneficiaries without prior insurance continued to access the health care system differently after Medicare enrollment. This latter group of Subsequent commentary and analysis by both research groups suggests that the conflicting results may be primarily attributable to different definitions of prior insurance and different analytical approaches to control for differences in beneficiaries with and without prior insurance. The group that found that having prior insurance was linked to lower spending used a more rigorous definition of prior insurance based on a longitudinal assessment of insurance coverage before age 65 rather than a point-in- time assessment. This group included beneficiaries who were enrolled in Medicare, Medicaid, and other government health programs before age 65 in its analysis and used a statistical weighting methodology to control for the possibility of reverse causality between health status and insurance coverage. More specifically, some individuals may have experienced declining health before age 65 that led to loss of employment, loss of private insurance coverage, and subsequent enrollment in government health programs. The group that did not find that having prior insurance was linked to lower spending criticized the inclusion of these beneficiaries, noting that many individuals transition to government health programs before age 65 because of poor health, thereby resulting in an overestimate of the effect of having prior insurance on their Medicare spending after age 65. These researchers also criticized the statistical weighting methodology used to control for the possibility that beneficiaries entered these programs because of poor health, contending that the data used in the weighting methodology were not sufficiently detailed to adequately adjust for this possibility. Beneficiaries with prior continuous insurance were more likely than those without prior continuous insurance to report being in good health or better in the 6 years after Medicare enrollment. On average, the predicted probability of reporting being in good health or better in the first 2 years in Medicare was approximately 84 percent for beneficiaries with prior continuous insurance and approximately 79 percent for beneficiaries without prior continuous insurance. Although the predicted probabilities of beneficiaries who reported being in good health or better decreased over time for both those with and without prior continuous insurance, the percentage point difference increased slightly. In total, having prior continuous insurance raised the predicted probability that a beneficiary reported being in good health or better by nearly 6 percentage points in the first 6 years after Medicare enrollment. (See table 1.) According to previous research, there are reasons why Medicare beneficiaries with prior continuous insurance may be healthier than those without prior continuous insurance. Because of financial constraints, beneficiaries without prior continuous insurance may have difficulty accessing medical services that could help them improve their health before they enroll in Medicare. In addition, being uninsured before Medicare may have effects on beneficiaries' health that remain for some time. For example, if a beneficiary without prior continuous insurance is diagnosed with diabetes and has inadequate access to care before Medicare, the beneficiary may develop complications that increase the risk for adverse health events for years to come, even after the diabetes is controlled. There were differences in Medicare spending and use of services between beneficiaries with and without prior continuous insurance. In particular, compared with beneficiaries without prior continuous insurance, beneficiaries with prior continuous insurance had significantly lower total spending during the first year in Medicare. Beneficiaries with prior continuous insurance had lower total program spending during the first year in Medicare compared with those without prior continuous insurance.Medicare, average predicted total spending for beneficiaries with and without prior continuous insurance was $4,390 and $6,733, respectively-- a difference of $2,343, or 35 percent. Because the difference in total spending was the greatest during the first year in Medicare, it is possible that beneficiaries without prior continuous insurance had a pent-up demand for medical services in anticipation of coverage at age 65. Table 2 shows predicted spending, as well as the difference in predicted spending, during the first 5 years in Medicare for beneficiaries with and without prior continuous insurance. Beneficiaries with prior continuous insurance had more physician office visits during the first 5 years in Medicare than those without prior continuous insurance. Specifically, during the first 5 years in Medicare, the difference in the average predicted number of physician office visits between beneficiaries with and without prior continuous insurance ranged from 1.3 to 2.5, or 23 to 46 percent (see table 4). This utilization pattern may indicate that, even after Medicare enrollment, beneficiaries with prior continuous insurance continued to access medical services differently compared with those without prior continuous insurance. For example, beneficiaries with prior continuous insurance may have been more likely to have physician office visits before Medicare if their insurance covered these visits. According to our analyses, the number of institutional outpatient visits was similar for beneficiaries with and without prior continuous insurance. However, because we found that beneficiaries without prior continuous insurance had higher institutional outpatient spending, it is possible that they required more costly outpatient care than beneficiaries with prior continuous insurance. Previous research regarding the extent to which health insurance coverage prior to Medicare enrollment affects beneficiaries' spending and use of services after enrollment has been inconclusive, possibly because of different definitions of prior insurance and different approaches for dealing with the potential for reverse causality between health status and health insurance coverage. Like researchers who did not find significant differences in Medicare spending between beneficiaries with and without prior insurance coverage, we excluded individuals who were enrolled in government health programs prior to age 65 from our analysis because of the possibility that they lost insurance coverage because of poor health, which could have resulted in an overestimate of the effect of having prior insurance on Medicare spending after age 65. However, like researchers who did find significant differences in Medicare spending between these groups, we used a more rigorous definition of prior insurance based on a longitudinal assessment of insurance coverage before age 65 rather than a single point in time. Using our methodology, we found significant differences in Medicare spending between beneficiaries with and without prior continuous insurance. This study adds to the body of evidence suggesting that beneficiaries with prior insurance used fewer or less costly medical services in Medicare compared with those without prior insurance, because they either were in better health or were accustomed to accessing medical services differently. In particular, we found that beneficiaries with prior continuous insurance were more likely than those without prior continuous insurance to report being in good health or better in the 6 years after Medicare enrollment. Additionally, we found that beneficiaries without prior continuous insurance had higher total and institutional outpatient spending but did not have higher spending for physician and other noninstitutional services, suggesting that they required more intensive medical services or that they were accustomed to visiting hospitals more than physician offices. This suggests that the extent to which individuals enroll in private insurance before age 65 has implications for beneficiaries' health status and Medicare spending. We provided a draft of this report to the Department of Health and Human Services for review. In written comments, reproduced in appendix II, the department highlighted a key finding in our report that beneficiaries with prior insurance used fewer or less costly medical services in Medicare compared with those without prior insurance. As arranged with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to appropriate congressional committees and the Administrator of the Centers for Medicare & Medicaid Services (CMS). The report also will be available at no charge on GAO's website at http://www.gao.gov. If you or your staffs have any questions regarding 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 major contributions to this report are listed in appendix III. This appendix describes the data and methods we used to address our research objectives. We used data from the Health and Retirement Study (HRS) and Medicare claims. HRS is a longitudinal panel study that surveys a representative sample of more than 26,000 Americans over the age of 50 every 2 years. We used a subset of HRS data from 1996 through 2010 to obtain information on beneficiaries' health insurance coverage before Medicare, health status in Medicare, demographic characteristics, potential health risk factors, and diagnoses of health conditions. Because HRS data are survey data, these data were self- reported. We also used data from the Medicare Beneficiary Annual Summary Files and the Medicare Denominator Files from 2001 through 2010 to obtain information on Medicare spending and use of services. We worked with Acumen, LLC, to link beneficiaries' HRS data with their Medicare data and to conduct statistical analyses of their spending and use of services. We assessed the reliability of the HRS and Medicare data and determined that the data were adequate for our purposes. We conducted our work from July 2011 to December 2013 in accordance with generally accepted government auditing standards. To determine whether Medicare beneficiaries had continuous health insurance coverage before Medicare, we used HRS data to develop a composite measure. We categorized beneficiaries as having prior continuous insurance if they reported receiving private insurance through their employer or their spouse's employer in the three consecutive HRS surveys before Medicare enrollment at age 65--a period spanning approximately 6 years. To analyze beneficiaries' health status in Medicare, we collapsed the HRS self-reported health status measure, which uses a scale from 1 (excellent) to 5 (poor), to two categories. We classified beneficiaries as being in good health or better if they reported being in excellent, very good, or good health. We also used HRS data to develop a set of independent variables for our analyses. Specifically, we used data on demographic characteristics (census division, education level, income, marital status, race, and sex), potential health risk factors (body mass index and smoking status), and ever having had a diagnosis of any of eight health conditions (arthritis, cancer, diabetes, heart problem, high blood pressure, lung problem, psychological problem, and stroke). To analyze beneficiaries' spending and use of services, we used data from the Medicare Beneficiary Annual Summary Files. In particular, we obtained data on total, institutional outpatient, institutional inpatient, home health, and physician and other noninstitutional spending; institutional outpatient and physician office visits; and hospital stays. We also used enrollment data from the Beneficiary Annual Summary Files and Medicare Denominator Files to determine which beneficiaries to include in our analyses of spending and use of services. Because we used HRS data on beneficiaries' self-reported health status that were collected about every 2 years, we defined three groups of beneficiaries, drawn from multiple survey years spanning 2001 through 2010, who were in (1) their first and second years of Medicare, (2) their third and fourth years of Medicare, and (3) their fifth and sixth years of Medicare (see fig. 1). This approach allowed us to measure the effect of prior continuous insurance on self-reported health status at three points in time after Medicare enrollment. Because we used Medicare data on beneficiaries' program spending and use of services that were collected every year, we defined five groups of beneficiaries who were in their first, second, third, fourth, and fifth years of enrollment from 2001 through 2010 (see fig. 2). This approach allowed us to measure the effect of prior continuous insurance on spending and use of services for beneficiaries in each of the first 5 years of Medicare enrollment. For all of our analyses, we excluded beneficiaries from our study populations because of missing data and design and methodological issues. Specifically, we excluded beneficiaries who died before age 65; beneficiaries who were over age 65 as of January 31, 2001; beneficiaries who did not participate in all three HRS surveys in their pre-Medicare period; and beneficiaries who did not respond to relevant HRS questions about insurance during their pre-Medicare period. We excluded beneficiaries who were enrolled in Medicare or Medicaid before age 65 because their enrollment in these programs may have been due, at least in part, to poor health, which would indicate that their health status affected their insurance coverage rather than the other way around. We chose to exclude these beneficiaries to avoid overestimating the effects of having prior continuous insurance on health status, spending, and use of services. In addition, we excluded beneficiaries who reported receiving coverage from the Veterans Health Administration before age 65 because their Medicare spending and use of services might not fully represent their overall use of medical services. For our analyses of spending and use of services, we applied additional exclusion criteria to define our study populations. We excluded Medicare Advantage beneficiaries because they did not have fee-for-service data that could be linked to HRS data. In addition, we excluded beneficiaries who were not enrolled in both Medicare Parts A and B for all months they were alive during a given year because we did not have complete information on their spending and use of services. After the exclusions, the number of beneficiaries in our three study populations for our health status analyses ranged from 3,201 for the first group to 2,001 for the third group. The number of beneficiaries in our five study populations for our analyses of spending and use of services ranged from 1,592 for the first group to 1,152 for the fifth group. To examine the relationship between Medicare beneficiaries' prior continuous insurance and their self-reported health status, we used logistic regression analysis. In particular, we modeled beneficiaries' self- reported health status during three periods after Medicare enrollment. We also predicted probabilities of their reporting being in good health or better assuming both that they did and that they did not have prior continuous insurance. In all of our analyses, we included the following independent variables: prior continuous insurance, demographic characteristics, potential health risk factors, and ever having had a diagnosis of any of eight health conditions. See table 5 for an example of results from one of the three models that we conducted for our analyses of health status. To examine the relationship between Medicare beneficiaries' prior continuous insurance and their spending and use of services, we used generalized linear models because our spending and service variables had skewed distributions and a high proportion of zero values. For example, for beneficiaries in their first year of Medicare enrollment, 30 percent of beneficiaries in our study population had no institutional outpatient visits and therefore no institutional outpatient spending. We modeled total, institutional outpatient, and physician and other noninstitutional spending and institutional outpatient and physician office visits for beneficiaries in each of the first 5 years of Medicare enrollment. We predicted values for these variables assuming both that beneficiaries did and that beneficiaries did not have prior continuous insurance. In all of our analyses, we included the following independent variables: prior continuous insurance, demographic characteristics, potential health risk factors, ever having had a diagnosis of any of eight health conditions, and the number of months a beneficiary was alive during the year. For our spending analyses, we used the price index from the Personal Health Care Expenditure component of the CMS National Health Expenditure Accounts to express all spending in 2011 dollars. This approach adjusted for inflation by removing the effects of health care price-level changes between 2001 and 2010. See table 6 for an example of results from 1 of the 25 models that we ran for our analyses of spending and use of services. Because we used multiple exclusion criteria to define our study populations, our results might not be representative of the entire Medicare population. To compare our study populations with the entire Medicare population, we examined certain characteristics of these populations-- gender, race, and census division (see tables 7 and 8). We selected these characteristics because data on these characteristics were available in each of the data sources that we used. Because we only had access to Medicare Denominator File data for 2003 through 2010, we compared characteristics for beneficiaries in their first or second year of Medicare enrollment from 2003 through 2010. On the basis of this analysis, we determined that our study populations and the entire Medicare population were comparable. However, we noted small differences between the populations. For example, compared with the entire Medicare population, our study populations included slightly higher percentages of females. We excluded Medicare beneficiaries who were enrolled in Medicaid before age 65 from our primary analyses because their enrollment in this program may have been due, at least in part, to poor health. To determine the effect, if any, of removing these beneficiaries from our analyses, we conducted supplementary analyses of Medicare spending and use of services that included these beneficiaries. Results for most of the dependent variables (e.g., total spending, physician and other noninstitutional spending, physician office visits, and institutional outpatient visits) were similar to our original results. However, beneficiaries with prior continuous insurance only had lower institutional outpatient spending during the first year in Medicare, rather than during the first and second years in Medicare, when we included these beneficiaries. In addition to the contact listed above, Christine Brudevold, Assistant Director; George Bogart; David Grossman; Elizabeth T. Morrison; Aubrey Naffis; and Eric Wedum made key contributions to this report.	Nearly 7 million individuals aged 55 to 64--more than 18 percent of the pre-Medicare population--lacked health insurance coverage in the first half of 2012. Health insurance protects individuals from the risk of financial hardship when they need medical care, and uninsured individuals may refrain from seeking necessary care because of the cost. If they forgo medical care beforehand, these individuals may be in worse health and need costlier medical services after enrolling in Medicare compared to those with prior insurance. GAO was asked to review the effects of having prior health insurance coverage on Medicare beneficiaries. This report examines the health status, program spending, and use of services of Medicare beneficiaries with and without continuous health insurance coverage before Medicare enrollment. To examine the effects of beneficiaries' prior insurance coverage, GAO used data from the Health and Retirement Study and Medicare claims to conduct two types of multivariate analysis. GAO predicted probabilities of beneficiaries' reporting being in good health or better and values for program spending and beneficiaries' use of services. In comments on a draft of this report, the Department of Health and Human Services highlighted a key finding in GAO's report that beneficiaries with prior insurance used fewer or less costly medical services in Medicare compared with those without prior insurance. Beneficiaries with continuous health insurance coverage for approximately 6 years before enrolling in Medicare were more likely than those without prior continuous insurance to report being in good health or better during the first 6 years in Medicare. In particular, having prior continuous insurance raised the predicted probability that a beneficiary reported being in good health or better by nearly 6 percentage points during the first 6 years in Medicare. Beneficiaries with prior continuous insurance had lower total program spending during the first year in Medicare compared with those without prior continuous insurance. Specifically, during the first year in Medicare, beneficiaries with prior continuous insurance had approximately $2,300, or 35 percent, less in average predicted total spending than those without prior continuous insurance. Similarly, beneficiaries with prior continuous insurance had lower institutional outpatient spending--for example, spending for services provided in a hospital outpatient setting--during the first and second years in Medicare compared with those without prior continuous insurance. In contrast, physician and other noninstitutional spending--spending for services provided by physicians, clinical laboratories, free-standing ambulatory surgical centers, and other noninstitutional providers--were similar during the early years in Medicare for beneficiaries with and without prior continuous insurance. However, during the fourth and fifth years in Medicare, beneficiaries with prior continuous insurance had physician and other noninstitutional spending that was about 30 percent higher than beneficiaries without prior continuous insurance. Beneficiaries with prior continuous insurance had more physician office visits during the first 5 years in Medicare compared with those without prior continuous insurance. Specifically, during the first 5 years in Medicare, the difference in the average predicted number of physician office visits between beneficiaries with and without prior continuous insurance ranged from 1.3 to 2.5, or 23 to 46 percent. This utilization pattern may indicate that, even after Medicare enrollment, beneficiaries with prior continuous insurance continued to access medical services differently from those without prior continuous insurance. The number of institutional outpatient visits was similar for beneficiaries with and without prior continuous insurance for the first 5 years after Medicare enrollment. Taken together, GAO's results show that, consistent with those of some other researchers, beneficiaries with prior continuous insurance used fewer or less costly medical services compared with beneficiaries without such insurance during the early years in Medicare, because they either were in better health or were accustomed to accessing medical services differently. This suggests that the extent to which individuals enroll in private insurance before age 65 has implications for beneficiaries' health status and Medicare spending.	3,728	766
The sole purpose of Newark AFB is to house and support the large industrial complex comprising the AGMC. Supporting two Air Force missions--depot maintenance and metrology and calibration--AGMC provides depot level maintenance of inertial guidance and navigation systems and components and displacement gyroscopes for the Minuteman and Peacekeeper intercontinental ballistic missiles and most of the Air Force's aircraft. In fiscal year 1994, AGMC's depot maintenance workload consisted of about 900,000 hours; almost 10,500 items were produced to support repair requirements for 66 Air Force, Navy, and Army systems and components. This work was accomplished by about 500 maintenance and engineering personnel and 325 management and support personnel. AGMC is different from the Air Force air logistics centers (ALC) in that it does not have weapon system and item management responsibility collocated at the same base. For Air Force systems repaired at AGMC, weapon system and item management functions are performed primarily at the Ogden or Oklahoma City ALCs. However, some of the engineering support normally provided by the system program management offices at ALCs is performed at AGMC for systems it repairs. In its second Air Force mission, metrology and calibration, AGMC performs overall technical direction and management of the Air Force Metrology and Calibration Program and operates the Air Force Measurement Standards Laboratory. About 200 personnel are involved in the metrology and calibration mission--109 in generating technical orders, certification of calibration equipment, and management operations and 89 in the standards laboratory. As the single manager for the Air Force Metrology and Calibration Program, AGMC provides all metrology engineering services for the Air Force. The standards laboratory complex, consisting of 47 laboratories, serves as the primary laboratory for calibrating and certifying measurement standards used worldwide in all Air Force precision measurement equipment laboratories. In fiscal year 1994, the standards laboratory produced about 11,500 calibrated items. The Department of Defense (DOD) considered AGMC's work conducive to conversion to the private sector and recommended closing Newark AFB/AGMC through privatization and/or transferring the workload to other depots. DOD justified the closure by (1) identifying at least 8.7 million hours of excess Air Force depot maintenance capacity, with the closure of AGMC expected to reduce this excess by 1.7 million hours, and (2) applying the eight base closure criteria to Air Force bases having depots and ranking Newark AFB low relative to the others (see app. II for base closure criteria). DOD assigned a low military value to Newark AFB primarily because it was a single mission base with no airfield. DOD estimated that implementing its recommendation on Newark AFB/AGMC would cost $31.3 million, result in an annual savings of $3.8 million, and have an 8-year payback period for closure and relocation expenses. In our report on the base closure and realignment recommendations and selection process, we estimated that the Newark AFB/AGMC closure costs would be $38.29 million, with a 13-year payback period. BRAC determined that the AGMC workload could either be contracted out or privatized-in-place at the same location, although the BRAC noted that industry interest in privatization-in-place was limited. The BRAC recommended closing Newark AFB/AGMC--noting that some workload will move to other depot maintenance activities, including the private sector. The President agreed with the overall BRAC recommendations dealing with maintenance depots, including the closure of AGMC. The Congress did not challenge the overall BRAC recommendations. The Air Force has begun the implementation of the closure and privatization of Newark AFB/ AGMC. Implementation of the Newark AFB/AGMC closure through privatization is still in the early phases, with many details yet to be worked out. In general, the Air Force has developed a three-pronged approach to implementing BRAC's decision. First, four systems, representing about 3 percent of AGMC's existing depot maintenance workload, will be transferred to other Air Force depots. Second, ownership of the Newark AFB/AGMC property and facilities will be transferred to a local reuse commission. The commission is to lease space to one prime guidance system repair contractor that will provide depot maintenance work, one prime metrology contractor that will perform calibrations and author calibration manuals, and the remaining organic metrology program management contingent. While privatization-in-place is the goal, based on a strategy option announced in the Commerce Business Daily, contractors may elect to move workload to other facilities. Hypothetically, this option could result in all workload moving to other contractor locations--should the winning contractor(s) demonstrate that moving workload to other locations would provide the best value to the government. Third, the metrology and calibration mission will be continued at AGMC, with some functions privatized and another continued as an Air Force activity reporting to AFMC Headquarters or one of the ALCs. The Air Force originally planned to privatize all activities related to the metrology and calibration mission, but it later determined that the Air Force Metrology and Calibration Program's materiel group manager function could not be privatized because it is a function considered to be "inherently governmental." In performing this function, AGMC civilian and military employees provide policy and direction for all precision measurement equipment laboratories Air Force wide, inspect these laboratories for compliance with required policies and procedures, and procure calibration standards used in calibration laboratories. Current plans for the metrology and calibration program provide for (1) retaining about 130 government employees to provide the metrology and calibration management function--with the Air Force leasing space at AGMC from the local reuse commission and (2) contracting out the primary standards laboratory and technical order preparation, which will also remain at AGMC, with the contractor leasing space from the reuse commission. The Air Force plans to retain ownership of mission-related maintenance and metrology and calibration equipment, which will be provided to the winning contractor(s) as government-furnished equipment. AGMC accountable records indicate the value of the depot maintenance equipment is $297.5 million and the value of the metrology and calibration equipment $28.5 million. Details such as the cost of the lease arrangement, allocation of utility and support costs between the Air Force and contractor(s), and the determination of whether the government or the contractor will be responsible for maintaining the equipment are not yet known. To manage the AGMC privatization, the Air Force established a program management office at Hill AFB. This office is responsible for developing the statement of work, request for proposal, acquisition plan, source selection plan, and related documents. The award is scheduled for September 29, 1995. Several key milestones leading up to contract award have slipped, compressing the schedule for the remaining tasks in the pre-contract-award period. Air Force officials describe this schedule as optimistic. After contract award, the Air Force plans to initiate a phased process for transitioning individual maintenance workloads to the contractor. Air Force officials stated that this 12-month transition period reduces the risk of interrupting ongoing operations and allows the contractor(s) an opportunity to build up an infrastructure and trained workforce. However, according to the program management office, a "turn-key" transition where the contractor becomes fully responsible for the AGMC workload at one point in time is the preferred strategy of the ALC system managers and may be adopted. Our work has identified several concerns regarding the cost, savings, and payback period for the Air Force's implementation of the AGMC BRAC decision. These include concerns that (1) the projected cost of closing AGMC has doubled and may increase further; (2) the $3.8 million annual savings projected to result from AGMC's closure is not likely to be realized because of potentially higher costs for contract administration, contractor profit, possible recurring proprietary data costs, and other factors that have not been considered in the cost computation; and (3) the payback period could be extended to over 100 years or never, depending upon the Air Force's ability to contain one-time closure costs and recurring costs of performing the AGMC mission after privatization. Recognizing that projected closure costs have increased, in August 1994, the Air Force base closure group validated a Newark AFB/AGMC closure budget of $62.2 million. This amount is $30.9 million more than the original projection of $31.3 million. Almost all of the increase is attributable to the estimated $30.5 million transition cost to convert from Air Force to contractor operation. According to Air Force officials, the original cost estimate only included costs associated with transferring and separating personnel under the base closure process and for transferring a limited amount of workload to other Air Force depots. They noted that DOD has no prior experience with privatizing a large, complex depot maintenance facility. Additionally, since the development of the closure and privatization option for AGMC was done quickly, the time available to identify all the factors and costs associated with this option at the time of the 1993 BRAC was limited. We recomputed the payback period using DOD's 1993 Cost of Base Realignment Actions (COBRA) model. We used the estimated nonrecurring costs validated by the Air Force in August 1994 (adjusted for inflation) and assumed that post-closure operations would result in $3.8 million annual savings as DOD originally projected in 1993. The model indicated that, with these costs and assumptions, the payback period would be over 100 years rather than 8 years as originally projected by DOD. However, DOD approved discount rate used in the COBRA model has been reduced from 7 percent in the 1993 BRAC process to 2.75 percent in 1995. Consequently, we adjusted the COBRA model to the revised discount factor--holding all other variables constant--and found the revised payback period to be 17 years. Achieving a 17-year payback is dependent on no further increase in one-time closure costs and achieving the $3.8 million annual post-closure operational cost savings originally projected by DOD. Our work has determined that neither of these assumptions is likely because of significant cost uncertainties. While the Air Force has recognized that an estimated $62.2 million will be required as BRAC funded costs of closure, it also recognizes there will be additional one-time closure costs not funded by BRAC. For example, an estimated $4.86 million will be needed to cover costs such as interim health benefits for personnel separating from government employment. Also, there will be environmental cleanup costs of some undetermined amount. Thus far, $3.62 million has been identified for environmental cleanup. As already indicated, we have also identified other potential closure costs that the Air Force has not included. One is the cost to acquire the right to provide data some equipment manufacturers consider proprietary to contractors expecting to bid on the AGMC maintenance workload. Proprietary rights involve the claim of ownership by equipment manufacturers of some unique information, such as technical data, drawings, and repair processes, to protect the manufacturer's market position by prohibiting disclosure outside the government. An Air Force official said cost estimates were submitted by four equipment manufacturers claiming proprietary rights, and these estimates were "absurdly high." While we cannot identify what these additional one-time costs will be, any unidentified costs push the payback period even further. At the time AGMC was identified for closure and privatization, DOD estimated $68.09 million annual cost for contractor operations and $71.84 million in net annual savings in personnel and overhead costs--resulting in an estimated annual savings of $3.8 million. Recurring costs after AGMC closure and privatization probably cannot be determined with any degree of assurance until after contract negotiation and award. However, some Air Force officials have estimated that rather than achieving savings, annual recurring costs could actually exceed current costs of operations. For example, an Air Force Materiel Command (AFMC) memorandum noted that prevailing labor rates and private sector charges for similar items suggest that it will be difficult to keep the annual contract value the same as the current annual civilian salary--a key assumption in achieving the originally projected $3.8 million annual savings. An AFMC analysis determined that, assuming these costs are comparable, additional costs for profit and contract administration could result in post-closure operation costs exceeding the current operation costs by at least $1.8 million. Additional costs for proprietary data and taxes could increase the post-closure operation costs by $3.8 million annually. A November 1994 AFMC memorandum informed system managers of increased funding requirements for AGMC workloads to cover anticipated increases in costs of operation under privatization-in-place. A December 1994 meeting of the Acquisition Strategy Panel confirmed the projected increases. For example, the projected fiscal year 1997 costs after privatization-in-place were about 107 percent higher than projected costs under government operation. Additionally, the projected costs of contractor operations for the 5-year period between fiscal years 1996 and 2000 were estimated to be over $456 million more than previously estimated costs of government operations over that period. Other privatization issues relate to (1) proprietary data claims, (2) the effect of the closure on excess depot maintenance capacity, (3) the impact of privatizing core workload, (4) the segmentation of the metrology and calibration mission, and (5) the transfer of AGMC property and facilities to the local reuse commission. The proprietary rights to technical data is unresolved for some workloads to be contracted out and could greatly increase the costs of privatization. In this case, when contractors have a legitimate claim of ownership, the government cannot make this information available to other private sector firms that compete for the AGMC maintenance workload. The amount of depot maintenance workload at AGMC that involves proprietary data, the extent to which owners of proprietary rights are willing to sell these rights to the government, or the potential cost of this acquisition have not been determined. Air Force officials noted they are investigating possible methods for the prospective bidders to gain the necessary data rights as part of their proposal. However, proprietary data problems have already contributed to the delay of several key program milestones, including preparation of the statement of work and acquisition and source selection plans, and are a potential barrier to the AGMC privatization. The privatization of AGMC will not reduce excess capacity by the 1.7 million hours previously estimated if privatization-in-place is completed as currently planned. Since many of the systems and components currently repaired at AGMC are not repaired elsewhere, the AGMC depot maintenance capability does not generally duplicate repair capability found elsewhere. Where duplicate capability exists, consolidating like repair workloads and eliminating redundancies would be expected to generate economies and efficiencies. Currently, it is planned that almost all the AGMC capability will be retained in place for use by private contractors. The Air Force will retain ownership of depot plant equipment and the standards laboratory equipment, which AGMC accountable records indicate are valued at about $326 million. With this arrangement, it is difficult to understand how DOD projects the elimination of 1.7 million hours of excess capacity. All of AGMC's maintenance workload has been identified as core work to be retained in government facilities. Since 1993, when the Air Force recommended that AGMC be closed and privatized, each of the services identified depot maintenance capability for which it was considered essential that this capability be retained as organic DOD capability--referred to as core capability. According to Office of the Secretary of Defense guidance, core exists to minimize operational risks and to guarantee required readiness for critical weapon systems. The Air Force determined that 100 percent of the AGMC depot maintenance workload is core. AGMC is the only Air Force depot activity having all its repair workload defined as core--with other depots' core capability ranging from 59 percent at Sacramento ALC to 84 percent at Warner Robins ALC. An AFMC memorandum noted some inconsistency in planning to contract out workload defined as 100 percent core, while continuing to support the need for retaining core capability in DOD facilities. However, the memorandum noted that the inherent risk of contracting out can be minimized if the workload is retained at AGMC as a result of privatization-in-place. Air Force officials stated that retaining government ownership of the mission-related equipment at AGMC is essential to controlling the risk of privatizing this critical core workload. The current plan to retain part of the metrology and calibration mission to be performed by Air Force personnel while privatizing the standards laboratory function may be neither practicable nor cost-effective. We found that the standards laboratory function is generally the training ground where Air Force civilian personnel develop the skills they need to perform the other metrology and calibration functions that will be continued at AGMC as a government operation. We discussed this issue with personnel from both the Army and the Navy who maintain similar organic capabilities to support service metrology and calibration management functions. They noted that from their perspective, contracting part of this work while maintaining most of it as a government activity would not be desirable. Navy officials noted that 100 percent of their metrology and calibration program management personnel were formerly employed in the primary standards laboratory. Army and Navy officials stated that the experience and training gained from their prior work in laboratories was essential to performance of program management responsibilities. We questioned the viability of having the Air Force interservice its metrology and calibration activities to the Army and/or the Navy, which have similar activities. Army and Navy officials said they believe it would be possible to combine the Air Force metrology and calibration function with that of one or both of the other services. Air Force officials said they considered interservicing but determined that neither the Army nor the Navy facilities meet the tolerances required for calibrating some Air Force equipment or have the capacity to assume the Air Force workload. Army and Navy officials stated that an existing memorandum of agreement among the three military departments provides that if one of the primary standards laboratories loses its capability, the remaining laboratories would assist in meeting calibration requirements. These officials said they believe that interservicing or joint operations should be further considered by the Air Force. The AGMC privatization-in-place approach is based on transferring ownership of the Newark AFB/AGMC property and facilities, which the Air Force estimates to be worth about $331 million, to the local reuse commission. To make this approach work, the Air Force must transfer ownership of the property and facilities at no cost or less than fair market value. Whether this transfer will take place is unclear since (1) the fair market value has not been determined and (2) agreements as to the cost of the property or means of payment and as to whether the reuse commission is willing to assume responsibility for operating the property and facilities have not been reached. To effect property transfer at below estimated fair market value, the Secretary of the Air Force must explain the cost and approve the transfer. Air Force officials noted that, pending results of the environmental impact analysis, they expect to convey the property through an economic development conveyance with very favorable terms to the local reuse commission. A local reuse commission official told us that until recently the commission believed the Newark AFB/AGMC property would be transferred to the commission at no cost. The official noted that it is questionable whether the commission will be interested in acquiring the property under other conditions. DOD historically has encountered difficulties in trying to close military bases. This makes us reluctant--absent very compelling reasons--to recommend that DOD revisit prior BRAC decisions. However, we believe that the problems being faced in implementing this decision are of such an unusual nature to warrant revisiting the planned closure and privatization of AGMC. Therefore, we recommend that the Secretaries of the Air Force and Defense reevaluate, as a part of the ongoing BRAC 1995 process, both DOD's 1993 recommendation to close Newark AFB/AGMC and the Air Force's approach to implementing the closure decision through privatization-in-place. Part of the work on this assignment resulted from our ongoing effort to review various depot maintenance issues, including an analysis of the status of DOD's efforts to implement depot closures resulting from prior BRAC decisions. We completed work for this report in December 1994. Our work was performed in accordance with generally accepted government auditing standards. We discussed a draft of this report with agency officials and have included their comments where appropriate. Our scope and methodology are discussed in greater detail in appendix I. We are sending copies of this report to the Director, Office of Management and Budget; the Secretaries of Defense and the Air Force; and other interested parties. We will make copies available to others upon request. Please contact me at (202) 512-8412 if you or your staff have any questions concerning this report. Major contributors to this report were Julia Denman, Assistant Director and Project Director, and Frank Lawson, Deputy Project Director. You asked us to review how the Department of Defense (DOD) is managing various issues related to the closure of depot maintenance activities, including (1) the allocation of workload that is currently being performed at these activities, either to DOD activities or to the commercial sector; (2) policies and procedures for the disposition of equipment at these activities; (3) policies and procedures to provide the existing workforce opportunities for employment; (4) the potential for conversion of these activities into commercial repair activities; and (5) an update of DOD's estimates for closure costs and savings as a result of implementing prior Defense Base Closure and Realignment Commission (BRAC) decisions for depot closures. We discussed the Newark Air Force Base closure and privatization of the Aerospace Guidance and Metrology Center (AGMC) with Air Force officials responsible for implementing the BRAC decision at AGMC, Air Force Materiel Command (AFMC), and Air Force headquarters. We also (1) discussed estimated closure costs and savings with Air Force officials at various locations and (2) toured the AGMC facility, conducting interviews with center personnel and reviewing historical and evolving documentation. In addition, we contacted Defense Contract Management Command, Defense Contract Audit Agency, and AFMC contracting personnel for contract-related information and Army and Navy metrology officials responsible for the primary standards laboratories to obtain information on their capability to maintain the AGMC metrology workload and their views on privatizing part of the metrology functions while continuing to keep the management function as a government operation. We analyzed laws, policies, and regulations governing core capability and Office of Management and Budget Circular A-76 and Policy Letter 92-1 for information on inherently governmental functions. To assess the impact of the increase in the estimated cost of closing Newark AFB/AGMC, we used the 1993 Cost of Base Realignment Actions model to calculate the closure and relocation cost payback period. In conducting this review, we used the same reports and statistics the Air Force uses to monitor the cost of closure and estimate the recurring costs associated with AGMC privatization. We did not independently determine their reliability. The current and future mission requirements and the impact of operational readiness of DOD's total force. The availability and condition of land, facilities, and associated airspace at both the existing and potential receiving locations. The ability to accommodate contingency, mobilization, and future total force requirements at both the existing and potential receiving locations. The cost and manpower implications. The extent and timing of potential costs and savings, including the number of years, beginning with the date of completion of the closure or realignment. The economic impact on communities. The ability of both the existing and potential receiving communities' infrastructure to support forces, missions and personnel. The environmental impact. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.	Pursuant to a congressional request, GAO reviewed the cost and savings issues related to the closure and privatization of the Newark Air Force Base Aerospace Guidance and Metrology Center (AGMC). GAO found that: (1) the justification for closing AGMC is not clear; (2) the Department of Defense (DOD) considers AGMC work conducive to conversion to the private sector and has recommended closing AGMC through privatization and transferring its workload to other depots; (3) DOD estimates that closing AGMC would cost $31.3 million and would result in annual savings of $3.8 million; (4) one-time closure costs have doubled in the past year and may still be underestimated; (5) the projected costs of conducting post-privatization operations could exceed the cost of current Air Force operations and reduce or eliminate projected savings; and (6) other closure and privatization issues create uncertainty about the validity of the Air Force's planned action, including the disposition of proprietary data claims, the effect of the closure on excess depot maintenance capacity, the segmentation of the metrology and calibration mission, and the transfer of AGMC property to a local reuse commission.	5,183	246
Managed by DHS's Customs and Border Protection (CBP), SBInet is intended to strengthen CBP's ability to detect, identify, classify, track, and respond to illegal breaches at and between ports of entry. The SBI Program Executive Office, which is organizationally within CBP, is responsible for managing key acquisition functions associated with SBInet, such as requirements management and risk management. Within the Executive Office, the SBInet System Program Office (SPO) is responsible for managing the day-to-day development and deployment of SBInet. In September 2006, CBP awarded a 3-year contract to the Boeing Company for SBI, with three additional 1-year options. As the prime contractor, Boeing is responsible for designing, producing, testing, deploying, and sustaining the system. In September 2009, CBP extended its contract with Boeing for the first option year. CBP is acquiring SBInet incrementally in a series of discrete units of capabilities, referred to as "blocks." Each block is to deliver one or more system capabilities from a subset of the total system requirements. The first block, known as Block 1, is to include a mix of surveillance technologies (e.g., cameras, radars, and sensors) and C3I technologies that are to produce a common operating picture--a uniform presentation of activities within specific areas along the border. Block 1 is to be initially deployed within the Tucson Sector to the Tucson Border Patrol Station (TUS-1) and to the Ajo Border Patrol Station (AJO-1). As of May 2010, the TUS-1 system is scheduled for government acceptance in September 2010, with AJO-1 acceptance in November 2010. In January 2010, the DHS Secretary ordered a departmentwide reassessment of the program to include a comprehensive assessment of alternatives to SBInet to ensure that the department utilizes the most efficient and effective technological and operational solutions to secure the border. Pending the results of the assessment, the Secretary also froze all Block 1 expenditures beyond those needed to complete the implementation of the initial SBInet deployments to TUS-1 and AJO-1. Further, in March 2010, the department announced its plans to redeploy $50 million from its American Recovery and Reinvestment Act of 2009 funding to purchase currently available, stand-alone technology, such as remote-controlled camera systems called Remote Video Surveillance Systems, and truck-mounted systems with cameras and radar, called Mobile Surveillance Systems, to meet near-term operational needs. In order to measure system acquisition progress and promote accountability for results, organizations need to establish clear commitments around what system capabilities will be delivered, and when and where they will be delivered. In September 2008, we reported that the scope of SBInet was becoming more limited without becoming more specific, thus making it unclear and uncertain what system capabilities would be delivered when and to what locations. Accordingly, we recommended that DHS establish and baseline the specific program commitments, including the specific system functional and performance capabilities that are to be deployed to the Tucson, Yuma, and El Paso Sectors, and establish when these capabilities are to be deployed and are to be operational. To its credit, the SPO subsequently defined the scope of the first incremental block of SBInet capabilities that it intended to deploy and make operational; however, these capabilities and the number of geographic locations to which they are to be deployed have continued to shrink. For example, the number of component-level requirements to be deployed to the TUS-1 and AJO-1 locations has decreased by about 32 percent since October 2008 (see fig. 1). In addition, the number of sectors that the system is to be deployed to was reduced from three border sectors spanning about 655 miles to two sectors spanning about 387 miles. Further, the stringency of the performance measures was relaxed, to the point that system performance is now deemed acceptable if it identifies less than 50 percent of items of interest that cross the border. According to program officials, the decreases are due to poorly defined requirements and limitations in the capabilities of commercially available system components. The result will be a deployed and operational system that does not live up to user expectations and provides less mission support than was envisioned. The success of a large-scale system acquisition program, like SBInet, depends in part on having a reliable schedule of when the program's set of work activities and milestone events will occur, how long they will take, and how they are related to one another. Among other things, a reliable schedule provides a road map for systematic execution of a program and the means by which to gauge progress, identify and address potential problems, and promote accountability. In September 2008, we reported that the program did not have an approved master schedule that could be used to guide the development of SBInet. Accordingly, we recommended that the SPO finalize and approve an integrated master schedule that reflects the timing and sequencing of SBInet tasks. However, DHS has yet to develop a reliable integrated master schedule for delivering the first block of SBInet. Specifically, the August 2009 SBInet integrated master schedule, which was the most current version available at the time of our review, did not sufficiently comply with seven of nine schedule estimating practices that relevant guidance states are important to having a reliable schedule. For example, the schedule did not adequately capture all necessary activities to be performed, including those to be performed by the government, such as obtaining environmental permits in order to construct towers. Further, the schedule did not include a valid critical path, which represents the chain of dependent activities with the longest total duration in the schedule, and it does not reflect a schedule risk analysis, which would allow the program to better understand the schedule's vulnerability to slippages in the completion of tasks. These limitations are due, in part, to the program's use of the prime contractor to develop and maintain the integrated master schedule, whose processes and tools do not allow it to include in the schedule work that it does not have under contract to perform, as well as the constantly changing nature of the work to be performed. Without having a reliable schedule, it is unclear when the first block will be completed, and schedule delays are likely to continue. The decision to invest in any system, or major system increment, should be based on reliable estimates of costs and meaningful forecasts of quantifiable and qualitative benefits over the system's useful life. However, DHS has not demonstrated the cost-effectiveness of Block 1. In particular, it has not reliably estimated the costs of this block over its entire life cycle. To do so requires DHS to ensure that the estimate meets key practices that relevant guidance states are important to having an estimate that is comprehensive, well-documented, accurate, and credible. However, DHS's cost estimate for Block 1, which is about $1.3 billion, does not sufficiently possess any of these characteristics. Further, DHS has yet to identify expected quantifiable or qualitative benefits from this block and analyze them relative to costs. According to program officials, it is premature to project such benefits given the uncertainties surrounding the role that Block 1 will ultimately play in overall border control operations, and that operational experience with Block 1 is first needed in order to estimate such benefits. While we recognize the value of operationally evaluating an early, prototypical version of a system in order to better inform investment decisions, we question the basis for spending in excess of a billion dollars to gain this operational experience. Without a meaningful understanding of SBInet costs and benefits, DHS lacks an adequate basis for knowing whether the initial system solution is cost-effective. Successful management of large information technology programs, like SBInet, depends in large part on having clearly defined and consistently applied life cycle management processes. In September 2008, we reported that the SBInet life cycle management approach had not been clearly defined. Accordingly, we recommended that the SPO revise, approve, and implement its life cycle management approach, including implementing key requirements development and management practices, to reflect relevant federal guidance and leading practices. To the SPO's credit, it has defined key life cycle management processes that are largely consistent with relevant guidance and associated best practices. However, it has not effectively implemented these processes. In particular: The SPO revised its Systems Engineering Plan, which documents its life cycle management approach for SBInet definition, development, testing, deployment, and sustainment, in November 2008, and this plan is largely consistent with DHS and other relevant guidance. For example, it defines a number of key life cycle milestone or "gate" reviews that are important in managing the program, such as initial planning reviews, requirements reviews, system design reviews, and test reviews. The plan also requires most key artifacts and program documents that DHS guidance identified as important to each gate review, such as a risk management plan and requirements documentation. However, the SPO has not consistently implemented these life cycle management activities for Block 1. For example, the SPO did not review or consider key artifacts, including plans for testing and evaluating the performance of the system, as well as assessing the robustness of the system's security capabilities, during its Critical Design Review, which is the point when, according to the plan, verification and testing plans are to be in place. The SBInet Requirements Development and Management Plan states that (1) a baseline set of requirements should be established by the time of the Critical Design Review; (2) requirements should be achievable, verifiable, unambiguous, and complete; and (3) requirements should be bi- directionally traceable from high-level operational requirements through detailed low-level requirements to test plans. Further, the plan states that ensuring traceability of requirements from lower-level requirements to higher-level requirements is an integral part of ensuring that testing is properly planned and conducted. However, not all Block 1 component requirements were sufficiently defined at the time that they were baselined at the Critical Design Review. Further, operational requirements continue to be unclear and unverifiable, which has contributed to testing challenges, including the need to extemporaneously rewrite test cases during test execution. In addition, while requirements are now largely traceable backwards to operational requirements and forward to design requirements and verification methods, this traceability has not been used until recently to verify that higher-level requirements have been satisfied. In 2008, the SPO documented a risk management approach that largely complies with relevant guidance. However, it has not effectively implemented this approach for all risks. Moreover, available documentation does not demonstrate that significant risks were disclosed to DHS and congressional decision makers in a timely fashion as we previously recommended, and, while risk disclosure to DHS leadership has recently improved, not all risks have been formally captured and thus shared. For example, some of the risks that have not been formally captured include the lack of well-defined acquisition management processes, staff with the appropriate acquisition expertise, and agreement on key system performance parameters. However, the SPO recently established a risk management process for capturing SBI enterprisewide risks, including the lack of well-defined acquisition management processes and staff expertise. Reasons cited by program officials for not implementing these processes include their decision to rely on task order requirements that were developed prior to the Systems Engineering Plan and competing SPO priorities, including meeting an aggressive deployment schedule. Until the SPO consistently implements these processes, it will remain challenged in its ability to successfully deliver SBInet. To address the program's risks, uncertainties, and acquisition management weaknesses, our report being released today provides 12 recommendations. In summary, we recommended that DHS limit future investment in SBInet to work that is either already under contract and supports the completion of Block 1 activities for deployment to TUS-1 and AJO-1 and/or provides a basis for a departmental decision on what, if any, expanded investment in SBInet is justifiable as a prudent use of DHS's resources for carrying out its border security and immigration management mission. As part of this recommendation, we reiterated prior recommendations pertaining to program management challenges and recommended that DHS address weaknesses identified in our report by, for example, ensuring that the SBInet integrated master schedule, Block 1 requirements, and the Systems Engineering Plan, among other program elements, are consistent with best practices. We also recommended that the program undertake a detailed cost-benefit analysis of any incremental block of SBInet capabilities beyond Block 1 and report the results of such analyses to CBP and DHS leadership. Further, we recommended that DHS decide whether proceeding with expanded investment in SBInet represents a prudent use of the department's resources, and report the decision, and the basis for it, to the department's authorization and appropriations committees. To DHS's credit, it has initiated actions to address our recommendations. In particular, and as previously mentioned, the department froze all funding beyond the initial TUS-1 and AJO-1 deployments until it completes a comprehensive reassessment of the program that includes an analysis of the cost and projected benefits of additional SBInet deployments, as well as the cost and mission effectiveness of alternative technologies. Further, in written comments on a draft of our report, DHS described steps it is taking to fully incorporate best practices into its management of the program. For example, DHS stated that, in response to our previous recommendations, it has instituted more rigorous oversight of SBInet, requiring the program to report to the department's Acquisition Review Board at specified milestones and receive approval before proceeding with the next deployment increment. With respect to our new recommendations, DHS stated that it is, among other things, taking steps to bring the Block 1 schedule into alignment with best practices, verifying requirements and validating performance parameters, updating its Systems Engineering Plan, and improving its risk management process. In closing, let me emphasize our long held position that SBInet is a risky program. To minimize the program's exposure to risk, it is imperative for DHS to follow through on its stated commitment to ensure that SBInet, as proposed, is the right course of action for meeting its stated border security and immigration management goals and outcomes, and once this is established, for it to ensure that the program is executed in accordance with proven acquisition management best practices. To do less will perpetuate a program that has for too long been oversold and under delivered. This concludes my prepared statement. I would be pleased to respond to any questions that you or other Members of the Subcommittees may have. For questions about this statement, please contact Randolph C. Hite at (202) 512-3439 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Individuals making key contributions to this testimony include Deborah Davis, Assistant Director; David Alexander; Rebecca Alvarez; Carl Barden; Sylvia Bascope; Tisha Derricotte; Neil Doherty; Nancy Glover; Dan Gordon; Cheryl Dottermusch; Thomas J. Johnson; Kaelin P. Kuhn; Jason T. Lee; Jeremy Manion; Taylor Matheson; Lee McCracken; Jamelyn Payan; Karen Richey; Karl W.D. Seifert; Matt Snyder; Sushmita Srikanth; Jennifer Stavros-Turner; Stacey L. Steele; Karen Talley; and Juan Tapia-Videla. 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 Secure Border Initiative (SBI) is intended to help secure the 6,000 miles of international borders that the contiguous United States shares with Canada and Mexico. The program, which began in November 2005, seeks to enhance border security and reduce illegal immigration by improving surveillance technologies, raising staffing levels, increasing domestic enforcement of immigration laws, and improving physical infrastructure along the nation's borders. Within SBI, the Secure Border Initiative Network (SBInet) is a multibillion dollar program that includes the acquisition, development, integration, deployment, and operation of surveillance technologies--such as unattended ground sensors and radar and cameras mounted on fixed and mobile towers--to create a "virtual border fence." In addition, command, control, communications, and intelligence (C3I) software and hardware are to use the information gathered by the surveillance technologies to create a real-time picture of what is transpiring within specific areas along the border and transmit the information to command centers and vehicles. The testimony summarizes our most recent report on SBInet, which provided a timely and compelling case for DHS to rethink the plans it had in place at the beginning of this year for investing in SBInet. In this regard, we showed that the scope of the initial system's capabilities and areas of deployment have continued to shrink, thus making it unclear what capabilities are to be delivered when. Moreover, DHS had yet to demonstrate the cost-effectiveness of the proposed SBInet solution, and thus whether the considerable time and money being invested represented a prudent use of limited resources. Further, DHS had not employed the kind of acquisition management rigor and discipline needed to reasonably ensure that the proposed system capabilities would be delivered on time and within budget. Collectively, we concluded that these limitations increased the risk that the proposed solution would not meet the department's stated border security and immigration management goals. To minimize the program's exposure to risk, we recommended that DHS determine whether its proposed SBInet solution satisfied the department's border security needs in the most cost-effective manner and that the department improve several key life cycle management areas. DHS largely agreed with our recommendations. More importantly, since receiving these recommendations in a draft of our report in March 2010, the Secretary of Homeland Security has taken action to limit the department's near-term investment in SBInet pending its completion of an analysis of alternative investment options. This and other planned actions are consistent with the intent of our recommendations.	3,392	525
SSA administers three major benefit programs: Old-Age and Survivors Insurance (OASI), which provides benefits to retired workers and their families and to families of deceased workers; (2) Disability Insurance (DI), which provides benefits to eligible workers with disabilities and their family members; and (3) Supplemental Security Income (SSI), which provides income for aged, blind, or disabled individuals with limited income and resources. In addition to paying benefits through these three programs, SSA also issues Social Security cards, maintains earnings records, and performs various other functions through a network of field, state and headquarter offices. SSA's field offices are the agency's primary points for providing face-to- face service to the public. In addition to processing new disability and retirement claims, field offices manage other workloads related to program integrity, such as determining whether certain individuals with disabilities remain eligible to receive disability payments based on program criteria. Besides field offices, SSA operates Social Security Card Centers, which issue Social Security numbers; Teleservice Centers, which offer services nationally via a toll-free telephone number; and Program Service Centers, which maintain earnings records, in addition to other functions. In 2008, SSA's administrative budget for managing its operations was $11.1 billion. The process for deciding who is eligible for SSA disability benefits is complex, consuming a large portion of SSA's administrative budget. Several state and federal offices, and several adjudication levels are involved in determining whether a claimant is eligible for benefits. The process begins when an individual files an application for disability benefits at an SSA field office, online or over SSA's toll-free number. In each case, an SSA representative determines whether a claimant meets the non-medical eligibility criteria of each program, such as ensuring that an SSI applicant meets income requirements, or determining if a DI applicant has a sufficient number of work credits. If applicants meet the non- medical eligibility criteria, field office personnel will help claimants complete their applications and obtain claimants' detailed medical, education, and work histories. The completeness of the information gathered at this time can affect the accuracy and speed of the decision. After the field office determines that an applicant has met SSA's non- medical eligibility requirements for disability benefits, up to four adjudicative levels may review the applicant's claim for eligibility generally based on medical criteria. The first adjudicative level is the state Disability Determination Services (DDS), where a disability examiner, working with medical staff, must make every reasonable effort to help the claimant get medical reports from physicians, hospitals, clinics, or other institutions where the claimant has received past medical treatments. After assembling all medical and vocational information for the claim, the DDS examiner in consultation with appropriate medical staff determines whether the claimant meets the requirements of the law for having a disability. In doing so, the DDS examiner uses a five-step, sequential evaluation process that includes a review of the claimant's current work activity, severity of impairment, and vocational factors. See figure 1. Claimants who are dissatisfied with the initial DDS determination have up to three additional levels of adjudicative appeal. The claimant may request a "reconsideration" of the claim, which is conducted by DDS personnel who were not involved in the original decision. If the reconsideration team concurs with the initial denial of benefits, the claimant then has 60 days from the time of this decision to appeal and request a hearing before an administrative law judge (ALJ). ALJs, who are based in 140 hearing offices located throughout the nation, can consider new evidence and request additional information including medical evidence or medical and vocational expert testimony. A claimant who is dissatisfied with the hearings decision may request, within 60 days of the ALJ's decision, that the Appeals Council review the claim. The Appeals Council is SSA's fourth and final adjudicative appeals level and is comprised of administrative appeals judges. The Appeals Council may uphold, modify, or reverse the ALJ's action, or it may return the claim back to the ALJ for another hearing and issuance of a new decision. The decision of the Appeals Council is the Commissioner's final decision. To appeal this decision, the claimant must file an action in Federal Court. SSA measures its performance in managing its workloads in various ways. For its disability claims process, at each level of the claims process SSA tracks the number of claims pending a decision each year and the time it takes to issue a decision. The agency also uses a relative measure to determine the backlog by considering how many cases should optimally be pending at year-end. This relative measure is referred to as "target pending" and is set for each level of the disability process with the exception of the reconsideration level. From 1999 to 2006, SSA's target pending was 400,000 for claims at the initial stage and 300,000 and 40,000 for the hearings and Appeals Council stages, respectively. The number of pending claims that exceed these numbers represents the backlog. With respect to service delivery, SSA uses various measures of performance, including work productivity (average work units performed per year, per employee), customer wait times at field offices, and overall customer satisfaction with service delivery. SSA has experienced increased backlogs and processing times associated with disability claims in recent years, as well as declines in measures of field office service. These trends are likely due to rising workloads and staffing shortfalls. The total number of backlogged disability claims in SSA more than doubled over the last decade, with the greatest accumulation of claims occurring at the hearing level. By the close of fiscal year 2006, the total number of backlogged disability claims, by SSA's measure, reached 576,000, which represented an overall growth rate of more than 120 percent from fiscal year 1997. As shown in figure 2, backlogs of varying degree have occurred at all stages of the claims process where backlogs are calculated. However, since fiscal year 2001, these claims were concentrated most heavily at the hearings level and, to a lesser extent, at the initial processing level within the DDS offices. The hearings level accounted for the largest share of backlogged claims for 7 of the 10 years we reviewed. In fiscal years 2000 and 2001, the DDS level accounted for the largest share of the backlog. The Appeals Council had the largest backlog in fiscal year 1999, but dramatically reduced these numbers by 2006. In concert with changes in the total claims backlog, average processing times for disability claims at most adjudicative levels increased. As shown in figure 3, although processing times decreased dramatically at the Appeals Council level, they increased markedly at the hearings level, and somewhat at the initial and reconsideration levels. For example, from 1997 to 2006, processing times increased about 20 days at the DDS level and 95 days at the hearings level. Further, in fiscal year 2006, 39 percent of all hearing decisions took between 365 to 599 days to process; 28 percent took 600 to 999 days to process; and 2 percent took over 1,000 days. For two regions (region 5 in Chicago and region 10 in Seattle), nearly half of all hearing decisions made in fiscal year 2006 took longer than 600 days to complete. One contributor to increased disability claims backlogs has been spikes in new applications. For example, the number of initial applications for DI and SSI benefits increased by 21 percent overall from fiscal years 1997 to 2006, contributing to the claims backlog and adding additional pressures to field office personnel who initially review these claims. These increases can be attributed to a number of influences: periodic downturns in the economy, the aging of the baby boom population, increased referrals from other programs, previous changes in program eligibility requirements and regulations, and increased program outreach. Officials in one region recounted one initiative that targeted outreach to the homeless, which increased applications and also added to processing times. They also attributed some processing delays to the time required to track homeless candidates and help them document their disabilities. With respect to the economy, SSA officials, DDS senior managers, and our prior work all attest to the fact that economic downturns from a failing industry or natural disaster can precipitate new disability applications. The growth in the disability claims backlogs has also coincided with losses in key personnel associated with the disability claims process. For example, although DDS staff increased about 4 percent from 1997 to 2006, DDSs have experienced high rates of staff turnover and attrition. Attrition rates for DDS disability examiners, who are state employees, were almost double that of SSA federal staff. Many DDS senior managers we spoke with said that turnover of experienced disability examiners has affected productivity. For example, from September 1998 to January 2006, over 20 percent of disability examiners hired during that period left or were terminated within their first year. DDS officials said the loss of experienced staff affects DDS' ability to process disability claims workloads because it generally takes newly hired examiners about 2 years to become proficient in their role. Further, at the hearings level, SSA generally experienced shortfalls in ALJs and support staff--decision writers, staff that prepare case files for review, attorneys, and claims technicians. The number of ALJs available to conduct hearings ranged from a high of 1,087 in 1998 to a low of 919 in 2001, ending at 1,018 in 2006. Although SSA has had fewer than 1,100 ALJs over the last 10 years, in May 2006, SSA's Commissioner noted that the agency requires no less than 1,250 ALJs to properly manage its current pending workload. With respect to support staff, numbers ranged from a high of 5,500 in 1999 to a low of 4,700 in 2006. Although SSA managers and judges would like to see a ratio of 5.25 support staff per ALJ, the actual ratio has more often been lower, ranging from a ratio of 4.59 in 1997 to 4.12 in 2006. Only in 2001, when the number of ALJs was at its lowest point, was the target ratio achieved. Finally, a number of initiatives undertaken by SSA to improve the disability process and potentially remedy backlogs have faltered for a variety of reasons, including poor planning and execution. In fact, some initiatives had the effect of slowing processing times by reducing staff capacity, increasing the number of appeals, or complicating the decision process. Several other initiatives improved the process, but were too costly and subsequently abandoned. This was the case for several facets of a major 1997 initiative, known as the "Disability Process Redesign," which sought to streamline and expedite disability decisions for both initial claims and appeals. In the past, we reported that various initiatives within this effort became problematic and were largely discontinued due to their ineffectiveness and high cost. Further, implementation of an electronic system enhanced some aspects of the disability claims process, but also caused delays due to systemic instability and shutdowns at the DDS and hearings offices. Further, the "Hearings Process Improvement" initiative, implemented in 2000, involved reorganizing hearing office staff and responsibilities with the goal of reducing the number of appeals. However, many of the senior SSA officials we spoke with expressed the opinion that this initiative left key workloads unattended and was therefore responsible for dramatic increases in delays and processing times at the hearings level. In addition to disability claims backlogs and increased processing times, other aspects of SSA's service delivery at field offices have declined in recent years. From fiscal year 2002 to 2006, the average time customers waited in a field office to speak with an SSA representative increased by 40 percent from 15 to 21 minutes. In fiscal year 2008, more than 3 million customers waited for over 1 hour to be served. Further, SSA's 2007 Field Office Caller Survey found that 51 percent of customers calling selected field offices had at least one earlier call that had gone unanswered. Because SSA based its results only on customers who were ultimately able to get through, the actual percentage of customers that had unanswered calls was likely even higher. Overall these factors may have contributed to a 3 percent drop in SSA's overall customer satisfaction, from 84 percent in fiscal year 2005 to 81 percent in fiscal year 2008. Declines in field office service delivery measures coincided with a period of staff turnover and losses agency wide. From fiscal year 2005 to 2008, SSA experienced a 2.9 percent reduction in total employees and a 4.4 percent reduction in field office employees. At the same time, employees and managers reported high levels of stress. We asked 153 employees at 21 offices to rate the stress they experienced in attempting to complete their work in a timely manner and 65 percent reported feeling stress to a great or very great extent on a daily basis, while 74 percent of office managers described high levels of stress. Declines in service delivery measures also coincided with increased workloads. For example, the number of annual field office visitors increased by about 2.5 million customers, from 41.9 million in fiscal year 2006 to 44.4 million in fiscal year 2008. In addition, SSA's field offices experienced growth in other types of workloads. Between 2005 and 2008, SSA performed more work related to managing beneficiary rolls and assigning Social Security numbers. Finally, the work SSA performs on behalf of other federal agencies has grown. For example, new elements of the Medicare prescription drug program and new state laws requiring federal government verification of work authorization are resulting in additional work and field office visits. SSA projects an increase in disability claims and other workloads over the coming years while at the same time anticipates the retirement of many experienced workers. Specifically, SSA projects: An overall 13 percent increase in retirement and disability claims from fiscal years 2007 to 2017. A growth of 22 percent in the number of retirement and disability beneficiaries from 2007 to 2015. That nearly 40 percent of its current workforce will be eligible to retire in 5 years and 44 percent will retire by 2016. SSA continues to take steps to address disability claims backlogs and service delivery challenges, including efforts to improve its disability claims process, redistribute workloads across field offices, and develop a plan for addressing future growth in disability and retirement claims. Some of these efforts have been hampered by poor planning while others are too recent to evaluate. SSA has pursued a number of initiatives to improve the overall efficiency and effectiveness of its disability claims process. For example, the DSI initiative, piloted in 2006, was designed to produce correct decisions on disability claims as early in the application process as possible, with the expectation that DSI would reduce both appeals of denied claims and future backlogs. The plan involved several envisioned changes to improve the disability determination process. However, results of the initiative by early 2007 were mixed. (See table 1 for examples of these initiatives and their results.) In general, we found that implementation of these and other DSI initiatives were hampered by rushed implementation, poor communication, and inadequate financial planning. Overall, the DSI initiatives cost more than the agency had originally estimated. The future of DSI currently remains uncertain. While the Quick Disability Determination will likely be implemented nationwide, SSA suspended national roll-out of most portions of the DSI initiative, and issued a proposed rule to suspend the Federal Reviewing Official and Medical and Vocational Expertise initiatives in the Boston region. SSA has said that it will continue to conduct an evaluation of DSI initiatives to determine whether they should be reinstated. Because SSA's assessment of DSI components to date has been limited, in 2007 we recommended that SSA conduct a thorough evaluation of DSI before deciding which elements should be implemented or discontinued. SSA noted that it would continue to collect data and monitor outcomes to evaluate DSI, but that, due to constrained resources, it may not be able to collect sufficient data to ensure the reliability of the results. SSA suspended DSI, in part, to refocus on reducing its hearings backlog, which had reached critical levels. In May 2007, SSA outlined a new hearings backlog reduction plan that focuses on reducing the existing backlog and preventing its recurrence through a series of steps that employ some prior innovations and also new initiatives. However, officials we spoke with at SSA emphasized that the hearings backlog reduction plan is not meant to replace the DSI initiative but to complement it until a final decision is made regarding the future of DSI. Steps in the plan include updating SSA's medical eligibility criteria, expediting cases for which eligibility is more clear-cut, improving hearings office capacity and performance, and other actions. Also in the plan, the Commissioner proposed dedicating $25 million to improve SSA's electronic processing system. SSA's efforts to reduce the hearings backlog may be supported by additional funds through recent legislation. Specifically, the American Recovery and Reinvestment Act of 2009 (ARRA) allocated $500 million to SSA to assist with processing workloads and related technology acquisitions. SSA has not yet determined how it will use this money for its various workloads. In December 2007, we recommended that SSA take the necessary steps to increase the likelihood that new initiatives will succeed, such as performing comprehensive planning to anticipate challenges of implementation, including the appropriate staff in the design and implementation stages, establishing feedback mechanisms to track progress and problems, and performing periodic evaluations. SSA agreed with the intent of this recommendation, noting that it would take necessary steps to improve the likelihood of success of future initiatives. Accordingly, we are currently evaluating the extent to which the hearings backlog reduction plan includes components of sound planning and the potential effects of the plan on the hearings backlog and other SSA operations. As part of this review, we will (1) examine the plan's potential to eliminate the hearings-level backlog, (2) determine the extent to which the plan includes components of sound planning, and (3) identify potential unintended effects of the plan on hearings level operations and other aspects of the disability process. We expect to complete our work later this year. To address overall workloads and maintain customer service, SSA is shifting workloads to less busy offices. For example, if a field office has work demands that it cannot immediately cover, that office can request that some work be transferred to another office. Offices that have a particular expertise in that particular type of work will make themselves available, as they can process this work more quickly. These efforts likely contributed to increased productivity levels. Specifically, the average amount of work produced by field office employees increased by 2.9 percent between fiscal years 2005 and 2008. Managers also are addressing workloads by using claims processing personnel to perform the duties typically conducted by lower-graded employees, and in some cases, office managers take on duties of their employees. Such duties include answering the telephone, providing initial services to arriving customers, processing requests for new or replacement Social Security cards, and conducting some administrative duties. Although visiting customers need attention, this practice may reduce time spent on other workloads, such as claims processing or managing the office. Moreover, as we noted earlier, the stress of expanding workloads and staffing constraints can negatively impact morale. With fewer staff available, SSA has deferred some workloads, although this practice may have significant drawbacks. Specifically, SSA has focused on field office work it considers essential to its "core workloads," such as processing new claims for Social Security benefits and issuing Social Security cards, while deferring other types of work including changes of address, changes to direct deposit information, and reviews to determine beneficiaries' continuing eligibility for DI and SSI benefits. Reviews of continuing eligibility, however, are key activities in ensuring payment accuracy. Such reviews yield a lifetime savings for both DI and SSI of $10 for every dollar invested, according to SSA. In recent years, SSA has reduced the number of reviews conducted, citing budget limitations and an increase in core work. When reviews of benefits are delayed, some beneficiaries continue receiving benefits when they no longer qualify. SSA has used a variety of strategies to maintain adequate staffing levels overall, although it faces challenges with hiring, training and retaining staff. For example, SSA: offers recruitment, relocation, and retention bonuses to individuals with needed skills; offers workplace flexibilities; uses dual compensation waivers from the Office of Personnel Management for certain hard-to-fill positions; and developed recruiting efforts to reach out to a broader pool of candidates, including retired military and veterans with disabilities. SSA may also use ARRA money to hire additional staff to help manage some of its workloads. However, in the past, SSA has encountered obstacles that delay hiring. For example, SSA's ability to hire sufficient ALJ's has been hindered by the length of the Office of Personnel Management's review process. In addition, field office managers and staff at many locations we visited stated that it typically takes 2 to 3 years for new employees to become proficient after being hired. For disability examiners, this process can take about 2 years, according to SSA staff, while at the same time turnover is high. More recently, in response to our recommendation that SSA develop a detailed service delivery plan, SSA stated that it intends to consolidate its various planning efforts into a single planning document. SSA commented that its consolidated document will, at minimum, include comprehensive plans for expanding electronic services for customers; increasing the centralization of receiving phone calls and working claims from customers while maintaining the network of local field offices; enhancing phone and video services in field offices (where applicable) and piloting self-service personal computers in the reception areas of those offices; and continuing to assess the efficiency of field offices. While a consolidated planning document will better reflect the variety of planning efforts SSA has to improve its operations, it remains unclear how SSA will manage growing workloads with its current infrastructure of approximately 1,300 field offices, while minimizing the deferral of its workloads and declines in customer service. By all accounts, the operational challenges that SSA faces are projected to become more acute in the coming years as our society ages. SSA's aging workforce and our faltering economy may exacerbate these challenges. Over the years and across many fronts, SSA has taken numerous and varied steps to address its backlog of disability claims and its service delivery challenges, but often with mixed results or at the expense of some other key services. Funds that SSA receives through the ARRA may relieve staffing shortages and potentially improve electronic case processing, but more concerted efforts will likely be needed to get in front of the challenges ahead. We have recommended that, to increase the probability of success for any new initiatives aimed at reducing the backlog of claims, SSA focus on comprehensive planning that anticipates implementation challenges by involving key staff in design and implementation, establishing feedback loops, and performing periodic evaluations to ensure that reforms are executed effectively. We have also recommended that SSA develop a service delivery plan that addresses in detail how it will successfully deliver quality customer service in the future while managing growing work demands with constrained resources. SSA agreed that it should take necessary steps to improve the likelihood of success of future initiatives and to develop a comprehensive service delivery plan, and noted that they are taking steps toward these ends. We look forward to SSA's progress as it moves forward with these efforts. Mr. Chairman and Members of the Subcommittee, this concludes my remarks. I would be happy to answer any questions that you or other Members of the Subcommittee may have. For further information, please contact Daniel Bertoni at (202) 512-7215 or [email protected]. Also contributing to this statement were Michele Grgich, Erin Godtland, and Jessica Orr. Advisors included Blake Ainsworth, Barbara Bovbjerg, Julianne Cutts, Shelia Drake, Cindy Fagnoni, Sal Sorbello, and Paul Wright. Roger Thomas provided legal advice. High-Risk Series: An Update (GAO-09-271, January, 2009). Social Security Administration: Service Delivery Plan Needed to Address Baby Boom Retirement Challenges (GAO-09-24, January 9, 2009). Social Security Disability: Better Planning, Management, and Evaluation Could Help Address Backlogs (GAO-08-40, December 7, 2007). Social Security Disability: Management Controls Needed to Strengthen Demonstration Projects (GAO-08-1053, September. 26, 2008). 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.	For years, the Social Security Administration (SSA) has experienced challenges managing a large disability workload and making timely decisions. In fiscal year 2006, SSA made about 3.7 million disability claims decisions, while over a million were awaiting a decision. Further, SSA has faced staffing challenges and difficulties managing its workloads at its network of approximately 1,300 field offices, where millions of people go to apply for disability and retirement benefits, to obtain Social Security cards, and for a host of other services. The Subcommittees on Income Security and Family Support, and on Social Security, House Committee on Ways and Means, asked GAO to address (1) key service delivery challenges facing SSA, particularly with respect to the backlog of disability claims, and (2) steps SSA is taking to address these challenges. This testimony is based primarily on reports assessing trends in disability claims processing and backlogs, steps SSA is taking to reduce the backlog, and other challenges SSA faces in meeting future service delivery needs. Certain information was updated to reflect recent legislative changes. In recent years, SSA has experienced a growing backlog of disability claims and deteriorating customer service at field offices. SSA's total backlog of disability claims doubled from 1997, reaching 576,000 in 2006, which has resulted in claimants waiting longer for final decisions. The backlog was particularly acute at the hearings level. SSA also experienced declines in field office service delivery, with average customer wait times in field offices increasing by 40 percent from 2002 to 2006, and over 3 million customers waiting more than 1 hour to be served in 2008. Two key factors likely contributed to the backlog and service delivery challenges: (1) staffing reductions or turnover of field office staff and key personnel involved in the disability claims process, and (2) increased workloads. In particular, initial applications for disability benefits grew by more than 20 percent over the past 10 years. SSA projects further increases in workloads as the baby boom generation reaches its disability-prone years and retires. SSA has taken steps to improve its disability claims process, reduce the claims backlog, and manage its field office workloads, but some efforts were hampered by poor planning and execution while others are too recent to evaluate. In 2006, SSA introduced a comprehensive set of reforms to improve the efficiency, accuracy and timeliness of the disability claims process. However, this initiative produced mixed results and many aspects were suspended to focus on the hearings backlog and other priorities. While final decisions regarding many aspects of this reform are pending, SSA outlined a new plan in 2007 that concentrates on clearing out backlogged cases at the hearings level. GAO is currently reviewing this plan as part of its ongoing work. To address overall workloads and maintain customer service, SSA has shifted workloads to less busy offices and deferred workloads it deemed lower priority. However, deferring certain workloads, such as continuing eligibility reviews, can result in beneficiaries receiving payments who no longer qualify. In response to a recent GAO recommendation, SSA agreed to develop a single service delivery plan to help it better manage future service delivery challenges. However, it remains unclear how SSA will address current and future challenges given its current service delivery infrastructure and resource constraints.	5,391	696
According to Census data, in 2005 an estimated 21.9 million households, or 20 percent of the 111.1 million households nationwide, were "veteran households"--that is, they had at least one member who was a military veteran. Most veteran households--about 80 percent--owned their own homes, a significantly higher percentage than was the case for other (nonveteran) households (about 64 percent). About 4.3 million veteran households rented their homes. Census data also show that renter households were more likely to be low-income than were owner-occupied households; in 2005, about 66 percent of renter households were low- income while 32 percent of homeowners were low-income. VA, through a variety of programs, provides federal assistance to veterans who are homeless, and also provides homeownership assistance, but does not provide rental assistance. One of the agency's largest programs for homeless veterans is the Homeless Providers Grant and Per Diem program, which provides funding to nonprofit and public agencies to help temporarily shelter veterans. VA also administers eight other programs for outreach and treatment of homeless veterans. In addition to its homelessness programs, VA provides a variety of programs, services, and benefits to veterans and their families. HUD provides rental housing assistance through three major programs-- housing choice voucher, public housing, and project-based. In fiscal year 2005, these programs provided rental assistance to about 4.8 million households and paid about $28 billion in rental subsidies. These three programs generally serve low-income households--that is, households with incomes less than or equal to 80 percent of their local area median incomes. Most of these programs have targets for households with extremely low incomes--30 percent or less of their area median incomes. HUD-assisted households generally pay 30 percent of their monthly income, after certain adjustments, toward their unit's rent. HUD pays the difference between the household's contribution and the unit's rent (under the voucher and project-based programs) and the difference between the public housing agencies' operating costs and rental receipts for public housing. According to our analysis of ACS data, of the 4.3 million veteran households that rented their homes, an estimated 2.3 million, or about 53 percent were low-income in 2005. As shown in table 1, the largest share of these 2.3 million households was concentrated in the highest low-income category--that is, 50.1 to 80 percent of the area median income--with somewhat smaller shares in the two lower categories. The table also shows that other renter households (that is, households without a veteran member) were even more likely to be low-income than veteran renter households. The estimated numbers of low-income veteran renter households in 2005 varied greatly by state, from some 236,000 in California--the most of any state--to less than 6,000 in each of 3 states--Delaware, Vermont, and Wyoming. The percentages of veteran renter households that were low- income in 2005 also varied considerably by state, from about 65 percent in Michigan to about 41 percent in Virginia. Further details on how these figures varied by state, including maps, can be found in appendix I. In addition, a significant proportion of low-income veteran renter households included a veteran who was elderly or had a disability. Specifically, an estimated 816,000 (36 percent of these veteran households) had at least one veteran who was elderly (that is, 62 years of age or older); and 887,000 (39 percent) had at least one veteran member with a disability. According to our analysis of ACS data, an estimated 1.3 million low- income veteran households, or about 56 percent of the approximate 2.3 million such households, had rents that exceeded 30 percent of their household income in 2005 (see table 2). These veteran renter households had what HUD terms "moderate" or "severe" problems affording their rent. Specifically, about 31 percent of low-income veteran renter households had moderate affordability problems, and about 26 percent had severe affordability problems. The remainder either paid 30 percent or less of their household income in rent, reported zero income, or did not pay cash rent. In comparison, a higher proportion of other low-income renter households had moderate or severe housing affordability problems. The extent of housing affordability problems among low-income veteran renter households varied significantly by state in 2005 (see fig. 1). The median percentage of low-income veteran renters with affordability problems nationwide was 54 percent. California and Nevada had the highest proportions of affordability problems among low-income veteran renter households--about 68 and 70 percent, respectively. North Dakota and Nebraska had the smallest--about 37 and 41 percent, respectively. A relatively small percentage of veteran households lived in overcrowded or inadequate housing in 2005. Specifically, an estimated 73,000, or 3 percent, of low-income veteran renter households lived in overcrowded housing--housing with more than one person per room--and less than 18,000, or about 1 percent, lived in severely overcrowded housing-- housing with more than one and a half persons per room. In contrast, an estimated 1.5 million, or 7 percent, of other low-income renter households lived in overcrowded housing, and about 423,000, or 2 percent, lived in severely overcrowded housing. Finally, ACS data indicate that a very small share of low-income veteran renters lived in inadequate housing. ACS provides very limited information about the quality of the housing unit; the survey classifies a unit as inadequate if it lacks complete plumbing or kitchen facilities, or both. In 2005, an estimated 53,000, or 2 percent, of low-income veteran renter households lived in inadequate housing. In comparison, an estimated 334,000, or 2 percent, of other households lived in inadequate housing. HUD's major rental assistance programs are not required to take a household's veteran status into account when determining eligibility and calculating subsidy amounts. (Consequently, HUD does not collect any information that identifies the veteran status of assisted households.) As with other households, veterans can benefit from HUD rental assistance provided that they meet all of the programs' income and other eligibility criteria. For example, assisted households must meet U.S. citizenship requirements and, for some of the rental assistance programs, HUD's criteria for an elderly household or a household with a disability. When determining income eligibility and subsidy amounts, HUD generally does not distinguish between income sources that are specific to veterans, such as VA-provided benefits, and other types of income. HUD policies define household income as the anticipated gross annual income of the household, which includes income from all sources received by the family head, spouse, and each additional family member who is 18 years of age or older. Specifically, annual income includes, but is not limited to, wages and salaries, periodic amounts from pensions or death benefits, and unemployment and disability compensation. HUD policies identify 39 separate income sources and benefits that are excluded when determining eligibility and subsidy amounts. These exclusions relate to income that is nonrecurring or sporadic in nature, health care benefits, student financial aid, and assistance from certain employment training and economic self- sufficiency programs. We found that, based on HUD's policies on income exclusions, most types of income and benefits that veteran households receive from VA would be excluded when determining eligibility for HUD's programs and subsidy amounts. Many of the excluded benefits relate to payments that veteran households receive under certain economic self-sufficiency programs or nonrecurring payments such as insurance claims. Of the benefits included, most are associated with recurring or regular sources of income, such as disability compensation, pensions, and survivor death benefits. Of the 39 exclusions, we found that two income exclusions specifically applied to certain veteran households but, according to HUD, these exclusions are rarely used. These income exclusions are (1) payments made to Vietnam War-era veterans from the Agent Orange Settlement Fund and (2) payments to children of Vietnam War-era veterans who suffer from spina bifida. The two exclusions are identified in federal statutes that are separate from those authorizing the three major rental assistance programs. HUD does provide rental assistance vouchers specifically to veterans under a small program called the Housing and Urban Development- Veterans Affairs Supportive Housing program (HUD-VASH). Established in 1992, HUD-VASH is jointly funded by HUD and VA and offers homeless veterans an opportunity to obtain permanent housing, as well as ongoing case management and supportive services. HUD allocated these special vouchers to selected public housing agencies that had applied for funding, and VA was responsible for identifying participants based on specific eligibility criteria, including the veteran's need for treatment of a mental illness or substance abuse disorder. Under the HUD-VASH initiative, HUD allocated 1,753 vouchers from fiscal years 1992 through 1994. HUD funded these vouchers for 5 years and, if a veteran left the program during this period, the housing agency had to reissue the voucher to another eligible veteran. According to VA officials, after the 5-year period ended, housing agencies had the option of continuing to use their allocation of vouchers for HUD-VASH, or could discontinue participation whenever a veteran left the program (that is, the housing agency would not provide the voucher to another eligible veteran upon turnover). VA stated that after the 5-year period ended, many housing agencies decided not to continue in HUD- VASH after assisted veterans left the program; instead, housing agencies exercised the option of providing these vouchers to other households under the housing choice voucher program. As a result, the number of veterans that receive HUD-VASH vouchers has declined. Based on information from VA, about 1,000 veterans were in the program as of the end of fiscal year 2006, and absent any policy changes, this number is likely to decline to 400 because housing agencies responsible for more than 600 vouchers have decided not to continue providing these vouchers to other veterans as existing participants leave the program. Congress statutorily authorized HUD-VASH as part of the Homeless Veterans Comprehensive Assistance Act of 2001. Under the act, Congress also authorized HUD to allocate 500 vouchers each fiscal year from 2003 through 2006--a total of 2,000 additional vouchers. In December 2006, Congress extended this authorization through fiscal year 2011--allocating an additional 2,500 vouchers or 500 each year. However, HUD has not requested, and Congress has not appropriated, funds for any of the vouchers authorized from fiscal years 2003 through 2007. Currently, HUD's policies give public housing agencies and owners of project-based properties the discretion to establish preferences for certain groups when selecting households for housing assistance. Preferences affect only the order of applicants on a waiting list for assistance; they do not determine eligibility for housing assistance. Before 1998, federal law required housing agencies and property owners to offer a preference to eligible applicants to their subsidized housing programs who (1) had been involuntarily displaced, (2) were living in substandard housing, or (3) were paying more than half their income for rent. Public housing agencies were required by law to allocate at least 50 percent of their public housing units and 90 percent of their housing choice vouchers to applicants who met these criteria. Similarly, project-based owners had to allocate 70 percent of their units to newly admitted households that met these criteria. The Quality Housing and Work Responsibility Act of 1998 (QHWRA) gave more flexibility to housing agencies and project-based property owners to administer their programs, in part by eliminating the mandated housing preferences. Although it gave housing agencies and owners more flexibility, QHWRA required that public housing agencies and owners target assistance to extremely low-income households. Under QHWRA, housing agencies and owners of project-based properties may, but are not required to, establish preferences to better direct resources to those with the greatest housing needs in their areas. Public housing agencies can select applicants on the basis of local preferences provided that their process is consistent with their administrative plan. HUD policy requires housing agencies to specify their preferences in their administrative plans, and HUD reviews these preferences to ensure that they conform to nondiscrimination and equal employment opportunity requirements. Similarly, HUD policy allows owners of project-based properties to establish preferences as long as the preferences are specified in their written tenant selection plans. While HUD requires housing agencies and property owners to disclose their preferences in their administrative or tenant selection plans, HUD officials said the department does not compile or systematically track this information because public housing agencies and property owners are not required to have preferences. Most of the 41 public housing agencies we contacted used a preference system for admission to their public housing and housing choice voucher programs, but less than half offered a veterans' preference. As shown in table 3, of the 34 largest housing agencies that administered the public housing program, 29 established preferences for admission to the program and 14 used a veterans' preference. Similarly, of the 40 housing agencies that administered the housing choice voucher program, 34 used admission preferences, and 13 employed a preference for veterans. According to public housing agency officials, the most common preferences used for both programs were for working families, individuals who were unable to work because of age or disability, and individuals who had been involuntarily displaced or were homeless. Of course, veterans could benefit from these admission preferences if they met the criteria. Some of the public housing agencies we contacted offered veterans' preferences because their states required them to do so. Other housing agency officials told us they offered a veterans' preference because they believed it was important to serve the needs of low-income veterans since they had done so much for the well-being of others. Public housing agencies that we contacted that did not offer a veterans' preference gave various reasons for their decisions. Some officials told us that the housing agency did not need a veterans' preference because veteran applicants generally qualified under other preference categories, such as elderly or disabled. One housing agency official we contacted said a veterans' preference was not needed because of the relatively small number of veterans in the community. According to all of the performance-based contract administrators we contacted, owners of project-based properties that they oversee generally did not employ a veterans' preference when selecting tenants. Ten of the 13 largest contract administrators told us, based on their review of property owners' tenant selection plans, that owners of project-based properties generally did not employ preferences for any specific population. Officials from the remaining three contract administrators said they were aware of some property owners offering preferences to individuals who had been involuntarily displaced, working families, or those unable to work because of age or disability. However, all the contract administrators we contacted either said that property owners did not use preferences or agreed that the use of preferences, including a veterans' preference, among owners of properties with project-based assistance was limited. HUD officials to whom we spoke also stated, based on their experience with tenant selection plans, that the use of preferences at project-based properties likely was infrequent. Low-income veteran renter households were less likely to receive HUD rental assistance than other households. As shown in table 4, of the total 2.3 million veteran renter households with low incomes, about 250,000 (or 11 percent) received HUD assistance. In comparison, of the 22 million other renter households with low incomes, 4.1 million (about 19 percent) received HUD assistance. (As noted previously, although HUD is the largest provider of federal rental housing assistance to low-income households, it is not the sole source of such assistance. Thus, these percentages likely understate the actual share of all eligible veteran renter households that receive federal rental assistance.) The reasons why other households were nearly twice as likely as veteran households to receive HUD assistance are unclear. However, based on our analyses and discussions with agency officials, we identified some potential explanations. For example: As previously noted, although a significant proportion of low-income veteran households face affordability problems, an even larger proportion of other (nonveteran) households face more severe affordability problems. Thus, the level of veteran demand for rental assistance may be lower than that of nonveteran households. Also as previously noted, HUD rental assistance programs do not take veteran status into account when determining eligibility, and most public housing agencies and property owners do not offer veterans' preferences. As a result, these policy decisions likely focus resources on other types of low-income households with housing needs. Although low-income households generally are eligible to receive rental assistance from HUD's three programs, statutory requirements mandate that a certain percentage of new program participants must be extremely low income. These targeting requirements may lead to a higher share of HUD rental assistance going to nonveteran households because veteran households generally are less likely to fall within the extremely low-income category. The estimated 250,000 veteran households that received HUD rental assistance in 2005 constituted about 6 percent of all HUD-assisted households. The housing choice voucher program served the largest number of veteran households, followed by the project-based program, and public housing (see fig. 3). However, a slightly higher proportion of veteran households participated in the public housing program (6.9 percent) than participated in the voucher (5.7 percent) and project-based (5.2 percent) programs. We found some similarities in the demographic characteristics of veterans and other assisted households we analyzed. For example: Compared with other assisted households, HUD-assisted veteran households were as likely to be elderly. Specifically, in fiscal year 2005, about 75,000, or 30 percent, of assisted veteran households were elderly, and about 1.3 million, or 31 percent, of other assisted households were elderly. HUD-assisted veteran households were more likely to have a disability. In fiscal year 2005, HUD provided assistance to about 88,000 veteran households with a disability, or about 34 percent of assisted veteran households. In comparison, 1.2 million or 28 percent of other assisted households had a disability. Our August 2007 report contains additional information on the demographic and income characteristics of veteran and nonveteran households, as well as the extent to which HUD programs take veteran status into account when determining eligibility and subsidy amounts. Madam Chairwoman, this concludes my prepared statement. I would be happy to answer any questions at this time. For further information on this testimony, please contact David G. Wood at (202) 512-8678 or [email protected]. Contact points from our Office of Congressional Relations may be found on the last page of this statement. Individuals making key contributions to this testimony included Marianne Anderson, Michelle Bowsky, Daniel Garcia-Diaz, John T. McGrail, Josephine Perez, and Rose Schuville. The estimated numbers of low-income veteran renter households in 2005 varied greatly by state, as shown in figure 4. The estimated median number of low-income veteran renters in any state was about 34,000. California had significantly more low-income veteran renter households than any other state--more than 236,000, or about 10 percent of all such households nationwide--followed by Texas with about 142,000, and New York with about 135,000. The states with the smallest number of low-income veteran households were Vermont, Delaware, and Wyoming with less than 6,000 each. As shown in figure 5, the percentages of veteran renter households that were low-income in 2005 also varied considerably by state. Michigan had the highest percentage--about 65 percent of its veteran renter households were low income, while Virginia had the lowest--about 41 percent.	Veterans returning from service in Iraq and Afghanistan could increase demand for affordable rental housing. Households with low incomes (80 percent or less of the area median income) generally are eligible to receive rental assistance from the Department of Housing and Urban Development's (HUD) housing choice voucher, public housing, and project-based programs. However, because rental assistance is not an entitlement, not all who are eligible receive assistance. This testimony, based on a 2007 report, discusses (1) the income status and demographic and housing characteristics of veteran renter households, (2) how HUD's rental assistance programs treat veteran status (whether a person is a veteran or not) and whether they use a veteran's preference, and (3) the extent to which HUD's rental assistance programs served veterans in fiscal year 2005. The 2007 report discussed in this testimony made no recommendations. In 2005, an estimated 2.3 million veteran renter households had low incomes. The proportion of veteran renter households that were low income varied by state but did not fall below 41 percent. Further, an estimated 1.3 million, or about 56 percent of these low-income veteran households nationwide, had housing affordability problems--that is, rental costs exceeding 30 percent of household income (see map for state percentages). Compared with other (nonveteran) renter households, however, veterans were somewhat less likely to be low income or have housing affordability problems. HUD's major rental assistance programs are not required to take a household's veteran status into account when determining eligibility and calculating subsidy amounts, but eligible veterans can receive assistance. The majority of the 41 largest public housing agencies that administer the housing choice voucher or public housing programs had no veterans' preference for admission. The 13 largest performance-based contract administrators that oversaw most properties under project-based programs reported that owners generally did not adopt a veterans' preference. In fiscal year 2005, an estimated 11 percent of all eligible low-income veteran households (at least 250,000) received assistance, compared with 19 percent of nonveteran households. Although the reasons for the difference are unclear, factors such as differing levels of need for affordable housing among veteran and other households could influence the percentages.	4,169	465
The departments of the Army, Navy, and Air Force have a variety of statutory authorities that allow them to accept payments in the form of in- kind renovation or construction of facilities. For example, in fiscal year 2013, DOD used authority provided by sections 2667 and 2668 of Title 10 of the United States Code to lease or issue easements relating to domestic real property under their control or jurisdiction in exchange for payment in the form of in-kind construction or renovation projects. A description of these authorities is provided in table 1. For leases, the services are required under section 2667 of Title 10 to receive payments in an amount that is not less than the fair-market value of the property interest, as determined by the military department Secretary. Concerning cash payments received in exchange for leases and easements, section 2667 provides that, generally, money rentals must be deposited into a special account in the U.S. Treasury and must be appropriated before they can be used. Once appropriated, section 2667 provides that at least 50 percent of the funds shall be available for use only at the installation where the leased property is located. Overseas in-kind payment projects are subject to specific bilateral agreements and statutory authorities. Bilateral agreements include efforts to relocate U.S. forces and consolidate infrastructure being used by DOD. There are also other agreements between the United States and host nations to defray some of the costs of stationing U.S. forces overseas, and to support installations that will continue to be used by the United States--known as enduring installations--through the use of host-nation resources. According to DOD real-property management officials, installation personnel are generally responsible for selecting domestic in-kind payment projects based on the needs of the installation and its chain of command. Each installation has a list of unfunded construction and renovation projects that were not included in the military services' budget submissions to the Office of the Secretary of Defense. The military services generally allow each installation to decide which projects from these lists should be considered for in-kind payment projects. The responsibility for managing in-kind payment projects is generally shared between installation personnel and the services' respective real-property management offices or agencies. Within the Navy, the Secretary of the Navy has delegated certain real-property management responsibilities to Naval Facilities Engineering Command. Specifically, Naval Facilities Engineering Command, subject to certain requirements, is authorized to grant, execute, amend, administer, and terminate all instruments granting the use of Navy-controlled real property, to include real-estate transactions using in-kind payment projects. Within the Air Force, the Secretary of the Air Force has delegated certain real-property management responsibilities to the Air Force Civil Engineer Center. The Air Force Civil Engineer Center is responsible for acquiring, disposing of, and managing all Air Force-controlled real property. Within the Army, the Chief of Engineers is the principal advisor to the Secretary of the Army for policy formulation related to real property. According to Army officials, the Secretary of the Army generally has delegated responsibilities to the Army Corps of Engineers for execution of a variety of real-estate transactions, including transactions that include in-kind payments. DOD reported that the military services initiated 137 in-kind payment projects in Asia, Germany and the United States during fiscal year 2013 with an estimated value of at least $1.8 billion. In Asia, DOD reported initiating 105 in-kind construction and renovation projects with a total value that DOD estimated to be at least $1.6 billion. Of the 105 projects in Asia, 31 are in Korea with an estimated value of $1.57 billion and 74 are in Japan--32 of which have an estimated value of $264 million. In Germany, DOD reported initiating 3 in-kind payment projects with a total value that DOD estimated to be almost $20.7 million. For domestic locations, DOD reported initiating 29 in-kind construction and renovation projects with a total value that DOD estimated to be $18.6 million. Of the 29 domestic projects, the Navy initiated 22 and the Air Force initiated 7. The Army and Marine Corps did not initiate any domestic in-kind payment projects in fiscal year 2013. Table 2 summarizes the number and value of in-kind payment projects by location and also highlights the most frequently reported purpose for which the projects were used. Appendixes II through V provide more detailed information for each in- kind payment project initiated by DOD in fiscal year 2013. The military services' real-property management officials reported as many as four advantages to accepting in-kind payment projects rather than cash payments in domestic real-estate transactions, and officials from the three services reported one disadvantage. Installations can generally obtain facilities more quickly. According to officials of the Army Corps of Engineers, Air Force Civil Engineer Center, and Naval Facilities Engineering Command, in-kind payment projects can be advantageous because the value received does not need to be re- appropriated and can be immediately available to the installation. While congressional notification is required if the estimated annual fair-market value of a lease or easement exceeds $750,000, the law does not require appropriation of the funding for in-kind payment projects, so the benefits may be realized sooner. For example, in 2008 at Nellis Air Force Base, Nevada, the Air Force entered into an agreement with the city of North Las Vegas to allow construction of a wastewater treatment plant on 41 acres of land leased from Nellis. As part of its payment to the base, the city agreed to fund the construction of a new $27 million fitness center. According to Air Force Civil Engineer Center officials, the base had a longstanding requirement for an updated fitness center but was unable to secure funding for it. Once the agreement was signed, the city immediately began construction and the base was able to open the new fitness center in 2012. By contrast, if an installation receives cash payments, section 2667 requires the immediate deposit of all cash into a special account in the U.S. Treasury where it is subject to the appropriation process before the installation can use it. Officials stated that it can take up to a year between the deposit of the cash payments and the funds being provided to the installation. The originating installation is more likely to receive100 percent of the negotiated payments for the real property interest. According to Army Corps of Engineers, Air Force Civil Engineer Center and Naval Facilities Engineering Command officials, although the receipt of in-kind payment projects is at the discretion of the respective military department Secretary, the military department secretaries generally allow the installations where the real-property is located to receive 100 percent of any negotiated in-kind payments resulting from real property agreements. Conversely, section 2667 states that, subject to appropriations, installations are guaranteed to receive only 50 percent of any deposited cash payments, and can receive the other 50 percent only at the discretion of the respective military department secretary. In-kind payments are not governed by similar restrictions, and, as such, are more likely to result into the installation receiving 100 percent of the value generated by its real estate transactions. Installations may have the opportunity to potentially receive infrastructure improvements worth more than the fair-market value of the property interest. Air Force Civil Engineer Center and Naval Facilities Engineering Command officials stated that the nature of a potential developer's business or expertise and economies of scale may allow the developer to provide in-kind payment projects worth more than the fair-market value of the property interest by obtaining construction materials or labor at a below-market cost. For example, in 2004 the Navy entered into an agreement with a real-estate development firm to redevelop the Moanalua Shopping Center at the Pearl Harbor Naval Complex, Pearl Harbor, Hawaii. As part of the agreement, the Navy conveyed the existing shopping center to the developer as well as development rights for up to another 15,000 square feet of new commercial market space. As payment to the Navy, the developer was required to demolish over 40,000 square feet of existing space and to develop 40,000 square feet of new administrative space to be used as a Navy community support services center. A 2004 Navy analysis valued these demolition and construction projects at about $21 million--which was about $8 million more than the appraised market value of the property conveyed by the Navy. Installation officials generally have more flexibility in real-estate transactions. According to officials of the Air Force Civil Engineer Center, in-kind payment projects offer installation officials greater flexibility in executing real-estate transactions, especially in cases where a developer does not have cash readily available at the time the real-estate transaction is executed. Also, allowing in-kind payment projects can increase the potential pool of developers, the officials stated. For example, in-kind payment projects may be the only way to secure adequate value from non-profit or charitable organizations that may not have adequate cash resources but have the ability to provide goods and services. These same military service officials reported that one common disadvantage to accepting in-kind payment projects rather than cash payments is the amount of additional administrative work and oversight needed to execute the in-kind agreements. Army Corps of Engineers, Air Force Civil Engineer Center, and Naval Facilities Engineering Command officials identified three scenarios in which in-kind payment projects likely will require additional work and oversight. Additional work and oversight to ensure that the transaction complies with statutory requirements. Several statutes govern the receipt of in- kind payment projects, so installation personnel conduct reviews to ensure that the transactions follow appropriate financial and administrative procedures as required by law. Additional work and oversight to ensure that the developer is complying with the terms of the transaction. For example, installation personnel work to properly monitor construction and renovation progress to ensure that the developer is adequately providing any agreed-upon services over the terms of the agreement. Additional work and oversight to ensure that in-kind payment projects are properly valued over time. Some transactions involving in-kind payment projects, such as enhanced-use leases, can last as long as 50 years and the in-kind payment projects may continue over these 50 years. As a result, installation personnel will be responsible for the extra work to value in-kind payment projects during the 50-year lease. By contrast, cash value is known and requires no extra work to value. To address the disadvantage of accepting in-kind versus cash payments, some of the military services have implemented policy changes for accepting cash. For example, the Army has issued guidance stating that cash payments are preferred over in-kind payment projects. According to the Army memorandum, leases typically involve only cash payments because procedures to properly value and assure receipt of in-kind payment projects over a lease's terms can be administratively burdensome. This memorandum was issued partly in response to our 2011 work that found problems with the adequacy of those procedures. Army officials stated that in-kind payment projects may still be accepted, however, if installation officials determine that accepting them is in the best interest of the installation and they document the basis for that determination. Approaching the disadvantage from a different angle, the Air Force issued guidance that requires the return of 100 percent of the net proceeds from cash payments--up to $1 million--to the originating installation. This policy negates the advantage in-kind payment projects have in assuring that the originating installation receives 100 percent of the negotiated value of the in-kind payment projects for the real-property interest since the originating installation receives the full amount of the cash payment up to $1 million. According to Air Force officials, the policy was implemented to not only eliminate some of the administrative burden of accepting in-kind payment projects but also to reward installations for finding ways to reduce infrastructure costs by identifying alternative funding sources to military construction appropriations. Our review of various service policies governing real-estate transactions identified that all three services have issued guidance requiring that the cumulative value of in-kind payment projects reflect the fair-market value of the real-property interest in real-estate transactions and follow similar procedures to value domestic in-kind payment projects to ensure the receipt of fair- market value. Based, in part, on prior GAO recommendations, each of the services has issued guidance to require the determination of fair-market value for real-property assets included in real-estate transactions and have provided instructions on how to determine the fair-market value. For example, to determine the fair- market value of the real-property interest, the Army, Air Force and Navy use certified real-estate appraisers to determine the full market value of their real-property interests and require that the appraisals be conducted in accordance with the Uniform Standards of Professional Appraisal Practice prior to the finalization of any real-estate transaction. However, our review of service-level guidance governing real-estate transactions did not identify any specific steps to follow for valuing in-kind payment projects. Officials from the offices of the Army Corps of Engineers, Air Force Civil Engineer Center, and Naval Facilities Engineering Command confirmed that no specific guidance is available, but described similar broad procedures and documentation requirements that they used for determining the value of their in-kind payment projects. Officials indicated that installation public-works personnel, with the aid as needed of the respective service's regional real-property management office, generally were responsible for determining the value of the in-kind payment projects. In some cases, installation personnel prepare formal requirements documents, such as a DOD form 1391 or some other form of a statement of work, or independent government cost estimate to document the value of the in-kind work to be performed. In other cases, installation personnel review and validate a contractor's cost estimates for valuing certain projects instead of obtaining an independent cost estimate. Once the cost estimate is developed, installation public-works personnel, with the aid as needed of the respective service's regional real-property management office, use the cost estimate to negotiate with the lessee for the completion of the work. If the developer and installation officials agree to the value of the work and that the value of the work is within the range of fair-market value of the real-estate interest, the parties execute the agreement to document the services to be performed as an in-kind payment project in lieu of cash. Table 3 describes the 29 domestic projects and lists which type of procedures the service used to document the value of the in-kind payment projects. To confirm that the installations used the cost- estimating methods described for valuing in-kind payment projects by service officials, we collected and reviewed the documentation available that the Air Force and Navy used to value the domestic in-kind payment projects initiated during fiscal year 2013. All 29 projects had documentation available showing how the cost estimates were established and that the services had processes in place to value in-kind payment projects. We are not making any recommendations in this report. We provided DOD with a draft of this report for review. DOD provided technical comments on our findings, which we have incorporated where appropriate. We are sending copies of this report to appropriate congressional committees and to the Secretary of Defense; the Secretaries of the Army, Navy, and Air Force; and the Director of the Office of Management and Budget. In addition, this report is 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- 4523 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. To identify the in-kind payment projects that DOD reported it initiated during fiscal year 2013, we requested information and compiled data on in-kind construction and renovation projects for fiscal year 2013, their estimated value in U.S. dollars, the source of the in-kind payment project, the agreement or statutory authority, and their purpose and need from DOD components--U.S. Pacific Command; U.S. European Command; the Departments of the Army, Navy (including the Marine Corps), and Air Force. To determine whether a project was an in-kind payment project, we defined "in-kind construction and renovation projects" in this report as those resulting from certain host-nation support programs or from transactions (whether domestic or overseas) in which DOD provides goods, services, real property, or an interest in real property (including, but not limited to, a leasehold or easement) in exchange for compensation, and in which any part of that compensation is provided in the form of construction or renovation services. This definition of "in-kind construction and renovation projects," which was also used in our 2014 report, is broader than the concept of in-kind "payments" for residual value or received in-lieu-of cash compensation as part of a domestic agreement with a third party because the definition includes host-nation support for installation facilities overseas. Voluntary contributions made by a host nation for the purpose of defraying costs to station, maintain, and train U.S. military forces in its country do not constitute a payment or obligate a host nation to make payments to the United States. We excluded from our definition of "in-kind construction or renovation projects" gifts, sustainment projects (e.g., regularly scheduled maintenance and inspections), and cash sales or rent used to finance construction or renovation. To determine that a project was initiated in 2013, we also re-used our 2014 report's definition for "initiated" as that point at which the party responsible for completing the construction or renovation project received an official notice that allowed them to proceed with the project. To summarize the purposes of the projects, we used the real-property system classification code reported by DOD for each project as part of their data submission to us. The first digit of the code represents the facility class, and we used the facility class to represent the purpose of the projects. We corroborated the project data that each DOD component submitted by requesting that the component provide the supporting documentation where the data was obtained. We attempted to obtain supporting documentation for all the data elements for all of the domestic and overseas projects. We were able to obtain corroborating documentation for all of the domestic projects and the projects in Germany. The Office of the Assistant Secretary of Defense for Energy, Installations and Environment also reviewed the information the DOD components provided to GAO on in-kind construction and renovation projects for fiscal year 2013 for consistency and to ensure that the data were for projects that we considered "in-kind payment projects." Lastly, after we compiled the project data, we provided each component with an additional opportunity to review and confirm the data. By taking these steps, we determined that the reported project data for the domestic projects and the projects in Germany were generally sufficiently reliable for the purposes of this report. However, numerous projects in Korea and Japan were executed under bilateral agreements or as part of voluntary host nation programs where the host nation manages the programming and execution processes and supporting documentation for these projects was not readily available in English or the specific project costs incurred by the Governments of Korea and Japan were, according to DOD officials, not required to be disclosed to the United States. In the absence of supporting documentation, we asked DOD to describe, to the extent possible, the source or calculation method for the estimated value of the project cost, initiation date and the real-property system classification code. However, DOD officials had a limited explanation of the source of some of this basic project information because of international agreements and host-nation requested relocation projects that, according to DOD officials, do not require disclosure of specific costs by the host nation. For instance, DOD officials reported that for the 74 in- kind payment projects in Japan, they did not know the specific basis used by Japanese officials for calculating the value for 32 of the projects in Japan and did not have any information on the value for another 42 projects. The report notes instances where we were unable to determine the reliability of reported data for various projects in Japan and Korea Appendixes II through V provide a listing and detailed information for each in-kind payment project initiated by DOD in fiscal year 2013. To describe the potential advantages and disadvantages of accepting in- kind payments instead of cash for domestic real-estate transactions, we reviewed the services' policies and procedures regarding the types of payments (cash or in-kind payment project) to be included in real-estate transactions and Army and Air Force guidance that informs when cash or in-kind payment projects are advantageous or not advisable. We also interviewed officials from the Army Corps of Engineers, Air Force Civil Engineering Center, and Naval Facilities Engineering Command to discuss the factors they consider in determining whether to accept cash or in-kind payment projects, the rationale for preferring one type of payment (cash or in-kind payment project) over another, and the advantages and disadvantages in terms of administration and costs of executing cash versus in-kind payment projects. To identify the extent to which the military services have developed and implemented guidance and procedures to value in-kind payment projects to ensure the receipt of fair-market value for domestic projects, we compared the military services' guidance governing real-estate transactions to DOD's guidance for leasing and obtaining fair-market value of its real-estate interest. We then reviewed the military services' established policies and procedures where available to determine if their procedures would ensure receipt of fair-market value. Furthermore, we obtained and reviewed the in-kind payment project agreements and supporting documentation, such as the lease exhibits, site and task work orders, and the real-estate appraisal for the 29 domestic in-kind payment projects initiated during fiscal year 2013 to review whether the military services were following the established procedures they described for valuing these specific in-kind payment projects. In addition to the previously mentioned DOD offices, we also interviewed officials from the Office of the Assistant Secretary of Defense for Energy, Installations and Environment, Army Office Assistant Chief of Staff for Installation Management, Office of Assistant Secretary of the Air Force (Installations, Environment and Logistics), and Office of the Assistant Secretary of the Navy (Energy, Installations and Environment) to determine the procedures and documentation requirements used by the services to value in-kind payment projects. We conducted this performance audit from August 2014 to September 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. DOD reported that the military services initiated 31 in-kind payment projects involving construction or renovation in Korea in fiscal year 2013 with a value of about $1.6 billion. The projects support various DOD purposes throughout the Republic of Korea, but mostly for construction of new facilities at United States Army Garrison Humphreys. Most of the projects (23 of 31) initiated in Korea were either for improvements to or the construction of operations and training facilities (14 projects) or for housing and community facilities (9 projects). Table 4 provides a summary of the intended purposes and value of in-kind payment projects initiated in Korea in fiscal year 2013. We found that the reported values for 26 of the 31 projects were of undetermined reliability because of a lack of documentation. Table 5 provides specific information on the military service responsible for the project, location, purpose, type of agreement, source of in-kind payment project, and estimated value for the 31 in-kind payment projects involving construction or renovation initiated in Korea during fiscal year 2013. DOD reported that the military services initiated 74 in-kind payment projects involving construction or renovation in Japan in fiscal year 2013, 32 of which were valued at $264 million. The projects supported various purposes for the U.S. military's presence in the country. A majority of the projects initiated in Japan (39 of 74) were for improvements to or construction of utility and ground improvement infrastructure (23 projects) or for operations and training facilities (16 projects). Table 6 provides a summary of the intended purposes, value, and number of in-kind payment projects initiated in Japan in fiscal year 2013. We found that the reported estimated values for the in-kind payment projects in Japan were of undetermined reliability because of a lack of documentation. Table 7 provides specific information on the military service responsible for the project, location, purpose, type of agreement, source of in-kind payment project, and estimated value for the 74 in-kind payment projects involving construction or renovation initiated in Japan during fiscal year 2013. DOD reported that the Army initiated 3 in-kind construction and renovation projects in Germany with a value of over $20 million. The in- kind payment projects in Germany were initiated as compensation from the government of Germany to the United States for improvements the United States made to facilities that were being returned to the government of Germany. Table 8 provides specific information on the military service responsible for the project, location, purpose, type of agreement, source of in-kind payment project, and estimated value for the three in-kind payment projects involving construction or renovation initiated by the Army in Germany during fiscal year 2013. For the projects underway at U.S. locations, DOD reported that the military services initiated 29 in-kind construction and renovation projects with a total value estimated by DOD of $18.6 million. The Navy had the most in-kind payment projects (22), and all resulted from the lease of DOD property at Navy bases in Virginia, California, Florida, and West Virginia. A majority of the Navy projects (12) were for either improvements to or construction of research, development, test, and evaluation facilities (6 projects) or maintenance and production facilities (6 projects). The Air Force initiated seven in-kind payment projects, all resulting from either granting an easement or leasing DOD property at Eglin Air Force Base. All of the Air Force projects were for either improvements to or construction of administrative facilities or utility and ground infrastructure. The Army and Marine Corps did not initiate any domestic in-kind payment projects in fiscal year 2013. Table 9 provides a summary of the intended purposes and value of in-kind payment projects initiated in the United States in fiscal year 2013. Table 10 provides specific information on the military service responsible for the project, location, purpose, agreement, type of agreement, and estimated value for the 29 in-kind payment projects involving construction or renovation initiated in the United States during fiscal year 2013. GAO staff members who made key contributions to this report were Laura Durland, Assistant Director; Bonita Anderson; Shawn Arbogast; Pat Donahue; Dave Keefer; Richard Powelson; and Michael Willems.	DOD uses in-kind payments domestically and overseas in its real-estate transactions as an alternative to appropriated funds to help manage a global real-property portfolio that includes more than 555,000 facilities worldwide. In-kind payments refer to DOD receiving construction and renovation services rather than cash as payment for DOD providing goods, services, real property, or an interest in real property. The National Defense Authorization Act for Fiscal Year 2013 includes a provision for GAO to review the use of in-kind projects. This report identifies (1) the in-kind payment projects that DOD reported it initiated during fiscal year 2013, and discusses the potential advantages and disadvantages of accepting in-kind payments instead of cash for domestic real-estate transactions; and (2) the extent to which the military services have developed and implemented guidance and procedures to value domestic in-kind payments to ensure the receipt of fair-market value. The Act also provided for a listing of facilities constructed or renovated with the use of in-kind payments, and additional information, which GAO provides in appendixes to this report. To conduct this work, GAO collected in-kind project data from the military services, reviewed DOD and military service policy and project documentation, and interviewed military officials. GAO is not making recommendations in this report. DOD provided technical comments on the findings, which GAO has incorporated where appropriate. The Department of Defense (DOD) reported to GAO that 137 in-kind projects involving construction or renovation, valued at about $1.8 billion, were initiated in Korea, Japan, Germany and the United States during fiscal year 2013. In-kind payments involve non-cash options, such as renovating or constructing a facility. The table below summarizes the number and value (estimated costs to be incurred) of the projects by country and highlights the most frequently reported purpose for which the projects were used. Number, Value, and Purpose of In-Kind Construction and Renovation Projects Initiated by DOD during Fiscal Year 2013 Source: GAO summary of Department of Defense (DOD) data. \| GAO-15-649 a Subtotals for Korea and Japan and totals for DOD are of undetermined reliability because supporting documentation was not readily available in English, or, according to DOD officials, the costs incurred by the Governments of Korea and Japan were not required to be disclosed to the United States. The military services' real-estate and real-property management officials discussed four potential advantages to accepting in-kind payments rather than cash payments in domestic real-estate transactions, and identified one potential disadvantage. The reported advantages included generally obtaining facilities more quickly than through the appropriations process and installations receiving 100 percent of the value of negotiated payments received from a real-property interest as opposed to cash payments where only 50 percent of the value is guaranteed to be provided back to the installation. However, some services have implemented policy changes such as returning 100 percent of the value of the real-property interest back to the installation--up to $1 million when accepting cash payments. One reported disadvantage was in-kind payments may require additional administrative work and oversight compared to cash payments. GAO's review of service policies governing real-estate transactions identified that all services have issued guidance requiring that the cumulative value of in-kind projects reflect the fair-market value of the real-property interest in real-estate transactions. Each of the Services reported similar broad procedures for valuing in-kind payment projects and GAO's review of the documentation for the projects initiated in fiscal year 2013 confirmed that the installations were following the described procedures.	5,717	782
As we testified in July 2001, controls over grant and loan disbursements did not include a key edit check or follow-up process that would help identify schools that were disbursing Pell Grants to ineligible students. To identify improper payments that may have resulted from the absence of these controls, we performed tests to identify students 70 years of age and older because we did not expect large numbers of older students to be receiving Pell Grants, and in 1993, we identified abuses in the Pell Grant program relating to older students. Based on the initial results of our tests and because of the problems we identified in the past, we expanded our review of 7 schools that had disproportionately high numbers of older students to include recipients 50 years of age and older. We found that 3 schools fraudulently disbursed about $2 million of Pell Grants to ineligible students, and another school improperly disbursed about $1.4 million of Pell Grants to ineligible students. We also identified 31 other schools that had similar disbursement patterns to those making the payments to ineligible students. These 31 schools disbursed approximately $1.6 million of Pell Grants to potentially ineligible students. We provided information on these schools to Education for follow-up. Education staff and officials told us that they have performed ad hoc reviews in the past to identify schools that disbursed Pell Grants to ineligible students and have recovered some improper payments as a result. However, Education did not have a formal, systematic process in place specifically designed to identify schools that may be improperly disbursing Pell Grants. In September 2001, we issued an interim report in which we recommended that the Secretary of Education (1) establish appropriate edit checks to identify unusual grant and loan disbursement patterns and (2) design and implement a formal, routine process to investigate unusual disbursement patterns identified by the edit checks. In our July 2001 testimony, we told you that Education decided to implement a new edit check, effective beginning with the 2002-2003 school year to identify students who are 85 years of age or older. We explained that we believed the age limit was too high and would exclude many potential ineligible students. Education subsequently lowered the age limit for that edit to 75 years of age or older. If the student's date of birth indicates that he or she is 75 years of age or older, the system edit will reject the application and the school will not be authorized to give the student federal education funds until the student either submits a corrected date of birth or verifies that it is correct. However, without also looking for unusual patterns and following up, the edit may not be very effective, other than to correct data entry errors or confirm older students applying for aid. Education is also in the process of implementing a new system, called the Common Origination and Disbursement (COD) system, which is to become effective starting this month. Education officials told us that this integrated system will replace the separate systems Education has used for Pell Grants, direct loans, and other systems containing information on student aid, and it will integrate with applicant data in the application processing system. The focus of COD is to improve program and data integrity. If properly implemented, a byproduct of this new system should be improved controls over grant and loan disbursements. According to Education officials, they will be able to use COD to identify schools with characteristics like those we identified. However, until there is a mechanism in place to investigate schools once unusual patterns are identified, Education will continue to be vulnerable to the types of improper Pell Grant payments we identified during our review. We identified over $32 million of other potentially improper grant and loan payments. Based on supporting documentation provided to us by Education, we determined that over $21 million of these payments were proper. However, because Education did not provide adequate supporting documentation, we were unable to determine the validity of about $12 million of these transactions or conclude on the effectiveness of the related edit checks. While the amount of improper and potentially improper grant and loan payments we identified is relatively insignificant compared to the billions of dollars disbursed for these programs annually, it represents a control risk that could easily be exploited to a greater extent. During our investigation of potentially improper transactions, we found that two students submitted counterfeit Social Security cards and fraudulent birth certificates along with their applications for federal education aid, and they received almost $55,000 in direct loans and Pell Grants. The U.S. Attorney's Office is considering prosecuting these individuals. During our tests to determine the effectiveness of Education's edit checks, we also found data errors, such as incorrect social security numbers (SSN) of borrowers, in the Loan Origination System (LOS), which processes all loan origination data received from schools. Such errors could negatively affect the collection of student loans because without correct identifying information, Education may not be able to locate and collect from borrowers when their loans become due. We reviewed data for more than 1,600 loans and determined that for almost 500 of these loans, the borrowers' SSNs or dates of birth were incorrect in LOS. During the application process, which is separate from the loan origination process, corrections to items such as incorrect SSNs are processed in the Central Processing System (CPS); however, these corrections are not made to data in LOS. The new COD system discussed earlier may alleviate this situation. If this system works as intended, student data should be consistent among all of the department's systems, including CPS and LOS, because it will automatically share corrected data. However, until the new system is fully implemented, errors in LOS could impede loan collection efforts. As we testified in April and July 2001, significant internal control weaknesses over Education's process for third party drafts markedly increased the department's vulnerability to improper payments. Although segregation of duties is one of the most fundamental internal control concepts, we found that some individuals at Education could control the entire payment process for third party drafts. We also found that Education employees circumvented a key computer system application control designed to prevent duplicate payments. We tested third party draft transactions and identified $8.9 million of potential improper payments, $1.7 million of which remain unresolved because Education was unable to provide us with adequate supporting documentation. Education has referred the $1.7 million to the OIG for further investigation. Because of the risks we identified in the third party draft payment process, and in response to a letter from this subcommittee, Education took action in May 2001 to eliminate the use of third party drafts. In our July 2001 testimony before this subcommittee, we described internal control weaknesses over Education's purchase card program, including lack of supervisory review and improper authorization of transactions. We found that Education's inconsistent and inadequate authorization and review processes for purchase cards, combined with a lack of monitoring, created an environment in which improper purchases could be made with little risk of detection. Inadequate control over these expenditures, combined with the inherent risk of fraud and abuse associated with purchase cards, resulted in fraudulent, improper, and questionable purchases, totaling about $686,000, by some Education employees. During the time of our review, Education's purchase card program was operating under policies and procedures that were implemented in 1990. The policy provided very limited guidance on what types of purchases could be made with the purchase cards. While the policy required each cardholder and approving official to receive training on their respective responsibilities, we found that several cardholders and at least one approving official were not trained. In addition, we found that only 4 of Education's 14 offices required cardholders to obtain authorization prior to making some or all purchases, although Education's policy required all requests to purchase items over $1,000 be made in writing to the applicable department Executive Officer. We also found that approving officials did not use monitoring reports that were available from Bank of America to identify unusual or unauthorized purchases and that only limited use was made of available mechanisms to block specific undesirable Merchant Category Codes (MCC). These factors combined resulted in a lax control environment for this inherently risky program. Education officials told us the department relied on the approving official's review of the cardholder's monthly purchase card statements to ensure that all purchases made by employees were proper. We tested the effectiveness of the approving officials' review of 5 months of cardholder statements. We reviewed all 903 monthly statements that were issued during these months, totaling about $4 million, and found that 338, or 37 percent, totaling about $1.8 million, were not approved by the appropriate approving official. To determine whether improper purchases were made without being detected, we requested documentation supporting the $1.8 million of purchases that were not properly reviewed. We also requested documentation for other transactions that appeared unusual. We reviewed the documentation provided by Education and identified some fraudulent, improper, and questionable purchases, which I will discuss in a moment. We considered fraudulent purchases to be those that were unauthorized and intended for personal use. Improper purchases included those for government use that were not, or did not appear to be, for a purpose permitted by law or regulation. We also identified as improper purchases those made on the same day from the same vendor that appeared to circumvent cardholder single purchase limits. We defined questionable transactions as those that, while authorized, were for items purchased at an excessive cost, for a questionable government need, or both, as well as transactions for which Education could not provide adequate supporting documentation to enable us to determine whether the purchases were valid. We found one instance in which a cardholder made several fraudulent purchases from two Internet sites for pornographic services. The purchase card statements contained handwritten notes next to the pornography charges indicating that these were charges for transparencies and other nondescript items. According to the approving official, he was not aware of the cardholder's day-to-day responsibilities and did not feel that he was in a position to review the monthly statements properly. The approving official stated that the primary focus of his review was to ensure there was enough money available in that particular appropriation to pay the bill. As a result of investigations related to these purchases, Education management issued a termination letter that prompted the employee to resign. We identified over $140,000 of improper purchases. For example, one employee made improper charges totaling $11,700 for herself and a coworker to attend college classes that were unrelated to their jobs at the department. We also identified improper purchases totaling $4,427 from a restaurant in San Juan, Puerto Rico. These restaurant charges were incurred during a Year 2000 focus group meeting, and included breakfasts and lunches for federal employees and nonfederal guests. Education, however, could not provide us with any evidence that the nonfederal attendees provided a direct service to the government, which is required by federal statute in order to use federal appropriated funds to pay for the costs of nonfederal individuals at such meetings. We have referred this matter to Education's OIG. Other examples of improper purchases we identified include 28 purchases totaling $123,985 where Education employees made multiple purchases from a vendor on the same day. These purchases appear to violate the Federal Acquisition Regulation provision that prohibits splitting purchases into more than one segment to circumvent single purchase limits. For example, one cardholder purchased two computers from the same vendor at essentially the same time. Because the total cost of these computers exceeded the cardholder's $2,500 single purchase limit, the total of $4,184.90 was split into two purchases of $2,092.45 each. In some instances, Education officials sent memos to the offending cardholders reminding them of the prohibition against split purchases. We identified five additional instances, totaling about $17,000, in which multiple purchases were made from a single vendor on the same day. Although we were unable to determine based on the available supporting documentation whether these purchases were improper, these transactions share similar characteristics with the 28 split purchases. We identified questionable purchases totaling $286,894 where Education employees paid for new office furniture and construction costs to renovate office space that they were planning to vacate. Only a small amount of furniture, including chairs for employees with special needs, was moved to the new building when department employees relocated. In addition, we identified as questionable more than $218,000 of purchases for which Education provided us with no support or inadequate support to assess the validity. For $152,000, Education could not provide any support, nor did the department know specifically what was purchased, why it was purchased, or whether these purchases were appropriate. For the remaining $66,000, Education was able to provide only limited supporting documentation. As a result, we were unable to assess the validity of these payments, and we consider these purchases to be potentially improper. After our July 2001 testimony, we issued an interim report, that described the poor internal controls over purchase cards and made recommendations that the department reiterate to all employees established policies regarding the appropriate use of government purchase cards; strengthen the process of reviewing and approving purchase card transactions, focusing on identifying split purchases and other inappropriate transactions; and expand the use of MCCs to block transactions with certain vendors. Recently, Education has made some changes in the way it administers its purchase card program in an effort to address these three recommendations. For example, in December 2001, the department issued new policies and procedures that, among other things, (1) establish detailed responsibilities for the cardholder and the approving official, (2) prohibit personal use of the card and split purchases to circumvent the cardholder's single purchase limits, (3) require approving officials to review the appropriateness of individual purchases, (4) establish mandatory training prior to receiving the card and refresher training every 2 years, and (5) establish a quarterly quality review of a sample of purchase card transactions to ensure compliance with key aspects of the department's policy. If appropriately implemented, these new policies and procedures are a good step toward reducing Education's vulnerability to future improper purchases. Further, in July 2001, the department implemented a new process to approve purchase card purchases. Instead of the approving official signing a monthly statement indicating that all transactions are proper, the approval is now done electronically for each individual transaction. According to Education officials, most approving officials and cardholders received training on this new process. In order to assess the effectiveness of this new approval process, we reviewed a statistical sample of the monthly statements of cardholders for July, August, and September 2001. Purchases during these months totaled $1,881,220. While we found evidence in the department's system that all of the 87 statistically sampled monthly statements had been reviewed by the cardholder's approving official, 20 of the statements had inadequate or no support for items purchased, totaling $23,151. Based on our work, we estimate the most likely amount of unsupported or inadequately supported purchases during these 3 months is $65,817. The effectiveness of the department's new approval process has been minimized because approving officials are not ensuring that adequate supporting documentation exists for all purchases. In addition, these procedures do not address the problem of an authorizing official who does not have personal knowledge of the cardholder's daily activities and therefore is not in a position to know what types of purchases are appropriate. In response to our recommendation regarding the use of MCCs to block transactions from certain vendors, in November 2001, the department implemented blocks on purchases from a wide variety of merchants that provide goods and services totally unrelated to the department's mission, including veterinary services, boat and snowmobile dealers, and cruise lines. In total, Education blocked more than 300 MCCs. By blocking these codes, Education has made use of a key preventive control to help reduce its exposure to future improper purchases. As we told you in our July 2001 testimony, Education took action earlier in 2001 to improve internal controls related to the use of government purchase cards by lowering the maximum monthly spending limit to $30,000, lowering other cardholders' single purchase and total monthly purchase limits, and revoking some purchase cards. This action was in response to a letter from this subcommittee dated April 19, 2001, which highlighted our April 2001 testimony, in which we stated that some individual cardholders had monthly purchase limits as high as $300,000. These and the other steps I just discussed have helped reduce Education's exposure to improper purchase card activities. However, more needs to be done to improve the approval function, which is key to adequate control of these activities. Education lacked adequate internal controls over computers acquired with purchase cards and third party drafts which contributed to the loss of 179 pieces of computer equipment with an aggregate purchase cost of about $211,700. From May 1998 through September 2000, Education employees used purchase cards and third party drafts to purchase more than $2.9 million of personal computers and other computer-related equipment. Such purchases were actually prohibited by Education's purchase card policy in effect at the time. The weak controls we identified over computers acquired with purchase cards and third party drafts included inadequate physical controls-- according to Education's OIG, the department had not taken a comprehensive physical inventory for at least 2 years prior to October 2000--and lack of segregation of duties, which is one of the most fundamental internal controls. In the office where most of the missing equipment was purchased, two individuals had interchangeable responsibility for receiving more than $120,000 of computer equipment purchased by a single cardholder, from one particular vendor. In addition, these two individuals also had responsibility for bar coding the equipment, securing the equipment in a temporary storage area, and delivering the computers to the users. Furthermore, one of these two individuals was responsible for providing information on computer purchases to the person who entered the data into the department's asset management system. According to the cardholder who purchased the equipment, they did not routinely compare the purchase request with the receiving documents from the shipping company to ensure that all items purchased were received. In addition, our review of records obtained from the computer vendor from which Education made the largest number of purchase card and third party draft purchases showed that less than half of the $614,725 worth of computers had been properly recorded in the department's property records, thus compounding the lack of accountability over this equipment. Combined, these weaknesses created an environment in which computer equipment could be easily lost or stolen without detection. In order to identify computers that were purchased with purchase cards and third party drafts that were not included in the department's asset management system, we obtained the serial numbers of all pieces of computer equipment purchased from the largest computer vendor the department used. We compared these serial numbers to those in the department's asset management system and found that 384 pieces of equipment, including desktop computers, scanners, and printers totaling $399,900, appeared to be missing. In September 2001, we conducted an unannounced inventory to determine whether these computers were actually missing or were inadvertently omitted from the property records. We located 143 pieces of equipment that were not on the property records, valued at about $138,400, and determined that 241 pieces, valued at about $261,500, were missing at that time. After we completed our work in this area, we again visited the office where most of the computer equipment was missing because Education officials told us they had located some of the missing inventory. Officials in this office told us that they hired a contractor to keep track of their computers when the office moved to its new space. According to the officials, as part of its work, the contractor recorded the serial numbers of all computers moved and identified 86 of the 241 pieces of computer equipment that we were unable to locate during our unannounced inventory in September 2001. However, when Education staff and officials tried to locate this equipment, they were only able to find 73 of the 86 pieces of equipment. When we visited, we located only 62 of the 73 pieces of equipment. Education officials have been unable to locate the remaining 179 pieces of missing computer equipment with an acquisition value of about $211,700. They surmised that some of these items may have been surplused; however, there is no paperwork to determine whether this assertion is valid. According to Education officials, new policies have been implemented that do not allow individual offices to purchase computer equipment without the consent of the Office of the Chief Information Officer (OCIO). However, during our previously mentioned review of a statistical sample of purchase card transactions made from July 2001 through September 2001, we found three transactions totaling $2,231 for the purchase of computer equipment without any supporting documentation from the OCIO. Based on these results, the new policies are not being effectively implemented. This is another indication that the new purchase card approval function is not fully operating as an effective deterrent to improper purchases. In January 2002, we also reviewed the new computer ordering and receiving processes in the office where most of the missing equipment was purchased and found mixed results. These new policies are designed to maintain control over the procurement of computers and related equipment and include purchasing computers from preferred vendors that apply the department's inventory bar code label and record the serial number of each computer on a computer disk that is sent directly to the Education official in charge of the property records; loading the computer disk containing the bar code, serial number, and description of the computer into the property records; and having an employee verify that the computers received from the vendor match the serial numbers and bar codes on the shipping documents and the approved purchase order. However, a continued lack of adequate physical control negates the effectiveness of these new procedures. For example, the doors to the two rooms used to store computer equipment waiting to be installed were both unlocked and unattended. The receptionist at the mail counter next to the first storage room we visited told us that he had the door open to regulate the room temperature. The Education official responsible for this process stated that he did not know that mailroom personnel had access to this room. Furthermore, he stated that he does not have a key to either storage room. Also, during our second search for this equipment, we visited four rooms where some of the computers were stored and found them all unsecured.	The Department of Education has a history of financial management problems, including serious internal control weaknesses, that have affected the Department's ability to provide reliable financial information on its operations. GAO found that significant internal control weaknesses in payment processes and poor physical control over its computer assets led to fraud, improper payments, and lost assets. GAO also identified instances of grant and loan fraud and pervasive control breakdowns and improper payments in other areas, particularly involving purchasing cards.	4,767	97
Initially, U.S. deployment plans in support of the NATO peacekeeping effort (known as Operation Joint Endeavor) called for a heavy reliance on road and rail for transporting troops and equipment into Bosnia. These early plans assumed only minimal airlift support would be needed and that would be provided by C-130s based in Europe. However, when the time available to accomplish the logistics of moving troops and equipment into Bosnia diminished and when various problems, including weather and rail strikes limited the use of ground transportation, the U.S. deployment shifted to heavy reliance on cargo aircraft. The C-130s in the theater were supplemented by C-141s, C-5s, and C-17s from Air Mobility Command to meet the increasing need for airlift within the European theater. The range of airlift requirements for the Bosnia deployment were confined primarily to intratheater support, with no airdrop or medical evacuation requirements, and only limited support provided from outside the European theater. The C-17 aircraft, which is being produced for the Air Force by the McDonnell Douglas Corporation, is designed to airlift substantial payloads over long ranges without refueling. The C-17 is planned to replace the C-141 transport aircraft in the current fleet and to complement the larger but less maneuverable C-5 aircraft. In providing airlift support, the C-17 is intended to deliver cargo and troops directly to forward airfields; fly into small, austere airfields; land on short runways; transport outsize cargo such as tanks; and airdrop troops and equipment. In August 1995, the Air Force completed a 30-day reliability, maintainability, and availability (RM&A) evaluation of the aircraft's compliance with contractual RM&A specifications. During this evaluation, the C-17's RM&A performance was assessed during both peace-and wartime missions, including aerial refueling, equipment and personnel airdrops, formation flying, low-level operations, and operations into small austere airfields. Wartime missions ranged from 12.5 to 26 hours, while peacetime missions ranged from 2 to 20 hours. In July 1996 we reported that unresolved questions regarding certain important C-17 capabilities still remained after the RM&A evaluation. The Office of the Director, Operational Test and Evaluation, reported in November 1995 that based on its assessment of the C-17's operational effectiveness and suitability, the C-17 is suitable for the conduct of air-land missions and effective in the airdrop of personnel. However, the report also stated that additional testing was necessary to fully evaluate the aircraft's capability for the mass airdrop of personnel, and that the C-17 was not effective or suitable for routine aeromedical evacuation missions until certain deficiencies were corrected. Airlift aircraft, particularly the C-17, performed a major transportation support role during the Operation Joint Endeavor deployment, which occurred between the December 1995 and February 1996 time frame. According to Air Mobility Command (AMC) data, the majority of deployment airlift missions flown were intratheater support, as were the majority of C-17 deployment missions. (See fig. 1.) Intratheater support involved moving troops and equipment over short distances within the European theater, such as from Germany to the initial staging base in Hungary, or more directly into the American sector in Bosnia. There were few intertheater deployment requirements, which would have involved moving troops and equipment from the continental United States into the European theater. Of the 3,827 airlift missions flown during the deployment time frame, 2,924 or 76.4 percent were intratheater missions. Of the 1,000 total C-17 deployment missions, 917 or 91.7 percent were intratheater missions. Airlift aircraft moved about 45,369 tons of cargo and about 18,539 passengers during the deployment. Table 1 shows the amount of cargo and passengers carried by each type of airlift aircraft. As this table shows, the C-17 flew about 26 percent of the total deployment airlift missions and carried about 44 percent of total cargo and 30 percent of total passengers. In total, the C-17 carried an average cargo load of 39,784 pounds per mission compared to the specified average cargo weight of 48,649 pounds per mission over the lifetime of the aircraft. This is based on mission profiles in C-17 contract specifications. Overall, all types of airlift aircraft carried average cargo weights per mission that were less than their maximum payload capacities. Table 2 provides a comparison of average cargo loads per aircraft type, carried during the deployment, versus maximum aircraft payload capacity. As this table shows, none of the airlift aircraft carried maximum payload capacities during the deployment period we evaluated. The C-5 carried the largest reported average cargo weight per mission of 53,192 pounds while primarily performing intertheater missions, whereas the C-17 carried an average of 39,784 pounds while primarily performing intratheater missions. AMC representatives said that cargo weight data for C-130 aircraft was particularly unreliable since C-130 operators do not require tracking of total cargo weight on a per mission basis. In responding to a draft of this report, DOD noted that cargo weight plays a critical role in airlifter performance only in relatively rare missions when armored vehicles and/or ammunition are being carried. Further, DOD stated that less than maximum cargo weight does not equate to inefficient use of aircraft since maximum cargo volume, or the maximum volume of cargo that will fit into an airlifter, is usually reached before maximum cargo weight is reached. DOD also stated that since most airlift aircraft cargo loads reach maximum volume first, it would be unusual for any airplane to carry more than 50 percent of its maximum payload weight. Finally, DOD stated that AMC tracks cargo weight since center-of-gravity information is a safety of flight issue; however, since cargo volume is not a safety of flight issue, AMC does not track cargo volume carried on any airframe in the fleet. The prime contractor for the C-17 used a variety of performance parameters to assess C-17 performance during the deployment. DOD used the same parameters to assess C-17 performance during RM&A evaluation and initial operational test and evaluation. According to the contractor, the C-17 achieved better than required performance levels for five key maintenance and repair parameters during the December 1995 through February 1996 time frame. In addition, the contractor reported the C-17 achieved a mission capable rate of 86.2 percent versus a requirement of 81.2 percent during the same time period. The C-17's overall departure reliability and logistics departure reliability rates during the deployment also improved over those achieved during recent RM&A evaluations, according to AMC representatives. Overall departure reliability is the percentage of aircraft leaving no more than 20 minutes prior to and no later than 14 minutes after the scheduled departure time. Logistics departure reliability rate is the percentage of aircraft achieving on time departure not counting aircraft departure delays caused by weather. According to AMC, between December 19, 1995, and January 17, 1996, the C-17 achieved a logistics departure reliability rate of 97.8 percent and an overall departure reliability rate of 83.9 percent. The C-17 also performed well when moving outsize cargo, according to AMC representatives. Outsize cargo is defined as a single item that exceeds 1,000 inches long by 117 inches wide by 105 inches high in any one dimension and requires the use of a C-5 or C-17 aircraft (an M-1 tank, for example). AMC representatives listed the following examples of the C-17 moving outsize cargo during the deployment: one C-17 landed at Tuzla with a self-propelled 155-mm howitzer, a support vehicle, and trailer; seven C-17s moved 15 Bradley fighting vehicles plus support in 1 day during the deployment; and three C-17s moved 25 pontoon bridge sections to Hungary. The Bosnia deployment airlift requirements did not include the need for any airlift aircraft to perform or demonstrate several of the airlift roles and missions which the Army considers important operational capabilities for the C-17 in providing support for certain Army missions. The C-17 had trouble performing, or did not perform, several of these tasks during operational testing and the RM&A evaluation. For example, Army reports on the C-17 RM&A evaluation and initial operational testing results have raised questions regarding the C-17's ability to operate on short, wet runways; perform personnel airdrops missions; and provide aeromedical evacuation. The Bosnia deployment did not provide the opportunity for any airlift aircraft to demonstrate these capabilities. During initial operational testing, concerns surfaced regarding the C-17's ability to operate on short, wet runways. The Army defined a short austere airfield as a 3,000-foot long runway, either paved or unpaved, for the purpose of operational testing. Simulations have shown that, during a landing on wet unpaved surfaces, the C-17 would slide off the end of a 3,000-foot long runway. Rather, simulations suggest that C-17 landings with a full payload on a wet (paved or unpaved) surface would require a 5,000-foot runway. Since none of the runways used by any airlift aircraft during the deployment were less than 7,874 feet, the Bosnia deployment did not provide the opportunity to assess any airlifter's ability to operate on short, wet runways. The C-17 also did not have the opportunity to demonstrate its ability to support personnel airdrops since no airlift aircraft had to fly such missions during the Operation Joint Endeavor deployment. The Army considers personnel formation airdrops a logical extension of its personnel airdrop requirement and, primarily due to safety concerns, it did not certify personnel formation airdrops for the C-17 during operational testing. According to DOD, the Army and the Air Force are jointly working to address C-17 formation personnel airdrop issues. Airlift aircraft were also not required to perform aeromedical evacuations during the Bosnia deployment. According to the Army's report on C-17 initial operational test results, the C-17 demonstrated the capability to move 36 patients versus an Army requirement to move 48 patients in an aeromedical evacuation. Further, the Army notes that initial operational testing found a number of other deficiencies in the C-17 aircraft that make it unsuitable for use in performing routine aeromedical evacuations. But, according to AMC, all current C-17s will be capable of fulfilling designated aeromedical airlift roles by June 1997. According to DOD, in August 1996, based on the AMC Commander's recommendation to amend the published C-17 aeromedical evacuation requirement, the requirement was changed from 48 to 36 patient litters. DOD notes that while the AMC Commander cannot change the requirement, the Commander can make declarations of capability, and the new capability for 36 litters will be reflected in an updated C-17 Operational Requirements Document. DOD believes the C-17's performance in the Bosnia deployment validates the November 1995 Defense Acquisition Executive's decision to procure an additional 80 C-17s, for a total of 120 aircraft. The scope of work for this report did not include a validation/invalidation of that decision. However, in our report, Military Airlift: Options Exist For Meeting Requirements While Acquiring Fewer C-17s (GAO/NSIAD-97-38, Feb. 1997), we suggested that Congress consider funding only 100 C-17s, which would save over $7 billion in life-cycle costs over the 120 C-17 aircraft program. We reported that DOD can meet mission requirements with 100 C-17s by employing various low-cost options and by extending the use of alternatives for accomplishing the extended range brigade airdrop. DOD also stated that it was inappropriate to include any discussion regarding C-17 capabilities to perform short-wet runway operations, personnel airdrops, and aeromedical evacuations in our report, since during the deployment there were no missions requiring those capabilities. We disagree. Our scope of work included an examination of the missions that the C-17 performed during the deployment and a comparison of how it was used versus its expected capabilities. A discussion of whether the C-17 had the opportunity to perform the stated capabilities during the deployment is appropriate to the discussion, since these are C-17 operational capabilities that have yet to be fully demonstrated. DOD also provided suggestions for additional comments to be included in the report. To the extent practical, those comments are reflected in the body of our report. DOD's written comments are included in appendix I. To determine (1) how the C-17 was used during the deployment and (2) whether the deployment required airlift aircraft to perform any of the unique operational capabilities the C-17 is expected to perform, we interviewed officials and obtained, reviewed, and analyzed reports and electronic airlift transportation performance information. This information was provided by the U.S. Transportation Command and AMC. We also interviewed deployment airlift customers and analyzed reports and data available from the U.S. European Command; the U.S. Army, Europe; and the U.S. Air Forces, Europe; as well as discussed and documented their observations concerning the performance of the C-17 from a customer perspective. To determine the operational capabilities required and actually performed during the deployment, we interviewed C-17 pilots, maintainers, and loadmasters at the 437th Air Wing, Charleston Air Force Base, South Carolina; and conducted interviews and analyzed reports on C-17 deployment experience from representatives of the 621st Air Mobility Operations Group at Travis Air Force Base, California, who comprised and operated the Tanker Airlift Control Elements at Zagreb, Croatia, and Taszar, Hungary. The scope of our work did not include an assessment of the cost-effectiveness of using one airlift aircraft to provide intratheater airlift support versus another. However, we are currently assessing DOD's intratheater airlift requirements and will address the cost-effectiveness issue in that report. To assess reported airlift activity by aircraft type during the deployment, we analyzed data contained in AMC's Military Airlift Integrated Reporting System (MAIRS) and the AMC History System (AHS). AHS is a database of airlift sorties and is intended to replace MAIRS; however, AMC was using both systems at the time of the Joint Endeavor deployment. AMC representatives expressed concern about data accuracy and reliability of both databases. At the time of our review, AMC officials could not provide us with a statistical error rate or confidence level with which they, or we, could rely on data derived from these systems. However, AMC used this data to support some of its C-17 performance claims. Our assessment of those databases supports various AMC representatives' concerns regarding data reliability and accuracy. Our review of data within these systems identified records containing questionable information. For example, 57 records indicated that aircraft took off but never landed, 11 records indicated sorties had negative flying hour lengths, and 438 records indicated that airlift aircraft flew missions into Bosnia and/or Hungary but carried no cargo or passengers. We presented our observations in a fact sheet to AMC officials who agreed that our analysis highlights some problems it needs to address. Further, they indicated these problems could be the result of data input errors, lack of proper review of data input in the theater, or a lack of system validation. AMC officials also said that some of our concerns may have resulted from problems with our analysis; however, AMC will need to perform a more detailed review of the data to make that determination. AMC officials are aware of inaccurate data and reliability problems associated with these systems and have had an outside contractor working to resolve them since March 1996. AMC said that the contractor underestimated the effort required and had revised its completion date to the end of October 1996. However, the contractor had not completed work by the time we prepared this report in December 1996. Although the accuracy of AMC's data covering the activities of its airlift aircraft is questionable, we attempted to obtain an accurate picture of how the C-17 was used and how well it performed by contacting and interviewing Air Force operational, maintenance, and loadmaster personnel who were directly involved with operating the C-17 during the Joint Endeavor deployment. We also interviewed AMC's customers in the European theater, including high-level Army and Air Force officials. In addition to working with AMC to resolve data issues, we have drafted a letter of inquiry for the Secretary of Defense regarding concerns we have about the potential effect of unreliable and/or inaccurate airlift performance and operational data. We are confident that, in general, we have a fairly accurate picture of how the C-17 was used and how it performed during the deployment, although AMC has not taken a formal position on the reliability and/or accuracy of the specific data in its databases. Since AMC had not performed a reliability assessment of these systems, and because it is not able to provide a statistical error rate or confidence level for data derived from these systems, all of this data must be qualified. We conducted our review from May to December 1996 in accordance with generally accepted government auditing standards. We provided a draft of this report to DOD and incorporated their comments where appropriate. The department's written comments are included in appendix I. We are providing copies of this report to the appropriate House and Senate Committees and the Secretaries of Defense, the Air Force, and the Army. We will also provide copies to other interested parties upon request. If you or your staff have any questions concerning this report, please call me on (202) 512-5140. The major contributors to this report were William C. Meredith, John G. Wiethop, and David J. Henry. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.	GAO reviewed how the C-17 aircraft was used during the North Atlantic Treaty Organization (NATO) peacekeeping force deployment to Bosnia, focusing on: (1) how well it performed during the deployment; and (2) whether deployment transportation requirements included the need for airlift aircraft to perform any of the C-17's expected operational capabilities. GAO found that: (1) during Operation Joint Endeavor, the C-17 accomplished the airlift tasks required of it, as did other airlifters such as the C-141, the C-5, and the C-130; (2) the C-17 was used to satisfy the Army's immediate need for a high-capacity, short distance air transport to move troops, equipment, and outsize cargo from central Europe into the Bosnia area of operations; (3) the C-17 performed about 26 percent of the deployment airlift missions and carried about 44 percent of the cargo moved during the deployment; (4) the C-17 also performed a limited number of strategic airlift missions in which it delivered cargo from the continental United States to final destinations in Germany, Hungary, and Bosnia; (5) according to contractor reports, the C-17 achieved a mission capable rate of 86.2 percent during the December 1995 through February 1996 time frame compared to a required rate of 81.2 percent; (6) transportation needs of the Bosnia deployment did not offer the opportunity for any airlift aircraft to perform or demonstrate several operational roles and missions; and (7) consequently, the C-17 was not required to perform many tasks which it had trouble doing, or did not do, during operational testing.	4,021	328
In preparation for the 2010 Census, the address canvassing operation was tested as part of the 2008 Dress Rehearsal. From May 7 to June 25, 2007, the Bureau conducted its address canvassing operation for its 2008 Dress Rehearsal in selected localities in California (see fig. 1) and North Carolina (see fig. 2). The 2008 Census Dress Rehearsal took place in San Joaquin County, California, and nine counties in the Fayetteville, North Carolina, area. According to the Bureau, the dress rehearsal sites provided a comprehensive environment for demonstrating and refining planned 2010 Census operations and activities, such as the use of HHCs equipped with Global Positioning System (GPS). Prior to Census Day, Bureau listers perform the address canvassing operation, during which they verify the addresses of all housing units. Address canvassing is a field operation to help build a complete and accurate address list. The Bureau's Master Address File (MAF) is intended to be a complete and current list of all addresses and locations where people live or potentially live. The Topographically Integrated Geographic Encoding and Referencing (TIGER®️) database is a mapping system that identifies all visible geographic features, such as type and location of streets, housing units, rivers, and railroads. Consequently, MAF/TIGER®️ provides a complete and accurate address list (the cornerstone of a successful census) because it identifies all living quarters that are to receive a census questionnaire and serves as the control mechanism for following up with households that do not respond. If the address list is inaccurate, people can be missed, counted more than once, or included in the wrong location(s). Generally, during address canvassing, census listers go door to door verifying and correcting addresses for all households and street features contained on decennial maps. The address listers add to the 2010 Census address list any additional addresses they find and make other needed corrections to the 2010 Census address list and maps using GPS-equipped HHCs. Listers are instructed to compare what they discover on the ground to what is displayed on their HHC. As part of the 2004 and 2006 Census Tests, the Bureau produced a prototype of the HHC that would allow the Bureau to automate operations, and eliminate the need to print millions of paper questionnaires, address registers, and maps used by temporary listers to conduct address canvassing and non-response follow-up as well as to allow listers to electronically submit their time and expense information. The HHCs for these tests were off-the-shelf computers purchased and programmed by the Bureau. While the Bureau was largely testing the feasibility of using HHCs for collecting data, it encountered a number of technical problems. The following are some of the problems we observed during the 2004and 2006 tests: slowness and frequent lock-up, problems with slow or unsuccessful transmissions, and difficulty in linking a mapspot to addresses for multi-unit structures. For the 2008 Dress Rehearsal and the 2010 Census, the Bureau awarded the development of the hardware and software for a HHC to a contractor. In March 2006, the Bureau awarded a 5-year contract of $595,667,000 to support the FDCA project. The FDCA project includes the development of HHCs, and Bureau officials stated that the HHCs would ultimately increase the efficiency and reduce costs for the 2010 Census. According to the Director of the Census Bureau, the FDCA program was designed to supply the information technology infrastructure, support services, hardware, and software to support a network for almost 500 local offices and for HHCs that will be used across the country. He also indicated that FDCA can be thought of as being made up of three fundamental components: (1) automated data collection using handheld devices to conduct address canvassing, and to collect data during the non-response follow-up of those households that do not return the census form; (2) the Operations Control System (OCS) that tracks and manages decennial census workflow in the field; and (3) census operations infrastructure, which provides office automation and support for regional and local census offices. The 2008 Dress Rehearsal Address Canvassing operation marked the first time the contractor-built HHCs and the operations control system were used in the field. In 2006, we reported that not using the contractor-built HHCs until 2008 Dress Rehearsal Address Canvassing would leave little time to develop, test, and incorporate refinements to the HHCs in preparation for the 2010 Census. We also reported that because the Bureau-developed HHC had performance problems, the introduction of a new HHC added another level of risk to the success of the 2010 Census. For the 2008 Dress Rehearsal, the FDCA contractor developed the hardware and software used in census offices and on the HHCs. See figure 3 for more details. The HHC included several applications that varied depending on the role of the user: software enabling listers to complete their time and expense electronically; text messaging software enabling listers to communicate via text message; software enabling staff to review all work assigned to them and enabling crew leaders to make assignments; software enabling staff to perform address canvassing; and an instrument enabling quality control listers to perform quality assurance tasks. The dress rehearsal address canvassing started May 7, 2007, and ended June 25, 2007, as planned. The Bureau reported in its 2008 Census Dress Rehearsal Address Canvassing Assessment Report being able to use the HHC to collect address information for 98.7 percent of housing units visited and map information for 97.4 percent of the housing units visited. There were 630,334 records extracted from the Bureau's address and mapping database and sent to the Bureau's address canvassing operation and 574,606 valid records following the operation. Mapspots (mapping coordinates) were collected for each structure that the Bureau defined as a Housing Unit, Other Living Quarters, or Uninhabitable. Each single- family structure received its own mapspot, while multi-unit structures shared a single mapspot for all the living quarters within that structure. According to the Bureau's 2008 Dress Rehearsal Address Canvassing Assessment Report, the address canvassing operation successfully collected GPS mapspot coordinates in the appropriate block for approximately 92 percent of valid structures; most of the remaining 8 percent of cases had a manual coordinate that was used as the mapspot. It is not clear whether this represents acceptable performance because the Bureau did not set thresholds as to what it expected during the address canvassing dress rehearsal. Listers experienced multiple problems using the HHCs. For example, we observed and the listers told us that they experienced slow and inconsistent data transmissions from the HHCs to the central data processing center. The listers reported the device was slow to process addresses that were a part of a large assignment area. Bureau staff reported similar problems with the HHCs in observation reports, help desk calls, and debriefing reports. In addition, our analysis of Bureau documentation revealed problems with the HHCs consistent with those we observed in the field: Bureau observation reports revealed that listers most frequently had problems with slow processing of addresses, large assignment areas, and transmission. The help desk call log revealed that listers most frequently reported issues with transmission, the device freezing, mapspotting, and large assignment areas. The Bureau's debriefing reports illustrated the impact of the HHCs problems on address canvassing. For example, one participant commented that the listers struggled to find solutions to problems and wasted time in replacing the devices. Collectively, the observation reports, help desk calls, debriefing reports, and Motion and Time Study raised serious questions about the performance of the HHCs during the address canvassing operation. The Bureau's 2008 Dress Rehearsal Address Canvassing Assessment Report cited several problems with HHCs. For example, the Bureau observed the following problems: substantial software delays for assignment areas with over 700 housing substantial software delays when linking mapspots at multi-unit unacceptable help desk response times and insufficient answers, which "severely" affected productivity in the field, and inconsistencies with the operations control system that made management of the operation less efficient and effective. The assessment reported 5,429 address records with completed field work were overwritten during the course of the dress rehearsal address canvassing operation, eliminating the information that had been entered in the field. The Bureau reported that this occurred due to an administrative error that assigned several HHCs the same identification number. Upon discovering the HHC mistake, the FDCA contractor took steps during the dress rehearsal address canvassing operation to ensure that all of the HHC devices deployed for the operation had unique identification numbers. Left uncorrected, this error could have more greatly affected the accuracy of the Bureau's master address list during dress rehearsal. The HHCs are used in a mobile computing environment where they upload and download data from the data processing centers using a commercial mobile broadband network. The data processing centers housed telecommunications equipment and the central databases, which were used to communicate with the HHCs and manage the address canvassing operation. The HHCs download data, such as address files, from the data processing centers, and upload data, such as completed work and time and expense forms, to the data processing centers. The communications protocols used by the HHCs were similar to those used on cellular phones to browse Web pages on the Internet or to access electronic mail. For HHCs that were out of the coverage area of the commercial mobile broadband network or otherwise unable to connect to the network, a dial- up capability was available to transfer data to the data processing centers. FDCA contract officials attributed HHC transmission performance problems to this mobile computing environment, specifically: telecommunication and database problems that prevented the HHC from communicating with the data center, extraneous data being transmitted (such as column and row headings), an unnecessary step in the data transmission process. When problems with the HHC were identified during address canvassing, the contractor downloaded corrected software in five different instances over the 7-week period of the dress rehearsal address canvassing operation. After address canvassing, the Bureau established a review board and worked with its contractor to create task teams to address FDCA performance issues such as (1) transmission problems relating to the mobile computing environment, (2) the amount of data transmitted for large assignment areas, and (3) options for improving HHC performance. One factor that may have contributed to these performance problems was a compressed schedule that did not allow for thorough testing before the dress rehearsal. Given the tighter time frames going forward, testing and quickly remedying issues identified in these tests becomes even more important. Productivity results were mixed when Census listers used the HHC for address canvassing activities. A comparison of planned versus reported productivity reveals lister productivity exceeded the Bureau's target by almost two housing units per hour in rural areas, but missed the target by almost two housing units per hour in urban/suburban areas. Further, the reported productivity for urban/suburban areas was more than 10 percent lower than the target, and this difference will have cost implications for the address canvassing operation. Table 1 shows planned and reported productivity data for urban/suburban and rural areas. While productivity results were mixed, the lower than expected productivity in urban/suburban areas represents a larger problem as urban/suburban areas contain more housing units--and therefore a larger workload. According to the Bureau's dress rehearsal address canvassing assessment report, HHC problems appear to have negatively affected listers' productivity. The Bureau's assessment report concluded that "productivity of listers decreased because of the software problems." However, the extent of the impact is difficult to measure, as are other factors that may have affected productivity. The effect of decreases in productivity can mean greater costs. The Bureau, in earlier cost estimates, assumed a productivity rate of 25.6 housing units per hour, exceeding both the expected and reported rates for the dress rehearsal. We previously reported that substituting the actual address canvassing productivity for the previously assumed 25.6 units per hour resulted in a $270 million increase in the existing life-cycle cost estimate. The Bureau has made some adjustments to its cost estimates to reflect its experience with the address canvassing dress rehearsal, but could do more to update its cost assumptions. We recommended the Bureau do so in our prior report. The Bureau took some steps to collect data, but did not fully evaluate the performance of the HHCs. For instance, the contractor provided the Bureau with data such as average transmission times collected from transmission logs on the HHC, as required in the contract. But the Bureau has not used these data to analyze the full range of transmission times, nor how this may have changed throughout the entire operation. Without this information, the magnitude of the handheld computers' performance issues throughout dress rehearsal was not clear. Also, the Bureau had few benchmarks (the level of performance it is expected to attain) to help evaluate the performance of HHCs throughout the operation. For example, the Bureau has not developed an acceptable level of performance for total number of failed transmissions or average connection speed. Additionally, the contractor and the Bureau did not use the dashboard specified in the contract for dress rehearsal activities. Since the dress rehearsal, the Bureau has specified certain performance requirements that should be reported on a daily, weekly, monthly, and on an exception basis. In assessing an "in-house built" model of the HHC, we recommended in 2005 that the Bureau establish specific quantifiable measures in such areas as productivity that would allow it to determine whether the HHCs were operating at a level sufficient to help the Bureau achieve cost savings and productivity increases. Further, our work in the area of managing for results has found that federal agencies can use performance information, such as that described above, to make various types of management decisions to improve programs and results. For example, performance information can be used to identify problems in existing programs, identify the causes of problems, develop corrective actions, plan, identify priorities, and make resource allocation decisions. Managers can also use performance information to identify more effective approaches to program implementation. The Bureau had planned to collect certain information on operational aspects of HHC use, but did not specify how it would measure HHC performance. Specifically, sections of the FDCA contract require the HHCs to have a transmission log with what was transmitted, the date, time, user, destination, content/data type, and outcome status. In the weeks leading up to the January 16, 2008, requirements delivery, Bureau officials drafted a document titled "FDCA Performance Reporting Requirements," which included an array of indicators such as average HHC transmission duration, total number of successful HHC transmissions, total number of failed HHC transmissions, and average HHC connection speed. Such measures may be helpful to the Bureau in evaluating its address canvassing operations. While these measures provide certain useful information, they only cover a few dimensions of performance. For example, to better understand transmission time performance, it is important to include analyses that provide information on the range of transmission times. The original FDCA contract also requires that the contractor provide near real-time reporting and monitoring of performance metrics on a "control panel/dashboard" application to visually report those metrics from any Internet-enabled PC. Such real-time reporting would help the Bureau and contractor identify problems during the operation, giving them the opportunity to quickly make corrections. However, the "control panel/dashboard" application was not used during the dress rehearsal. The Bureau explained that it needed to use the dress rehearsal to identify what data or analysis would be most useful to include on the dashboard it expects to use for address canvassing in 2009. In January and February 2008, the Bureau began to make progress in identifying the metrics that will be used in the dashboard. According to Bureau officials, the dashboard will include a subset of measures from the "FDCA Performance Reporting Requirements" such as average HHC transmission time and total number of successful and failed HHC transmissions, which would be reported on a daily basis. Between April 28, 2008, and May 1, 2008, the Bureau and its contractor outlined the proposed reporting requirements for the dashboard. The Bureau indicated that the dashboard will be tested during the systems testing phase, which is currently scheduled for November and December 2008. They did not specify if the dashboard will be used in the operational field test of address canvassing, which is the last chance for the Bureau to exercise the software applications under Census-like conditions. The dress rehearsal address canvassing study assessment plan outlines the data the Bureau planned to use in evaluating the use of the HHC, but these data do not allow the Bureau to completely evaluate the magnitude of performance problems. The plan calls for using data such as the number of HHCs shipped to local census offices, the number of defective HHCs, the number of HHCs broken during the dress rehearsal address canvassing operation, the number checked in at the end of the operation, whether deployment affected the ability of staff to complete assignments, software/hardware problems reported through the help desk, the amount of time listers lost due to hardware or software malfunctions, and problems with transmissions. The plan also called for the collection of functional performance data on the HHCs, such as the ability to collect mapspots. Despite reporting on the data outlined in the study plan, the Bureau's evaluation does not appear to cover all relevant circumstances associated with the use of the HHC. For example, the Bureau does not measure when listers attempt transmissions but the mobile computing environment does not recognize the attempt. Additionally, the Bureau's evaluation does not provide conclusive information about the total amount of downtime listers experienced when using the HHC. For example, in the Bureau's final 2008 Census Dress Rehearsal Address Canvassing Assessment Report, the Bureau cites its Motion and Time Study as reporting observed lister time lost due to hardware or software malfunctions as 2.5 percent in the Fayetteville and 1.8 percent in the San Joaquin County dress rehearsal locations. The report also notes that the basis for these figures does not include either the downtime between the onset of an HHC error and the last/successful resolution attempt, nor does it include the amount of time a lister spent unable to work due to an HHC error. These times were excluded because they were not within the scope of the Motion and Time Study of address canvassing tasks. However, evaluating the full effect of HHC problems should entail accounting for the amount of time listers spend resolving HHC errors or are not engaged in address canvassing tasks due to HHC errors. Because of the performance problems observed with HHCs during the 2008 Dress Rehearsal, and the Bureau's subsequent redesign decision to use the HHCs for the actual address canvassing operation, HHC use will have significant implications for the 2010 Address Canvassing operation. In his April 9, 2008, congressional testimony, the Bureau's Director outlined next steps that included developing an integrated schedule for address canvassing and testing. On May 22, 2008, the Bureau issued this integrated schedule, which identifies activities that need to be accomplished for the decennial and milestones for completing tasks. However, the milestones for preparing for address canvassing are very tight and in one case overlap the onset of address canvassing. Specifically, the schedule indicates that the testing and integrating of HHCs will begin in December 2008 and be completed in late March 2009; however, the deployment of the HHCs for address canvassing will actually start in February 2009, before the completion of testing and integration. It is uncertain whether the testing and integration milestones will permit modification to technology or operations prior to the onset of operations. Separately, the Bureau on June 6, 2008, produced a testing plan for the address canvassing operation. This testing plan includes a limited operational field test of address canvassing; however, the plan does not specify that the dashboard described earlier will be used in this test. The address canvassing testing plan is a high-level plan that describes a partial redo of the dress rehearsal to validate certain functionality and represents a reasonable approach. However, it does not specify the basis for readiness of the FDCA solution for address canvassing and when and how this determination will occur--when the Bureau would say that the contractor's solution meets its operational needs. Field staff reported problems with HHCs when working in large assignment areas during address canvassing. According to Bureau officials, the devices could not accommodate more than 720 addresses--3 percent of dress rehearsal assignment areas were larger than that. The amount of data transmitted and used slowed down the HHCs significantly. In a June 2008, congressional briefing, Bureau officials indicated once other HHC technology issues are resolved the number of addresses the HHCs can accommodate may increase or decrease from the current 720. Identification of these problems caused the contractor to create a task team to examine the issues, and this team recommended improving the end-to-end performance of the mobile solution by controlling the size of assignment area data delivered to the HHC for address canvassing. One specific recommendation was limiting the size of assignment areas to 200 total addresses. However, the redesign effort took another approach and decided that the Bureau will use laptops and software used in other demographic surveys to collect information in large blocks (assignment areas comprise one or more blocks). Specifically, the collection of information in large blocks (those with over 700 housing units) will be accomplished using existing systems and software known as the Demographic Area Address Listing (DAAL) and the Automated Listing and Mapping Instrument (ALMI). Prior to the start of the address canvassing operation, blocks known to have more than 700 housing units would be removed from the scope of the FDCA solution. These blocks will be flagged in the data delivered to the contractor and will not be included for the address canvassing operation. Because this plan creates dual-track operations, Bureau officials stated that differences exist in the content of the extracts and that they are currently working to identify the differences and determine how to handle those differences. Additionally, they said that plans for the testing of the large block solution are expected to occur throughout various phases of the testing for address canvassing and will include performance testing, interface testing, and field testing. The costs for a help desk that can support listers during address canvassing were underestimated during planning and have increased greatly. Originally, the costs for the help desk were estimated to be approximately $36 million, but current estimates have the cost of the help desk rising as high as $217 million. The increased costs are meant to increase the efficiency and responsiveness of the help desk so that listers do not experience the kind of delays in getting help that they did during the address canvassing dress rehearsal. For example, the Bureau's final assessment of dress rehearsal address canvassing indicated that unacceptable help desk response times and insufficient answers severely affected productivity in the field. Field staff told us that help desk resources were unavailable on the weekends and that they had difficulty getting help. The increased costs cited above are due in part to improvements to the help desk, such as expanded availability and increased staffing. Lower than expected productivity has cost implications. In fact, the Bureau is beginning to recognize part of this expected cost increase. Specifically, the Bureau expects to update assumptions for the number of hours listers may work in a given week. The model assumes 27.5 hours per week, but the Bureau now expects this to be 18. This will make it necessary to hire more listers and, therefore, procure more HHCs. The Bureau adjusted its assumptions based on its experience in the dress rehearsal. Our related report recommends updating assumptions and cost estimates. The dress rehearsal represents a critical stage in preparing for the 2010 Census. This is the time when Congress and others should have the information they need to know how well the design for 2010 is likely to work, what risks remain, and how those risks will be mitigated. We have highlighted some of the risks facing the Bureau in preparing for its first major field operation of the 2010 Census--address canvassing. Going forward, it will be important for the Bureau to specify how it will ensure that this operation will be successfully carried out. If the solutions do not work in resolving HHC technology issues the Bureau will not achieve productivity targets, and decennial costs will continue to rise. Without specifying the basis and time frame for determination of readiness of the FDCA address canvassing solution, the Bureau will not have the needed assurance that the HHCs will meet its operational needs. Such testing is especially critical for changes to operations that were not part of the address canvassing dress rehearsal. For example, because data collection in large blocks will be conducted in parallel with the address canvassing operation, and the Bureau is currently working to identify the differences in the content of the resulting extracts, it is important that this dual-track be tested to ensure it will function as planned. Furthermore, without benchmarks defining successful performance of the technology, the Bureau and stakeholders will be less able to reliably assess how well the technology worked during address canvassing. Although the Bureau field tested the HHCs in its dress rehearsal last year, it did not then have in place a dashboard for monitoring field operations. The Bureau's proposal for a limited field operations test this fall provides the last opportunity to use such a dashboard in census-like conditions. To be most effective, test results, assessments, and new plans need to be completed in a timely fashion, and they must be shared with those with oversight authority as soon as they are completed. To ensure that the Bureau addresses key challenges facing its implementation of the address canvassing operation for the 2010 Census, we recommend that the Secretary of Commerce direct the Bureau to take the following four actions: Specify the basis for determining the readiness of the FDCA solution for address canvassing and when and how this determination will occur-- when the Bureau would say that the contractor's solution meets its operational needs. Specify how data collection in large blocks will be conducted in parallel with the address canvassing operation, and how this dual-track will be tested in order to ensure it will function as planned. Specify the benchmarks for measures used to evaluate the HHC performance during address canvassing. Use the dashboard to monitor performance of the HHCs in the operational field test of address canvassing. The Secretary of Commerce provided written comments on a draft of this report on July 25, 2008. The comments are reprinted in appendix II. Commerce had no substantive disagreements with our conclusions and recommendations and cited actions it is taking to address challenges GAO identified. Commerce offered revised language for one recommendation, which we have accepted. Commerce also provided technical corrections, which we incorporated. Specifically, we revised our recommendation that the Bureau "Specify the basis for acceptance of the FDCA solution for address canvassing and when that acceptance will occur--when the Bureau would say it meets its operational needs and accepts it from the contractor" to "Specify the basis for determining the readiness of the FDCA solution for address canvassing and when and how this determination will occur--when the Bureau would say that the contractor's solution meets its operational needs." Also, after further discussion with Bureau officials, we provided more specific measures of address and map information successfully collected. We revised our discussion of the 2004 and 2006 census tests to make clear that the HHC prototype was only used for non-response follow-up in the 2004 test. Finally, we revised our language on their decision to contract the development of HHC hardware and software to address the Bureau's concerns about how we characterized the timing of its decision. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to other interested congressional committees, the Secretary of Commerce, and the Director of the U.S. Census Bureau. Copies will be made available to others upon request. This report will also be available at no charge on GAO's Web site at http://www.gao.gov. If you have any questions on matters discussed in this report, please contact Mathew J. Scire at (202) 512-6806 or [email protected], or David A. Powner at (202) 512-9286 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. Our objectives for this report were to analyze U.S. Census Bureau (Bureau) and contractor data showing how handheld computers (HHC) operated and its implications on operations, and examine implications the redesign may have on plans for address canvassing in the 2010 Census. To determine how well the HHC worked in collecting and transmitting address and mapping data, and what data the Bureau and contractor used in assessing HHC performance during address canvassing, we examined Bureau documents, observed HHCs in use, and interviewed Bureau and contractor officials. For example, we reviewed Census Bureau memos that outline the data on HHC performance the Bureau planned to collect. We reviewed the Field Data Collection Automation (FDCA) contract, focusing specifically on what performance specifications and requirements were included in the contract. We observed HHC use during dress rehearsal address canvassing, and interviewed Bureau officials and contractor officials about HHC use and performance during the dress rehearsal of address canvassing. Specifically, we observed five different listers over the course of 2 days in the Fayetteville, North Carolina, dress rehearsal site and six different listers over 3 days in the San Joaquin County, California, dress rehearsal site. We also analyzed data on HHC use including data on HHC functionality/usability, HHC log data, the Bureau's Motion and Time Study, the Bureau's 2008 Dress Rehearsal assessments, observational and debriefing reports, a log of help desk tickets, and lessons-learned documents. Additionally, we interviewed knowledgeable Bureau and contractor officials. We did not independently verify the accuracy and completeness of the data either input into or produced by the operation of the HHCs. To better understand how HHC performance affected worker productivity, we attended the dress rehearsal address canvassing training for listers, interviewed Bureau officials about HHC performance, and examined data provided in the Bureau's Motion and Time Study and other sources related to predicted and reported productivity. In addition, we identified and analyzed the factors that contribute to HHC performance on aspects of address canvassing productivity. We examined the Bureau's Motion and Time Study results, conducted checks for internal consistency within the reported results, and met with Bureau officials to obtain additional information about the methodology used. The results reported in the study are estimates based on a non-random sample of field staff observed over the course of the address canvassing operation. Within the context of developing estimates for the time it takes address listers to perform address canvassing tasks and successfully resolve certain HHC problems, we determined that these data were sufficiently reliable for the purposes of our analysis. However, the study's methodology did not encompass a full accounting of the time field staff spent on the job, nor did the report explain how some results attributed to the Motion and Time Study were derived. We also compared the Bureau's expected productivity rates to productivity rates reported to us by the Bureau in response to our request for actual productivity data from the 2008 Dress Rehearsal Addressing Canvassing operation. After analyzing the Bureau's productivity data, we requested information about how the productivity data figures were calculated in order to assess their reliability. In reviewing documentation on the methodology and data, we identified issues that raise concerns. The Bureau acknowledged that data for all address field staff were not included in its analysis. Even though the productivity figures reported to us and presented in this report are generally in line with the range of productivity figures shown in the Bureau's Motion and Time Study, the missing data, along with the Bureau's lack of response to some of our questions about calculations of productivity figures, limit the reliability of these data. We determined that they are adequate for purposes of this report in that they provide a rough estimate of field worker productivity, but are not sufficiently reliable to be characterized as definitive representation of the actual productivity experienced in the 2008 Dress Rehearsal Address Canvassing operation. To ascertain the implications the redesign may have on plans for address canvassing in the 2010 Census, we observed meetings with officials of the Bureau, Commerce, Office of Management and Budget, and the contractor who were working on the FDCA redesign at Bureau headquarters. We also met with the Director of the Census Bureau and analyzed key Department of Commerce, Bureau, and contractor documents including the 2010 Census Risk Reduction Task Force Report and a program update provided by the contractor (as well as new and clarified requirements). The Bureau is in the process of revising some of its plans for conducting address canvassing and had not finalized those plans prior to the completion of this audit. We conducted this performance audit from April 2007 to July 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact names above, Assistant Director Signora May, Stephen Ander, Thomas Beall, Jeffrey DeMarco, Richard Hung, Barbara Lancaster, Andrea Levine, Amanda Miller, Niti Tandon, Lisa Pearson, Cynthia Scott, Timothy Wexler, and Katherine Wulff made key contributions to this report.	The U.S. Census Bureau (Bureau) had planned to rely heavily on automation in conducting the 2010 Census, including using handheld computers (HHC) to verify addresses. Citing concerns about escalating costs, in March 2008 the Secretary of Commerce announced a redesign of the key automation effort. GAO was asked to (1) analyze Bureau and contractor data showing how HHCs operated and their impact on operations, and (2) examine implications the redesign may have on plans for address canvassing in the 2010 Census. GAO reviewed Bureau and contractor data, evaluations, and other documents on HHC performance and staff productivity; interviewed Bureau and contractor officials; and visited the two dress rehearsal sites to observe and document the use of the HHCs in the field. Census and contractor data highlight problems field staff (listers) experienced using HHCs during the address canvassing dress rehearsal operation in 2007. Help desk logs, for example, revealed that listers most frequently reported issues with transmission, the device freezing, mapspotting (collecting mapping coordinates), and difficulties working with large blocks. When problems were identified, the contractor downloaded corrected software to the HHCs. Nonetheless, help desk resources were inadequate. The Bureau acknowledged that issues with the use of technology affected field staff productivity. After address canvassing, the Bureau established a review board and worked with its contractor to create task teams to analyze and address Field Data Collection Automation (FDCA) performance issues. Although the Bureau recognized that technology issues affected operations, and the contractor produced data on average transmission times, the Bureau and its contractor did not fully assess the magnitude of key measures of HHC performance. GAO previously recommended the Bureau establish specific quantifiable measures in such areas as productivity and performance. Also, the FDCA contract calls for the contractor to provide near real-time monitoring of performance metrics through a "dashboard" application. This application was not used during the census dress rehearsal. The Bureau has developed a preliminary list of metrics to be included in the dashboard such as daily measures on average transmission duration and number of failed transmissions, but has few benchmarks for expected performance. For example, the Bureau has not developed an acceptable level of performance on total number of failed transmissions or average connection speed. Technology issues and the Bureau's efforts to redesign FDCA have significant implications for address canvassing. Among these are ensuring that FDCA solutions for technical issues identified in the dress rehearsal are tested, the help desk adequately supports field staff, and a solution for conducting address canvassing in large blocks is tested. In June 2008, the Bureau developed a testing plan that includes a limited operational field test, but the plan does not specify the basis for determining the readiness of the FDCA solution for address canvassing and when and how this determination will occur.	7,319	591
From fiscal years 2002 through 2007, several changes occurred that affected refuge management including changes in funding and staffing levels, refuge system policy initiatives, and the influence of external factors, such as extreme weather and human development. Fluctuations in refuge funding. Inflation-adjusted funding (in 2002 dollars) for core refuge system activities--measured as obligations for refuge operations, maintenance, and fire management--peaked in fiscal year 2003, for the celebration of the refuge system's centennial, at about $391 million--6.8 percent above fiscal year 2002 levels--and then declined quickly to 4.7 percent below peak levels by fiscal year 2005, before increasing again to 2.3 percent below peak levels in fiscal year 2007; it ended 4.3 percent above fiscal year 2002 levels. In nominal dollars, core funding increased each year over the time period from about $366 million in fiscal year 2002 to about $468 million in fiscal year 2007. At the refuge level, inflation-adjusted core funding at refuges varied considerably during the time period, with about as many losing funding as gaining funding since fiscal year 2002. Specifically, from fiscal year 2002 through fiscal year 2007, core inflation-adjusted funding decreased for 96 of 222 complexes and stand-alone refuges and increased for 92, with funding remaining about the same for 34. The magnitude of the changes in core funding at the refuge level were also more pronounced than for the trend overall. Specifically, core funding for 39 complexes and stand-alone refuges decreased by more than 25 percent during this time period. Fluctuations in staffing levels. Staffing levels for core refuge activities (core staffing), as measured by full-time equivalents (FTE) the refuge system actually used, peaked one year later than core inflation-adjusted funding and then declined more slowly. Specifically, core staffing, which includes operations, maintenance, and fire management, peaked in fiscal year 2004 at a level 10.0 percent higher than in fiscal year 2002, but declined after that to 4.0 percent below peak staffing levels in fiscal year 2007. This level, however, was still 5.5 percent higher than the staffing level in fiscal year 2002. While operations and maintenance FTEs increased 3.6 percent overall during our study period, they ended the period down 6.9 percent from their 2004 peak. Fire management FTEs, on the other hand, increased 14.3 percent over fiscal year 2002 levels. Similar to FTEs, the number of employees on board in refuge system positions also declined after peaking in fiscal year 2004. Through fiscal year 2007, nearly 375 employees were lost from the refuge system's peak staffing levels, a reduction of 8.4 percent over this period. About three- quarters of this loss came through a reduction in permanent employees (a 7.5 percent reduction), which refuge managers and regional and headquarters officials told us are a key measure of the effective strength of the workforce available to conduct core refuge activities because they represent employees on board indefinitely. Though 38 complexes and stand-alone refuges increased their permanent staff by more than 5 percent since 2004, more than three times as many lost at least 5 percent. Figure 1 compares the trends in the refuge system's core funding, staffing, and permanent employee levels during our study period. New policy initiatives. Several new refuge system policy initiatives were implemented during this period: Recognizing that funding declines after 2003 were exacerbating an already high proportion of staff costs in refuge budgets, regional offices began to (1) reduce staff positions through attrition and by further consolidating some stand-alone refuges into complexes, and (2) categorize refuges into three tiers for the purpose of prioritizing funding and staffing allocations among refuges. These measures are primarily responsible for the decline in FTEs and permanent employees from fiscal year 2004 peak levels and the shifts in staffing among complexes and stand-alone refuges. Recognizing that the refuge system was not on pace to meet a mandate in the National Wildlife Refuge System Improvement Act of 1997 to complete conservation plans for each refuge by 2012, refuge system officials created a completion schedule and, beginning in 2004, began requiring staff at refuges to turn their attention to completing the plans. While refuge officials believe that they can meet the deadline, current information shows that some plans are behind schedule. To help spread visitor service funds across as many refuges as possible, refuge officials began placing a greater emphasis on constructing smaller visitor facility structures, such as informational kiosks and restrooms, at a larger number of refuges rather than constructing a smaller number of traditional visitor centers. To improve safety and address other concerns, refuge system management began an initiative to increase the number of full-time law enforcement officers and their associated training and experience requirements. However, refuge officials told us that they need to hire about 200 additional officers in order to reach the minimum number needed to provide adequate protection to refuge resources and visitors. Various refuge system, FWS, and Interior policies increased requirements on nonadministrative staff to enter additional data into certain systems and respond to numerous data calls. Refuge system officials are beginning to implement changes to reduce some of these administrative burdens. Increasing external factors. The influence of external factors--those outside the control of the refuge system that complicate refuges' abilities to protect and restore habitat quality, including extreme weather and development on adjacent lands--increased over this period. For example, refuge managers reported that between fiscal years 2002 and 2007, the influence of development--such as the expansion of urban areas and the conversion of off-refuge land near refuges to agriculture or industrial use--increased around refuges and contributed to refuge habitat problems for almost one half of the refuges. Such development can pollute refuge lands and waters and make it more difficult to maintain viable, interconnected habitat in and around a refuge's borders. From fiscal years 2002 through 2007, several changes occurred in refuges' habitat management and visitor services, creating concerns about the refuges' abilities to maintain high quality habitat and visitor services in the future. Habitat management. Habitats on refuges for five types of key species-- waterfowl, other migratory birds, threatened and endangered species, candidate threatened and endangered species, and state species of concern--improved between fiscal years 2002 and 2007--about two times as often as they worsened (see table 1). Refuge managers reported two to nearly seven times as often that habitats for several types of key species were of high quality than low quality in 2007 (see table 2). Habitat quality is determined by the availability of several key components, including fresh water, food sources, and nesting cover, among other things, and the absence of habitat problems, such as invasive species. High quality habitat generally provides adequate amounts of each of these main habitat components and is not significantly affected by habitat problems, while low quality habitat generally lacks these components and may have significant problems; moderate quality habitat has a mixture of these attributes. Complicating habitat management is growing pressure from increasing habitat problems occurring on refuges and the influence of external factors. Our survey found that invasive plant species and habitat fragmentation--the disruption of natural habitat corridors, often caused by human development activities--were the leading problems, affecting 55 percent and 44 percent of refuges, respectively, and both were increasing on more than half of refuges. Managers at refuges close to urban centers showed us busy roads adjacent to their refuge that have cut off natural habitat corridors, leading to animals trying to cross them or cutting them off from other members of their species, leading to genetic homogeneity and inbreeding. Managers of more rural refuges talked about increasing pressures to convert lands to agricultural uses, citing factors such as the increasing price of corn, or to industrial uses, such as oil and gas development. At the same time, refuge managers reported increasing the time spent on a number of key habitat management activities on many refuges between fiscal years 2002 and 2007 (see table 3). Importantly, time spent on developing comprehensive conservation plans, which are required by the Improvement Act, increased for 59 percent of refuges during our study period. In addition, refuges that increased the time spent on habitat management activities were about three times more likely to report that habitat quality for waterfowl and other migratory birds improved rather than worsened. In light of increasing problems and threats affecting refuge conditions, as well as recent funding and staffing constraints, refuge managers and regional and headquarters officials expressed concern about refuges' abilities to sustain or improve current habitat conditions for wildlife into the future. Even though our survey showed that a large number of refuges increased staff time on habitat management activities, some refuge managers we interviewed explained that staff were simply working longer hours to get the work done. Several refuge managers repeatedly indicated that despite growing habitat problems, an increasing administrative workload, and reduced staffing, they are still trying to do everything possible to maintain adequate habitat, especially habitats for key species, such as waterfowl, other migratory birds, and threatened and endangered species. Several managers said that attention to key habitats is the last thing that will stop receiving management attention in the event of declining funding. Several managers even said that they have to limit the amount of time staff spend at the refuge, as these employees are working overtime without extra pay. Visitor services. Our survey found that the quality of all six wildlife- dependent visitor services was stable or improving between fiscal years 2002 and 2007, according to the vast majority of refuge managers responding to our survey. Most notably, environmental education and interpretation programs showed the largest percentage of refuges reporting improvement, although these programs also showed the largest percentage reporting declines as well, as compared to other visitor services (see table 4). Our survey found that four of the six key visitor services provided to the public were of moderate or better quality at most refuges in 2007, but environmental education and interpretation were reported to be low quality at about one-third of refuges (see table 5). Managers told us that education and interpretation are among the most resource intensive visitor service programs and, for these reasons, the programs are often among the first areas to be cut when a refuge faces competing demands. A major factor influencing the quality of visitor services--beyond the abundance of fish and wildlife populations--is the amount and quality of refuge infrastructure and the availability of supplies. For example, the availability of trails and tour routes is essential to providing the public with access to what refuges have to offer and is generally important for supporting any type of visitor service activity. Hunting and fishing infrastructure depend largely on physical structures such as duck blinds, boat launches, and fishing platforms. Providing wildlife observation and photography opportunities simply require adequate access to the refuge, but can be enhanced through observation platforms and photography blinds. Environmental education depends on physical infrastructure, such as classrooms, and supplies, such as workbooks, handouts, and microscopes. Environmental interpretation also depends on physical infrastructure such as informational kiosks and interpretive signs along trails. Some refuges reported that they expanded their visitor services infrastructure between fiscal years 2002 and 2007, for example, by adding informational kiosks and trails and tour routes, yet more than one-half of refuges reported no change (see table 6). Most refuges also reported that the quality of their visitor services infrastructure stayed about the same or increased since 2002. Time spent by refuges on visitor services varied considerably throughout the system. Overall, at least one in five refuges reported a decrease in staff time for each visitor service area (see table 7). Refuge managers indicated that staffing changes and a lack of resources for increasing and maintaining infrastructure, raise concerns about their ability to provide quality visitor services into the future. Our survey results showed that the time spent by permanent staff on visitor services had been reduced at more than one-third of refuges and more than half of refuge managers reported increasing their reliance on volunteers to help manage visitor centers and deliver education programs, for example. Refuge managers are also concerned about the impact that the increasing administrative workload incurred by non-administrative refuge staff is having on the refuges' ability to deliver visitor services. Refuge managers and regional and headquarters officials expressed concern about the long- term implications of declining and low quality visitor services. Many refuge managers cited the importance of ensuring that the public has positive outdoor experiences on refuges and providing them with meaningful educational and interpretative services. Managers said that the availability of visitor services is a way to get young people interested in future careers with the refuge system and instill in children an appreciation for wildlife and the outdoors as well as an interest in maintaining these resources. In addition, visitor services are important for developing and maintaining community relationships, as the refuge system is increasingly turning toward partnerships with private landowners and other agencies and organizations to maintain and improve ecosystems both on and around wildlife refuges. In conclusion, maintaining the refuge system as envisioned in law--where the biological integrity, diversity and environmental health of the refuge system are maintained; priority visitor services are provided; and the strategic growth of the system is continued--may be difficult in light of continuing federal fiscal constraints and an ever-expanding list of challenges facing refuges. While some refuges have high quality habitat and visitor service programs and others have seen improvements since 2002, refuge managers are concerned about their ability to sustain high quality refuge conditions and continue to improve conditions where needed because of expected continuing increases in external threats and habitat problems affecting refuges. Already, FWS has had to make trade- offs among refuges with regard to which habitats will be monitored and maintained, which visitor services will be offered, and which refuges will receive adequate law enforcement coverage. FWS's efforts to prioritize its use of funding and staff through workforce planning have restored some balance between refuge budgets and their associated staff costs. However, if threats and problems afflicting refuges continue to grow as expected, it will be important for the refuge system to monitor how these shifts in resources are affecting refuge conditions. Madam Chair, 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]. Contact points for our offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Trish McClure, Assistant Director; Mark Braza; David Brown; Stephen Cleary; Timothy J. Guinane; Carol Henn; Richard Johnson; Michael Krafve; Alison O'Neill; George Quinn, Jr.; and Stephanie Toby 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. 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 National Wildlife Refuge System, which is administered by the Fish and Wildlife Service in the Department of the Interior, comprises 585 refuges on more than 96 million acres of land and water that preserve habitat for waterfowl and other migratory birds, threatened and endangered species, and other wildlife. Refuges also provide wildlife-related activities such as hunting and fishing to about 40 million visitors every year. GAO was asked to testify on a report that is being released today, Wildlife Refuges: Changes in Funding, Staffing, and Other Factors Create Concerns about Future Sustainability (GAO-08-797), which (1) describes changing factors that the refuge system experienced from fiscal years 2002 through 2007, including funding and staffing changes, and (2) examines how habitat management and visitor services changed during this period. For this report, GAO surveyed all refuges, visited 19 refuges in four regions, and interviewed refuge, regional, and national officials. In its September 2008 report, GAO reports that for fiscal years 2002 through 2007, the refuge system experienced funding and staffing fluctuations, the introduction of several new policy initiatives, and the increased influence of external factors such as extreme weather that threaten wildlife habitat and visitor infrastructure. Although core funding--measured as obligations for refuge operations, maintenance, and fire management--increased each year, inflation-adjusted core funding peaked in fiscal year 2003 at about $391 million--6.8 percent above fiscal year 2002 funding. Inflation-adjusted core funding ended the period 2.3 percent below peak levels, but 4.3 percent above fiscal year 2002 levels by fiscal year 2007. Core refuge staffing levels peaked in fiscal year 2004 at 3,610 full-time equivalents--10.0 percent above the fiscal year 2002 level--and then declined more slowly than funding. By fiscal year 2007, staffing levels fell to 4.0 percent below peak levels, but 5.5 percent above fiscal year 2002 levels. Through fiscal year 2007, the number of permanent employees utilized by the refuge system declined to 7.5 percent below peak levels. During this period, refuge system officials initiated new policies that: (1) reduced staff positions and reconsidered how they allocate funds and staff among refuges in order to better align staff levels with funding, (2) required refuge staff to focus on a legislative mandate to complete refuge conservation plans by 2012, (3) shifted to constructing a larger number of smaller visitor structures, such as informational kiosks, and fewer large visitor centers to spread visitor service funds across more refuges, (4) increased the number of full-time law enforcement officers and their associated training requirements, and (5) resulted in additional administrative work. During this period, external factors, such as severe storms, that complicate refuge staffs' ability to protect and restore habitat quality also increased. GAO's survey of refuge managers showed that changes in habitat management and visitor service programs varied across refuges during the study period. Habitat conditions for key types of species improved about two times more often than they worsened, but between 7 and 20 percent of habitats were of poor quality in 2007. Certain habitat problems increased at more than half of refuges during thisperiod, and managers reported that they increased the time spent on certain habitat management activities, such as addressing invasive plants, despite declining staffing levels. However, several managers GAO interviewed said that staff were working longer hours without extra pay to get work done, and managers expressed concern about their ability to sustain habitat conditions. While the quality of four key visitor service programs was reported to be stable or improving between fiscal years 2002 and 2007 at the vast majority of refuges, the other two key programs--environmental education and interpretation--were considered poor quality at one-third of refuges in 2007. Changes in the time spent on visitor services varied considerably across refuges, and managers noted that visitor services are generally cut before habitat management activities when resources are limited. Managers are concerned about their ability to provide high quality visitor services in the future given staffing and funding constraints.	3,227	849
The amount of insurance coverage available to homeowners under the NFIP is limited by requirements set forth in statute and regulation. As a result of these limitations, insurance payments to claimants for flood damage may not cover all the costs of repairing or replacing flood- damaged property. For example, there is a $250,000 statutory ceiling on the amount of flood insurance homeowners can purchase for the building structure and a $100,000 ceiling on the amount they can purchase for certain personal property. Thus, homes that might sustain more than $250,000 in damage cannot be insured to their full replacement cost. In addition, to the statutory limitations on coverage amounts, Congress also gave FEMA broad authority to issue regulations establishing "the general terms and conditions of insurability," including the classes, types, and locations of properties that are eligible for flood insurance; the nature and limits of loss that may be covered, the classification, limitation, and rejection of any risks that FEMA considers advisable; and the amount of appropriate loss deductibles. Pursuant to this delegation of authority, FEMA has issued regulations, including a "Standard Flood Insurance Policy," that further delineate the scope of coverage. All flood insurance made available under the NFIP is subject to the express terms and conditions of the statute and regulations, including the standard policy. The Federal Insurance Administrator within FEMA is charged with interpreting the scope of coverage under the standard policy. In addition, NFIP policies cover only direct physical loss by or from flood. Therefore, losses resulting primarily from a preexisting structural weakness in a home or prior water damage, and losses resulting from events other than flood, such as windstorms or or earth movements, are not covered by the NFIP. Personal property is covered, with certain limitations, only if the homeowner has purchased separate NFIP personal property insurance in addition to coverage for the building. Finally, the method of settling losses affects the amount recovered. For example, homes that qualify only for an actual cash value settlement--which represents the cost to replace damages property, less the value of physical depreciation--would presumably receive payments that are less than homes that qualify for a replacement cost settlement, which does not deduct for depreciation. Finally, the amount recoverable under the SFIP is limited to the amount that exceeds the applicable deductible. Our report discusses the limitations on coverage and recoverable losses in greater detail. About 40 FEMA employees, assisted by about 170 contractor employees, are responsible for managing the NFIP. Management responsibilities include establishing and updating NFIP regulations, administering the National Flood Insurance Fund, analyzing data to actuarially determine flood insurance rates and premiums, and offering training to insurance agents and adjusters. In addition, FEMA and its program contractor are responsible for monitoring and overseeing the quality of the performance of the write-your-own companies to assure that the NFIP is administered properly. To meet its monitoring and oversight responsibilities, FEMA is to conduct periodic operational reviews of the 95 private insurance companies that participate in the NFIP. In addition, FEMA's program contractor is to check the accuracy of claims settlements by doing quality assurance reinspections of a sample of claims adjustments for every flood event. For operational reviews, FEMA examiners are to do a thorough review of the companies' NFIP underwriting and claims settlement processes and internal controls, including checking a sample of claims and underwriting files to determine, for example, whether a violation of policy has occurred, an incorrect payment has been made, and if files contain all required documentation. Separately, FEMA's program contractor is responsible for conducting quality assurance reinspections of a sample of claims adjustments for specific flood events in order to identify, for example, whether an insurer allowed an uncovered expense, or missed a covered expense in the original adjustment. Operational reviews of flood insurance companies participating in the NFIP that are conducted by FEMA staff are FEMA's primary internal control mechanism for monitoring, identifying, and resolving problems related to how insurers sell and review NFIP policies and adjust claims. For all aspects of operational reviews, the examiners are to determine whether files are maintained in good order, whether current forms are used and whether staff has a proficient knowledge of requirements and procedures to properly underwrite and process flood claims. Examiners are also to look at internal controls in place at each company. When problems are identified, examiners are to classify the severity of the errors. Each file reviewed is to be classified as satisfactory or unsatisfactory. Unsatisfactory files contain either a critical error (e.g., a violation of policy or an incorrect payment) or three non-critical errors (e.g., violations of procedures that did not delay actions or claims). Write-your-own companies with error rates of 20 percent or higher of the total number of files reviewed for the specific underwriting or claims operation review would always receive an unsatisfactory designation. In such cases, FEMA requires that the company develop an action plan to correct the problems identified and is to schedule a follow-up review in 6 months to determine whether progress has been made. The operational reviews and follow-up visits to insurance companies that we analyzed during 2005 followed FEMA's internal control procedures for identifying and resolving specific problems that may occur in individual insurance companies' processes for selling and renewing NFIP policies and adjusting claims. According to information provided by FEMA, the number of operational reviews completed between 2000 and August 2005 were done at a pace that allows for a review of each participating insurance company at least once every 3 years, as FEMA procedures require. In addition, the processes FEMA had in place for operational reviews and quality assurance reinspections of claims adjustments met our internal control standard for monitoring federal programs. In addition to operational reviews done by FEMA staff, FEMA's program contractor conducts quality assurance reinspections of claims for specific flood events. The program contractor employs nine general adjusters who conduct quality assurance reinspections of a sample of open claims for each flood event. Procedures for the general adjusters to follow are outlined in FEMA's Write Your Own Financial Control Plan. According to the general adjusters we interviewed, in addition to preparing written reports of each reinspection, general adjusters discuss the results of the reinspections they perform with officials of write-your-own companies that process the claims. If a general adjuster determines that the insurance company allowed an expense that should not have been covered, the company is to reimburse the NFIP. Conversely, if a general adjuster finds that the private-sector adjuster missed a covered expenses in the original adjustment, the general adjuster is to take steps to provide additional payment to the policyholder. An instructor at an adjuster refresher training session, while observing that adjusters had performed very well overall during the 2004 hurricane season, cited several errors that he had identified in reinspections of claims, including improper room dimension measurements and improper allocation of costs caused by wind damage (covered by homeowners' policies) versus costs caused by flood damage. In addition, the instructor identified as a problem poor communication with homeowners on the processes followed to inspect the homeowner's property and settle the claim. Overall error rates for write-your-own companies are monitored. Procedures require additional monitoring, training, or other action if error rates exceed 3 percent. According to the general adjusters we interviewed and FEMA's program contractor, qualify assurance reinspections are forwarded from general adjusters to the program contractor where results of reinspections are to be aggregated in a reinspection database as a method of providing for broad-based oversight of the NFIP as its services are delivered by the write-your-own companies, adjusting firms and independent flood adjusters. The process FEMA used to select a sample of claims files for operational reviews and the process its program contractor used to select a sample of adjustments for reinspections were not randomly chosen or statistically representative of all claims. We found that the selection processes used were, instead, based upon judgmental criteria including, among other items, the size and location of loss and complexity of claims. As a result of limitations in the sampling processes, FEMA cannot project the results of these monitoring and oversight activities to determine the overall accuracy of claims settled for specific flood events or assess the overall performance of insurance companies and their adjusters in fulfilling their responsibilities for the NFIP--actions necessary for FEMA to meet our internal control standard that it have reasonable assurance that program objectives are being achieved and that its operations are effective and efficient. To strengthen and improve FEMA's monitoring and oversight of the NFIP, we are recommending in today's report that FEMA use a methodologically valid approach for sampling files selected for operational reviews and quality assurance claims reinspections. As of September 2005, FEMA had not yet fully implemented provisions of the Flood Insurance Reform Act of 2004. Among other things, the act requires FEMA to provide policyholders a flood insurance claims handbook; to establish a regulatory appeals process for claimants; and to establish minimum education and training requirements for insurance agents who sell NFIP policies. The 6-month statutory deadline for implementing these changes was December 30, 2004. In September 2005, FEMA posted a flood insurance claims handbook on its Web site. The handbook contains information on anticipating, filing and appealing a claim through an informal appeals process, which FEMA intends to use pending the establishment of a regulatory appeals process. However, because the handbook does not contain information regarding the appeals process that FEMA is statutorily required to establish through regulation, it does not yet meet statutory requirements. With respect to this appeals process, FEMA has not stated how long rulemaking might take to establish the process by regulation, or how the process might work, such as filing requirements, time frames for considering appeals, and the composition of an appeals board. Therefore, it remains unclear how or when FEMA will establish the statutorily required appeals process. With respect to minimum training and education requirements for insurance agents who sell NFIP policies, FEMA published a Federal Register notice on September 1, 2005, which included an outline of training course materials. In the notice, FEMA stated that, rather than establish separate and perhaps duplicative requirements from those that may already be in place in the states, it had chosen to work with the states to implement the NFIP requirements through already established state licensing schemes for insurance agents. The notice did not specify how or when states were to begin implementing the NFIP training and education requirements. Thus, it is too early to tell the extent to which insurance agents will meet FEMA's minimum standards. FEMA officials said that, because changes to the program could have broad reaching and significant effects on policyholders and private-sector stakeholders upon whom FEMA relies to implement the program, the agency is taking a measured approach to addressing the changes mandated by Congress. Nonetheless, without plans with milestones for completing its efforts to address the provisions of the act, FEMA cannot hold responsible officials accountable or ensure that statutorily required improvements are in place to assist victims of future flood events. We are recommending in today's report that FEMA develop documented plans with milestones for implementing requirements of the Flood Insurance Reform Act of 2004 to provide policyholders a flood insurance claims handbook that meets statutory requirements, to establish a regulatory appeals process, and to ensure that flood insurance agents meet minimum NFIP education and training requirements. FEMA did not agree with our recommendations for both its sampling methodology and implementation of the requirements of the Flood Insurance Reform Act of 2004. It noted that its current sampling methodology of selecting a sample based on knowledge of the population to be sampled was more appropriate for identifying problems than the statistically random probability sample we recommended. Although FEMA's current nonprobability sampling strategy may provide an opportunity to focus on particular areas of risk, it does not provide management with the information needed to assess the overall performance of private insurance companies and adjusters participating in the program--information that FEMA needs to have reasonable assurance that program objectives are being achieved. FEMA also disagreed with our characterization of the extent to which FEMA has met provisions of the Flood Insurance Reform Act of 2004. We believe that our description of those efforts and our recommendations with regard to implementing the Act's provisions are valid. For example, although FEMA commented that it was offering claimants an informal appeals process in its flood insurance claims handbook, it must establish regulations for this process, and those are not yet complete. To the extent possible, the NFIP is designed to pay operating expenses and flood insurance claims with premiums collected on flood insurance policies rather than with tax dollars. However, as we have reported, the program, by design, is not actuarially sound because Congress authorized subsidized insurance rates to be made available for policies covering some properties to encourage communities to join the program. As a result, the program does not collect sufficient premium income to build reserves to meet the long-term future expected flood losses. FEMA has statutory authority to borrow funds from the Treasury to keep the NFIP solvent. Until the 2004 hurricane season, FEMA had been generally successful in keeping the NFIP on sound financial footing. It had exercised its authority to borrow from the Treasury three times in the last decade when losses were heavy and repaid all funds with interest. As of August 2005, the program had borrowed $300 million to cover more than $1.8 billion in claims from the major disasters of 2004, including hurricanes Charley, Frances, Ivan, and Jeanne, which hit Florida and other East and Gulf Coast states. The large number of claims arising from Hurricanes Katrina and Rita will require FEMA to borrow heavily from the Treasury, because the NFIP does not have the financial reserves necessary to offset heavy losses in the short-term. Following Hurricane Katrina in August 2005, legislation was enacted that increased FEMA's borrowing authority from $1.5 billion to $3.5 billion through fiscal year 2008. Additional borrowing authority may be needed to pay claims arising from Hurricanes Katrina and Rita. In reauthorizing the NFIP in 2004, Congress noted that "repetitive-loss properties"--those that had resulted in two or more flood insurance claims payments of $1,000 or more over 10 years--constituted a significant drain on the resources of the NFIP. These repetitive loss properties are problematic not only because of their vulnerability to flooding but also because of the costs of repeatedly repairing flood damages. While these properties make up only about 1 percent of the properties insured under the NFIP, they account for 25 to 30 percent of all claims losses. At the time of our March 2004 report on repetitive loss properties, nearly half of all nationwide repetitive loss property insurance payments had been made in Louisiana, Texas, and Florida. According to a recent Congressional Research Service report, as of December 31, 2004, FEMA had identified 11,706 "severe repetitive loss" properties defined as those with four or more claims or two or three losses that exceeded the insured value of the property. Of these 11,706 properties almost half (49 percent) were in three states--3,208 (27 percent) in Louisiana, 1,573 (13 percent) in Texas, and 1,034 (9 percent) in New Jersey. As the destruction caused by horrendous 2004 and 2005 hurricanes are a driving force for improving the NFIP today, devastating natural disasters in the 1960s were a primary reason for the national interest in creating a federal flood insurance program. In 1963 and 1964, Hurricane Betsy and other hurricanes caused extensive damage in the South, and, in 1965, heavy flooding occurred on the upper Mississippi River. In studying insurance alternatives to disaster assistance for people suffering property losses in floods, a flood insurance feasibility study found that premium rates in certain flood-prone areas could be extremely high. As a result, the National Flood Insurance Act of 1968, which created the NFIP, mandated that existing buildings in flood-risk areas would receive subsidies on premiums because these structures were built before the flood risk was known and identified on flood insurance rate maps. Owners of structures built in flood-prone areas on or after the effective date of the first flood insurance rate maps in their areas or after December 31, 1974, would have to pay full actuarial rates. Because many repetitive loss properties were built before either December 31, 1974 or the effective date of the first flood insurance rate maps in their areas, they were eligible for subsidized premium rates under provisions of the National Flood Insurance Act of 1968. The provision of subsidized premiums encouraged communities to participate in the NFIP by adopting and agreeing to enforce state and community floodplain management regulations to reduce future flood damage. In April 2005, FEMA estimated that floodplain management regulations enforced by communities participating in the NFIP have prevented over $1.1 billion annually in flood damage. However, some of the properties that had received the initial rate subsidy are still in existence and subject to repetitive flood losses, thus placing a financial strain on the NFIP. For over a decade, FEMA has pursued a variety of strategies to reduce the number of repetitive loss properties in the NFIP. In a 2004 testimony, we noted that congressional proposals have been made to phase out coverage or begin charging full and actuarially based rates for repetitive loss property owners who refuse to accept FEMA's offer to purchase or mitigate the effect of floods on these buildings. The 2004 Flood Insurance Reform Act created a 5-year pilot program to deal with repetitive-loss properties in the NFIP. In particular, the act authorized FEMA to provide financial assistance to participating states and communities to carry out mitigation activities or to purchase "severe repetitive loss properties." During the pilot program, policyholders who refuse a mitigation or purchase offer that meets program requirements will be required to pay increased premium rates. In particular, the premium rates for these policyholders would increase by 150% following their refusal and another 150% following future claims of more than $1,500. However, the rates charged cannot exceed the applicable actuarial rate. It will be important in future studies of the NFIP to continue to analyze data on progress being made to reduce the inventory of subsidized NFIP repetitive loss properties, how the reduction of this inventory contributes to the financial stability of the program, and whether additional FEMA regulatory steps or congressional actions could contribute to the financial solvency of the NFIP, while meeting commitments made by the authorizing legislation. In 1973 and 1994, Congress enacted requirements for mandatory purchase of NFIP policies by some property owners in high risk areas. From 1968 until the adoption of the Flood Disaster Protection Act of 1973, the purchase of flood insurance was voluntary. However, because voluntary participation in the NFIP was low and many flood victims did not have insurance to repair damages from floods in the early 1970s, the 1973 act required the mandatory purchase of flood insurance to cover some structures in special flood hazard areas of communities participating in the program. Homeowners with mortgages from federally-regulated lenders on property in communities identified to be in special flood hazard areas are required to purchase flood insurance on their dwellings for the amount of their outstanding mortgage balance, up to a maximum of $250,000 in coverage for single family homes. The owners of properties with no mortgages or properties with mortgages held by lenders who are not federally regulated were not, and still are not, required to buy flood insurance, even if the properties are in special flood hazard areas--the areas NFIP flood maps identify as having the highest risk of flooding. FEMA determines flood risk and actuarial ratings on properties through flood insurance rate mapping and other considerations including the elevation of the lowest floor of the building, the type of building, the number of floors, and whether or not the building has a basement, among other factors. FEMA flood maps designate areas for risk of flooding by zones. For example, areas subject to damage by waves and storm surge are in zones with the highest expectation for flood loss. Between 1973 and 1994, many policyholders continued to find it easy to drop policies, even if the policies were required by lenders. Federal agency lenders and regulators did not appear to strongly enforce the mandatory flood insurance purchase requirements. According to a recent Congressional Research Service study, the Midwest flood of 1993 highlighted this problem and reinforced the idea that reforms were needed to compel lender compliance with the requirements of the 1973 Act. In response, Congress passed the National Flood Insurance Reform Act of 1994. Under the 1994 law, if the property owner failed to get the required coverage, lenders were required to purchase flood insurance on their behalf and then bill the property owners. Lenders became subject to civil monetary penalties for not enforcing the mandatory purchase requirement. In June 2002, we reported that the extent to which lenders were enforcing the mandatory purchase requirement was unknown. Officials involved with the flood insurance program developed contrasting viewpoints about whether lenders were complying with the flood insurance purchase requirements primarily because the officials used differing types of data to reach their conclusions. Federal bank regulators and lenders based their belief that lenders were generally complying with the NFIP's purchase requirements on regulators' examinations and reviews conducted to monitor and verify lender compliance. In contrast, FEMA officials believed that many lenders frequently were not complying with the requirements, which was an opinion based largely on noncompliance estimates computed from data on mortgages, flood zones, and insurance policies; limited studies on compliance; and anecdotal evidence indicating that insurance was not always in place where required. Neither side, however, was able to substantiate its differing claims with statistically sound data that provide a nationwide perspective on lender compliance. Accurate flood maps that identify the areas at greatest risk of flooding are the foundation of the NFIP. Flood maps must be periodically updated to assess and map changes in the boundaries of floodplains that result from community growth, development, erosion, and other factors that affect the boundaries of areas at risk of flooding. FEMA has embarked on a multi- year effort to update the nation's flood maps at a cost in excess of $1 billion. The maps are principally used by (1) the approximately 20,000 communities participating in the NFIP to adopt and enforce the program's minimum building standards for new construction within the maps' identified flood plains; (2) FEMA to develop accurate flood insurance policy rates based on flood risk, and (3) federal regulated mortgage lenders to identify those property owners who are statutorily required to purchase federal flood insurance. Under the NFIP, property owners whose properties are within the designated "100-year floodplain" and have a mortgage from a federally regulated financial institution are required to purchase flood insurance in an amount equal to their outstanding mortgage balance (up to the statutory ceiling of $250,000). FEMA expects that by producing more accurate and accessible digital flood maps, the NFIP and the nation will benefit in three ways. First, communities can use more accurate digital maps to reduce flood risk within floodplains by more effectively regulating development through zoning and building standard. Second, accurate digital maps available on the Internet will facilitate the identification of property owners who are statutorily required to obtain or who would be best served by obtaining flood insurance. Third, accurate and precise data will help national, state, and local officials to accurately locate infrastructure and transportation systems (e.g., power plants, sewage plants, railroads, bridges, and ports) to help mitigate and manage risk for multiple hazards, both natural and man-made. Success in updating the nation's flood maps requires clear standards for map development; the coordinated efforts and shared resources of federal, state, and local governments; and the involvement of key stakeholders who will be expected to use the maps. In developing the new data system to update flood maps across the nation, FEMA's intent is to develop and incorporate flood risk data that are of a level of specificity and accuracy commensurate with communities' relative flood risks. Not every community may need the same level of specificity and detail in its new flood maps. However, it is important that FEMA establish standards for the appropriate data and level of analysis required to develop maps for all communities of a similar risk level. In its November 2004 Multi-Year Flood Hazard Identification Plan, FEMA discussed the varying types of data collection and analysis techniques the agency plans to use to develop flood hazard data in order to relate the level of study and level of risk for each of 3,146 counties. FEMA has developed targets for resource contribution (in-kind as well as dollars) by its state and local partners in updating the nation's flood maps. At the same time, it has developed plans for reaching out to and including the input of communities and key stakeholders in the development of the new maps. These expanded outreach efforts reflect FEMA's understanding that it is dependent upon others to achieve the benefits of map modernization. The most immediate challenge for the NFIP is processing the flood insurance claims resulting from Hurricanes Katrina and Rita. FEMA reported, as of October 13th, that it had received 192,809 flood insurance claims and had paid nearly $1.3 billion to settle 7,664 of these claims. The number of claims is more than twice as many as were filed in all of 2004, itself a record year. The need for effective communication and consistent and appropriate application of policy provisions will be particularly important in working with anxious policyholders, many of whom have been displaced from their homes. In the longer term, Congress and the NFIP face a complex challenge in assessing potential changes to the program that would improve its financial stability, increase participation in the program by property owners in areas at risk of flooding, reduce the number of repetitive loss properties in the program, and maintain current and accurate flood plain maps. These issues are complex, interrelated, and are likely to involve trade-offs. For example, increasing premiums to better reflect risk may reduce voluntary participation in the program or encourage those who are required to purchase flood insurance to limit their coverage to the minimum required amount (i.e., the amount of their outstanding mortgage balance). This in turn can increase taxpayer exposure for disaster assistance resulting from flooding. There is no "silver bullet" for improving the current structure and operations of the NFIP. It will require sound data and analysis and the cooperation and participation of many stakeholders. Mr. Chairman and Members of the Committee, this concludes my prepared statement. I would be pleased to respond to any questions you and the Committee Members may have. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this statement. For further information about this testimony, please contact Norman Rabkin at (202) 512-8777 or at [email protected], or William O. Jenkins, Jr. at (202) 512-8757 or at [email protected]. This statement was prepared under the direction of Christopher Keisling. Key contributors were Amy Bernstein, Christine Davis, Deborah Knorr, Denise McCabe, and Margaret Vo. 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 disastrous hurricanes that have struck the Gulf Coast and Eastern seaboard in recent years--including Katrina, Rita, Ivan, and Isabel--have focused attention on federal flood management efforts. The National Flood Insurance Program (NFIP), established in 1968, provides property owners with some insurance coverage for flood damage. The Federal Emergency Management Agency (FEMA) within the Department of Homeland Security is responsible for managing the NFIP. GAO issues a report earlier this week that was mandated by the Flood Insurance Reform Act of 2004. This testimony discusses findings and recommendations from that report and information from past GAO work. Specifically, the testimony discusses (1) the statutory and regulatory limitations on coverage for homeowners under the NFIP; (2) FEMA's role in monitoring and overseeing the NFIP; (3) the status of FEMA's implementation of provisions of the Flood Insurance Reform Act of 2004. It also offers observations on broader issues facing the NFIP including its financial structure and updating flood maps. The amount of insurance coverage available to homeowners under the NFIP is limited by requirements set forth in statute and FEMA's implementing regulations, which include FEMA's standard flood insurance policy. As a result of these limitations, insurance payments to claimants for flood damage may not cover all of the costs of repairing or replacing flood-damaged property. For example, homes that could sustain more than $250,000 in damage cannot be insured to their full replacement cost, thus limiting claims to this statutory ceiling. In addition, NFIP policies cover only direct physical loss by or from flood. Therefore, losses resulting primarily from a preexisting structural weakness in a home, or losses resulting from events other than flood such as windstorms, are not covered by NFIP policies. To meet its monitoring and oversight responsibilities, FEMA is to conduct periodic operational reviews of the 95 private insurance companies that participate in the NFIP, and FEMA's program contractor is to check the accuracy or claims settlements by doing quality assurance reinspections of a sample of claims adjustments for every flood event. FEMA did not use a statistically valid method for sampling files to be reviewed in these monitoring and oversight activities. As a result, FEMA cannot project the results of these reviews to determine the overall accuracy of claims settled for specific flood events or assess the overall performance of insurance companies and their adjusters in fulfilling responsibilities for the NFIP--actions necessary for FEMA to have reasonable assurance that program objectives are being achieved. FEMA has not yet fully implemented provisions of the Flood Insurance Reform Act of 2004 requiring the agency to provide policyholders with a flood insurance claims handbook that meets statutory requirements, to establish a regulatory appeals process, and to ensure that insurance agents meet minimum education and training requirements. The statutory deadline for implementing these changes was December 30, 2004. Efforts to implement the provisions are under way, but have not yet been completed. DEMA has not developed plans with milestones for assigning accountability and projecting when program improvements will be made, so that improvements are in place to assist victims of future flood events. As GAO has previously reported, the NFIP, by design, is not actuarially sound. The program does not collect sufficient premium income to build reserves to meet long-term future expected flood losses, in part because Congress authorized subsidized insurance rates to be made available for some properties. FEMA has generally been successful in keeping the NFIP on a sound financial footing, but the catastrophic flooding events of 2004 (involving 4 major hurricanes) required FEMA, as of August 2005, to borrow $300 million from the U.S. Treasury to help pay an estimated $1.8 billion on flood insurance claims. Following Hurricane Katrina in August 2005, legislation was enacted to increase FEMA's borrowing authority from $1.5 billion to $3.5 billion through fiscal year 2008.	5,947	835
The Internal Revenue Manual (IRM) describes the desired outcome of an income tax audit as the determination of the correct taxable income and tax liability of the person or entity under audit. In making these determinations, the auditor has a responsibility to both the audited taxpayer and all other taxpayers to conduct a quality audit. IRS uses nine audit standards, which have evolved since the 1960s, to define audit quality. These standards address several issues, such as the scope, techniques, technical conclusions, reports, and time management of an audit, as well as workpaper preparation. Each standard has one or more key elements. (See table I.1 in app. I for a list of these standards and their associated key elements.) Workpapers provide documentation on the scope of the audit and the diligence with which it was completed. According to the IRM, audit workpapers (1) assist in planning the audit; (2) record the procedures applied, tests performed, and evidence gathered; (3) provide support for technical conclusions; and (4) provide the basis for review by management. Audit workpapers also provide the principal support for the auditor's report, which is to be provided to the audited taxpayer, on findings and conclusions about the taxpayer's correct tax liability. The primary tool used by IRS to control quality under the nine standards is the review of ongoing audit work. This review is the responsibility of IRS' first-line supervisors, called group managers, who are responsible for the quality of audits done by the auditors they manage. By reviewing audit workpapers during the audit, group managers attempt to identify problems with audit quality and ensure that the problems are corrected. After an audit closes, IRS uses its Examination Quality Measurement System (EQMS) to collect information about the audit process, changes to the process, level of audit quality, and success of any efforts to improve the process and quality. EQMS staff are to review audit workpapers and assess the degree to which the auditor complied with the audit standards. To pass a standard, the audit must pass all of the key elements. Our observations about the adequacy of the audit workpapers and supervisory review during audits are based on our work during 1996 and 1997 on IRS' use of financial status audit techniques. Among other things, this work relied on a random sample of individual tax returns that IRS had audited. This sample excluded audits that were unlikely to use financial status audit techniques because the audit did not look at individual taxpayers' books and records. Such excluded audits involved those done at service centers and those that only passed through various types of tax adjustments from other activities (e.g., partnership audits and refund claims). This random sample included 354 audits from a population of about 421,000 audits that were opened from October 1994 through October 1995 and closed in fiscal years 1995 or 1996. Each audit covered one or more individual income tax returns. The sample of audits from our previous work focused on the frequency in which IRS auditors used financial status audit techniques, rather than on the adequacy of audit workpapers. Consequently, we did not do the work necessary to estimate the extent to which workpapers met IRS' workpaper standard for the general population of audits. However, our work did identify several cases in which audit workpapers in our sample did not meet IRS' workpaper standard. We held follow-up discussions about the workpaper and supervisory review requirements, as well as about our observations, with IRS Examination Division officials. On the basis of these discussions, we agreed to check for documentation of group manager involvement by examining employee performance files for nine of our sample audits conducted out of IRS' Northern California District Office to get a better idea of how the group managers handle their audit inventories and ensure quality. According to IRS officials, these files may contain documentation on case reviews by group managers even though such documentation may not be in the workpapers. We requested comments on a draft of this report from the Commissioner of Internal Revenue. On March 27, 1998, we received written comments from IRS, which are summarized at the end of this letter and are reproduced in appendix II. These comments have been incorporated into the report where appropriate. We did our work at IRS headquarters in Washington, D.C., and at district offices and service centers in Fresno and Oakland, CA; Baltimore, MD; Philadelphia, PA; and Richmond, VA. Our work was done between January and March, 1998, in accordance with generally accepted government auditing standards. One of IRS' audit standards covers audit workpapers. In general, IRS requires the audit workpapers to support the auditor's conclusions that were reached during an audit. On the basis of our review of IRS' audit workpapers, we found that IRS auditors did not always meet the requirements laid out under this workpaper standard. IRS' workpaper standard requires that workpapers provide the principal support for the auditor's report and document the procedures applied, tests performed, information obtained, and conclusions reached. The five key elements for this workpaper standard involve (1) fully disclosing the audit trail and techniques used; (2) being clear, concise, legible, and organized and ensuring that workpaper documents have been initialed, labeled, dated, and indexed; (3) ensuring that tax adjustments recorded in the workpapers agree with IRS Forms 4318 or 4700 and the audit report; (4) adequately documenting the audit activity records; and (5) appropriately protecting taxpayers' rights to privacy and confidentiality. The following are examples of some of the problems we found during our review of IRS audit workpapers: Tax adjustments shown in the workpapers, summaries, and reports did not agree. For example, in one audit, the report sent to the taxpayer showed adjustments for dependent exemptions and Schedule A deductions. However, neither the workpaper summary nor the workpapers included these adjustments. In another audit, the workpaper summary showed adjustments of about $25,000 in unreported wages, but the report sent to the taxpayer showed adjustments of only about $9,000 to Schedule C expenses. Required documents or summaries were not always in the workpaper bundle. For example, we found instances of missing or incomplete activity records and missing workpaper summaries. Workpapers that were in the bundle were not always legible or complete. The required information that was missing included the workpaper number, tax year being audited, date of the workpaper, and auditor's name or initials. Although we are unable to develop estimates of the overall quality of audit workpapers, IRS has historically found problems with the quality of its workpapers. This observation is supported by evaluations conducted as part of IRS' EQMS, which during the past 6 years (1992-97) indicated that IRS auditors met all of the key elements of the workpaper standard in no more than 72 percent of the audits. Table 1 shows the percentage of audits reviewed under EQMS that met all the key elements of the workpaper standard. The success rate, as depicted in table 1, indicates whether all of the key elements within the standard were met. That is, if any one element is not met, the standard is not met. Another indicator of the quality of the audit workpapers is how often each element within a standard meets the criteria of that element. Table I.2 in appendix I shows this rate, which IRS calls the pass rate, for the key elements of the workpaper standard. Workpapers are an important part of the audit effort. They are a tool to use in formulating and documenting the auditor's findings, conclusions, and recommended adjustments, if any. Workpapers are also used by third-party reviewers as quality control and measurement instruments. Documentation of the auditor's methodology and support for the recommended tax adjustments are especially important when the taxpayer does not agree with the recommendations. In these cases, the workpapers are to be used to make decisions about how much additional tax is owed by the taxpayer. Inadequate workpapers may result in having the auditor do more work or even in having the recommended adjustment overturned. IRS' primary quality control mechanism is supervisory review of the audit workpapers to ensure adherence to the audit standards. However, our review of the workpapers in the sampled audits uncovered limited documentation of supervisory review. As a result, the files lacked documentation that IRS group managers reviewed workpapers during the audits to help ensure that the recommended tax adjustments were supported and verified, and that the audits did not unnecessarily burden the audited taxpayers. The IRM requires that group managers review the audit work to assess quality and ensure that audit standards are being met, but it does not indicate how or when such reviews should be conducted. However, the IRM does not require that documentation of this review be maintained in the audit files. We found little documentation in the workpapers that group managers reviewed workpapers before sharing the audit results with the taxpayer. In analyzing the sampled audits, we recorded whether the workpapers contained documentation that a supervisor had reviewed the workpapers during the audit. We counted an audit as having documentation of being reviewed if the group manager made notations in the workpapers on the audit findings or results; we also counted audits in which the workpapers made some reference to a discussion with the group manager about the audit findings. On the basis of our analysis of the sampled audits closed during fiscal years 1995 and 1996, we estimated that about 6 percent of the workpapers in the sample population contained documentation of group manager review during the audits. In discussions about our estimate with IRS Examination Division officials, they noted that all unagreed audits (i.e., those audits in which the taxpayers do not agree with the tax adjustments) are to be reviewed by the group managers, and they pointed to the manager's initials on the notice of deficiency as documentation of this review. We did not count reviews of these notices in our analysis because they occurred after IRS sent the original audit report to the taxpayer. If we assume that workpapers for all unagreed audits were reviewed, our estimate on the percentage of workpapers with documentation of being reviewed increases from 6 percent to about 26 percent. Further, we analyzed all unagreed audits in our sample to see how many had documentation of group manager review during the audit, rather than after the audit results were sent to the taxpayer; this would be the point at which the taxpayer either would agree or disagree with the results. We found documentation of such a review in 12 percent of the unagreed audits. The Examination Division officials also said that a group manager may review the workpapers without documentation of that review being recorded in the workpapers. Further, they said that group managers had limited time to review workpapers due to many other responsibilities. The officials also told us that group managers can be involved with audits through means other than review of the workpapers. They explained that these managers monitor their caseload through various processes, such as evaluations of auditors' performance during or after an audit closes, monthly discussions with auditors about their inventory of audits, reviews of auditors' time charges, reviews of audits that have been open the longest, and visits to auditors located outside of the district office. The Examination Division officials also noted that any time the audit is expanded, such as by selecting another of the taxpayer's returns or adding a related taxpayer or return, this action must be approved by the group manager. According to these officials, these other processes may involve a review of audit workpapers, but not necessarily during the audit. We agreed that we would check for documentation of these other processes in our nine sample audits from IRS' District Office located in Oakland. We found documentation of workload reviews for one of these nine sample audits. In these monthly workload reviews, supervisors are to monitor time charges to an audit. In one other audit, documentation showed that a special unit within the Examination Division reviewed and made changes to the form used to record data for input into IRS' closed audits database. However, none of this documentation showed supervisory review of the audit workpapers. If any other forms of supervisory involvement with these audits had occurred, the documentation either had been removed from the employee performance file as part of IRS' standard procedure or was not maintained in a way that we could relate it back to a specific taxpayer. As a result, we do not know how frequently these other processes for supervisory involvement occurred and whether substantive reviews of the audits were part of these processes. IRS is currently drafting changes to the IRM relating to workpapers. In the draft instructions, managers are required to document managerial involvement. This documentation may include signatures, notations in the activity record, or summaries of discussions in the workpapers. When completed, this section is to become part of the IRM's section on examination of returns. According to an IRS official, comments from IRS' field offices on the draft changes are not due into headquarters until May 1998. IRS audits tax returns to ensure that taxpayers pay the correct amount of tax. If auditors do quality work, IRS is more likely to meet this goal while minimizing the burden on taxpayers. Quality audits should also encourage taxpayers to comply voluntarily. Supervisory review during the audits is a primary tool in IRS' efforts to control quality. IRS requires group managers to ensure the quality of the audits, leaving much discretion on the frequency and nature of their reviews during an audit. IRS officials noted that group managers are to review workpapers if taxpayers disagree with the auditor's report on any recommended taxes. The IRM does not specifically require that all of these supervisory reviews be documented in the workpapers, even though generally accepted government auditing standards do require such documentation. However, recent draft changes to the IRM may address this issue by requiring such documentation. We found little documentation of such supervisory reviews, even though these reviews can help to avoid various problems. For example, supervisory review could identify areas that contribute to IRS' continuing problems in creating audit workpapers that meet its standard for quality. Since fiscal year 1992, the quality of workpapers has been found wanting by IRS' EQMS. Inadequately documented workpapers raise questions about whether supervisory review is controlling audit quality as intended. These questions cannot be answered conclusively, however, because the amount of supervisory review cannot be determined. The lack of documentation on workpaper review raises questions about the extent of supervisory involvement with the audits. Proposed changes to the IRM's sections on examination of returns require documentation of management involvement in the audit process. We recommend that the IRS Commissioner require audit supervisors to document their review of audit workpapers as a control over the quality of audits and the associated workpapers. On March 25, 1998, we met with IRS officials to obtain comments on a draft of this report. These officials included the Acting Deputy Chief Compliance Officer, the Assistant Commissioner for Examination and members of his staff, and a representative from IRS' Office of Legislative Affairs. IRS documented its comments in a March 27, 1998, letter from the IRS Commissioner, which we have reprinted in appendix II. In this letter, IRS agreed to make revisions to the IRM instructions for the purpose of implementing our recommendation by October 1998. The letter included an appendix outlining adoption plans. The IRS letter also expressed two concerns with our draft report. First, IRS said our conclusion about the lack of evidence of supervisory review of audit workpapers was somewhat misleading and pointed to examples of other managerial practices, such as on-the-job visitations, to provide oversight and involvement in cases. We do not believe our draft report was misleading. As IRS acknowledges in its letter, when discussing the lack of documentation of supervisory review, we also described these other managerial practices. Second, IRS was concerned that our draft report appeared to consider these other managerial practices insufficient. Our draft report did not discuss the sufficiency of these practices but focused on the lack of documentation of supervisory review, including these other managerial practices. We continue to believe that documentation of supervisory review of workpapers is needed to help ensure quality control over the workpapers and audits. At the March 25, 1998, meeting, IRS provided technical comments to clarify specific sections of the draft report that described IRS processes. IRS officials also discussed the distinction between supervisory review and documentation of that review. We have incorporated these comments into this report where appropriate. We are sending copies of this report to the Subcommittee's Ranking Minority Member, the Chairmen and Ranking Minority Members of the House Ways and Means Committee and the Senate Committee on Finance, various other congressional committees, the Director of the Office of Management and Budget, the Secretary of the Treasury, the IRS Commissioner, and other interested parties. We will also make copies available to others upon request. Major contributors to this report are listed in appendix III. If you have any questions concerning this report, please contact me at (202) 512-9110. The Office of Compliance Specialization, within the Internal Revenue Service's (IRS) Examination Division, has responsibility for Quality Measurement Staff operations and the Examination Quality Measurement System (EQMS). Among other uses, IRS uses EQMS to measure the quality of closed audits against nine IRS audit standards. The standards address the scope, audit techniques, technical conclusions, workpaper preparation, reports, and time management of an audit. Each standard includes additional key elements describing specific components of a quality audit. Table I.1 summarizes the standards and the associated key elements. Table I.1: Summary of IRS' Examination Quality Measurement System Auditing Standards (as of Oct. 1996) Measures whether consideration was given to the large, unusual, or questionable items in both the precontact stage and during the course of the examination. This standard encompasses, but is not limited to, the following fundamental considerations: absolute dollar value, relative dollar value, multiyear comparisons, intent to mislead, industry/business practices, compliance impact, and so forth. Measures whether the steps taken verified that the proper amount of income was reported. Gross receipts were probed during the course of examination, regardless of whether the taxpayer maintained a double entry set of books. Consideration was given to responses to interview questions, the financial status analysis, tax return information, and the books and records in probing for unreported income. Measures whether consideration was given to filing and examination potential of all returns required by the taxpayer including those entities in taxpayer's sphere of influence/responsibility. Required filing checks consist of the analysis of return information and, when warranted, the pick-up of related, prior and subsequent year returns. In accordance with Internal Revenue Manual 4034, examinations should include checks for filing information returns. (continued) Measures whether the issues examined were completed to the extent necessary to provide sufficient information to determine substantially correct tax. The depth of the examination was determined through inspection, inquiry, interviews, observation, and analysis of appropriate documents, ledgers, journals, oral testimony, third-party records, etc., to ensure full development of relevant facts concerning the issues of merit. Interviews provided information not available from documents to obtain an understanding of the taxpayer's financial history, business operations, and accounting records in order to evaluate the accuracy of books/records. Specialists provided expertise to ensure proper development of unique or complex issues. Measures whether the conclusions reached were based on a correct application of tax law. This standard includes consideration of applicable law, regulations, court cases, revenue rulings, etc. to support technical/factual conclusions. Measures whether applicable penalties were considered and applied correctly. Consideration of the application of appropriate penalties during all examination is required. Measures the documentation of the examination's audit trail and techniques used. Workpapers provided the principal support for the examiner's report and documented the procedures applied, tests performed, information obtained, and the conclusions reached in the examination. Measures the presentation of the audit findings in terms of content, format, and accuracy. Addresses the written presentation of audit findings in terms of content, format, and accuracy. All necessary information is contained in the report, so that there is a clear understanding of the adjustments made and the reasons for those adjustments. Measures the utilization of time as it relates to the complete audit process. Time is an essential element of the Auditing Standards and is a proper consideration in analyses of the examination process. The process is considered as a whole and at examination initiation, examination activities, and case closing stages. (Table notes on next page) IRS uses the key element pass rate as one measure of audit quality. This measure computes the percentage of audits demonstrating the characteristics defined by the key element. According to IRS, the key element pass rate is the most sensitive measurement and is useful when describing how an audit is flawed, establishing a baseline for improvement, and identifying systemic changes. Table I.2 shows the pass rates for the key elements of the workpaper standard for fiscal years 1992 through 1997 for office and field audits. Table I.2: Key Element Pass Rate for EQMS Workpaper Standard for District Audits From Fiscal Years 1992-97 Key element pass rate by fiscal year1995 (10/94-3/95) 1995 (4/95-9/95) Legend: n/a = not applicable The key element "Disclosure" was added in the middle of fiscal year 1995. Kathleen E. Seymour, Evaluator-in-Charge Louis G. Roberts, Senior Evaluator Samuel H. Scrutchins, Senior Data 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. 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.	GAO reviewed the condition of the Internal Revenue Service's (IRS) audit workpapers, including the documentation of supervisory review. GAO noted that: (1) during its review of IRS' financial status audits, the workpapers did not always meet the requirements under IRS' workpaper standards; (2) standards not met in some audit workpapers included the expectation that: (a) the amount of tax adjustments recorded in the workpapers would be the same as the adjustment amounts shown in the auditor's workpaper summary and on the report sent to the taxpayer; and (b) the workpaper files would contain all required documents to support conclusions about tax liability that an auditor reached and reported to the taxpayer; (3) these shortcomings with the workpapers are not new; (4) GAO found documentation on supervisory review of workpapers prepared during the audits in an estimated 6 percent of the audits in GAO's sample; (5) in the remaining audits, GAO found no documentation that the group managers reviewed either the support for the tax adjustments or the report communicating such adjustments to the taxpayer; (6) IRS officials indicated that all audits in which the taxpayer does not agree with the recommended adjustments are to be reviewed by the group managers; (7) if done, this review would occur after the report on audit results was sent to the taxpayer; (8) even when GAO counts all such unagreed audits, those with documentation of supervisory review would be an estimated 26 percent of the audits in GAO's sample population; (9) GAO believes that supervisory reviews and documentation of such reviews are important because they are IRS' primary quality control process; (10) proper reviews done during the audit can help ensure that audits minimize burden on taxpayers and that any adjustments to taxpayers' liabilities are supported; (11) although Examination Division officials recognized the need for proper reviews, they said IRS group managers cannot review workpapers for all audits because of competing priorities; (12) these officials also said that group managers get involved in the audit process in ways that may not be documented in the workpapers; (13) they stated that these group managers monitor auditors' activities through other processes, such as by reviewing the time that auditors spent on an audit, conducting on-the-job visits, and talking to auditors about their cases and audit inventory; and (14) in these processes, however, the officials said that group managers usually were not reviewing workpapers or validating the calculations used to recommend adjustments before sending the audit results to the taxpayer.	4,894	531
During congressional testimony in early 1996, the Army Chief of Staff requested funds from Congress to speed up the fielding of urgently needed new technologies to the soldier. The Chief of Staff stressed that Congress and the Army could accelerate the development of new technologies by making funds available more quickly than is normally required in the budget process for new programs. The Army proposed WRAP as a tool that would help jump-start technologies that were still under development but nearing the production phase. These new technologies were being tested in Army experiments designed to support a new warfighting concept called Force XXI. Force XXI embodies the Army's vision of how military operations will be carried out in the 21st century and relies heavily on the fielding in the year 2000 of the 4th Infantry Division, the Army's first digitized division. The Army selected technologies slated for WRAP funding from those tested in the Task Force XXI Advanced Warfighting Experiment (AWE), completed in March 1997 and carried out to support the first digitized division. Congress added $50 million to the Army's fiscal year 1997 budget. The money eventually funded the first 11 WRAP initiatives. However, the House Committee on Appropriations, in its report on the fiscal year 1997 defense appropriations bill, expressed concern that WRAP funds might be used for limited fielding of unbudgeted items that had not competed for funds and would not be affordable in future budgets. Therefore, it required notification to the defense committees prior to the obligation of WRAP funds and stipulated that these funds could not be used to field interim Land Warrior prototypes. When it established the program in early 1996, the Army planned to request $100 million per year from fiscal year 1998 to 2003. In its guidance for the program, the Army established the condition that these funds could not be used for technologies requiring "indefinite experimentation" and that WRAP candidates must be a compelling experimental success, urgently needed, ready for production within 2 years, and sufficiently funded in the out-years. Technologies requiring "continued experimentation" were to be allowed to receive WRAP funding. According to the Army, these differ from technologies needing indefinite experimentation in that they are not mature but are expected to start production within 2 years. Selected initiatives are funded from the Force XXI Initiatives (WRAP) budget, which is a holding account created expressly for WRAP initiatives. In fiscal year 1998, Congress appropriated $99.9 million for WRAP: $61 million for the second year of the first 11 initiatives and $38.9 million for the first year of new 1998-99 initiatives. However, recent actions taken by the Department of Defense (DOD) and the congressional appropriations committees will affect funding for new initiatives. For example, DOD reduced fiscal year 1998 WRAP funding for 1998-99 initiatives to $8.6 million (see app. I), and the appropriations conference committee reduced fiscal year 1999 WRAP funding by $35 million to $64.5 million. On July 16, 1998, the Army submitted 6 new candidates for funding in fiscal years 1998-99 and 4 new ones for funding in fiscal years 1999-2000 (detailed descriptions of the 21 initiatives and candidates are in app. I). On September 25, 1998, the appropriations conference committee denied funding for two of the four fiscal year 1999-2000 candidates. The Army plans to submit additional fiscal year 1999-2000 candidates by December 1998. The Army is also required by the Senate Armed Services Committee to submit quarterly reports on the status of obligated funds. WRAP has experienced growing pains in its first 2 years. While evolving, the program has lacked focus in the selection of initiatives. The assumptions and expectations that drove WRAP at its inception have not been clearly stated. As a result, we were unable to determine whether the results are consistent with congressional intent. However, we found that (1) some initiatives do not support the first digitized division, although the Army initially justified WRAP funding on the basis of the need to urgently field technologies associated with the first digitized division; (2) funds have been used both for production items and development work; and (3) future initiatives may not have sufficient test data for proper evaluation. Furthermore, the Army is still trying to refine its selection process so as to avoid the delays that so far have hindered the program's implementation. Meanwhile, Congress is not being informed of the program's progress or of changes in some ongoing initiatives. WRAP criteria for selection of initiatives allow considerable room for interpretation. Therefore, the WRAP initiatives funded so far are quite different from each other. Some initiatives did not meet all the Army's criteria for WRAP funding, and others will not be fielded with the first digitized division in 2000. They were approved, however, because they fit the general description of urgently needed new technologies that the Army is trying to field as quickly as possible. WRAP funds were also used to purchase production items rather than to develop new technologies. Neither congressional restrictions nor the Army's criteria specify whether WRAP funds should be used only to support the Army's first digitized division. However, the Army initially justified WRAP funding on the basis of the urgent need to field technologies associated with the first digitized division, and appropriation of that funding occurred in a strategic environment dominated by development of the first digitized division. For example, the Task Force XXI AWE was carried out to support the digitized division, the first 11 WRAP initiatives were tested in the Task Force XXI AWE, the Army's Training and Doctrine Command (TRADOC) cited support for the first digitized division as the top priority when selecting WRAP candidates, about two thirds of fiscal year 1997 funding was for initiatives that support the first digitized division, and the Army initially placed WRAP funds under the digitization budget before establishing a separate Force XXI initiatives budget. There is disagreement within the Army about whether WRAP should be directly linked to the first digitized division. An Operational Test and Evaluation Command (OPTEC) official believes that WRAP is directly related to digitization, while the Director of the Acquisition Reform Reinvention Lab, Office of the Assistant Secretary of the Army for Research, Development, and Acquisition, believes that WRAP is an acquisition streamlining tool that may or may not support digitization. He views WRAP as part of the Army's efforts to field needed technologies more rapidly, regardless of their relationship to the digitized division. We found that 3 of the first 11 initiatives, accounting for about one third of all WRAP funds, will not be part of the first digitized division. These initiatives, the Mortar Fire Control System, the Gun Laying and Positioning System, and the Avenger Slew-to-Cue, together received $14.3 million in WRAP funds in fiscal year 1997 and are slated to receive $22.5 million in fiscal year 1998. However, all six of the WRAP candidates submitted for fiscal years 1998-99 funding are considered critical for the first digitized division. Two initiatives, Applique and Tactical Internet, did not meet the Army's criterion that WRAP candidates be ready for production within 2 years, but as the backbone of the Army's first digitized division, they were justified on the basis of urgent need. Both were approved as continued experimentation initiatives and are not expected to begin production until fiscal year 2004. An OPTEC official told us that other initiatives were clearly closer to fielding but that the Army approved Applique and Tactical Internet because it believed they were worth the expense of additional development work. They received $12.3 million (about 26 percent) of the $47.7 million of fiscal year 1997 WRAP funds and will receive $8.6 million (about 14 percent) of the $61 million of fiscal year 1998 WRAP funds. WRAP funds have also been used to purchase substantial quantities of production items (finished products ready for fielding). The Army allocated $17.6 million of $61 million (about 29 percent) of WRAP funds in fiscal year 1998 to procure production items. For example, the Army will use 1998 WRAP funds to procure 432 Movement Tracking Systems, enough to fully equip 2 Army divisions. WRAP was created to help jump-start new technologies that require developmental work and that must be fielded quickly. But production items by definition do not require further testing or development. Army criteria allow the use of WRAP funds for operational prototypes but do not specify what distinguishes a prototype from a finished production item. In our opinion, using WRAP funds to purchase large quantities of finished products (more than are needed for operational prototypes) is not consistent with the WRAP goal of developing new technologies until they are ready for production. In response to our questions about this issue, the Director of the Acquisition Reform Reinvention Lab told us that the Army now acknowledges that the practice should be discontinued. The Army has not scheduled any AWEs through 1999 to test new technologies. Consequently, it may be forced to rely increasingly on candidates that have not proven themselves through prior testing, require long-term experimentation, or may not be ready to begin production within 2 years. Officials have expressed concern that this approach may eventually lead to candidates that are less developed and take longer to field. Some approved initiatives have not been proven in testing and are less developed. While only 2 of 11 WRAP initiatives in fiscal years 1997-98 were defined as requiring continued experimentation, 3 of 10 candidates in fiscal years 1998-99 fell into this category. OPTEC was the lead evaluator for the Task Force XXI AWE. It evaluated the 72 participating initiatives and prepared ratings for 13 WRAP candidates.However, two of the three new continued experimentation WRAP candidates (Close Combat Tactical Trainer XXI and Global Combat Service Support System-Army) have not provided enough test and experimentation data to allow OPTEC to carry out a thorough evaluation and rating. They were still unrated as of July 1998. On September 25, 1998, the appropriations conference committee denied funding for both candidates. OPTEC may decline to issue a rating if it does not have enough data to conclude that the candidate is a compelling experimental success as required by Army criteria. An OPTEC official said that the Army will find it increasingly difficult to demonstrate such success because it has not scheduled any AWEs or similar large-scale exercises through fiscal year 1999. Without AWEs, he added, it will be difficult to find new candidates at the same level of development and experimental testing as the first group of candidates. He said that evaluation criteria may need to be changed to introduce other ways of qualifying candidates. In our opinion, this could result in more candidates that need continued experimentation. Meanwhile, the Army is trying to fill the gap created by the absence of AWEs. The Director of the Army Acquisition Reform Reinvention Lab said the Army is seeking alternatives to AWEs to expand its pool of WRAP candidates. The alternatives could include advanced technology and advanced concept technology demonstrations, concept experimentation programs, and battle lab warfighting experiments. Such candidate technologies could then use WRAP funds to move more quickly through development and into production. However, in our opinion, these demonstrations may involve technologies that require lengthy testing and experimentation. The key to securing timely congressional approval of WRAP candidates is the Army's ability to finalize its selection early enough in the budget cycle. To date, this has not happened. In requesting the release of fiscal year 1997 funds from DOD, the Army did not initially justify the need for or indicate the ultimate destination of the funds, delaying the start-up and implementation of programs. As a result, approval of WRAP funds was delayed until very late in the fiscal year (see app. II for a description of the Army's process for WRAP candidate selection). Additionally, funding reductions have also affected implementation. In the end, for most initiatives, WRAP probably will not speed up fielding as much as initially hoped. The 1997 WRAP selection and approval process lasted most of fiscal year 1997. The Army narrowed its list of candidates from 300 to 15 and made its final selection after reviewing the results of a March 1997 Task Force XXI AWE evaluation. The Army did not present the final 11 candidates to Congress until May 30, 1997. But even after the candidates were selected, DOD withheld $47.7 million for several months in fiscal year 1997 because the Army had not clearly stated which programs would receive the funds and how the funds would be used. DOD released $17.5 million of the funds in August 1997 and the remainder in late September 1997. In fiscal year 1998, DOD again withheld funds, saying it wanted to be certain they were needed. As of October 8, 1998, $36.9 million of fiscal year 1998 funds still had not been released. The Army has been trying to speed up its selection process in order to receive WRAP funds earlier in the fiscal year, but with little success. The fiscal year 1998 selection process took even longer than it had the previous year and the Army did not present its list of candidates to Congress until July 1998. This time the process was reportedly delayed by continuing debate within the Army over candidates, insufficient test data, and indecision about whether to submit candidates all at once or in batches, as they were selected. The Army has acknowledged the need to start candidate selection earlier. For fiscal year 1999, it plans to convene the next Army Systems Acquisition Review Council in November 1998, 2 months earlier than the previous year, and submit the last batch of 1999 candidates to Congress no later than December 1998. Funding cuts by DOD also affected the program. DOD reprogrammed WRAP funds to other operations, such as the Small Business Innovation Research Program. In fiscal years 1997 and 1998, DOD reprogrammed $2.3 million and $5 million, respectively, from WRAP to other programs. In addition, a June 1998 omnibus reprogramming action further reduced fiscal year 1998 WRAP funds for new initiatives by $27.8 million, leaving funding for new initiatives at $8.6 million. Army Airborne Command and Control System officials estimated that the loss of about $0.6 million of an $11 million WRAP allocation in fiscal year 1998 could delay the program by about 3 months. In another program, officials agreed that even losses as small as $0.2 million can have a negative effect on program plans. Although there have been delays, we believe that many WRAP-funded technologies may be fielded sooner because of the program. The Army initially estimated that 9 of the first 11 WRAP initiatives would accelerate the fielding of new technologies by an average of about 20 months. In its justification to Congress, the Army did not provide accelerated fielding estimates for two initiatives. Most estimates were made by the Army before the initiatives were approved and had to be revised because the selection and approval process took too long and funds were not released when planned. According to the latest fielding projections by program officials, six of the nine programs may not save as much time as originally claimed, two may accelerate fielding as originally estimated, and one may actually be ahead of the original fielding estimate (see table 1). Fielding could be postponed further if there are more delays or funding shortfalls. The Army made substantial changes to some WRAP initiatives. These changes prolonged implementation. The Army concluded, for example, that the design of Avenger Slew-to-Cue was deficient and that the technology would become obsolete before it would be fielded. In fiscal year 1997, the Army thus made major changes in the design and acquisition strategy of the program; this led to additional development work and testing. Because of these changes, DOD has been withholding 1998 WRAP funding for the initiative. The Gun Laying and Positioning System also experienced a schedule slippage that will delay fielding. According to the program manager, the slippage will make it necessary to alter funding (for example, by shifting funds from the out-years to underfunded or unfunded years) in order to accelerate fielding. The congressional defense committees were not informed of these developments. The Army is not required to issue progress reports or to notify Congress of changes in ongoing programs. The only formal feedback mechanism is a congressional requirement that the Army submit quarterly funding reports to the Senate Armed Services Committee on the obligation of funds for WRAP initiatives. The Army is also required to provide more frequent reports if WRAP has significant successes or failures. To date, the Army has not submitted any of the required reports. After 2 years, there is growing uncertainty about which technologies should receive top priority for WRAP funding. The Army's criteria for WRAP candidates are open-ended and do not ensure that initiatives share a common set of characteristics. For example, there is disagreement within the Army over whether WRAP and the fielding of the first digitized division should be directly linked. In the absence of more precise selection criteria, disagreements over which candidates are most appropriate for WRAP funding will likely continue. The Army may find it increasingly difficult to identify candidates that are sufficiently developed in the near future because it has reduced large-scale test and experimentation exercises and will thus have less data with which to assess new WRAP candidates. The Army has not presented its slate of WRAP candidates for congressional approval early enough in the fiscal year to permit timely obligation of funds. This has led directly to delays in fielding because estimates were predicated on earlier availability of funds. Although some technologies may be fielded sooner because of WRAP, in most cases the program will not speed up fielding as much as originally expected. The Army is required to report quarterly on the status of funding obligations to the Senate Armed Services Committee. To date, it has not met this requirement, and there is no other requirement for reporting on program performance or status. We believe that Congress is being asked to make funding decisions without all the information it needs. Information presently not provided on a consistent basis includes program cost, schedule, and performance; planned obligations; any significant changes to program acquisition strategy; and any scheduled changes in program digital battlefield participation. We recommend that the Secretary of Defense direct the Secretary of the Army to issue WRAP guidance that calls for specific deadlines for candidate identification and selection to ensure timely submission of candidates to Congress and timely obligation of funds, minimum testing and experimentation requirements for WRAP candidates, periodic reports to Congress on the status of ongoing WRAP initiatives. Given Congress' 2 years of experience in reviewing Army requests for WRAP funding of specific technologies and the disagreement within the Army about which technologies are most appropriate for WRAP funding, this may be an appropriate time for Congress to clarify its expectations of the program and to ensure that these expectations are embodied in more precise selection criteria for WRAP candidates. In written comments on a draft of this report, DOD partially concurred with our recommendation, but did not specify why its concurrence was not complete. In its response, DOD stated that the Army is continuing to examine potential improvements. DOD indicated that the Army will provide recommendations for improvements by December 1, 1998, to the Office of the Secretary of Defense Overarching Integrated Product Team leaders as part of the Force XXI WRAP program update. DOD also stated that the Army is continuing to examine potential improvements to the WRAP/Force XXI process, including the schedules for candidate identification and selection, the requirements for levels of testing and experimentation tailored to the specific initiative, and the appropriate detail and frequency of reporting. Since WRAP is now in its third year of implementation, we believe it is time for specific remedies to address the issues that have been identified and believe our recommendation addresses these issues. DOD's comments are reprinted in their entirety in appendix III. To assess the current status of the program, we reviewed the criteria used to identify, evaluate, and select WRAP candidates. We interviewed both DOD and Army officials responsible for the WRAP. We visited the Office of the Assistant Secretary of the Army for Research, Development, and Acquisition, Washington, D.C.; TRADOC, Fort Monroe, Virginia; and OPTEC, Alexandria, Virginia. We reviewed congressional funding restrictions and selection criteria as well as the Army's WRAP policy guidelines, Army Systems Acquisition Review Council briefing packages, and resulting administrative decision memorandums. We discussed budget withholdings, assessments, and reprogramming with officials in the DOD Comptroller's Office and the Office of the Assistant Secretary of the Army for Research, Development, and Acquisition. With Office of the Assistant Secretary of the Army for Research, Development, and Acquisition and TRADOC's assistance, we examined in detail the WRAP candidate identification, selection, and approval process. We examined how TRADOC identifies and screens candidates and reviewed Office of the Assistant Secretary of the Army for Research, Development, and Acquisition's congressional briefings and OPTEC's rating and evaluation process. We also reviewed WRAP-related documentation, including program management and budget documents, congressional hearings and briefings, and AWE assessments. We also attended the Division AWE at Fort Hood, Texas, and observed WRAP initiatives in the field. We reviewed cost, schedule, and performance documentation at WRAP initiative program offices and reviewed program acquisition plans and schedules. We interviewed appropriate officials, received briefings, and reviewed relevant program documents during visits to the Short-Range Air Defense and Aviation Electronic Combat Project Offices, Redstone Arsenal, Huntsville, Alabama; the Simulation, Training, and Instrumentation Command, Orlando, Florida; and the Armament and Chemical Acquisition and Logistics Activity, Rock Island Arsenal, Rock Island, Illinois. We also met with OPTEC officials and reviewed relevant information papers and AWE assessments. We also discussed OPTEC's initiative rating process, particularly regarding test and experimentation data necessary to support an OPTEC rating. We also discussed how TRADOC and Office of the Assistant Secretary of the Army for Research, Development, and Acquisition officials incorporate ratings in the selection process. We performed our review from September 1997 to October 1998 in accordance with generally accepted government auditing standards. We are sending copies of this report to other appropriate congressional committees; the Secretaries of Defense and the Army; and the Director, Office of Management and Budget. Copies will also be made available to others upon request. Please contact me at (202) 512-4841 if you or your staff have any questions concerning this report. The major contributors to this report are listed in appendix IV. Tables I.1 through I.4 show funding for two groups of Warfighting Rapid Acquisition Program (WRAP) initiatives (fiscal years 1997-98 and fiscal years 1998-99) and briefly describe the programs in each group. Army Airborne Command and Control System Combat Synthetic Training Assessment Range Gun Laying and Positioning System Striker (Scout Common Vehicle) Digital battle command information system that provides on-the-move, almost real-time situation awareness to tactical combat, combat support, and combat service support leaders at individual fighting platforms. An on-the-move node that provides corps, division, and brigade commanders mobility and communications interoperability while maintaining sensor-to-shooter connectivity. Provides a digitized sensor-to-shooter link, enabling the squad leader or gunner to designate a target for engagement. Battle command training system that provides collective training for brigade-sized organizations at Fort Irwin, California, and Fort Hood, Texas. In testing, the system provided realistic signal intelligence, unmanned aerial vehicle intelligence/imagery, and joint surveillance target attack radar system intelligence/imagery to the brigade combat team. A tripod-mounted positioning and orienting device consisting of a nondevelopmental item gyroscope, electronic theodolite, position location ground receiver, and a short-range eye-safe laser rangefinder. A man-portable laser designator and target locator with eye-safe range finding, azimuth determination, self-location, and data/image export capability. It can locate targets in day or night with all-weather capability. Integrates mortars into the fire support architecture and provides full field artillery tactical data system compatibility. Consists of a high-mobility multiwheeled vehicle configured as a fire direction center and three subsystems: position navigation, fire control, and situational awareness. This platform is capable of loading and unloading itself and a companion trailer in 5 minutes to allow flexible mission assignment and operation under adverse conditions. It consists of the Palletized Load System platform and the Movement Tracking System (MTS). MTS can identify position, track progress, and communicate with the operators of tactical wheel vehicles. It has global positioning capability, can send base-to-mobile and mobile-to-base messages, and can locate/track an asset's position using personal computer-based software. Provides asset visibility/in-transit capability to units and managers. The tags are an assemblage of commercial off-the-shelf equipment that store embedded data of container contents, shipments, and vehicle identification. The tags are fixed to containers to track material through the distribution system. Striker ( Scout Common Vehicle) High-mobility, multiwheeled, vehicle used by combat observation lasing teams. The system can self-locate; determine range, azimuth, and vertical angle to a target; designate targets; and enhance day/night observation. It will contain the same Fire Support Team computer mission equipment as the Bradley vehicle. A software enhancement to improve voice-data contention and unit tasking order. Voice-data contention is the ability of the Single Channel Ground and Airborne Radio System radios to synchronize voice and data transmission over the same radio path. Unit tasking order can dynamically task-organize units within the Tactical Internet. Uses a network of computers and communication equipment to provide a joint integrated air picture to battalion, brigade, division, corps, and theater commanders, providing real-time air situational awareness and enhancing air defense-force protection. High-mobility, multiwheeled, vehicle-mounted shelter with digital communication that allows the brigade combat team to integrate, process, and interpret real-time sensor and broadcast reports from remote intelligence data bases via a common ground station and to merge the information with the brigade's organic reconnaissance. Provides combined arms training for the digitized division's close combat heavy battalion and units below. Supports the training of mission training plan tasks by the digitized force using all Force XXI C4 I systems. Receives, updates, and disseminates digital terrain data to provide both digital and analog tactical decision aids in support of the commanders' battlefield visualization process. Heavy contact maintenance vehicle that provides forward area battlefield maintenance to mechanized forces. Automated, worldwide, beyond line-of-sight tracking and messaging system used to inject unit location and limited messaging for nondigitized elements into existing and planned automated C2 systems. Links digitized and nondigitized forces. Provides essential video and high-speed data access through mobile subscriber equipment. Allows users to move voice, video, and data over the existing communication network. These modules merge data from the Unit Level Logistics Ground System, the Unit Level Logistics System, and the Standard Installation/Division Personnel System into a relational data warehouse based on a client-server system. Provides high data rate communications between tactical operation centers at brigade level and below. Provides digitized training for two-way exchange between tactical command and control system work stations and distributed interactive simulations. The Army's process for identifying, evaluating, and selecting WRAP candidates involves several organizations and a number of steps that lead candidates from initial identification to final presentation by the Army Chief of Staff to Congress. Key to securing timely congressional approval of WRAP candidates is the Army's ability to finalize its selection early in the budget cycle. It is important that WRAP candidates be processed promptly, since the success of the program depends on the timely development of technologies determined to be urgently needed by the warfighter. Proposals are initially submitted by the using commands to Training and Doctrine Command's (TRADOC) Battle Lab Board of Directors. Proposals must include (1) a battle lab experiment plan containing an urgency of need statement, test results, an acquisition strategy, and a budget estimate; (2) an operational requirements statement addressing defense planning guidance, threat, system requirements, and constraints; and (3) an information paper addressing technical merit and maturity, criticality, and priority of the warfighting effort, affordability, effectiveness, and budget sustainability. After the Board reviews the proposals, it forwards them to the TRADOC Commanding General, who approves and prioritizes them and forwards them to the Assistant Secretary of the Army for Research, Development, and Acquisition. Further review is then carried out by the Army Systems Acquisition Review Council (ASARC), which is composed of 13 representatives from the Army's commands, the Office of the Chief of Staff, and the secretariats. The Council is convened by the head of the Acquisition Reform Reinvention Lab (Assistant Secretary of the Army for Research, Development, and Acquisition) on request from the TRADOC Commanding General. In assessing proposals for WRAP funding, the TRADOC Battle Lab Board of Directors ensures that the candidates comply with WRAP criteria. For its part, ASARC examines proposals for urgency of need, requirements, affordability, and experimentation results. When assessing candidates, ASARC relies on information from a number of sources, including the Operational Test and Evaluation Command (OPTEC), which was the lead evaluator of the Task Force XXI Advanced Warfighting Experiment (AWE). OPTEC evaluates candidates and issues its own ratings for consideration by ASARC. The Council reviews the proposals and can recommend approval by the Army Chief of Staff, require further resolution of outstanding issues, or recommend funding from other sources. The Council also approves acquisition and funding strategies and assigns management responsibilities. ASARC forwards its recommendations to the Army Chief of Staff, who presents the final list of candidates for WRAP funding to Congress for approval. Arthur Fine, Evaluator-in-Charge Joseph Rizzo, Jr., Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.	Pursuant to a congressional request, GAO reviewed the Army's implementation of the Warfighting Rapid Acquisition Program (WRAP), focusing on the current status of the program. GAO noted that: (1) the Army's criteria for selecting WRAP candidates are open-ended and allow room for different interpretations; (2) as a result, although the Army initially justified WRAP funding on the basis of the need to urgently field technologies associated with the first digitized division, not all WRAP initiatives support the first digitized division; (3) furthermore, some initiatives do not meet all the Army's criteria for WRAP funding; (4) the Army is reducing the testing of new technologies through large-scale warfighting experiments; (5) as a result, the Army may need to change the criteria used to evaluate and rate WRAP candidates; (6) this may affect the quality of future candidates; (7) to date, the Army has not been able to finalize its selection of WRAP candidates early enough to ensure timely approval by Congress; (8) as a result, the final approval of funds and the subsequent start-up of initiatives have been delayed; (9) delays also occurred because the Army did not obtain the timely release of WRAP funds from the Department of Defense (DOD) and because DOD reduced funding for WRAP; (10) in spite of these delays, GAO believes that WRAP funds may still help speed the fielding of some new technologies, though not as much as originally estimated; (11) after initial congressional approval of the first 11 WRAP initiatives, the Army made substantial changes to some of them; (12) these changes affected program implementation; and (13) Congress was not informed of the changes because current reporting requirements do not require the Army to report such changes.	6,828	384
We reported in April 2013 that costs increased and schedules were delayed considerably for all four of VA's largest medical-facility construction projects, when comparing November 2012 construction project data with the cost and schedule estimates first submitted to Congress. Cost increases ranged from 59 percent to 144 percent,representing a total cost increase of nearly $1.5 billion and an average increase of approximately $366 million per project. The schedule delays ranged from 14 to 74 months with an average delay of 35 months per project. Of these four medical-facility construction projects VA had underway, Denver had the highest cost increase and the longest estimated years to complete. We reported that the estimated cost for the Denver project increased from $328 million in June 2004 to $800 million. VA's initial estimated completion date for the project was February 2014. Subsequently, VA estimated the project would be completed in May 2015. However, in an update provided to Congress in March 2015, VA did not provide an updated completion date. VA provided an update in April for the total estimated cost and estimated completion date for some of its projects. The data was as of March 2015. Total estimated years to complete 11.25 66 December 2014 February 2016 14 The column titled "total estimated years to complete" is reported to the nearest quarter year and is calculated from the time VA approved the architecture and engineering firm to the current estimated completion date. We calculated the "number of months extended" column by counting the months from the initial estimated completion date to the current estimated completion date, as reported by VA. According to VA, the dates in the initial estimated completion dates are from the initial budget prospectus, which assumed receipt of full construction funding within 1 to 2 years after the budget submission. In some cases, construction funding was phased over several years and the final funding was received several years later. Naval Facilities Engineering Command officials we spoke with told us that historically, medical facility projects take approximately 4 years from design to completion. We calculated the percentage change in cost by using the initial total estimated costs and total estimated costs, as reported by VA. The main medical center was completed in April 2012 and patients began utilizing the facility in August of 2012. However, as of March 2015, the final phase of the Las Vegas project to expand the emergency department is projected to be completed in the summer of 2015. For the purpose of our analysis above, we calculated the number of months extended and the total years to complete using the date of June 2015. However, schedule delays would increase if the project was completed later in the summer of 2015. In its March 2015 update, VA did not provide the total estimated cost for the Orlando project. According to VA's March 2015 update, the New Orleans project has a construction completion date of February 2016, except for Dixie/Research building which will be completed by late 2016. In commenting on a draft of our April 2013 report, VA stated that using the initial completion date from the construction contract would be more accurate than using the initial completion date provided to Congress; however, using the initial completion date from the construction contract would not account for how VA managed these projects before it awarded the construction contract. Cost estimates at this earlier stage should be as accurate and credible as possible because Congress uses these initial estimates to consider authorizations and make appropriations decisions. We used a similar methodology to estimate changes to cost and schedule of construction projects in a previous report issued in 2009 on VA construction projects. We believe that the methodology we used in our April 2013 and December 2009 reports on VA construction provides an accurate depiction of how cost and schedules for construction projects can change from the time they are first submitted to Congress. It is at this time that expectations are set among stakeholders, including the veterans' community, for when projects will be completed and at what cost. In our April 2013 report, we made recommendations to VA to help address these cost and schedule delays which are discussed later in this statement. In our April 2013 report, we identified two primary factors that contributed to cost increases and schedule delays at the Denver facility: (1) decisions to change plans from a shared university/VA medical center to a stand- alone VA medical center and (2) unanticipated events. Decision to change plans from a shared university/VA medical center to a stand-alone VA medical center. VA revised its original plans for shared facilities with a local university to stand-alone facilities after proposals for a shared facility could not be finalized. Plans went through numerous changes after the prospectus was first submitted to Congress in 2004. In 1999, VA officials and the University of Colorado Hospital began discussing the possibility of a shared facility on the former Fitzsimons Army base in Aurora, Colorado. Negotiations continued until late 2004, at which time VA decided against a shared facility with the University of Colorado Hospital because of VA concerns over the governance of a shared facility. In 2005, VA selected an architectural and engineering firm for a stand-alone project, but VA officials told us that the firm's efforts were suspended in 2006 until VA acquired another site at the former Army base adjacent to the new university medical center. Design restarted in 2007 before suspending again in January 2009, when VA reduced the project's scope because of lack of funding. By this time, the project's costs had increased by approximately $470 million, and the project's completion was delayed by 14 months. The cost increases and delays occurred because the costs to construct operating rooms and other specialized sections of the facility were now borne solely by VA, and the change to a stand-alone facility also required extensive redesign. Unanticipated events. VA officials at the Denver project site discovered they needed to eradicate asbestos and replace faulty electrical systems from pre-existing buildings. They also discovered and removed a buried swimming pool and found a mineral-laden underground spring that forced them to continually treat and pump the water from the site, which impacted plans to build an underground parking structure. In our April 2013 report, we found that VA had taken steps to improve its management of major medical-facility construction projects, including creating a construction-management review council. In April 2012, the Secretary of Veterans Affairs established the Construction Review Council to serve as the single point of oversight and performance accountability for the planning, budgeting, executing, and delivering of VA's real property capital-asset program. The council issued an internal report in November 2012 that contained findings and recommendations that resulted from meetings it held from April to July 2012. The report stated that the challenges identified on a project-by-project basis were not isolated incidents but were indicative of systemic problems facing VA. In our 2013 report we also found that VA had taken steps to implement a new project delivery method--called the Integrated Design and Construction (IDC) method. In response to the construction industry's concerns that VA and other federal agencies did not involve the construction contractor early in the design process, VA and the Army Corps of Engineers began working to establish a project delivery model that would allow for earlier contractor involvement in a construction project, as is often done in the private sector. We found in 2013 that VA did not implement IDC early enough in Denver to garner the full benefits. VA officials explained that Denver was initiated as a design-bid-build project and later switched to IDC after the project had already begun. According to VA officials, the IDC method was very popular with industry, and VA wanted to see if this approach would effectively deliver a timely medical facility project. Thus, while the intent of the IDC method is to involve both the project contractor and architectural and engineering firm early in the process to ensure a well coordinated effort in designing and planning a project, VA did not hire the contractor for Denver until after the initial designs were completed. According to VA, because the contractor was not involved in the design of the projects and formulated its bids based on a design that had not been finalized, these projects required changes that increased costs and led to schedule delays. VA staff responsible for managing the project said it would have been better to maintain the design-bid-build model throughout the entire process rather than changing mid-project because VA did not receive the value of having the contractor's input at the design phase, as the IDC method is supposed to provide. For example, according to Denver VA officials, the architectural design called for curved walls rather than less expensive straight walls along the hospital's main corridor. The officials said that had the contractor been involved in the design process, the contractor could have helped VA weigh the aesthetic advantages of curved walls against the lower cost of straight walls. Since our April 2013 report was issued, in 2014, the United States Civilian Board of Contract Appeals found that VA materially breached the construction contract with the construction contractor by failing to provide a design that could be built for the contracted amount of $582.8 million. In its decision, one of the Board's findings was that VA did not use the IDC design mechanism properly from the start. The Board noted that when the construction contractor was brought into the project, the architectural engineering design team had been under contract with VA since 2006 and that by 2010, the design was 50 percent complete and funding decisions had already been made. According to the Board, this limited VA's flexibility to make modifications based on the construction contractor's pre-construction advice. The Board also noted a September 2011 review by the Army Corps of Engineers, commissioned by VA, found that the IDC contract type may not have been appropriate for the Medical Center Replacement in Denver. In that review, the Army Corps of Engineers explained that proceedings from design development to major design milestones prior to the procurement of the IDC contractor did not permit the contractor to integrate with the designer to achieve the benefits related to this contract type. The Army Corps of Engineers concluded that the current methodology appeared to be counterintuitive to the government's ability to achieve best value. In our April 2013 report we identified systemic reasons that contributed to overall schedule delays and cost increases, and recommended that VA take actions to improve its construction management of major medical facilities: including (1) developing guidance on the use of medical equipment planners; (2) sharing information on the roles and responsibilities of VA construction project management staff; and (3) streamlining the change order process.aimed at addressing issues we identified at one or more of the four sites we visited during our review. VA has implemented our recommendations; however, the impact of these actions may take time to reflect improvements, especially for ongoing construction projects, depending on several issues, including the relationship between VA and the contractor. Since completing our April 2013 report, we have not reviewed the extent Our recommendations were to which these actions have affected the four projects, or the extent to which these actions may have helped to avoid the cost overruns and delays that occurred on each specific project. On August 30, 2013, VA issued a policy memorandum providing guidance on the assignment of medical equipment planners to major medical construction projects. The memorandum states that all VA major construction projects involving the procurement of medical equipment to be installed in the construction will retain the services of a Medical Equipment Specialist to be procured through the project's architectural engineering firm. Prior to issuance of this memorandum, VA officials had emphasized that they needed the flexibility to change their heath care processes in response to new technologies, equipment, and advances in medicine.Given the complexity and sometimes rapidly evolving nature of medical technology, many health care organizations employ medical equipment planners to help match the medical equipment needed in the facility to the construction of the facility. Federal and private sector stakeholders reported that medical equipment planners have helped avoid schedule delays. VA officials told us that they sometimes hire a medical equipment planner as part of the architectural and engineering firm's services to address medical equipment planning. However, in our April 2013 report we found that for costly and complex facilities, VA did not have guidance for how to involve medical equipment planners during each construction stage of a major hospital and has sometimes relied on local Veterans Health Administration (VHA) staff with limited experience in procuring medical equipment to make medical equipment planning decisions. Thus, we recommended that the Secretary of VA develop and implement agency guidance to assign medical equipment planners to major medical construction projects. As mentioned earlier, in August 2013, VA issued such guidance. In September 2013, in response to our recommendation, VA put procedures in place to communicate to contractors the roles and responsibilities of VA officials who manage major medical facility construction projects, including the change order process. Among these procedures is a Project Management Plan that requires the creation of a communications plan and matrix to assure clear and consistent communications with all parties. Construction of large medical facilities involves numerous staff from multiple VA organizations. Officials from the Office of Construction and Facilities Management (CFM) stated that during the construction process, effective communication is essential and must be continuous and involve an open exchange of information among VA staff and other key stakeholders. However, in our April 2013 report, we found that the roles and responsibilities of CFM and VHA staff were not always well communicated and that it was not always clear to general contracting firms which VA officials hold the authority for making construction decisions. This lack of clarity can cause confusion for contractors and architectural and engineering firms, ultimately affecting the relationship between VA and the general contractor. Participants from VA's 2011 industry forum also reported that VA roles and responsibilities for contracting officials were not always clear and made several recommendations to VA to address this issue. Therefore, in our 2013 report, we recommended that VA develop and disseminate procedures for communicating--to contractors--clearly defined roles and responsibilities of the VA officials who manage major medical-facility projects, particularly those in the change-order process. As discussed earlier in this statement, VA disseminated such procedures in September 2013. On August 29, 2013, VA issued a handbook for construction contract modification (change-order) processing which includes milestones for completing processing of modifications based on their dollar value. In addition, as of September 2013, VA had also hired four additional attorneys and assigned on-site contracting officers to the New Orleans, Denver, Orlando, Manhattan and Palo Alto major construction projects to expedite the processing and review of construction contract modifications. By taking steps to streamline the change order process, VA can better ensure that change orders are approved in a prompt manner to avoid project delays. Most construction projects require, to varying degrees, changes to the facility design as the project progresses, and organizations typically have a process to initiate and implement these changes through change orders. Federal regulations and agency guidance state that change orders must be made promptly, and agency guidance states in addition that there be sufficient time allotted for the government and contractor to agree on an equitable contract adjustment. VA officials at the sites we visited as part of our April 2013 review, including Denver, stated that change orders that take more than a month from when they are initiated to when they are approved can result in schedule delays, and officials at two federal agencies that also construct large medical projects told us that it should not take more than a few weeks to a month to issue most change orders.involved in VA and contractors' coming to agreement on the costs of changes and the multiple levels of review required for many of VA's change orders. As discussed earlier, VA has taken steps to streamline the change order process to ensure that change orders are approved in a prompt manner to avoid project delays. Processing delays may be caused by the difficulty Chairman Isakson, Ranking Member Blumenthal, 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 have any questions about this testimony, please contact Mark L. Goldstein at 202-512-2834 or [email protected]. Other key contributors to this testimony include Ed Laughlin (Assistant Director), Nelsie Alcoser, George Depaoli, Raymond Griffith, Hannah Laufe, SaraAnn Moessbauer, and Michael Clements. 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.	VA operates one of the nation's largest health care delivery systems. In April 2013, GAO reported that VA was managing the construction of 50 major medical-facility projects costing between $10 million and hundreds of millions of dollars, including the ongoing project in Denver. This statement discusses VA construction management issues, specifically, (1) the extent to which the cost, schedule, and scope at Denver and other major medical-facility projects has changed and the reasons for these changes, (2) actions VA has taken since 2012 to improve its construction management practices, and (3) VA's response to GAO's recommendations for further improvements in its management of these construction projects. This statement is based on GAO's April 2013 report ( GAO-13-302 ), May 2013 ( GAO-13-556T ), April 2014 ( GAO-14-548T ), and January 2015 ( GAO-15-332T ) testimonies, and selected updates on VA projects--located in Denver, Colorado; Las Vegas, Nevada; New Orleans, Louisiana; and Orlando, Florida. To conduct these updates, GAO obtained documentation from VA in April 2015. In April 2013, GAO found that costs substantially increased and schedules were delayed for Department of Veterans Affairs' (VA) largest medical-facility construction projects, located in Denver, Colorado; Las Vegas, Nevada; New Orleans, Louisiana; and Orlando, Florida. In comparison with initial estimates, the cost increases for these projects now range from 66 percent to 427 percent and delays range from 14 to 86 months. Since the 2013 report, some of the projects have experienced further cost increases and delays because of design issues. For example, as of April 2015, the cost for the Denver project increased by nearly $930 million, and the completion date for this project is unknown. In its April 2013 report, GAO found that VA had taken some actions since 2012 to address problems managing major construction projects. Specifically, VA established a Construction Review Council in April 2012 to oversee the department's development and execution of its real property programs. VA also took steps to implement a new project delivery method, called Integrated Design and Construction, which involves the construction contractor early in the design process to identify any potential problems early and speed the construction process. However, in Denver, VA did not implement this method early enough to garner the full benefits of having a contractor early in the design phase. VA has taken actions to implement the recommendations in GAO's April 2013 report. In that report, GAO identified systemic reasons that contributed to overall schedule delays and cost increases at one or more of four reviewed projects and recommended ways VA could improve its management of the construction of major medical facilities. In response, VA has issued guidance on assigning medical equipment planners to major medical facility projects who will be responsible for matching the equipment needed for the facility in order to avoid late design changes leading to cost increases and delays; developed and disseminated procedures for communicating to contractors clearly defined roles and responsibilities of the VA officials who manage major medical-facility projects to avoid confusion that can affect the relationship between VA and the contractor; and issued a handbook for construction contract modification (change-order) processing that includes milestones for completing processing of modifications based on their dollar value and took other actions to streamline the change order process to avoid project delays. While VA has implemented GAO's recommendations, the impact of these actions may take time to show improvements, especially for ongoing construction projects, depending on several issues, including the relationship between VA and the contractor. In its April 2013 report, GAO recommended that VA (1) develop and implement agency guidance for assignment of medical equipment planners; (2) develop and disseminate procedures for communicating to contractors clearly defined roles and responsibilities of VA officials; (3) issue and take steps to implement guidance on streamlining the change-order process. VA implemented GAO's recommendations.	3,465	817
According to NTSB's aviation accident database, from 1998 to 2009 one large commercial airplane was involved in a nonfatal accident after encountering icing conditions during flight and five large commercial airplanes were involved in nonfatal accidents related to snow or ice on runways. Although there have been few accidents, FAA and others recognize that incidents are potential precursors to accidents. Data on hundreds of incidents that occurred during this period reveal that icing and contaminated runways pose substantial risk to aviation safety. FAA's database of incidents includes 200 icing-related incidents involving large commercial airplanes that occurred from 1998 through 2007. These data covered a broad set of events, such as the collision of two airplanes at an ice-covered gate, and an airplane that hit the right main gear against the runway and scraped the left wing down the runway for about 63 feet while attempting to land with ice accumulation on the aircraft. During this same time period, NASA's Aviation Safety Reporting System (ASRS) received over 600 icing and winter weather-related incident involving large commercial airplanes. These incidents reveal a variety of safety issues such as runways contaminated by snow or ice, ground deicing problems, and in-flight icing encounters. This suggests that risks from icing and other winter weather operating conditions may be greater than indicated by NTSB's accident database and by FAA's incident database. FAA officials point out that there is no defined reporting threshold for ASRS reports and because they are developed from personal narrative, they can be subjective. However, these officials agree that the ASRS events must be thoroughly reviewed and evaluated for content to determine the relevancy to icing and the extent and severity of the safety issue. The contents of the ASRS data system also demonstrate the importance of aggregating data from all available sources to understand a safety concern. See table 1 for the number of icing and winter weather-related incident reports from ASRS for large commercial airplanes. While this testimony focuses on large commercial airplanes, I would like to note that from 1998 to 2007, small commercial airplanes and noncommercial airplanes experienced more icing-related accidents and fatalities than did large commercial airplanes, as shown in table 2. This is largely because, compared to large commercial airplanes, small commercial airplanes and noncommercial airplanes (1) operate at lower altitudes that have more frequent icing conditions, (2) have a higher icing collection efficiency due to their smaller scale, (3) are more greatly impacted by ice as a result of their smaller scale, (4) tend to have deicing equipment rather than fully evaporative anti-icing equipment, (5) may not have ice protection systems that are certified, nor are they required to be, because the airplane is not approved for flight in known icing conditions, and (6) may not have ice protections systems installed. Following the 1994 fatal crash of American Eagle Flight 4184 in Roselawn, Indiana, FAA issued a multiyear plan in 1997for improving the safety of aircraft operating in icing conditions and created a steering committee to monitor the progress of the planned activities. Over the last decade, FAA made progress on the implementation of the objectives specified in its multiyear plan by issuing or amending regulations, airworthiness directives (ADs), and voluntary guidance to provide icing-related safety oversight. For example, FAA issued three final rules on icing: in August 2007, a rule introduced new airworthiness standards to establish comprehensive requirements for the performance and handling characteristics of transport category airplanes in icing conditions; in August 2009, a rule required a means to ensure timely activation of the ice protection system on transport category airplanes; and in December 2009, a rule required pilots to ensure that the wings of their aircraft are free of polished frost. FAA has also proposed an icing-related rule in November 2009, on which the public comment period closed February 22, 2010; this rule would require the timely activation of ice protection equipment on commercial aircraft during icing conditions and weather conditions conducive to ice formation on the aircraft. In addition, FAA is developing a proposed rule to amend its standards for transport category airplanes to address supercooled large drop icing, which is outside the range of icing conditions covered by the current standards. Since 1997, FAA has issued over 100 ADs to address icing safety issues involving more than 50 specific types of aircraft, including ADs that required the installation of new software on certain aircraft and another that required operators and manufactures to install placards displaying procedures for use of an anti- icing switch on certain aircraft. Additionally, FAA has issued bulletins and alerts to operators emphasizing icing safety issues. As part of our ongoing review, we will conduct a more comprehensive evaluation of FAA's progress on the implementation of the objectives specified in its multiyear in-flight icing plan. Among other things, we will also analyze the results of FAA's surveillance activities related to monitoring air carriers' compliance with existing regulations and ADs. FAA also provided funding for a variety of icing-related purposes. For example, FAA has supported NASA research related to severe icing conditions and the National Center for Atmospheric Research (NCAR) research related to weather and aircraft icing. Furthermore, FAA has provided almost $200 million to airports through the Airport Improvement Program (AIP) to construct deicing facilities and to acquire aircraft deicing equipment from 1999 to 2009. See appendix I for a detailed listing of AIP icing-related funding by state, city, and year. Runway safety is a key concern for aviation safety and especially critical during winter weather operations. For example, in December 2005, a passenger jet landed on a snowy runway at Chicago's Midway Airport, rolled through an airport perimeter fence onto an adjacent roadway, and struck an automobile, killing a child and injuring 4 other occupants of the automobile and 18 airline passengers. According to the Flight Safety Foundation, from 1995 through 2008, 30 percent of global aviation accidents were runway-related and "ineffective braking/runway contamination" is the fourth largest causal factor in runway excursions that occur during landing. In fiscal year 2000, FAA's Office of Airport Safety and Standards initiated a program, which includes making funds available to airports through AIP, to accelerate improvements in runway safety areas at commercial service airports that did not meet FAA design standards. EMAS uses materials of closely controlled strength and density placed at the end of the runway to stop or greatly slow an aircraft that overruns the runway. According to FAA, the best material found to date is a lightweight crushable concrete. 2010. To date there have been five successful EMAS captures of overrunning aircraft. Government and industry stakeholders, external to FAA, also contribute to the effort to increase aviation safety in winter weather/icing conditions. For example, NTSB investigates and reports on civil aviation accidents and issues safety recommendations to FAA and others, some of which it deems most critical and places on a list of "Most Wanted" recommendations. Since 1996, NTSB has issued 82 recommendations to FAA aimed at reducing risks from in-flight structural icing, engine and aircraft component icing, runway condition and contamination, ground icing, and winter weather operations. NTSB's icing-related recommendations to FAA have called for FAA to, among other things, strengthen its requirements for certifying aircraft for flying in icing conditions, sponsor the development of weather forecasts that define locations with icing conditions, and enhance its training requirements for pilots. NTSB has closed 39 of these recommendations (48 percent) as having been implemented by FAA, and has classified another 25 (30 percent) as FAA having made acceptable progress. This combined 78 percent acceptance rate is similar to the rate for all of NTSB's aviation recommendations. For more than 30 years, NASA has conducted and sponsored fundamental and applied research related to icing. The research addresses icing causes, effects, and mitigations. For instance, NASA has conducted extensive research to characterize and simulate supercooled large drop icing conditions to inform a pending FAA rule related to the topic. NASA participated in research activities, partially funded by FAA, that developed additional knowledge and strategies which allowed forecasters to more precisely locate supercooled large drop icing conditions. Furthermore, NASA has an icing program, focused generally on research related to the effects of in-flight icing on airframes and engines for many types of flight vehicles. NASA has developed icing simulation capabilities that allow researchers, manufacturers, and certification authorities to better understand the growth and effects of ice on aircraft surfaces. NASA also produced a set of training materials for pilots operating in winter weather conditions. In recent years, NASA's funding decreased significantly, limiting the capability of its icing research program. NOAA, the National Weather Service (NWS), and NCAR have efforts directed and funded by FAA related to predicting the location and severity of icing occurrences. NWS operates icing prediction systems and NCAR conducts research to determine more efficient methods to complete this task. For example, in 2006, NCAR introduced a new Web-based icing forecast tool that allows meteorologists and airline dispatchers to warn pilots about icing hazards up to 12 hours in advance. NCAR developed this tool using FAA funding and NWS facilitates the operation of the new icing forecasting tool. NWS also posts on the agency's Web site maps of current icing conditions, pilot reports, forecasts, and freezing level graphics. The private sector has also contributed to efforts to prevent accidents and incidents related to icing and winter weather conditions. For example, as shown in figure 2, aircraft manufacturers have deployed various technologies such as wing deicers, anti-icing systems, and heated wings. In addition, airports operate ground deicing and runway clearing programs that help ensure clean wings (see fig. 3) and runways. While critical to safe, efficient winter operations, these programs involve treating aircraft and airport pavement with millions of pounds of deicing and anti-icing compounds annually. According to the Environmental Protection Agency, these compounds contain chemicals that can harm the environment. Some airports can control deicing pollution by capturing the fluids used to deice aircraft using technologies such as AIP-funded deicing pads, where aircraft are sprayed with deicing fluids before takeoff and the fluids are captured and treated; drainage collection systems; or vacuum-equipped vehicles. Third-party contractors, rather than individual air carriers, are increasingly performing deicing operations at commercial airports. FAA does not currently have a process to directly oversee these third-party contractors but indicates that it has one under development. While FAA and others are undertaking efforts to mitigate the risks of aircraft icing and winter weather operations, through our interviews and discussions with government and industry stakeholders, we have identified challenges related to these risks that, if addressed by ongoing or planned efforts, could improve aviation safety. These challenges include (1) improving the timeliness of FAA's winter weather rulemaking efforts, (2) ensuring the availability of adequate resources for icing-related research and development (R&D), (3) ensuring that pilot training is thorough, relevant, and realistic, (4) ensuring the collection and distribution of timely and accurate weather information, and (5) developing a more integrated approach to effectively manage winter operations. Improving the timeliness of FAA's winter weather rulemaking efforts. FAA's rulemaking, like that of other federal agencies, is a complicated, multistep process that can take many years. Nonetheless, NTSB, FAA, and we have previously expressed concerns about the efficiency and timeliness of FAA's rulemaking efforts. In 2001, we reported that a major reform effort begun by FAA in 1998 did not solve long-standing problems with its rulemaking process, as indicated both by the lack of improvement in the time required to complete the rulemaking process and by the agency's inability to consistently meet the time frames imposed by statute or its own guidance. External pressures--such as highly-publicized accidents, recommendations by NTSB, and congressional mandates--as well as internal pressures, such as changes in management's emphasis continued to add to and shift the agency's priorities. For some rules, difficult policy issues continued to remain unresolved late in the process. The 2001 report contained 10 recommendations designed to improve the efficiency of FAA's rulemaking through, among other things, (1) more timely and effective participation in decision-making and prioritization; (2) more effective use of information management systems to monitor and improve the process; and (3) the implementation of human capital strategies to measure, evaluate, and provide performance incentives for participants in the process. FAA implemented 8 of the 10 recommendations. NTSB's February 2010 update on the status of its Most Wanted recommendations related to icing characterized FAA's related rulemaking efforts as "unacceptably slow." In December 2009, at FAA's International Runway Safety Summit, NTSB's Chairman commented, "How do safety improvements end up taking 10 years to deliver? They get delayed one day at a time . . . and every one of those days may be the day when a preventable accident occurs as the result of something we were 'just about ready to fix.'" In particular, NTSB has expressed concern about the pace of FAA's rulemaking project to amend its standards for transport category airplanes to address supercooled large drop icing, which is outside the range of icing conditions covered by the current standards. FAA began this rulemaking effort in 1997 in response to a recommendation made by NTSB the prior year, and the agency currently expects to issue its proposed rule in July 2010 and the final rule in January 2012. However, until the notice of proposed rulemaking is published and the close of the comment period is known, it will be unclear as to when the final rule will be issued. Much of the time on this rulemaking effort has been devoted to research and analysis aimed at understanding the atmospheric conditions that lead to supercooled large drop icing. In 2009, FAA completed an internal review of its rulemaking process that concluded that several of the concerns from 1998 that led to the agency's major reform effort remain issues, including: inadequate early involvement of key stakeholders; inadequate early resolution of issues; inadequate selection and training of personnel involved in rulemaking; and inefficient quality guidance. According to FAA's manager for aircraft and airport rules, the agency is taking steps to implement recommendations made by the internal review, such as revising the rulemaking project record form and enhancing training for staff involved in rulemaking. In addition, in October 2009, FAA tasked its Aviation Rulemaking Advisory Committee (ARAC) with reviewing its processes and making recommendations for improvement within a year. We believe these efforts have the potential to improve the efficiency of FAA's rulemaking process. Recently, moreover, FAA has demonstrated a commitment to making progress on some high-priority rules that have languished for a long time. For example, FAA officials have said that they intend to expedite FAA's rulemaking on pilot fatigue, which has been in process since 1992. The issue of insufficient rest emerged as a concern from NTSB's investigation of the February 12, 2009, crash of Continental Connection/Colgan Air Flight 3407 near Buffalo, New York. Moreover, a capacity for progress in rulemaking will be critical because, as we have reported to this Subcommittee in our recent reviews of the transition to the Next Generation Air Transportation System (NextGen), many of the procedures that are proposed to safely enhance the efficiency and capacity of the national airspace system to address current delays and congestion in the system and to accommodate forecasted increases in air traffic will be dependent on the timely development of rules and standards. Ensuring the availability of adequate resources for icing-related R&D. NASA is a key source of R&D related to icing. The agency performs fundamental research related to icing in house and sponsors such research at universities and other organizations. According to NASA officials, possible areas for increased support for R&D that could be helpful include pilot training, supercooled large drop simulation (both experimental and computational), engine icing, and the effects of icing on future aircraft wing designs. However, the amount of NASA resources (including combined amounts of NASA's budget and funding from FAA for aircraft icing R&D at NASA facilities) and staffing for icing research have declined significantly since fiscal year 2005, as shown in figure 4. According to NASA officials, there were several contributing factors to the decline in available resources including the fiscal constraints on the overall federal budget, a shift in the Administration's priorities for NASA, as well as a restructuring within the NASA's aeronautical programs to reflect the available resources and priorities. Because the outcomes of R&D are often required for the development of rules and standards, as well as for technological innovation, a decline in R&D resources can delay actions that would promote safe operation in icing conditions. In June 2008, the FAA sponsored a symposium on fatigue management that provided an opportunity for subject matter experts to come together and discuss fatigue's effects on flight crews, maintenance personnel, and air traffic controllers. NTSB believes that fatigue management plans may hold promise as an approach to dealing with fatigue in the aviation environment. However, NTSB considers fatigue management plans to be a complement to, not a substitute for, regulations to prevent fatigue. For further information about this testimony, please contact Gerald Dillingham at (202) 512-2834. Individuals making key contributions to this testimony included Laurel Ball, Shareea Butler, Colin Fallon, David Goldstein, Brandon Haller, David Hooper, Joshua Ormond, and Sally Moino. 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.	Ice formation on aircraft can disrupt the smooth flow of air over the wings and prevent the aircraft from taking off or decrease the pilot's ability to maintain control of the aircraft. Taxi and landing operations can also be risky in winter weather. Despite a variety of technologies designed to prevent ice from forming on planes, as well as persistent efforts by the Federal Aviation Administration (FAA) and other stakeholders to mitigate icing risks, icing remains a serious concern. As part of an ongoing review, this statement provides preliminary information on (1) the extent to which large commercial airplanes have experienced accidents and incidents related to icing and contaminated runways, (2) the efforts of FAA and aviation stakeholders to improve safety in icing and winter weather operating conditions, and (3) the challenges that continue to affect aviation safety in icing and winter weather operating conditions. GAO analyzed data obtained from FAA, the National Transportation Safety Board (NTSB), the National Aeronautics and Space Administration (NASA), and others. GAO conducted data reliability testing and determined that the data used in this report were sufficiently reliable for our purposes. Further, GAO obtained information from senior FAA and NTSB officials, representatives of the Flight Safety Foundation, and representatives of some key aviation industry stakeholder organizations. GAO provided a draft of this statement to FAA, NTSB, and NASA and incorporated their comments where appropriate. According to NTSB's aviation accident database, from 1998 to 2009 one large commercial airplane was involved in a nonfatal accident after encountering icing conditions during flight and five large commercial airplanes were involved in nonfatal accidents due to snow or ice on runways. However, FAA and others recognize that incidents are potential precursors to accidents and the many reported icing incidents suggest that these airplanes face ongoing risks from icing. For example, FAA and NASA databases contain information on over 600 icing-related incidents involving large commercial airplanes. FAA and other aviation stakeholders have undertaken many efforts to improve safety in icing conditions. For example, in 1997, FAA issued a multiyear plan for improving the safety of aircraft operating in icing conditions and has since made progress on the objectives specified in its plan by issuing regulations, airworthiness directives, and voluntary guidance, among other initiatives. Other government entities that have taken steps to increase aviation safety in icing conditions include NTSB, which has issued numerous recommendations as a result of its aviation accident investigations, and NASA, which has contributed to icing-related research. The private sector has deployed various technologies on aircraft, such as wing deicers, and operated ground deicing and runway clearing programs at airports. GAO identified challenges related to winter weather aviation operations that, if addressed by ongoing or planned efforts, could improve safety. These challenges include (1) improving the timeliness of FAA's winter weather rulemaking efforts; (2) ensuring the availability of adequate resources for icing-related research and development; (3) ensuring that pilot training is thorough and realistic; (4) ensuring the collection and distribution of accurate weather information; and (5) developing a more integrated approach to effectively manage winter operations.	4,011	683
The Kennedy Center, established in 1964 as both a national cultural arts center and a memorial to the 35th President, opened in September 1971. Shortly thereafter, in 1972, the Secretary of the Interior, through NPS, assumed responsibility for building maintenance, security, interpretative, janitorial, and all other services necessary for the nonperforming arts functions of the Center. The Board, however, retained responsibility for all performing arts activities. The relationship was formalized in a July 1973 agreement between NPS and the Board. In the early 1990s, the Board petitioned Congress for complete control of all facility operations at the Center. In part, the Board based its request on the difficulty encountered in managing the Center under the dual responsibility established by the July 1973 agreement. In response, Congress, in the 1994 Amendments, transferred responsibility for the operation and maintenance of the facility from NPS to the Board and authorized appropriations to be made to the Board for this purpose. With the implementation of the Amendments the Board assumed responsibility for managing the day-to-day operation and maintenance related to the performing and nonperforming arts functions as well as the long-term care of the facility. The development of an overall organizational structure for the Kennedy Center was one item we discussed in a 1972 report. In discussing the direction in which the new Center could proceed, we stated that the Center should establish an organizational structure that clearly defines and specifically assigns responsibility for performance of functions while delegating appropriate authority to perform such functions. Subsequently, in a February 1993 report we noted that the Center did not have individuals on staff with certain professional and technical skills, such as a federal contracting officer or architects and engineers that would be associated with managing capital projects. However, our report noted that, on the basis of our discussions with Center officials, there appeared to be no reason that--with sufficient time and funding--the Center could not acquire the necessary management capability. In August and September 1995, a Center consultant evaluated the Center's operational and maintenance functions to identify strategies for improving the efficiency and effectiveness of the facility management staff and operations. The consultant's September 1995 report noted in part that there were no clear lines of responsibility within the existing facility management structure and that job descriptions were not clearly defined. The consultant recommended that mechanisms be developed to (1) establish clear lines of responsibility and authority, (2) consolidate all services related to the maintenance of the facility under one authority, and (3) develop specific and detailed job descriptions for each position. Further, the consultant's report also noted that "An organized system should be developed for managing information concerning the facility operations to be used to monitor performance against established standards." The objectives of our work were to develop information on the status of the Center's efforts to (1) define and implement facility management positions; (2) develop or procure and implement a facility management system; and (3) develop facility project and financial reports, since the 1994 transfer of facility responsibilities from NPS to the Board. Therefore, we limited our inquiries to identifying the facility management positions that were created by the Center since the 1994 transfer. We also identified the management systems and reports that support the facility management positions. We did not attempt to assess whether the persons filling facility management positions had the expertise or experience necessary for those positions or whether the definitions of the roles or responsibilities of the positions were complete. Further, we did not assess whether the management systems and reports had the capability to or were being used properly to assist facility managers. We defined the scope of facility management functions in accordance with guidelines of the International Facility Management Association. The guidelines provide that facility management coordinates the physical workplace with the people and work of the organization. In general, the scope of responsibilities can begin with the parking lot and extend to the grounds; building exterior; building systems; building services; and the layout, furniture, and furnishing of staff work space. The Association notes that 8 groups of similar activities, comprising 41 responsibilities, are commonly involved in managing facilities. The eight groups involve real estate, long-range planning, space management, interior planning, interior installations, maintenance and operations, architecture and engineering services, and budgeting. To obtain information on the development of facility management positions and their associated roles and responsibilities, we obtained Center organizational charts, discussed the roles and responsibilities of each managerial position with the current occupant, and obtained the position description. Since our objective was to provide information on the status of the creation of positions, we did not assess the appropriateness of organizational structures. To obtain information on the status of changes in the facility management systems and reports, we interviewed Center officials; reviewed documentation prepared by the Center or its vendors and obtained information on implementation schedules. To gain an understanding of the potential assistance the systems and reports could provide managers, we interviewed Center officials; reviewed contracting records and vendor materials; and reviewed documentation provided by finance and project officials, which demonstrated the types of reports that have been designed and implemented. Since our objective was to provide information only on the status of systems and reports, not the accuracy of the output of the systems, we did not test the accuracy or the completeness of the outputs we obtained. We did our work between January and December 1997 in accordance with generally accepted government auditing standards. On February 17, 1998, we provided a draft of this report to the Chairman of the Kennedy Center for review and comment. The Center's oral comments are discussed near the end of this report. Responsibility for the various facility management functions, transferred to the Center by the Amendments, is currently delegated to six facility management positions. Officials to whom we spoke told us that they do not anticipate a need for additional facility management positions. The Center's facility management organization includes four managerial positions that either were transferred from NPS or were created and staffed shortly after the Amendments. A synopsis of the history of each position and the positions' roles and responsibilities is presented below. Project Executive. On December 25, 1994, the NPS architect responsible for the capital work at the Center was transferred from NPS to the Center as the Project Executive responsible for the management of the capital program in the Center's Project Management Office. The position description for the Project Executive summarized the roles and responsibilities as including (1) directing capital repair projects; (2) managing, along with the Controller and Director of Contracting, the obligation and control of funds appropriated for the capital repair program; and (3) serving as the principal advisor to senior Center managers on matters pertaining to the capital repair program and facility improvement program planning. Director of Facilities. From September 1995 to December 1996, the Project Executive, in addition to his role as Project Executive, was also responsible for the functions of this position. Effective December 3, 1996, the role was transferred to, and became an additional responsibility of, the Director of Security. On July 20, 1997, the Director of Security, who had performed the duties of Director of Facilities in an acting capacity, was appointed the Director of Facilities while retaining the responsibilities of Director of Security. Officials to whom we spoke told us that, although one person has been given responsibility for both positions to reflect the close relationship between facilities and security needs in regard to operation of the Center, neither position had been abolished. They said that the Center could at any time appoint separate individuals to each position. The position description for the Director of Facilities summarized the roles and responsibilities as principal advisor to the Vice President of Facilities (1) on all matters pertaining to facilities and infrastructure, (2) on all matters pertaining to maintenance and operations, and (3) for the development and justification of the Center's annual utilities budget. Additionally, the Director is responsible for managing all security, fire, and life safety matters. Director of Contracting. On February 27, 1995, the Center posted a vacancy announcement to fill the position of Contracting Officer. The position description summarized the roles and responsibilities to include (1) the head of the contracting activity for the Center; (2) responsibility for the organization and management of the Office of Procurement; (3) management and control of the Center's appropriated fund contracting procedures; and (4) management of all aspects of the procurement cycle, including planning, negotiation and administration of construction, personal services, technical services, maintenance, supply, and related contracts in accordance with the Federal Acquisition Regulation and Center guidance. The position was filled on June 11, 1995, by a contracting officer with prior experience in federal facilities contracting. Director of Security. On November 30, 1994, the Center employed its former Secret Service liaison as the Director of Security. The position description summarized the roles and responsibilities as including (1) serving as the principal advisor to Center management on matters affecting safety and security; (2) implementing and administering procedures affecting safety and security; (3) assisting the Contracting Officer in managing the contract guard force; (4) maintaining liaison with pertinent federal and local law enforcement authorities; and (5) managing the security budget. On July 20, 1997, the Director of Security was also designated as the Director of Facilities, thus combining the roles and responsibilities of both positions. However, Center officials told us that because neither position had been abolished, but simply had been staffed by the same individual, the Center could at any time appoint separate individuals to each position. Director of Auxiliary Services. On August 7, 1996, the position of Director of Auxiliary Services was established and filled. According to Center officials, this was an area of facility management that had not previously received sufficient attention. The document appointing the director outlined the position's responsibilities as including consolidating responsibility for and overseeing the Center's concessionaire operations, such as the parking contractor, shuttle bus service arrangements, and taxi dispatching services. Subsequently, the job description covering this position was expanded to include liaison with the contracted restaurant service. Vice President for Facilities. On September 27, 1996, the President of the Center announced the creation of a senior management structure that included a Vice President for Facilities. The announcement creating the Vice President for Facilities highlighted the importance of the new position to the Center's strategic plans during the next few years. According to the announcement, among the responsibilities assigned to the new position were those of overseeing all appropriated funds operations and working with other departments to implement a host of new facility related initiatives, including the expansion of the parking garage and the large-screen format theater. Further, the announcement established a formal management reporting structure in which the incumbents in the key facility management positions report to the Vice President for Facilities. The Center managers, including the Board, determined that the Center's facility management program would be operated by a few managers supported by a small in-house staff and contractor technical staff. As a result, the Center relies on contractor employees for technical facility management expertise. To develop information on the Center's use of contractor employees, we focused our inquiries on the contractor technical support that the Project Executive employs in managing the capital improvement program. Briefly, the management support supplied by contract employees includes the following: Management of construction work. In 1995, the Center entered into a Memorandum of Agreement with the U.S. Army Corps of Engineers - Baltimore District, for technical assistance, including architect-engineer contract management, project design reviews, awarding and managing construction contract(s), contract reviews for legal sufficiency, and other related services. Project design services. The Center currently retains the services of architect-engineer firms through a source selection panel process to prequalify firms. Prequalified firms are awarded a 5-year contract with a small monetary guarantee and placed on the contractor prequalified list. From this list, prequalified firms may be selected for engagements for new design work or to do design reviews of work done by others. Both types of work can be awarded to a firm under a task order issued under the 5-year contract. Other design work. The Center plans to continue employing the services of NPS under an existing Interagency Agreement, dated September 23, 1994. The scope of this work may include landscape design and site planning or work requiring previous experience at the Center. Administrative support. The Center has entered into a Memorandum of Understanding and Agreement with the General Services Administration under which the Center receives accounting services including, in part, accounting and financial reporting. In addition to the six facilities management positions, several committees that relate to facility management assist managers in establishing facility policy, coordinating facility work with other Center activities, and managing the day-to-day contractual aspects of facilities projects. Meeting on a regular basis, the committee's membership ranges from Board members and senior management at the Operations Committee level to contract managers and technical support contractors at the Construction Coordinating Committee level. The committees include the following: Operations Committee. The Operations Committee, a committee of the Board, involves Board members and senior staff in quarterly briefings and presentations on policy issues or operating problems. In this regard, we were advised that the committee provides policy guidance, resolves the most serious issues requiring Board input, and functions as the Board's eyes and ears in Center operations. Architectural Review Committee. This committee, also a committee of the Board, was previously referred to as the Fine Arts Review Committee. The committee reviews and provides guidance to staff on detailed aspects of project design and construction work, thus, according to officials, acting as the Board's project oversight mechanism between Operations Committee meetings. The Committee recently focused on the Concert Hall renovation project, and officials told us that they expect the Committee to provide similar guidance on future projects. Vice Presidents' Committee. The members of this committee are the Center's president and six vice presidents. The meetings of these senior managers serve as the mechanism for elevating problems and policy questions concerning facility work to the attention of the president. Building Operations Coordinating Committee. This committee, headed by the Vice President for Facilities, focuses on facility projects' progress, schedules, problems, or open issues requiring the vice president's input or decision. The committee, which generally meets biweekly, except weekly in response to issues such as budget preparation, includes facility managers and others, such as the Director of Production, whose responsibilities may affect or be affected by facility projects work. Construction Coordination Committee. This committee, under the Project Executive, includes Center project staff and, as needed, consultants and technical support staff in weekly meetings focused on resolving detailed issues involving progress and problems with contracts, scheduling, or future work. The Center has purchased and is currently implementing a CIFM system. Further, the Center developed in-house, and has implemented, a number of project status and financial tracking reports. On August 9, 1996, after announcing its intent in the Commerce Business Daily, the Center purchased a system to assist in managing the facility. The vendor's literature for the CIFM system procured described a system directed toward control and management of an organization's resources, including real estate, equipment, personnel, space, leases, maintenance, cabling, and project budgeting. The system has nine modules, each focused on one aspect of facility management, and affords managers the opportunity to produce various analyses of operations. Center officials provided us with the schedule for implementing the software modules listed in table 1. The officials advised us that they have focused implementation efforts on the Property Portfolio, Asset Manager, Maintenance Manager, and Preventive Maintenance modules. The information provided to us indicated that the first three modules are operational, with the Preventive Maintenance module anticipated to be operational by the end of the first quarter of 1998. Regarding the remaining modules, officials advised us that they have no current time frame for implementing them since they first focused on those modules that most affected the day-to-day operation and maintenance of the facility. In a related facility management matter, officials advised us that they have evaluated scheduling software for use in preparing a comprehensive facility utilization schedule/calendar. The schedule/calendar would include utilization of various segments of the facility, by a number of Center departments, and would reflect requirements of special events, theater events, rehearsal usage, meeting room reservations, public space usage, and temporary storage. The officials expect to have the software in use during the second quarter of 1998. Management Reports Developed In-house Designed To Track Use Of Appropriated Funds. The Center's Project Management Office (PMO), Contracting Office, and Finance Office share responsibility for managing the funds appropriated for capital improvements. The PMO officials to whom we spoke provided us a list of the 11 management reports that have been developed and implemented to facilitate the tracking of federal funds. The following are examples of the reports and their purpose. Monthly Requisition Summary Report. This report is to capture all types of PMO contracting and purchasing information, including the purchase order number, requisition and obligation amounts, vendor, type of goods/services, and budget/function code. Since all types of contracting and purchasing actions are to be captured, the report includes administrative costs, construction contracts, design and consulting contracts, as well as the costs for contract staff, such as the Corps of Engineers. Architect/Engineer Contract Summary Report. This report is to present the entire history of a particular contractual relationship with the Center. The information contained in the report includes the contract start and end dates, the contract purpose, the original contract amount, any adjustments to the original amount, and the current adjusted amount of the contract. Payment Recommendation and Approval Report. This report is to present information required for processing and approving a contract payment request. The report also is to provide a contract's historical payment record as well as the percentage of the contract work completed as of the last payment. We provided copies of a draft of this report to the Chairman, John F. Kennedy Center, for comment. On March 10, 1998, the Center's Vice President for Facilities provided us with oral comments on the draft report. The Vice President advised us that the Center generally agreed with the information in the report. The Vice President also provided comments to clarify some of the information presented in the report, which we have incorporated where appropriate. We are sending copies of this report to the Chairmen and Ranking Minority Members of the Senate Subcommittee on Transportation and Infrastructure, and the House Committee on Transportation and Infrastructure, and the Chairman of the John F. Kennedy Center for the Performing Arts. Copies will be made available to others upon request. Major contributors to this report are listed in the appendix. If you have any questions about the report, please call me on (202) 512-8387. Ronald King, Assistant Director, Governmentwide Facility Management Issues Thomas Johnson, Evaluator-in-Charge Hazel Bailey, Communications Analyst John Parulis, Senior Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.	Pursuant to a congressional request, GAO reviewed the status of the John F. Kennedy Center for the Performing Arts' efforts to define and implement: (1) facility management positions; (2) a facility management system; and (3) facility project and financial reports. GAO noted that: (1) the Center managers, including the Board of Trustees, determined that the Center's facility management program would be operated by a few managers supported by a small in-house staff and contractor technical staff; (2) currently, six facility-related managerial positions have been established and, according to Center officials, they do not anticipate a need for additional positions in the future; (3) the six managerial positions include the Vice President for Facilities; the Directors of Contracting, Facilities, Security, and Auxiliary Services; and the Project Executive; (4) all but the Vice President for Facilities and the Director of Auxiliary Services positions were established in 1994 and 1995; (5) in August and September 1996, the Center created the Director of Auxiliary Services and Vice President for Facilities positions, respectively; (6) with the exception of the Vice President for Facilities, the managers in these positions use contractors to either support operations that they are responsible for, such as parking, or provide management support; (7) in the latter instance, the Project Executive--in so far as major construction projects are underway--uses contracted technical management expertise, particularly for project planning, design, construction, and construction management; (8) several committees have been established to assist in coordinating facility operations with performing arts schedules and to provide a forum for decisionmaking; (9) these committees bring together managers and staff from throughout the Center; (10) the committees consider a range of facility issues and problems, varying from those associated with the day-to-day execution of construction contracts to resolving policy level issues such as the approval of the appropriated funds budget; (11) to provide facility operating information to key managers, the Center has purchased and is implementing a computer-integrated facility management (CIFM) system; (12) to date, the Center is progressing with implementation of four module: Property Portfolio, Asset Manager, Maintenance Manager, and Preventative Maintenance; (13) GAO did not evaluate the usefulness of the system or the output that managers obtain because of the recent and ongoing implementation of the system; (14) in addition to the CIFM system, the Center staff developed 11 reports for use in managing appropriated funds; and (15) these reports are to provide managers with information for tracking items such as appropriated funds usage, contractor progress on work, and contract payment approvals.	4,184	551
In recent years, reservists have regularly been called on to augment the capabilities of the active-duty forces. The Army is increasingly relying on its reserve forces to provide assistance with military conflicts and peacekeeping missions. As of April 2003, approximately 148,000 reservists from the Army National Guard and the U.S. Army Reserve were mobilized to active duty positions. In addition, other reservists are serving throughout the world in peacekeeping missions in the Balkans, Africa, Latin America, and the Pacific Rim. The involvement of reservists in military operations of all sizes, from small humanitarian missions to major theater wars, will likely continue under the military's current war fighting strategy and its peacetime support operations. The Army has designated some Army National Guard and U.S. Army Reserve units and individuals as early-deploying reservists to ensure that forces are available to respond rapidly to an unexpected event or for any other need. Usually, those designated as early-deploying reservists would be the first troops mobilized if two major ground wars were underway concurrently. The units and individual reservists designated as early- deploying reservists change as the missions or war plans change. The Army estimates that of its 560,000 reservists, approximately 90,000 are reservists who have been individually categorized as early-deploying reservists or are reservists who are assigned to Army National Guard and U.S. Army Reserve units that have been designated as early-deploying units. The Army must comply with the following six statutory requirements that are designed to help ensure the medical and dental readiness of its early- deploying reservists. All reservists including early-deployers are required to have a 5-year physical examination, and complete an annual certificate of physical condition. All early-deploying reservists are also required to have a biennial physical examination if over age 40, an annual medical screening, an annual dental screening, and dental treatment. Army regulations state that the 5- and 2-year physical examinations are designed to provide the information needed to identify health risks, suggest lifestyle modifications, and initiate treatment of illnesses. While the two examinations are similar, the biennial examination for early- deploying reservists over age 40 contains additional age-specific screenings such as a prostate examination, a prostate-specific antigen test, and a fasting lipid profile that includes testing for total cholesterol, low- density lipoproteins, and high-density lipoproteins. The Army pays for these examinations. The examinations are also used to assign early-deploying reservists a physical profile rating, ranging from P1 to P4, in six assessment areas: (a) Physical capacity, (b) Upper extremities, (c) Lower extremities, (d) Hearing-ears, (e) Vision-eyes, and (f) Psychiatric. (See app. II for the Army's Physical Profile Rating Guide.) According to the Army, P1 represents a non-duty-limiting condition, meaning that the individual is fit for duty and possesses no physical or psychiatric impairments. P2 means a condition may exist; however, it is not duty-limiting. P3 or P4 means that the individual has a duty-limiting condition in one of the six assessment areas. P4 means the individual functions below the P3 level. A rating of either P3 or P4 puts the reservist in a nondeployable status or may result in the changing of the reservist's job classification. Beginning in January 2003, early-deploying reservists with a permanent rating of P3 or P4 in one of the assessment areas must be evaluated by an administrative screening board--the Military Occupational Specialty/Medical Retention Board (MMRB). This evaluation determines if reservists can satisfactorily perform the physical requirements of their jobs. The MMRB recommends whether a reservist should retain a job, be reassigned, or be discharged from the military. Army regulations that implement the statutory certification requirement provide that all reservists--including early-deploying reservists--certify their physical condition annually on a two-page certification form. Army early-deploying reservists must report doctor or dentist visits since their last examination, describe current medical or dental problems, and disclose any medications they are currently taking. (See app. III for a copy of the annual medical certificate--DA Form 7349.) In addition, the Army is required to conduct an annual medical screening for all early-deploying reservists. According to Army regulations, the Army is to meet the annual medical screening requirement by reviewing the medical certificate required of each early-deploying reservist. In addition, Army early-deploying reservists are required to undergo, at the Army's expense, an annual dental examination. The Army is also required to provide and pay for the dental treatment needed to bring an early- deploying reservist's dental status up to deployment standards--either dental class 1 or 2. (See table 1 for a general description of each dental classification.) According to Army officials, most of the 5-year and 2-year physical examinations, the dental examinations, and the dental treatments that have been performed were administered by military medical personnel. However, beginning in March 2001, the Army started outsourcing some examinations through the Federal Strategic Healthcare Alliance (FEDS_HEAL)--an alliance of private physicians and dentists and other physicians and dentists who work for the Department of Veterans Affairs and HHS's Division of Federal Occupational Health. FEDS_HEAL is a program that allows Army early-deploying reservists to obtain required physical and dental examinations and dental treatment from local providers. The Army contracts and pays for these examinations. About 12,000 of these providers nationwide participate in FEDS_HEAL. The Army plans to increase its reliance on FEDS_HEAL to provide physical and dental examinations, and dental treatment for early-deploying reservists. Medical experts recommend physical and dental examinations as an effective means of assessing health. For some people, the frequency and content of physical examinations vary according to the specific demands of their job. Because Army early-deploying reservists need to be healthy to fulfill their professional responsibilities, periodic examinations are useful for assessing whether they can perform their assigned duties. Furthermore, the estimated annual cost to conduct periodic examinations--about $140--is relatively modest compared to the thousands of dollars the Army spends for salaries and training of early- deploying reservists--an investment that may be lost if reservists can not perform their assigned duties. Physical and dental examinations are geared towards assessing and improving the overall health of the general population. The U.S. Preventive Services Task Force and many other medical organizations no longer recommend annual physical examinations for adults--preferring instead a more selective approach to detecting and preventing health problems. In 1996, the task force reported that while visits with primary care clinicians are important, performing the same interventions annually on all patients is not the most clinically effective approach to disease prevention. Consistent with its finding, the task force recommended that the frequency and content of periodic health examinations should be based on the unique health risks of individual patients. Today, many health associations and organizations are recommending periodic health examinations that incorporate age-specific screenings, such as cholesterol screenings for men (beginning at age 35) and women (beginning at age 45) every 5 years, and clinical breast examinations every 3 to 5 years for women between the ages of 19 and 39. Further, oral health care experts emphasize the importance of regular 6- to 12-month dental examinations. Both the private and public sectors have established a fixed schedule of physical examinations for certain occupations to help ensure that workers are healthy enough to meet the specific demands of their jobs. For example, the Federal Aviation Administration requires commercial pilots to undergo a physical examination once every 6 months. U.S. National Park Service personnel who perform physically demanding duties have a physical examination once every other year for those under age 40, and on an annual basis for those over age 40. Additionally, guidelines published by the National Fire Protection Association recommend that firefighters have an annual physical examination regardless of age. In the case of Army early-deploying reservists, the goal of the physical and dental examinations is to help ensure that the reservists are fit enough to be deployed rapidly and perform their assigned jobs. Furthermore, the Army recognizes that some jobs are more demanding than others and require more frequent examinations. For example, the Army requires that aviators undergo a physical examination once a year, while marine divers and parachutists have physical examinations once every 3 years. While governing statutes and regulations require physical examinations at specific intervals, the Army has raised concerns about the appropriate frequency for them. In a 1999 report to the Congress, the Offices of the Assistant Secretaries of Defense for Health Affairs and Reserve Affairs stated that while there were no data to support the benefits of conducting periodic physical examinations, DOD was reluctant to recommend a change to the statutory requirements. The report stated that additional research was needed to identify and develop a more cost-effective, focused health assessment tool for use in conducting physical examinations for reservists--in order to ensure the medical readiness of reserve forces. However, as of February 2003, DOD had not conducted this research. For its early-deploying reservists, the Army conducts and pays for physical and dental examinations and selected dental treatments at military treatment facilities or pays civilian physicians and dentists to provide these services. The Army could not provide us with information on the cost to provide these services at military hospitals or clinics primarily because it does not have a cost accounting system that records or generates cost data for each patient. However, the Army was able to provide us with information on the amount it pays civilian providers for these examinations under the FEDS_HEAL program. Using FEDS_HEAL contract cost information, we estimate the average cost of the examinations to be about $140 per early-deploying reservist per year. We developed the estimate over one 5-year period by calculating the annual cost for those early-deploying reservists requiring a physical examination once every 5 years, calculating the cost for those requiring a physical examination once every 2 years, and calculating the cost for those requiring an initial dental examination and subsequent yearly dental examinations. The FEDS_HEAL cost for each physical examination for those under 40 is about $291, and for those over 40 is about $370. The Army estimates that the cost of annual dental examinations under the program to be about $80 for new patients and $40 for returning patients. The Army estimates that it would cost from $400 to $900 per reservist to bring those who need treatment from dental class 3 to dental class 2. For the Army, there is likely value in conducting periodic examinations because the average cost to provide physical and dental examinations per early-deploying reservist--about $140 annually over a 5-year period--is relatively low compared to the potential benefits associated with such examinations. These examinations could help protect the Army's investment in its early-deploying reservists by increasing the likelihood that more reservists will be deployable. This likelihood is increased when the Army uses examinations to identify early-deploying reservists who do not meet the Army's health standards and are thus not fit for duty. The Army can then intervene by treating, reassigning, or dismissing these reservists with duty-limiting conditions--before their mobilization and before the Army needs to rely on the reservists' skills or occupations. Furthermore, by identifying duty-limiting conditions or the risks for developing them, periodic examinations give early-deploying reservists the opportunity to seek medical care for their conditions--prior to mobilization. Periodic examinations may provide another benefit to the Army. If the Army does not know the health condition of its early-deploying reservists, and if it expects some of them to be unfit and incapable of performing their duties, the Army may be required to maintain a larger number of reservists than it would otherwise need in order to fulfill its military and humanitarian missions. While data are not available to estimate these benefits, the benefit associated with reducing the number of reservists the Army needs to maintain for any given objective could be large enough to more than offset the cost of the examinations and treatments. The proportion of reservists whom the Army maintains but who cannot be deployed because of their health may be significant. For instance, according to a 1998 U.S. Army Medical Command study, a "significant number" of Army reservists could not be deployed for medical reasons during mobilization for the Persian Gulf War (1990-1991). Further, according to a study by the Tri-Service Center for Oral Health Studies at the Uniformed Services University of the Health Sciences, an estimated 25 percent of Army reservists who were mobilized in response to the events of September 11, 2001, were in dental class 3 and were thus undeployable. In fact, our analysis of the available current dental examinations at the seven early-deploying units showed a similar percentage of reservists--22 percent--who were in dental class 3. With each undeployable reservist, the Army loses, at least temporarily, a significant investment that is large compared to the cost of examining and treating these reservists. The annual salary for an Army early-deploying reservist in fiscal year 2001 ranged from $2,200 to $19,000. The Army spends additional amounts to train and equip each reservist and, in some cases, provides allowances for subsistence and housing. Additionally, for each reservist it mobilizes, the Army spends about $800. If it does not examine all of its early-deploying reservists, the Army risks losing its investment because it will train, support, and mobilize reservists who might not be deployed because of their health. The Army has not consistently carried out the requirements that early- deploying reservists undergo 5- or 2-year physical examinations, and the required dental examination. In addition, the Army has not required early- deploying reservists to complete the annual medical certificate of their health condition, which provides the basis for the required annual medical screening. Accordingly, the Army does not have current health information on early-deploying reservists. Furthermore, the Army does not have the ability to maintain information from medical and dental records and annual medical certificates at the aggregate or individual level, and therefore does not know the overall health status of its early-deploying reservists. We found that the Army has not consistently met the statutory requirements to provide early-deploying reservists physical examinations at 5- or 2-year intervals. At the seven Army early-deploying reserve units we visited, about 66 percent of the medical records were available for our review. Based on our review of these records, 13 percent of the reservists did not have a current 5-year physical examination on file. Further, the Army is also required to provide physical examinations every 2 years for Army early-deploying reservists over the age of 40. However, our review of the available records found that approximately 68 percent of early- deploying reservists over age 40 did not have a record of a current biennial examination. Army early-deploying reservists are required by statute to complete an annual medical certificate of their health status, and regulations require the Army to review the form to satisfy the annual screening requirement. In performing our review of the records on hand, we found that none of the units we visited required that its reservists complete the annual medical certificate, and consequently, none of them were available for review. Furthermore, Army officials stated that reservists at most other units have not filled out the certification form and that enforcement of this requirement was poor. The Army is also statutorily required to provide early-deploying reservists with an annual dental examination to establish whether reservists meet the dental standards for deployment. At the seven early-deploying units that we visited, we found that about 49 percent of the reservists whose records were available for review did not have a record of a current dental examination. The Army's two automated information systems for monitoring reservists' health do not maintain important medical and dental information for early- deploying reservists--including information on the early-deploying reservists' overall health status, information from the annual medical certificate form, dental classifications, and the date of dental examinations. In one system, the Regional Level Application Software, the records provide information on the dates of the 5-year physical examination and the physical profile ratings. In the other system, the Medical Occupational Database System, the records provide information on HIV status, immunizations, and DNA specimens. Neither system allows the Army to review medical and dental information for entire units at an aggregate level. The Army is aware of the information shortcomings of these systems and acknowledges that having sufficient, accurate, and current information on the health status of reservists is critical for monitoring combat readiness. According to Army officials, in 2003 the Army plans to expand the Medical Occupational Database System to provide the Army with access to current, accurate, and relevant medical and dental information at the aggregate and individual levels for all of its reservists--including early-deploying reservists. According to Army officials, this information will be readily available to the U.S. Army Reserve Command. Once available, the Army can use this information to determine which early-deploying reservists meet the Army's health care standards and are ready for deployment. Army reservists have been increasingly called upon to serve in a variety of operations, including peacekeeping missions and the current war on terrorism. Given this responsibility, periodic health examinations are important to help ensure that Army early-deploying reservists are fit for deployment and can be deployed rapidly to meet humanitarian and wartime needs. However, the Army has not fully complied with statutory requirements to assess and monitor the medical and dental status of early- deploying reservists. Consequently, the Army does not know how many of them can perform their assigned duties and are ready for deployment. The Army will realize benefits by fully complying with the statutory requirements. The information gained from periodic physical and dental examinations, coupled with age-specific screenings and information provided by early-deploying reservists on an annual basis in their medical certificates, will assist the Army in identifying potential duty-limiting medical and dental problems within its reserve forces. This information will help ensure that early-deploying reservists are ready for their deployment duties. Given the importance of maintaining a ready force, the benefits associated with the relatively low annual cost of about $140 to conduct these examinations outweighs the thousands of dollars spent in salary and training costs that are lost when an early-deploying reservist is not fit for duty. The Army's planned expansion, in 2003, of an automated health care information system is critical for capturing the key medical and dental information needed to monitor the health status of early-deploying reservists. Once collected, the Army will have additional information to conduct the research suggested by DOD's Offices of Health Affairs and Reserve Affairs to determine the most effective approach, which could include the frequency of physical examinations, for determining whether early-deploying reservists are healthy, can perform their assigned duties, and can be rapidly deployed. To help ensure that early-deploying reservists are healthy to carry out their duties, we recommend that the Secretary of Defense direct the Secretary of the Army to comply with existing statutory requirements to ensure that the 5-year physical examinations for early-deploying reservists under 40 and the biennial physical examinations for early-deploying reservists over 40 are current and complete, all early-deploying reservists complete their annual medical certificate of health status and that the appropriate Army personnel review the certificate, and the required dental examinations and treatments for all early-deploying reservists are complete. The Department of Defense provided written comments on a draft of this report, which are found in appendix IV. DOD concurred with the report's recommendations. DOD raised some concerns about our evaluation. For example, DOD stated that the intermittent use of the terms "The Army," "Reserve Component," and "Army Reserve" would lead to a misunderstanding of the organization of Army Components. While DOD did not offer specific examples, we reviewed the draft to ensure that terms were used appropriately and did not make any changes. DOD also raised the concern that we used a very narrow subject group that may not reflect a valid representative sample and that the report findings could be incorrectly applied to the Army National Guard. As we noted in our draft report, our work was conducted at seven early deploying U.S. Army Reserve units-- geographically dispersed in the states of Georgia, Maryland, and Texas-- and our analysis of the information collected at these units is not projectable. Finally, DOD stated that methods for annually certifying physical conditions could also include completing the statement of physical condition that is preprinted on the Personnel Qualification Record, and that we did not consider whether such alternatives were used for certification. During our visits we reviewed the medical files at all locations, the personnel files at one location, and interviewed military personnel who were responsible for maintaining the records of early- deploying reservists at all locations. We were unable to find one annual medical certificate that was reviewed by military personnel to meet the statutory requirements. In addition, some military personnel were not aware of the requirement. We are sending copies of this report to the Secretary of Defense, appropriate congressional committees, and other interested parties. Copies will also be made available to others on request. In addition, the report is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7101. Another contact and major contributors are listed in appendix V. We reviewed statutes and Army policies and regulations governing annual medical and dental screenings, and periodic physical and dental examinations. We obtained data from the Office of the Chief, U.S. Army Reserve on the physical and dental examinations performed since 2001 on early-deploying reservists. We reviewed our past reports that addressed medical and dental examinations. We conducted site visits to seven U.S. Army Reserve Units located in Georgia, Maryland, and Texas--where we obtained and reviewed all available medical and dental records. There were 504 early-deploying reservists assigned to the seven units we visited. Medical records for 332 reservists were available for our review. Army administrators told us that the remaining files were in transit, with the reservist, or on file at another location. Our analysis of the information gathered at these units is not projectable. We did not review medical or dental records at Army National Guard units, but obtained information from the Guard on its medical policies. To calculate an average annual cost to provide physical and dental examinations for Army early-deploying reservists, we obtained estimates from the Army's Federal Strategic Healthcare Alliance (FEDS_HEAL) administrator on the costs of outsourcing the examinations. We calculated the annual cost for those reservists requiring a physical examination once every 5 years and those requiring a physical examination once every 2 years. In developing the annual cost estimate, we used DOD information on the number of Army reservists that are under 40 (approximately 75 percent), and those over 40 (approximately 25 percent). We also included the initial dental examination cost and subsequent yearly dental examination costs. All costs were averaged over one 5-year period. The average annual cost does not include allowances for inflation, dental treatment, or specialized laboratory fees such as those for pregnancy, phlebotomy, and tuberculosis. We also obtained estimates of the cost to perform dental treatments from the Army Office of the Surgeon General and Army Dental Command. We obtained from DOD, HHS's Office of Public Health and Science, the Centers for Disease Control and Prevention, medical associations, and dental associations studies and information concerning the advisability of periodic physical and dental examinations. From these organizations we also obtained published common practices and standards concerning periodic medical and dental examinations, age and risk factors, and the value and relevance of patients' self-reporting of symptoms. Upper extremities Strength, range of motion, and general efficiency of upper arm, shoulder girdle, and upper back, including cervical and thoracic vertebrae. Lower extremities Strength, range of movement, and efficiency of feet, legs, lower back, and pelvic girdle. Hearing-ears Auditory sensitivity and organic disease of the ears. Vision-eyes Visual acuity and organic disease of the eyes and lids. No loss of digits or limitation of motion; no demonstrable abnormality; able to do hand-to- hand fighting. No loss of digits or limitation of motion; no demonstrable abnormality; able to perform long marches, stand over long periods, and run. Audiometer average level for each ear not more than 25 dB at 500, 1000, or 2000 Hz with no individual level greater than 30 dB. Not over 45 dB at 4000 Hz. Uncorrected vision acuity 20/200 correctable to 20/20 in each eye. Psychiatric Type, severity, and duration of the psychiatric symptoms or disorder existing at the time the profile is determined. Amount of external precipitating stress. Predispositions as determined by the basic personality makeup, intelligence, performance, and history of past psychiatric disorder impairment of functional capacity. No psychiatric pathology; may have history of transient personality disorder. Upper extremities Slightly limited mobility of joints, muscular weakness, or other musculo- skeletal defects that do not prevent hand-to- hand fighting and do not disqualify for prolonged effort. Lower extremities Slightly limited mobility of joints, muscular weakness, or other musculo- skeletal defects that do not prevent moderate marching, climbing, timed walking, or prolonged effort. Vision-eyes Distant visual acuity correctable to not worse than 20/40 and 20/70, or 20/30 and 20/100, or 20/20 and 20/400. Psychiatric May have history of recovery from an acute psychotic reaction due to external or toxic causes unrelated to alcohol or drug addiction. Defects or impairments that require significant restriction of use. Defects or impairments that require significant restriction of use. Hearing-ears Audiometer average level for each ear at 500, 1000, or 2000 Hz, not more than 30 dB, with no individual level greater than 35 dB at these frequencies, and level not more than 55 dB at 4000 Hz; or audiometer level 30 dB at 500 Hz, 25 dB at 1000 and 2000 Hz, and 35 dB at 4000 Hz in better ear. (Poorer ear may be deaf.) Speech reception threshold in best ear not greater than 30 dB HL measured with or without hearing aid, or chronic ear disease. Uncorrected distant visual acuity of any degree that is correctable to not less than 20/40 in the better eye. Functional level below P3. Functional level below P3. Functional level below P3. Functional level below P3. Satisfactory remission from an acute psychotic or neurotic episode that permits utilization under specific conditions (assignment when outpatient psychiatric treatment is available or certain duties can be avoided). Functional level below P3. The following staff members made key contributions to this report: Aditi S. Archer, Richard J. Wade, Krister P. Friday, Helen T. Desaulniers, and Mary W. Reich. Military Personnel: Preliminary Observations Related to Income, Benefits, and Employer Support for Reservists During Mobilizations. GAO-03-549T. Washington, D.C.: March 19, 2003. Defense Health Care: Most Reservists Have Civilian Health Coverage but More Assistance Is Needed When TRICARE Is Used. GAO-02-829. Washington, D.C.: September 6, 2002. Reserve Forces: DOD Actions Needed to Better Manage Relations between Reservists and Their Employers. GAO-02-608. Washington, D.C.: June 13, 2002. Department of Defense: Implications of Financial Management Issues. GAO/T-AIMD/NSIAD-00-264. Washington, D.C.: July 20, 2000. Reserve Forces: Cost, Funding, and Use of Army Reserve Components in Peacekeeping Operations. GAO/NSAID-98-190R. Washington, D.C.: May 15, 1998. Defense Health Program: Future Costs Are Likely to Be Greater than Estimated. GAO/NSIAD-97-83BR. Washington, D.C.: February 21, 1997. Wartime Medical Care: DOD Is Addressing Capability Shortfalls, but Challenges Remain. GAO/NSIAD-96-224. Washington, D.C.: September 25, 1996. Reserve Forces: DOD Policies Do Not Ensure That Personnel Meet Medical and Physical Fitness Standards. GAO/NSIAD-94-36. Washington, D.C.: March 23, 1994. Operation Desert Storm: Problems With Air Force Medical Readiness. GAO/NSIAD-94-58. Washington, D.C.: December 30, 1993. Reserve Components: Factors Related to Personnel Attrition in the Selected Reserve. GAO/NSIAD-91-135. Washington, D.C.: April 8, 1991.	During the 1990-1991 Persian Gulf War, health problems prevented the deployment of a significant number of Army reservists. To help correct this problem the Congress passed legislation that required reservists to undergo periodic physical and dental examinations. The National Defense Authorization Act for 2002 directed GAO to review the value and advisability of providing examinations. GAO also examined whether the Army is collecting and maintaining information on reservist health. GAO obtained expert opinion on the value of periodic examinations and visited seven Army reserve units to obtain information on the number of examinations that have been conducted. Medical experts recommend periodic physical and dental examinations as an effective means of assessing health. Periodic physical and dental examinations for early-deploying reservists provide a means for the Army to determine their health status. Army early-deploying reservists need to be healthy to meet the specific demands of their occupations; examinations and other health screenings can be used to identify those who cannot perform their assigned duties. Without adequate examinations, the Army may train, support, and mobilize reservists who are unfit for duty. The Army has not consistently carried out the statutory requirements for monitoring the health and dental status of Army early-deploying reservists. At the early-deploying units GAO visited, approximately 66 percent of the medical records were available for review. For example, we found that about 68 percent of the required 2-year physical examinations for those over age 40 had not been performed and that none of the annual medical certificates required of reservists were completed by reservists and reviewed by the units. The Army's automated health care information system does not contain comprehensive physical and dental information on early-deploying reservists. According to Army officials, in 2003 the Army plans to expand its system to maintain accurate and complete medical and dental information to monitor the health status of early-deploying reservists.	6,688	421
To meet the legislative requirements regarding independent management reviews, DOD issued guidance and instructions providing for a peer review process for services acquisitions. DOD's guidance generally addresses requirements prescribed in the Act to develop a process to evaluate the specified contracting issues, but according to DOD officials, DOD has not yet determined how the department plans to disseminate lessons learned or track recommendations that result from the newly instituted reviews. DOD officials expect to further refine their processes, including developing a more formal means for disseminating lessons learned and tracking recommendations as DOD assesses its initial experiences with peer reviews. Through the first year of implementation, DPAP, which is responsible for conducting reviews of acquisitions over $1 billion, had conducted 29 peer reviews on 18 services acquisitions. Similarly, the military departments, which are responsible for conducting reviews of their acquisitions under $1 billion, issued guidance that provides for peer reviews at various levels within the departments based on dollar values. The military departments could not, however, determine the exact number of peer reviews conducted because of the absence of comprehensive reporting processes. Further, as peer review processes evolve, the military departments are considering ways to disseminate lessons learned and track recommendations. DPAP issued a memorandum in September 2008 establishing a peer review process to fulfill the requirement for an independent management review of contracts for services. The requirement for a peer review process was subsequently incorporated into DOD Instruction 5000.02, Operation of the Defense Acquisition System, in December 2008. The guidance states that these reviews are intended to ensure consistent and appropriate implementation of policy and regulations, improve the quality of contracting processes, and facilitate sharing best practices and lessons learned. According to DOD officials, peer reviews by design are a means of improving individual acquisitions and not necessarily a tool for strategically managing DOD's services portfolio. Under DPAP's guidance, peer reviews supplement its existing process to review and approve services acquisitions. Pursuant to congressional direction, DOD had previously established a management review process that was intended to ensure that DOD services acquisitions are based on clear, performance-based requirements with measurable outcomes and that acquisitions are planned and administered to achieve intended results. In these management reviews, DPAP assesses and approves the acquisition strategies submitted by the military departments or defense agencies for obtaining contractor-provided services estimated to be valued at $1 billion or more. Once the acquisition strategies are approved, DOD contracting offices may continue the acquisition process, including soliciting bids for proposed work and subsequently awarding contracts. DOD may award different contract types to acquire products and services, or issue task orders under existing contracts. In November 2009, we reported that the number of contracts and task orders issued after the acquisition strategies were approved was significant. For example, we reported that nearly 1,900 task orders were issued under the seven professional and management support services acquisitions we reviewed. DOD generally conducts peer reviews at three key points in the acquisition process prior to contract award--prior to issuance of the solicitation (phase 1), prior to request for final proposal revisions (phase 2), and prior to contract award (phase 3)--and is to conduct periodic post-award reviews (phase 4) (see fig. 1). In February 2009, DOD issued guidance that clarified the relationship between the management reviews and the peer reviews. For example, the guidance identifies specific issues to assess and the criteria for the reviewers to use during the management reviews or pre-award peer reviews. According to the guidance, some contracting issues identified in the Act, such as contract type and competition, are to be assessed during the management reviews. Conversely, other contracting issues identified in the Act, including requirements definition and the extent of the agency's reliance on contractors to perform functions closely associated with inherently governmental functions, are to be assessed during pre-award peer reviews. The pre-award peer reviews also are to evaluate several elements of the source selection process that are not specified in the Act, such as the clarity and consistency of the documentation. Further, the guidance established review criteria for post-award reviews that address each of the contracting issues identified in the Act. For example, during post-award reviews, reviewers are to assess the extent to which the contracting office was able to achieve competition for orders and whether it was using appropriate contract types, well-defined requirements, and appropriate cost/pricing methods. According to DOD officials, in conducting these reviews, DPAP convenes a peer review team consisting of three to five members. Officials said that the teams are generally chaired by a deputy director within DPAP and include participation from senior contracting officials from the military departments and defense agencies as well as legal advisors from the Office of the Secretary of Defense's General Counsel. The teams review acquisition documents prior to an on-site review and hold discussions with contracting officers over multiple days. Upon completion of the on-site review, peer review teams develop summary memoranda that include observations and recommendations. The February 2009 guidance indicated that DPAP is to review services acquisitions with an expected value of over $1 billion. In addition, DPAP may review acquisitions under that threshold that it has designated as special interest because of the nature or sensitivity of the services to be acquired. According to DOD officials, DPAP does not have a capability to independently identify acquisitions that will require its review, but rather relies on the military departments and defense agencies to notify DPAP of acquisitions that will exceed the threshold. DPAP officials noted that some reviews were not conducted because the military departments did not notify DPAP that a peer review was necessary. DPAP officials stated that they are currently focusing on the pre-award peer reviews and are phasing in post-award peer reviews. As of September 30, 2009, DPAP had conducted 29 peer reviews for 18 services acquisitions. Because the peer review process was only implemented in September 2008, no single acquisition has been subject to all phases of the peer review process and no acquisition has been peer reviewed in both the pre- and post-award phases. While most of the reviews have focused on proposed acquisitions for which the initial contract had not yet been awarded, DPAP has also conducted two phase 3 peer reviews for proposed task orders valued at over $1 billion that were to be issued under an existing contract that had previously been reviewed. DPAP has not yet determined if it will establish a policy for conducting peer reviews for all individual task orders over this amount in the future. For the 29 peer reviews of services acquisitions that DPAP conducted, figure 2 shows when each review occurred and the corresponding milestone. For example, DPAP conducted a phase 1 peer review prior to the issuance of the solicitation for 12 of the 18 services acquisitions. Our review of the summary memoranda of the pre-award peer reviews that DPAP conducted as of September 30, 2009, found that review teams generally documented the evaluation of the use of contracting mechanisms and, to a lesser extent, the use, management, and oversight of subcontractors. DPAP officials noted that other contracting issues may have been discussed during pre-award site visits and not included in the summary memorandum because the peer review team did not identify any concerns that warranted inclusion. Further, we found that review teams made several related recommendations, as illustrated in the following examples: One pre-award peer review team recommended that the contracting office reconsider the number of contracts that it had proposed be awarded under an acquisition. In this case, the contracting office had proposed limiting the number of contracts to three prior to knowing what proposals and business arrangements would be submitted by industry. The peer review team noted that this may unduly restrict flexibility of the military department. Further, the team was unsure if documentation to support the limitation on contract number would be sufficient to withstand a bid protest from an unsuccessful offeror. Another pre-award peer review recommended that the contracting office increase its use of subcontractors and encourage the prime contractors to establish mentor-protege relationships with their subcontractors to bring more qualified contractors into an industry. Our review of the summary memoranda for the three post-award peer reviews conducted by DPAP found that consistent with guidance, the review teams evaluated all the contracting issues identified in the Act. All three summary memoranda listed the required contracting issues and then reported the peer review teams' observations and recommendations for the contracting offices to consider for the acquisition, as illustrated by the following examples: One post-award peer review team recommended that the contracting officer modify the contract to include provisions requiring the contractor to provide information on pass-through charges for all future task orders issued. At the time of the peer review, the contract did not contain a clause requiring the contractor to provide such information, and therefore the government was unable to determine the extent of pass-through charges and whether they were excessive. Another post-award team recommended that the contracting office reduce the use of time-and-materials task orders. In this case, the acquisition strategy envisioned that most of the work would be performed through fixed-priced task orders; however, time-and- materials task orders accounted for 62 percent of the value of orders issued under the contract in the first 2 years of performance. While DPAP's guidance noted that the recommendations made during peer reviews are advisory in nature, it also states that contracting offices are to document in the contract file the disposition of all pre-award peer review recommendations prior to contract award. The guidance does not address recommendations made during post-award reviews. According to DOD officials, contracting offices generally accept recommendations provided by the peer review teams. DPAP officials said that if the contracting office decides not to accept a peer review team's recommendation, the contracting officer is expected to document the reason in the contract file and provide a copy to DPAP. In addition to providing recommendations to address potential issues in proposed acquisitions, the peer review teams have also identified some best practices. For example, in one summary memorandum the team called attention to the contracting office's post-award performance plan for the acquisition, which specified how the office intended to evaluate and assess contract performance to maintain effective contract surveillance procedures. The team noted that the plan allowed real-time access to detailed cost performance data when combined with regular surveillance. According to officials, DOD, however, has not yet issued guidance establishing procedures to systematically track the recommendations made by peer review teams or disseminate best practices as required by the Act. DOD officials noted that to date, sharing lessons learned from peer reviews has largely occurred through word of mouth or through conferences. For example, at a December 2009 conference for senior DOD contracting officials, DPAP presented an update on its peer review process that included a discussion of lessons learned. To identify methods to better disseminate trends, lessons learned, and best practices identified during peer reviews, in August 2009 DPAP established a subcommittee within the Panel on Contracting Integrity. DPAP officials expect that the subcommittee will report on its findings in 2010. Further, an official stated that DPAP plans to consider ways to track the implementation of recommendations made during peer reviews. The September 2008 DPAP guidance required the military departments to establish their own procedures for conducting pre- and post-award peer reviews on acquisitions under $1 billion, but provided the flexibility to the services to tailor the process to best meet their needs. In response, the Air Force issued its guidance in January 2009, the Navy in March 2009, and the Army in April 2009. The military departments' policies varied in such areas as the frequency and timing of the reviews and the organizational levels delegated responsibility for conducting the reviews. For example, the Air Force conducts up to five pre-award pre-award peer reviews whereas the Army conducts two (see fig. 3). The military departments plan to refine their policies as they gain experience with the peer review process. According to officials, both the Air Force and Army modified existing pre- award reviews to incorporate the peer review requirements. The existing reviews were mandatory steps in each department's contract award process and, as such, focused on the proposed acquisition's contracting approach, source selection process, and readiness to issue a contract solicitation. Air Force officials stated that the department previously had a post-award review process that focused on cost, schedule, and performance metrics, which was revised to incorporate peer review requirements. Army officials noted that the Army has focused its attention on implementing pre-award peer reviews, but has not yet established a post-award peer review process. These officials noted that the Army plans to issue guidance on conducting post-award reviews in 2010. In contrast, the Navy developed a new process, modeled on DPAP's process, to review proposed services acquisitions. Navy officials are considering making some refinements to this process. For example, at the time of our review the Navy had not yet determined the optimal timing of its post-award peer reviews. The department was trying to determine a point at which there had been enough contract performance to evaluate the contractor while still allowing the contracting officers sufficient time to implement any peer review team recommendations prior to exercising an option year. While DPAP was not required to approve the military departments' guidance, DPAP officials reported that the guidance issued by the military departments was consistent with the intent of the September 2008 guidance. There are differences, however, in how the military departments addressed certain issues. For example, each of the military departments delegated responsibility for conducting peer reviews to commands and organizational units within their departments based on expected acquisition value. In that regard: The Air Force delegated responsibility for conducting peer reviews to its major commands for proposed services acquisitions valued from $50 million to $1 billion. The Army delegated responsibility to the head of the contracting activity within each of its commands for conducting peer reviews for services acquisitions valued from $250 million to $1 billion. Similarly, it identified the principal assistant responsible for contracting as being responsible for conducting peer reviews for acquisitions from $50 million to $250 million. The Navy delegated responsibility to the Deputy Assistant Secretary of the Navy - Acquisition and Logistics Management (DASN-A&LM) for conducting peer reviews for acquisitions valued from $250 million to $1 billion, while individual commands are responsible for conducting reviews of acquisitions valued from $50 million to $250 million. Further, the Air Force does not require peer reviews on noncompetitive acquisitions--in other words, on contracts awarded using other than full- and-open competition. Air Force officials explained that such contracts are already reviewed under a separate process and therefore believed that an additional peer review would be unnecessary. Similarly, both the Air Force and Army allow the offices responsible for conducting reviews to waive peer reviews under certain circumstances, whereas the Navy does not provide for a waiver process. Air Force guidance allows peer reviews to be waived based on acquisition/source selection history, such as for recurring acquisitions and where there is no history of bid protests. The Army also allows peer reviews to be waived but did not specify in its guidance which acquisitions could be waived. As of September 2009, the military departments reported conducting hundreds of peer reviews for services acquisitions, but the departments do not have comprehensive processes for determining the exact number of reviews conducted. Specifically: The Navy reported that it had conducted 257 peer reviews for services acquisitions, including 5 post-award reviews. The Navy could not identify how many of the reviews conducted by the commands occurred by September 30, 2009. DASN-A&LM conducted its first 4 peer reviews on September 22, 2009. Though the Air Force did not know the specific number of peer reviews conducted, officials noted that it had conducted up to five pre- award reviews on approximately 85 services acquisitions as of September 30, 2009. Army officials stated that though commands had conducted pre-award peer reviews, an exact number of reviews could not be identified because the Army does not have a reporting process. The Army also acknowledged that it did not conduct any post-award reviews because it has not yet established a post-award peer review process. As peer review processes evolve, the military departments are considering ways to disseminate lessons learned and track recommendations. For example, Navy officials said the department is waiting to see the results of initial reviews and will then develop additional guidance to address lessons learned made during peer reviews. Army officials stated that the department plans to address recommendations and lessons learned in 2010 when it issues guidance on post-award reviews. Finally, Air Force policy requires commands to submit annual reports to the Secretary of the Air Force - Acquisition and Contracting Policy that are to include major issues identified during pre-award peer reviews and the resolutions taken. DOD's guidance implementing a peer review process for major services acquisitions at the departmental level generally addresses the requirements prescribed by the Act. While DOD has derived benefits from these initial reviews, it has also recognized that there are issues that still need to be addressed, such as how to track recommendations and disseminate lessons learned. Further, at this stage, DOD's focus has been on evaluating acquisition strategies and proposed contracts at the pre- award stage. DOD has conducted relatively few post-award reviews, in which DOD assesses how well it is managing the contractor's actual performance. A key issue is whether and how to apply the peer review process to task orders through which DOD obtains much of its contractor- provided services. Few of these are large enough to reach the $1 billion DOD review threshold, but below the threshold they could be so numerous as to overtax the departments' peer review processes. Addressing these issues, as well as those at the military department level, is important if DOD is to achieve its stated objectives for peer reviews-- ensuring consistent and appropriate implementation of policy and regulations, improving the quality of contracting processes, and facilitating sharing best practices and lessons learned--on a more strategic or enterprisewide basis rather than limiting the peer reviews' benefits to the individual acquisitions being reviewed. Although we are not making any recommendations because DOD plans to address these issues, resolving these concerns in a timely manner is essential if DOD is to maximize the benefits of the peer review process. DOD provided written comments on a draft of this report. In its comments, DOD stated that peer reviews had improved the quality of its significant business arrangements. DOD indicated that it will continue to refine its peer review process to better disseminate trends, lessons learned, and best practices that are identified during peer reviews. DOD provided a technical comment, which was incorporated into the report. DOD's comments are reprinted in appendix II. We are sending copies of this report to the Secretary of Defense; the Secretaries of the Air Force, Army, and Navy; and interested congressional committees. The report also is available at no charge on GAO's Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-4841. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. Section 808 of the National Defense Authorization Act for Fiscal Year 2008 (the Act) directs GAO to report on the Department of Defense's (DOD) implementation of its guidance and implementing instructions providing for periodic management reviews of contracts for services. In response to this mandate, we (1) assessed the extent to which DOD's guidance addressed the Act's requirements at the department level and how the guidance was implemented and (2) determined the status of actions taken by the military departments pursuant to DOD's guidance. To do so, we reviewed DOD's September 2008 and February 2009 guidance issued by the Under Secretary of Defense for Acquisition, Technology and Logistics' Office of Defense Procurement and Acquisition Policy (DPAP). We compared the guidance and instructions to the requirements stipulated in Section 808 of the Act. The September 2008 guidance indicated that peer reviews were to be conducted for both supplies and services. As the Act's requirements were specific to services acquisitions, we limited our analysis to services. We also obtained guidance and implementing instructions issued by the Departments of the Air Force, Army, and Navy. We interviewed officials from DPAP and the Departments of the Army, Navy, and Air Force to gain further insight into how each organization developed its guidance and instructions. DOD's September 2008 memorandum also indicated that defense agencies were required to develop their own guidance. While these were outside the scope of our review, DPAP officials indicated that 13 of 17 defense agencies that DPAP believed would be required to develop guidance had done so at the time of this review. We obtained information on the number of peer reviews on services acquisitions that DPAP and the military departments reported they had conducted as of September 30, 2009. DPAP was able to identify the number of reviews that it had conducted. We determined this information to be sufficiently reliable for the purposes of our review. The Air Force provided an approximate number of acquisitions that had been reviewed but could not identify the number of individual peer reviews conducted. The Army did not provide any information on the specific number of reviews conducted. The Navy provided information on the number of reviews it had conducted but could not specify how many had been conducted as of September 30, 2009. We could not independently verify the information provided by the military departments because of the lack of available documentation. To determine the nature of the discussions and the issues addressed during peer reviews, we obtained the summary memoranda from each of the 29 peer reviews conducted by DPAP as of September 30, 2009. These 29 memoranda represented 18 unique acquisitions, as DPAP had reviewed some acquisitions more than once. Twenty-six of the memoranda were for pre-award peer reviews and 3 were for post-award reviews. We analyzed summary memoranda from each of the 29 peer reviews to determine the topics discussed in the memoranda, focusing specifically on the contracting issues identified in the Act. We also interviewed DPAP officials who chaired or participated in these reviews to obtain their views on the peer review process. We conducted this performance audit from October 2009 through January 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Timothy DiNapoli, Assistant Director; E. Brandon Booth; Morgan Delaney Ramaker; Christopher Mulkins; Thomas Twambly; and Alyssa Weir made key contributions to this report.	The Department of Defense (DOD) is the federal government's largest purchaser of contractor-provided services, obligating more than $207 billion on services contracts in fiscal year 2009. DOD contract management has been on GAO's high-risk list since 1992, in part because of continued weaknesses in DOD's management and oversight of contracts for services. The National Defense Authorization Act for Fiscal Year 2008 directed DOD to issue guidance providing for independent management reviews for services acquisitions. The Act required that the guidance provide a means to evaluate specific contracting issues and to address other issues, including identifying procedures for tracking recommendations and disseminating lessons learned. The Act also directed GAO to report on DOD's implementation of its guidance. GAO (1) assessed the extent to which DOD's guidance addressed the Act's requirements and how the guidance was implemented and (2) determined the status of actions taken by the military departments pursuant to DOD's guidance. GAO compared DOD's guidance with the Act's requirements; obtained data on the number of reviews conducted as of September 2009; and analyzed memoranda of 29 acquisitions valued at over $1 billion. In its written comments, DOD noted it planned to refine its processes to better share the lessons learned and best practices identified during peer reviews. To meet the legislative requirement regarding independent management reviews, DOD issued guidance in September 2008 and February 2009 providing for a peer review process for services acquisitions. DOD's guidance generally addresses requirements in the Act to issue guidance designed to evaluate specified contracting issues, but according to officials, DOD has not yet determined how it plans to disseminate lessons learned or track recommendations that result from the newly instituted reviews. Under this guidance, the Office of Defense Procurement and Acquisition Policy (DPAP) is responsible for conducting pre- and post-award peer reviews for services acquisitions with an estimated value of over $1 billion. Peer review teams include senior contracting officials from the military departments and defense agencies as well as legal advisors. As of September 30, 2009, DPAP had conducted 29 reviews of 18 services acquisitions, including 3 post-award reviews. DOD has also conducted peer reviews on two task orders but has not yet determined if it will do so on individual task orders in the future. The peer review teams made a number of recommendations and identified some best practices. DOD officials expect to refine their processes, including developing a more formal means for disseminating lessons learned and tracking recommendations, as DOD assesses its initial experiences with peer reviews. Each of the military departments has issued guidance establishing peer review processes for services acquisitions valued at less than $1 billion although the guidance is still evolving. The departments' guidance identifies the offices or commands tasked with conducting peer reviews based on various dollar thresholds. The military departments reported conducting hundreds of peer reviews for services acquisitions as of September 30, 2009, but could not provide exact numbers because of the lack of comprehensive reporting processes. Further, as peer review processes evolve, the military departments are considering ways to disseminate lessons learned and track recommendations.	4,929	662
Through a number of legislative actions, Congress has indicated its desire that agencies create telework programs to accomplish a number of positive outcomes. These actions have included recognizing the need for program leadership within the agencies; encouraging agencies to think broadly in setting eligibility requirements; requiring that employees be allowed, if eligible, to participate in telework, and requiring tracking and reporting of program results. Some legislative actions have provided for funding to assist agencies in implementing programs, while other appropriations acts withheld appropriated funds until the covered agencies certified that telecommuting opportunities were made available to 100 percent of each agency's eligible workforce. The most significant congressional action related to telework was the enactment of Sec. 359 of Pub. L. No. 106-346 in October 2000, which provides the current mandate for telework in the executive branch of the federal government by requiring each executive agency to establish a policy under which eligible employees may participate in telework.In this law, Congress required each executive branch agency to establish a telework policy under which eligible employees of the agency may participate in telework to the maximum extent possible without diminishing employee performance. The conference report language further explained that an eligible employee is any satisfactorily performing employee of the agency whose job may typically be performed at least 1 day per week by teleworking. In addition, the conference report required the Office of Personnel Management (OPM) to evaluate the effectiveness of the program and report to Congress. The legislative framework has provided both the General Services Administration (GSA) and OPM with lead roles for the governmentwide telework initiative--to provide services and resources to support and encourage telework, including providing guidance to agencies in developing their program procedures. In addition, Congress required certain agencies to designate a telework coordinator to be responsible for overseeing the implementation of telework programs and serve as a point of contact on such programs for the Committees on Appropriations. GSA and OPM provide services and resources to support the governmentwide telework implementation. OPM publishes telework guidance, which it recently updated, and works with the agency telework coordinators to guide implementation of the programs and annually report the results achieved. GSA offers a variety of services to support telework, including developing policy concerning alternative workplaces, managing the federal telework centers, maintaining the mail list server for telework coordinators, and offering technical support, consultation, research, and development to its customers. Jointly, OPM and GSA manage the federal Web site for telework, which was designed to provide information and guidance. The site provides access for employees, managers, and telework coordinators to a range of information related to telework including announcements, guides, laws, and available training. Although agency telework policies meet common requirements and often share some common characteristics, each agency is responsible for developing its own policy to fit its mission and culture. According to OPM, most agencies have specified occupations that are eligible for telework and most apply employee performance-related criteria in considering authorizing telework participation. In addition, OPM guidance states that eligible employees should sign an employee telework agreement and be approved to participate by their managers. The particular considerations concerning these requirements and procedures will differ among agencies. In our 2003 study of telework in the federal government, we identified 25 key practices that federal agencies should implement in developing their telework programs. Among those were several practices closely aligned with managing for program results including developing a business case for implementing a telework program; establishing measurable telework program goals; establishing processes, procedures, or a tracking system to collect data to evaluate the telework program; and identifying problems or issues with the telework program and making appropriate adjustments. Yet, in our assessment of the extent to which four agencies--the Department of Education, GSA, OPM, and the Department of Veterans Affairs--followed the 25 key practices, we found these four practices to be among the least employed. None of the four agencies we reviewed had effectively developed a business case analysis for implementing their telework programs. In discussing the business case key practice in our 2003 study, we cited the International Telework Association and Council, which had stated that successful and supported telework programs exist in organizations that understand why telework is important to them and what specific advantages can be gained through implementation of a telework program. According to OPM, telework is of particular interest for its advantages in the following areas: Recruiting and retaining the best possible workforce--particularly newer workers who have high expectations of a technologically forward-thinking workplace and any worker who values work/life balance. Helping employees manage long commutes and other work/life issues that, if not addressed, can reduce their effectiveness or lead to employees leaving federal employment. Reducing traffic congestion, emissions, and infrastructure effect in urban areas, thereby improving the environment. Saving taxpayer dollars by decreasing government real estate costs. Ensuring continuity of essential government functions in the event of national or local emergencies. In addition, some federal agency telework policies suggest other potential advantages. For example, the Department of Defense's telework policy includes enhancing the department's efforts to employ and accommodate people with disabilities as a purpose of its program. The Department of State's policy notes that programs may be used to increase productivity. As another example, the U.S. Department of Agriculture credits telework with having a positive effect on sick leave usage and workers compensation. A business case analysis of telework can ensure that an agency's telework program is closely aligned with its own strategic objectives and goals. Such an approach can be effective in engaging management on the benefits of telework to the organization. Making a business case for telework can help organizations understand why they support telework, address relevant issues, minimize business risk, and make the investment when it supports their objectives. Through business case analysis, organizations have been able to identify cost reductions in the telework office environment that offset additional costs incurred in implementing telework and the most attractive approach to telework implementation. We have recently noted instances where agency officials cited their telework programs as yielding some of the benefits listed above. For example, in a 2007 report on the U.S. Patent and Trademark Office (USPTO), we reported that, according to USPTO management officials, one of the three most effective retention incentives and flexibilities is the opportunity to work from remote locations. In fiscal year 2006, approximately 20 percent of patent examiners participated in the agency's telework program, which allows patent examiners to conduct some or all of their work away from their official duty station 1 or more days per week. In addition, USPTO reported in June 2007 that approximately 910 patent examiners relinquished their office space to work from home 4 days per week. The agency believes its decision to incorporate telework as a corporate business strategy and for human capital flexibility will help recruitment and retention of its workforce, reduce traffic congestion in the national capital region, and, in a very competitive job market, enable the USPTO to hire approximately 6,000 new patent examiners over the next 5 years. As another example, in a 2007 report on the Nuclear Regulatory Commission (NRC), we noted that most NRC managers we interviewed and surveyed considered telework and flexible work schedule arrangements to be very to extremely valuable in recruiting, hiring, and retaining NRC personnel and would be at least as valuable in the next few years. With regard to the second key practice aligned with managing for results, none of the four agencies had established measurable telework program goals. As we noted in our report, OPM's May 2003 telework guide discussed the importance of establishing program goals and objectives for telework that could be used in conducting program evaluations for telework in such areas as productivity, operating costs, employee morale, recruitment, and retention. However, even where measurement data are collected, they are incomplete or inconsistent among agencies, making comparisons meaningless. For example, in our 2005 report of telework programs in five agencies--the Departments of State, Justice, and Commerce; the Small Business Administration; and the Securities and Exchange Commission--measuring eligibility was problematic. Three of the agencies excluded employees in certain types of positions (e.g., those having positions where they handle classified information) when counting and reporting the number of eligible employees, while two of the agencies included all employees in any type of position when counting and reporting the number of eligible employees, even those otherwise precluded from participating. With regard to the third key practice--establishing processes, procedures, or a tracking system to collect data to evaluate the telework program--in our 2003 review we found that none of the four agencies studied were doing a survey specifically related to telework or had a tracking system that provided accurate participation rates and other information about teleworkers and the program. At that time, we observed that lack of such information not only impeded the agencies in identifying problems or issues related to their programs but also prevented them from providing OPM and Congress with complete and accurate data. In addition, in our 2005 study at five agencies, we found that four of the five agencies measured participation in telework based on their potential to telework rather than their actual usage. The fifth agency reported the number of participants based on a survey of supervisors who were expected to track teleworkers. According to OPM, most agencies report participation based on telework agreements, which can include both those for employees teleworking on a continuing basis as well as those for episodic telework. None of the five agencies we looked at had the capability to track who was actually teleworking or how frequently, despite the fact that the Fiscal Year 2005 Consolidated Appropriations Act covering those agencies required each of them to provide quarterly reports to Congress on the status of its telework program, including the number of federal employees participating in its program. At that time, two of the five agencies said they were in the process of implementing time and attendance systems that could track telework participation, but had not yet fully implemented them. The other three agencies said that they did not have time and attendance systems with the capacity to track telework. "The conferees are troubled that many of the agencies' telework programs do not even have a standardized manner in which to report participation. The conferees expect each of these agencies to implement time and attendance systems that will allow more accurate reporting." Despite this language, four of the five agencies have not yet developed such systems and are still measuring participation as they did in 2005. In the fifth agency--the Department of Justice--an official told us that the department has now implemented a Web-based time and attendance system in most bureaus and that this system allows the department to track actual telework participation in those bureaus. The Federal Bureau of Investigation (FBI) was the major exception. This fiscal year, however, the FBI began a pilot of a time and attendance application that will also have the ability to track telework. Upon completion of the pilot, the official said that all of the Department of Justice bureaus would have the ability to track telework. As for the fourth key practice closely related to managing for program results--identifying problems or issues with the telework program and making appropriate adjustments--none of the four agencies we reviewed for our 2003 study had fully implemented this practice and one of the four had taken no steps to do so despite the importance of using data to evaluate and improve their telework programs. An OPM official told us, for example, that she did not use the telework data she collected to identify issues with the program; instead, she relied on employees to bring problems to her attention. To help agencies better manage for results through telework programs, in our 2005 study we had said that Congress should determine ways to promote more consistent definitions and measures related to telework. In particular, we suggested that Congress might want to have OPM, working through the Chief Human Capital Officers (CHCO) Council, develop a set of terms, definitions, and measures that would allow for a more meaningful assessment of progress in agency telework programs. Program management and oversight could be improved by more consistent definitions, such as eligibility. Some information may take additional effort to collect, as for example, on actual usage of telework. Other valuable information may already be available through existing sources. The Federal Human Capital Survey, for example--which is administered biennially--asks federal employees about their satisfaction with telework, among other things. In the latest survey, only 22 percent indicated they were satisfied or very satisfied, while 44 percent indicated they had no basis to judge--certainly, there seems to be room for improvement there. In any case, OPM and the agency CHCO Council are well situated to sort through these issues and consider what information would be most useful. The CHCO Council and OPM could also work together on strategies for agencies to use the information for program improvements, including benchmarking. In conclusion, telework is a key strategy to accomplish a variety of federal goals. Telework is an investment in both an organization's people and the agency's capacity to perform its mission. We continue to believe that more fully implementing the practices related to managing for program results will significantly contribute to improving the success of federal telework programs. Mr. Chairman and members of the subcommittee, this completes my statement. I would be pleased to respond to any questions that you may have. For further information on this testimony, please contact Bernice Steinhardt, Director, Strategic Issues, at (202) 512-6806 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Individuals making key contributions to this testimony include William J. Doherty, Assistant Director; Joyce D. Corry; and Judith C. Kordahl. 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.	Telework continues to receive attention within Congress and federal agencies as a human capital strategy that offers various flexibilities to both employers and employees. Increasingly recognized as an important means to achieving a number of federal goals, telework offers greater capability to continue operations during emergency events, as well as affording environmental, energy, and other benefits to society. This statement highlights some of GAO's prior work on federal telework programs, including key practices for successful implementation of telework initiatives, identified in a 2003 GAO report and a 2005 GAO analysis of telework program definitions and methods in five federal agencies. It also notes more recent work where agency officials cite their telework programs as yielding benefits. As GAO has previously recommended, Congress should determine ways to promote more consistent telework definitions and measures. In particular, Congress might want to have the Office of Personnel Management (OPM) and the Chief Human Capital Officers Council develop definitions and measures that would allow for a more meaningful assessment of progress in agency telework programs. Through a number of legislative actions, Congress has indicated its desire that agencies create telework programs to accomplish a number of positive outcomes. Many of the current federal programs were developed in response to a 2000 law that required each executive branch agency to establish a telework policy under which eligible employees may participate in telecommuting to the maximum extent possible without diminishing employee performance. The legislative framework has provided OPM and the General Services Administration with lead roles for the governmentwide telework initiative--providing services and resources to support and encourage telework. Although agency telework policies meet common requirements and often share characteristics, each agency is responsible for developing its own policy to fit its mission and culture. In a 2003 report, GAO identified a number of key practices that federal agencies should implement in developing their telework programs. Four of these were closely aligned with managing for program results: (1) developing a business case for telework, (2) establishing measurable telework program goals, (3) establishing systems to collect data for telework program evaluation, and (4) identifying problems and making appropriate adjustments. None of the four agencies we reviewed, however, had effectively implemented any of these practices. In a related review of five other agencies in 2005, GAO reported that none of the agencies had the capacity to track who was actually teleworking or how frequently, relying mostly on the number of telework agreements as the measure of program participation. Consistent definitions and measures related to telework would help agencies better manage for results through their telework programs. For example, program management and oversight could be improved by more consistent definitions, such as eligibility. Some information may take additional efforts to collect, for example, on actual usage of telework rather than employees' potential to telework. However, other valuable information may already be available through existing sources, such as the Federal Human Capital Survey. The survey--which is administered biennially--asks federal employees about their satisfaction with telework, among other things. OPM and the Chief Human Capital Officers Council are well-situated to sort through these issues and consider what information would be most useful. The council and OPM could also work together on strategies for agencies to use the information for program improvements, including benchmarking.	3,135	716
In 1947, the United Nations (U.N.) created the Trust Territory of the Pacific Islands. The United States entered into a trusteeship with the U.N. Security Council and became the administering authority of the current islands of the FSM and the RMI. The United States administered the islands under this trusteeship until 1986, when it entered into a Compact of Free Association with the FSM and the RMI, both of which are located in the Pacific Ocean. The original Compact represented both a continuation of U.S. rights and obligations first embodied in the U.N. trusteeship agreement and a new phase in the unique and special relationship that had existed between the United States and these island nations. It also provided a framework for the United States to work toward achieving its three main goals of (1) securing self-government for the FSM and the RMI, (2) assisting the FSM and the RMI in their efforts to advance economic development and self-sufficiency, and (3) ensuring certain national security rights for all of the parties. The Department of the Interior's Office of Insular Affairs was responsible for disbursing and monitoring Compact funds. For the 15-year period from 1987 through 2001, it provided funding at levels that decreased every 5 years. For 2002 and 2003, while negotiations to renew the expiring Compact provisions were ongoing, funding levels increased to equal an average of the funding provided during the previous 15 years. For 1987 through 2003, total U.S. assistance to the FSM and the RMI to support economic development is estimated, based on Interior data, to be about $2.1 billion. In addition, the Compact identified several services that U.S. agencies would supply to the FSM and the RMI and further stated that these agencies could provide direct program assistance as authorized by the Congress. This assistance included grants, loans, and technical assistance that, for fiscal years 1987 through 2001, totaled about $700 million from 19 U.S. agencies. The Department of the Interior was responsible for supervising, coordinating, and monitoring program assistance, while the Department of State was responsible for directing and coordinating all U.S. government employees in foreign countries, except those under the command of U.S. area military commanders. In 2000, we reported that one tool that should be used for ensuring accountability over Compact assistance was the annual audits required by the Compact. FPAs for implementing the Compact required that financial and compliance audits be conducted in accordance with the provisions of the Single Audit Act. This act is intended to, among other things, promote sound financial management, including effective internal controls, with respect to the use of federal awards. Entities that expend $300,000 or more in federal awards in a year are required to comply with act's requirements. Further, the act requires entities to (1) maintain internal control over federal programs, (2) comply with laws, regulations, and the provisions of contracts or grant agreements, (3) prepare appropriate financial statements, including a Schedule of Expenditures of Federal Awards, (4) ensure that the required audits are properly performed and submitted when due, and (5) follow up and take corrective actions on audit findings. Deloitte Touche Tohmatsu, an independent public accounting firm, conducted the 30 single audits that we reviewed for the FSM; the 4 FSM states of Chuuk, Kosrae, Pohnpei, and Yap; and the RMI. Our objective was to review possible FSM and RMI misuse of Compact funds. One source of this type of information is the annual single audits that the fiscal procedures agreement for the implementation of the Compact requires the FSM and the RMI to obtain. We obtained the single audit reports for the years 1996 through 2000, the most recent single audit reports available at the time of our review, for the national government of the FSM; the FSM state governments of Chuuk, Kosrae, Pohnpei and Yap; and the national government of the RMI. In total, this amounted to 30 single audit reports representing 5 years, a period that we considered sufficient for identifying misuse of funds and common or persistent compliance and financial management problems involving Compact funds. While these reports did not specifically identify any findings as instances of misuse of Compact funds, they did identify problems that could leave Compact funds susceptible to misuse, including poor control over cash and equipment. We reviewed each report to identify and categorize the audit findings relevant to the Compact, paying particular attention to those involving assets or other financial accounts (i.e., cash and equipment) that we considered particularly susceptible to misuse. (We did not independently assess the quality of these audits or the reliability of the audit finding information. However, based on the fact that the audited entities developed corrective action plans for about 93 percent of the findings contained in the audit reports, we concluded that the audit findings provide an accurate representation of the problems reported.) We also reviewed the reports to identify auditee responses to the audit findings and their corrective action plans. These plans indicate auditee agreement or disagreement with the audit findings and the actions they planned to take or had taken to fix the findings. In addition, we reviewed the audit findings to determine if they recurred in successive single audits over the 5-year period. We completed our review of each single audit report by identifying and categorizing the auditor's opinions on the financial statements and the Schedules of Expenditures of Federal Awards. In responding to our previous review of the Compact program, Interior officials expressed concerns about the U.S. government's limited ability to enforce accountability over Compact funds due to certain provisions of the original Compact and the related FPA. In light of these concerns, we reviewed the amended Compacts and related FPAs to determine if they included measures that could increase accountability over Compact funds. In addition, we supplemented our review of these documents with a discussion about the amended Compacts with Interior officials to determine if the new provisions addressed their prior concerns about limited actions available to them for holding the FSM and the RMI accountable. Interior's Compact-related expenditures represented about 80 percent of the total expenditures of U.S. assistance made by the FSM, the 4 FSM states, and the RMI during the 5-year period. Because of the relatively small amount of funding from other federal agencies at these recipients, we did not discuss finding resolution with representatives of those agencies. We conducted our audit from August 2002 through May 2003 in accordance with generally accepted government auditing standards. We requested written comments on a draft of this report from the governments of the FSM and the RMI and the Secretary of the Interior. Their comments are discussed in the section entitled Government and Agency Comments and Our Evaluation and are reprinted in appendixes I, II, and III. Further, we considered all comments and made changes to the report, as appropriate. Single audits of the FSM, the four FSM states, and the RMI identified pervasive audit findings involving noncompliance with Compact requirements and financial statement problems in areas that we consider highly susceptible to misuse. In addition, the independent auditor performing the single audits issued qualified opinions or disclaimers of opinion on the financial statements in all 30 single audit reports reviewed and for 60 percent of the Schedules of Expenditures of Federal Awards. Taken together, these findings and opinions demonstrate that the FSM, the four FSM states, and the RMI did not provide reasonable accountability over Compact funds and assurance that these funds were used for their intended purposes. The 30 single audit reports that we examined contained about 90 audit findings for each year of the 5-year period covered by our review. In total, they contained 458 audit findings relevant to Compact funds and significant numbers of findings for each of the auditees for which we reviewed single audit reports. Further, successive single audits during the 5-year period contained recurring audit findings despite corrective action time frames established by the auditees and our conclusion that few of the findings involved significant issues, such as implementing an accounting system, that could be expected to require more than 2 years to correct. Figure 1 shows the number of audit findings reported annually from 1996 through 2000. It demonstrates that the auditors performing the 30 single audits in our review identified a significant number of audit findings both in total and in each year of the 5-year period of our review. In addition, the 30 audit reports identified a significant number of audit findings for each of the auditees. Figure 2 shows the percentages of the 458 audit findings related to Compact funds for each auditee. Office of Management and Budget (OMB) Circular No. A-133, Audits of States, Local Governments, and Non-Profit Organizations, establishes policies for federal agency use in implementing the Single Audit Act, as amended, and provides an administrative foundation for consistent and uniform audit requirements for nonfederal entities that administer federal awards. In part, the circular requires the auditee to follow up and take corrective actions on audit findings identified by the single audits. It clarifies this requirement by stating that, at the completion of the single audit, the auditee shall prepare a corrective action plan (CAP) to address each audit finding included in the current year auditor's report. If the auditee does not agree with the audit findings or believes corrective action is not required, the CAP is to include an explanation of and justification for this position. Based on our review of the audit reports, the FSM, the four FSM states, and the RMI generally fulfilled their responsibility to either prepare a CAP or indicate their disagreement with the audit finding and provide reasons for their disagreement. As figure 3 shows, they prepared CAPs for 93 percent of the audit findings identified by the single audits in our review and indicated their disagreement and reasons for this disagreement for 5 percent of the findings. Our review of these CAPs showed that about 33 percent (138) included anticipated completion dates, and, of these plans, only 4 percent (16) indicated that the planned corrective actions would require more than 2 years to complete. Based on a review of the CAPs that did not include anticipated completion dates (287), we concluded that, with a few exceptions,the problems addressed by these plans could be corrected within a year. For example, Financial Status Reports submitted to the grantor agencies for fiscal year 2000 were not available during the single audit of the RMI. The auditors recommended that an adequate filing system, including the maintenance of Financial Status Reports, be maintained for all federal awards. The CAP called for the Ministry of Finance to ensure that an adequate filing system was in place and to review status reports periodically. Further analysis of the findings revealed that successive single audits identified recurring audit findings over the 5-year period despite the time frames identified in the auditee-prepared CAPs or our estimate of the amount of time corrective action should take. As figure 4 shows, many audit findings that were identified in more than one single audit report recurred in 3 or more years over the 5-year period. The percentage of each auditee's single audit findings that recurred 3 or more years over the 5-year period of our review ranged from RMI's high of 69 percent to a low of 17 percent for the FSM. The auditors categorized the audit findings related to the Compact into three areas--federal award findings, local findings, and financial statement findings. Upon further review, we determined that 117 audit findings that the auditors categorized as federal award findings or local findings discussed problems related to compliance with Compact requirements, and the remaining 341 discussed financial statement problems. The auditors who performed these single audits qualified or disclaimed their opinion on all of the financial statements and about 60 percent of the Schedules of Expenditures of Federal Awards generally because the auditees did not provide them with all needed financial statements or documentation to support transactions recorded in their books. Taken together, the compliance and financial statement findings and audit opinions demonstrate poor accountability over Compact funds and an inability on the part of the entities involved to provide assurances that all program funds are used as intended. They highlight the need for a stronger control environment and greater efforts to implement control activities that strengthen accountability and help ensure that Compact funds are used for program purposes. Compliance requirements for federal assistance set forth what is to be done, who is to do it, the purpose to be achieved, the population to be served, and how much can be spent in certain areas. OMB's Single Audit Act guidance includes 15 compliance categoriesused by auditors to report on compliance-related findings. Our analysis of the compliance categories the auditors cited for the Compact-related audit findings showed that over half of the audit findings related to two categories--allowable costs/cost principles and equipment and real property management. The first category, allowable costs/cost principles, specifies the allowability of costs under federal awards. For example, expenditures for 17 types of projects or activities were allowable under the original Compact capital account, including construction or major repair of capital infrastructure, public and private sector projects, training activities, and debt service. The second category, equipment and real property management, specifies how federal award recipients should use, manage, and dispose of equipment and real property. The following examples illustrate the types of audit findings that the auditors categorized into the 15 areas. Kosrae advanced $93,000 in Compact Health and Medical Program funds to off-island health providers for medical referrals. The advances were immediately expensed without reference to the specific medical expenses actually incurred. This is an example of a compliance finding related to allowable costs/cost principles. Kosrae incurred over $274,000 in expenditures of Compact Capital funds that lacked proper supporting vendor's invoices. This is an example of a compliance finding related to allowable costs/cost principles. Chuuk transferred about $169,000 in Compact Capital funds to entities (subrecipients) that have not been audited or reviewed for compliance with Compact requirements. This is an example of a compliance finding related to subrecipient monitoring. As mentioned earlier, the auditors performing the single audits also categorized findings as financial statement findings. The audit findings for this category related to the reliability of financial reporting and involved recording, processing, summarizing, and reporting financial data. Unlike the findings that related to compliance with Compact requirements, the auditors did not tie the financial statement findings to the categories contained in the Single Audit Act guidance. Our review of these findings identified 101 financial statement findings involving problems with assets or accounts that we consider susceptible to misuse. The following examples illustrate financial statement findings related to assets or accounts that we consider susceptible to misuse. Yap's three major bank accounts (general checking, savings, and payroll) were not reconciled to bank records at the end of fiscal year 1999. Differences between the amounts shown for these cash accounts in Yap's books and the bank records amounted to over $150,000. The auditors identified this lack of bank reconciliations as an internal control weakness in Yap's single audit reports for the years 1995 through 1999. A record being out of balance is a risk factor auditors use to identify the possibility of fraud. This is an example of a cash problem. The RMI had not conducted a physical inventory or updated property records for equipment and real property. As of September 30, 2000, RMI reported that its equipment was worth about $11 million, but the auditor could not substantiate this amount due to inadequate records. The auditor identified a lack of updated property records for the General Fixed Asset Group in single audit reports for the years 1988 through 2000. Missing documents, such as the property records for equipment in this example, are a risk factor used by auditors to identify the possibility of fraud. This is an example of an equipment problem. The 30 single audit reports included auditor opinions or disclaimers of opinion on the financial statements and Schedules of Expenditures of Federal Awards for the FSM, the four FSM states, and the RMI. The financial statements reflect a federal award recipient's financial position, results of operations or changes in net assets, and, where appropriate, cash flows for the year. The Schedules of Expenditures of Federal Awards show the amount of expenditures for each federal award program during the year. If the auditors are not able to perform all of the procedures necessary to complete an audit, they consider the audit scope to be limited or restricted. Scope limitations may result from the timing of the audit work, the inability to obtain sufficient evidence, or inadequate accounting records. If the audit scope is limited, the auditors must make a professional judgment about whether to qualify or disclaim an opinion. A qualified opinion states that, except for the matter to which the qualification relates, the financial statements are fairly presented in accordance with generally accepted accounting principles. In a disclaimer of opinion, the scope limitation is serious enough that the auditor does not express an opinion. The auditor's opinions on the financial statements and Schedules of Expenditures of Federal Awards for the 30 single audits in our review reveal overall poor financial management. The auditors performing these single audits qualified or disclaimed their opinions on all of the financial statements and about 60 percent of the Schedules of Expenditures of Federal Awards generally because they were unable to obtain sufficient evidence or adequate accounting records. For example, the auditor qualified its opinion on the FSM's financial statements for the year 2000 because of the auditor's inability to ensure the propriety of receivables from other governments and missing financial statements for a component unit. In another example, the auditor did not express an opinion on Chuuk's financial statements for the year 1999 because of inadequacies in the accounting records and internal controls, incomplete financial statements for component units, and its inability to obtain audited financial statements supporting investments. The significant number of audit findings involving FSM and RMI noncompliance with Compact requirements and weaknesses in their financial management systems, along with auditor qualified opinions or disclaimers of opinion on financial statements, echo the control and accountability issues that we identified in our earlier reports on Compact assistance. Further, the pervasive and recurring nature of the compliance and financial statement problems highlights (1) the need for stronger control environments that will help ensure that Compact funds are used for program purposes and (2) the limited progress made during the 5-year period of our review in establishing accountability in the FSM, the four FSM states, and the RMI that would provide reasonable assurance that Compact funds are used for their intended purposes. In responding to our previous reviews of the original Compact program, Interior officials expressed concerns about the U.S. government's limited ability to enforce accountability over Compact funds due to certain provisions of the original Compact and the related FPA. According to these officials, administrators have been reluctant to commit oversight resources to the Compact when no enforcement mechanisms exist due to these provisions. The United States and the FSM signed an amended Compact in May 2003. The United States and the RMI signed an amended Compact in April 2003. These amended Compacts are awaiting legislative approval in the United States, the FSM, and the RMI. They contain strengthened reporting and monitoring measures over the original Compact that could improve accountability over Compact assistance, if diligently implemented. According to Interior officials, the FPA in effect during the period of our review created a financial management regimen unique in federal practice. They explained that it was negotiated to give the FSM and the RMI governments clear control over Compact funding and to limit the U.S. government's authority to intervene in spending decisions and, most important, to withhold payments if the terms and conditions of funding were violated. More specifically, these officials explained that the expiring FPAs lacked basic elements of federal grant management practice similar to those in OMB Circular A-102, Grants and Cooperative Agreements with State and Local Governments, which requires standard procurement practices and cost principles. They elaborated that, when coupled with the full faith and credit provisions of the Compact, this lack of standards limited the U.S. government's response to mismanagement. In summing up, they stated that while additional personnel and funding could have been committed to Compact oversight, the United States would still have had almost no ability to influence fiscal decisions made by the FSM or the RMI. The amended Compacts could potentially cost the U.S. government about $6.6 billion in new assistance. Of this amount, $3.5 billion would cover payments over a 20-year period (2004-23), while $3.1 billion represents payments for U.S. military access to the Kwajalein Atoll in the RMI for the years 2024 through 2086. The amended Compacts contain strengthened reporting and monitoring measures that could improve accountability over Compact assistance, if diligently implemented. In addition, the Department of the Interior has taken actions to increase resources dedicated to monitoring and oversight of Compact funds. The following are amended Compact and related FPA measures that represent changes from the prior Compact and FPAs. In 2000, we reported that Compact funds were placed in a general government fund and commingled with other revenues and, therefore, could not be further tracked. In addition, some Compact assistance was only traced at a high level with few details readily available regarding final use. The amended Compacts and FPAs include requirements that should address these accountability concerns. Specifically, they require fiscal control and accounting procedures sufficient to permit (1) preparation of required reports and (2) tracing of funds to a level of expenditures adequate to establish that such funds have been used in compliance with applicable requirements. Further, the amended Compacts specify standards for the financial management systems used by the FSM and the RMI. For example, these systems should maintain effective controls to safeguard assets and ensure that they are used solely for authorized purposes. The new FPAs would establish a joint economic management committee for the FSM and the RMI that would meet at least once a year. The committee would be composed of three U.S. appointed members, including the chairman, and two members appointed, as appropriate, by either the FSM or the RMI. The committee's duties would include (1) reviewing planning documents and evaluating island government progress to foster economic advancement and budgetary self-reliance, (2) consulting with program and service providers and other bilateral and multilateral partners to coordinate or monitor the use of development assistance, (3) reviewing audits, (4) reviewing performance outcomes in relation to the previous year's grant funding level, terms, and conditions, and (5) reviewing and approving grant allocations (which would be binding) and performance objectives for the upcoming year. Grant conditions normally applicable to U.S. state and local governments would apply to each grant. General terms and conditions for the grants would include conformance to plans, strategies, budgets, project specifications, architectural and engineering specifications, and performance standards. Specific postaward requirements address financial administration by establishing, for example, (1) improved financial reporting, accounting records, internal controls, and budget controls, (2) appropriate use of real property and equipment, and (3) competitive and well-documented procurement. The United States could withhold payments if either the FSM or the RMI fails to comply with grant terms and conditions. The amount withheld would be proportional to the breach of the term or condition. In addition, funds could be withheld if the FSM or RMI governments do not cooperate in U.S. investigations of whether Compact funds have been used for purposes other than those set forth in the amended Compacts. The new FPAs include numerous reporting requirements for the two countries. For example, each country must prepare strategic planning documents that are updated regularly, annual budgets that propose sector expenditures and performance measures, annual reports to the U.S. President regarding the use of assistance, quarterly and annual financial reports, and quarterly grant performance reports. The successful implementation of the new accountability provisions will require a sustained commitment by the three governments to fulfilling their new roles and responsibilities. Appropriate resources from the United States, the FSM, and the RMI represent one form of this commitment. While the amended Compacts do not address staffing issues, officials from Interior's Office of Insular Affairs have informed us that they intend to post six staff in a new Honolulu office: a health grant specialist, an education grant specialist, an accountant, an economist, an auditor, and an office assistant. Interior can also contract with the Army Corps of Engineers for engineering assistance, when necessary. These Honolulu-based staff may spend about half of their time in the FSM and the RMI. Further, an Interior official noted that his office has brought one new staff member on board in Washington, D.C. and intends to post one person to work in the RMI (one staff member already works in the FSM). We have not conducted an assessment of Interior's staffing plan and rationale and cannot comment on the adequacy of the plan or whether it represents sufficient resources in the right locations. The 30 single audit reports demonstrate a lack of or poor accountability over U.S. Compact assistance that has totaled an estimated $2.1 billion since 1987. The large number and recurring nature of the findings involving noncompliance with Compact requirements or financial management weaknesses, along with the preponderance of auditor's qualified opinions or disclaimers of opinion on FSM and RMI financial statements, clearly indicate the need for improved FSM and RMI management of U.S. assistance and greater U.S. oversight and monitoring of the use of this assistance. Changes are needed especially considering the fact that the amended Compacts with these nations could potentially cost the U.S. government about $3.5 billion in new assistance over the next 20 years. Under the original Compact, the Department of the Interior was responsible for supervising, coordinating, and monitoring the program assistance provided. Interior officials expressed frustration with the lack of tools available to them to administer or track this assistance in a manner that could reasonably ensure that such assistance was having its intended effect. The amended Compacts strengthen reporting and monitoring measures that could improve accountability over assistance, if diligently implemented. These measures include strengthened fiscal control and accounting procedures requirements, expanded annual reporting and consultation requirements, and the ability to withhold funds for noncompliance with grant terms and conditions. The successful implementation of the new accountability provisions will require appropriate resources and sustained commitment from the United States, the FSM, and the RMI. The joint economic committees called for in the Compact with each nation and Interior's planned increase in staff associated with Compact oversight and monitoring functions should play key roles in improving accountability over Compact funds. To help promote compliance with Compact requirements and sound financial management, the Secretary of the Interior should delegate responsibility to the Office of Insular Affairs and hold appropriate officials in that office accountable for ensuring the adequacy of staff dedicated to Compact oversight and monitoring FSM and RMI progress in addressing Compact-related single audit report findings, reporting on the FSM and RMI actions to correct Compact-related compliance and financial management findings identified in single audit reports to the Secretary of the Interior or other appropriate high-level Interior official, initiating appropriate actions when the FSM or the RMI do not undertake adequate actions to address Compact-related single audit findings in a timely manner, and investigating single audit findings that indicate possible violations of grant conditions or misuse of funds and taking appropriate actions when such problems are verified. In commenting on this report, the Office of Insular Affairs of the Department of the Interior, FSM, and RMI agreed with our findings or conclusions and recommendations. They also cited the amended Compacts as mechanisms that should result in improved financial management over Compact assistance. The FSM and RMI also provided technical comments and information on current actions to address financial management issues. We considered all comments and made changes to the report, as appropriate. The FSM comments noted that it found the report constructive and useful as it continues to prepare for the implementation of the amended Compact and its related agreements. The comments (reprinted in app. I) recognized that, although FSM has worked hard to develop a consistent approach to satisfy the Compact and FPA requirements, significant work remains to be done to improve and strengthen accountability in all aspects throughout the nation. Further, FSM agreed that it must continue to improve internal financial control through upgrading the current financial management system, providing for capacity building, and retaining its most productive and experienced employees. Finally, it noted that the amended Compact and related fiscal procedures agreement include requirements that will address all of the accountability concerns expressed in the report. RMI's comments (reprinted in app. II) stated that it concurred with the report's findings and noted that the report will be useful since it gives a summary of the financial and management situation of the RMI between 1996 and 2000. RMI noted that its problems stem partly from the fact that it has not had a global system for following up on audits that would apply throughout all ministries of the government as well as other entities that receive Compact grant assistance. RMI stated that it has made progress recently by upgrading its information system and strengthening its internal control procedures and noted that it will add personnel to the budget, procurement, and supply areas. In its comments (reprinted in app. III), the Office of Insular Affairs of the Department of the Interior agreed with the conclusions and recommendations in the report. The Office also noted that it looks forward to discharging its responsibilities under the amended Compacts and that it is confident that it will now have the tools needed to properly protect the American taxpayer's investment in the freely associated states. As agreed with your offices, unless you publicly announce its contents earlier, we will not distribute this report until 30 days after its date. At that time, we will send copies to the Secretary of the Interior, the President of the Federated States of Micronesia, the President of the Republic of the Marshall Islands, and appropriate congressional committees. Copies will also be made available to others on request. This report will also be available at no charge on GAO's Web site at http://www.gao.gov. For future contacts regarding this report, please call McCoy Williams at (202) 512-6906 or Susan S. Westin at (202) 512-4128. Staff contacts and other key contributors to this report are listed in appendix IV. In addition to the contacts named above, Perry Datwyler and Leslie Holen made key contributions to this report. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO's commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO's Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. You can print these documents in their entirety, including charts and other graphics. Each day, GAO issues a list of newly released reports, testimony, and correspondence. GAO posts this list, known as "Today's Reports," on its Web site daily. The list contains links to the full-text document files. To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select "Subscribe to e-mail alerts" under the "Order GAO Products" heading.	In 1986, the United States entered into a Compact of Free Association (Compact) that provided about $2.1 billion in U.S. assistance from 1987 through 2003 to the Pacific Island nations of the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI). GAO has issued a number of reports raising concerns about the effectiveness of this assistance. GAO was asked to review possible FSM and RMI misuse of Compact funds. We reviewed single audits for 1996 through 2000 and this report summarizes the audit results. GAO's review of 30 single audit reports for the FSM, 4 FSM states, and the RMI for the years 1996 through 2000 identified pervasive and persistent noncompliance with Compact requirements and financial statement-related audit findings. These single audit reports identified 458 audit findings relevant to the Compact. Significant numbers of these audit findings occurred during each year of the 5-year period and at each of the auditees. In addition, successive single audits identified recurring audit findings over the 5-year period despite corrective action plans prepared by the auditees. While none of the audit findings specifically discussed misuse of Compact funds, they did describe noncompliance with Compact requirements and financial management problems in areas that GAO considers highly susceptible to misuse, such as poor control over cash and equipment. When considered in conjunction with the qualified opinions or disclaimers of opinion on the financial statements in all 30 reports and for 60 percent of the Schedules of Expenditure of Federal Awards required by the Single Audit Act, the audit findings reveal one thing: overall poor accountability of Compact funds. In responding to GAO's previous reviews of the original Compact, Interior officials expressed concerns about the U.S. government's limited ability to enforce accountability over Compact funds due to certain provisions of the Compact and the related fiscal procedures agreement (FPA). Recently, an Interior official noted that departmental officials have been frustrated with the lack of tools to administer or track federal assistance in a manner that could reasonably ensure that such assistance is having its intended effect. GAO found that the amended Compacts and related FPAs, which are scheduled to become effective upon legislative approval in the three countries, include many strengthened reporting and monitoring measures that could improve accountability, if diligently implemented. For example, funds could be withheld for noncompliance with Compact terms and conditions. In addition, joint economic committees and an Interior oversight team will focus on monitoring and overseeing Compact funds.	6,815	528
Since it was launched in 1990, the Hubble Space Telescope has sent back images of space that have made a significant contribution to our understanding of the universe. The telescope uses pointing precision, powerful optics, and state-of-the-art instruments to explore the visible, ultraviolet, and near-infrared regions of the electromagnetic spectrum. To keep it at the forefront of astronomical research and extend its operational life, Hubble's instruments have been upgraded through a series of shuttle servicing missions. The fifth and final planned servicing mission was intended to install new science instruments, replace the telescope's insulation, and replace the batteries and gyroscopes. According to NASA, the lifetime of the observatory on orbit is ultimately limited by battery life, which may extend into the 2007-2008 time frame, but scientific operations are limited by the gyroscopes that stabilize the telescope--whose lifetimes are more difficult to predict. NASA forecasts that the Hubble will likely have fewer than three operating gyroscopes by mid-2006, and fewer than two by mid-2007. In response to congressional concerns about NASA's decision to cancel the servicing mission, NASA requested that the National Research Council conduct an independent assessment of options for extending the life of the Hubble Space Telescope. In May 2004, the Council established a committee to assess the viability of a shuttle servicing mission, evaluate robotic and ground operations to extend the life of the telescope as a valuable scientific tool, assess telescope component failures and their impact, and provide an overall risk-benefit assessment of servicing options. In an interim report issued in July 2004, the committee urged NASA to commit to a Hubble servicing mission that accomplishes the objectives of the canceled servicing mission and to take no actions that would preclude using a space shuttle to carry out this mission. According to a NASA official, the agency is not actively pursuing the shuttle servicing option but is not precluding it. NASA is currently evaluating the feasibility of performing robotic servicing of the Hubble Telescope. To facilitate the evaluation, the agency has formulated a robotic mission concept, which includes a vehicle comprised of a robotic servicing module and another module that can be used to eventually de-orbit the telescope. The potential task list of activities for robotic servicing includes replacing the gyroscopes and batteries, installing new science instruments, and de-orbiting the observatory at the end of its life. According to a NASA official, contracts to facilitate the robotic mission were recently awarded for work to begin on October 1, 2004. The CAIB concluded that the Columbia accident was caused by both physical and organizational failures. The Board's 15 return to flight recommendations necessary to implement before the shuttle fleet can return to flight primarily address the physical causes of the accident and include eliminating external tank debris shedding and developing a capability to inspect and make emergency repairs to the orbiter's thermal protection system. NASA publishes periodic updates to its plan for returning the shuttle to flight to demonstrate the agency's progress in implementing the CAIB recommendations. The most recent update is dated August 27, 2004. This update identifies the first shuttle flight as occurring in spring 2005. NASA does not currently have a definitive cost estimate for servicing the Hubble Telescope using the shuttle. The agency focused on safety concerns related to a servicing mission by the space shuttle in deciding not to proceed, and did not develop a cost estimate. At our request NASA prepared an estimate of the funding needed for a Hubble servicing mission by the space shuttle. NASA could not provide documented support for its estimate. The agency recognizes that there are many uncertainties that could change the estimate. NASA has now begun to explore the costs and benefits of various servicing alternatives, including robotic servicing, which should enable NASA to make a more informed decision regarding Hubble's future. At our request NASA began development of an estimate of the funding needed for a shuttle servicing mission to the Hubble. The estimate provided captures additional funds over and above NASA's fiscal year 2005 budget request that would be required to reinsert the mission in the shuttle flight manifest for launch in March 2007. The estimate does not include funding already expended to support the canceled servicing mission and develop the science instruments. NASA has determined that the additional funds needed to perform a shuttle servicing mission for Hubble would be in the range of $1.7 billion to $2.4 billion. According to NASA, this estimate is based on what it might cost, but it does not take into account the technical, safety, and schedule risks that could increase the cost and/or undermine the viability of the mission. For example, NASA cites uncertainties related to two safety-related requirements: inspection and repair and crew rescue mission capabilities that would be autonomous of the International Space Station and for which NASA currently has not formulated a design solution. In addition, NASA cautions that it did not examine whether design solutions could be accomplished in time to service Hubble before it ceases operations. Table 1 shows NASA's budget estimate phased by fiscal year (FY) for shuttle servicing of the Hubble Space Telescope, including ranges for some of the estimates. While we did not independently verify each component of NASA's estimate, we requested that NASA provide the analytical basis and documentary support for selected portions of the estimate, primarily those with large dollar values. NASA could not provide the requested information. For example, NASA officials told us that the Hubble project's sustaining engineering costs run $9 to10 million per month, but they were unable to produce a calculation or documents to support the estimate because they do not track these costs by servicing mission. We also requested the basis of estimate for the costs to delay shuttle phase-out and for tools development for vehicle inspection and repair without the International Space Station (a component of extravehicular activity above). In response, NASA provided the assumptions upon which the estimates were based and stated that the estimates were based on information provided by Johnson Space Center and Kennedy Space Center subject matter experts. NASA also added that rigorous cost estimating techniques could not be applied to the tools development estimate because a rescue mission currently is only a concept. No analytical or documentary support was provided. In estimating the cost for the autonomous inspection and repair and rescue mission capabilities, NASA used a 30 to 50 percent uncertainty factor because of the very high uncertainty in the cost of developing and conducting a mission that is not adequately defined--i.e., NASA's estimate of $425 million plus 50 percent equals the $638 million upper range shown in the table above for these two items added together. As with the other estimates for which we requested analytical and documentary support, NASA was not able to provide it because the agency could not do a risk analysis without a design solution, according to a NASA official. The lack of documented support for portions of NASA's estimate increases the risk of variation to the estimate. Further, NASA recognizes that there are many uncertainties that could change the current estimate. The 2004 NASA Cost Estimating Handbook states that cost analysts should document the results of cost estimates during the entire cost estimating process and that the documentation should provide sufficient information on how the estimate was developed so that independent cost analysts could reproduce the estimate. According to the handbook, the value of the documentation and analysis is in providing an understanding of the cost elements so that decision-makers can make informed decisions. Recently, we also reported that dependable cost estimates are essential for establishing priorities and making informed investment decisions in the face of limited budgets. Without this knowledge, a program's estimated cost could be understated and thereby subject to underfunding and cost overruns, putting programs at risk of being reduced in scope or requiring additional funding to meet their objectives. Since we began our review, attention has focused on alternatives to a shuttle mission, such as robotic servicing of Hubble. NASA has formed a team to evaluate Hubble servicing alternatives, including cost information. This analysis should enable NASA to make a more informed decision about Hubble's future and facilitate NASA's evaluation of the feasibility of robotic servicing options. Currently, NASA has developed budget estimates for implementing the CAIB recommendations required to return the space shuttle to flight but not for all of the CAIB recommendations. NASA provided us with documentary support for portions of the return to flight estimate, but we found it to be insufficient. According to NASA, the agency's cost for returning the shuttle to flight, which is slightly over $2 billion, will remain uncertain until the completion of the first shuttle missions to the International Space Station in fiscal year 2005. NASA's return to flight activities involve enhancing the shuttle's external tank, thermal protection system, solid rocket boosters, and imagery system to address the physical cause of the Columbia accident--a piece of insulating foam that separated from the external tank and struck a reinforced carbon-carbon panel on the leading edge of the orbiter's left wing. To address this cause, NASA is working to eliminate all external tank debris shedding. Efforts are also in place to improve the orbiter's thermal protection system, which includes heat resistant tiles, blankets, and reinforced carbon-carbon panels on the leading edge of the wing and nose cap of the shuttle, to increase the orbiter's ability to sustain minor debris damage. NASA is also redesigning the method for catching bolts that break apart when the external tank and solid rocket boosters separate as well as providing the capability to obtain and downlink images after the separation. NASA and the United States Air Force are working to improve the use of ground cameras for viewing launch activities. Table 2 shows NASA's budget estimates for return-to-flight activities. However, the majority of NASA's budget estimates for returning the shuttle to flight are not fully developed--including those for fiscal year 2005--as indicated by the agency's internal approval process. The Program Requirements Control Board (PRCB) is responsible for directing studies of identified problems, formulating alternative solutions, selecting the best solution, and developing overall estimates. According to NASA, actions approved with PRCB directives have mature estimates, while those with control board actions in process--that is currently under review but with no issued directives yet--are less mature. Both the content and estimates for return to flight work that have not yet been reviewed by the control board are very preliminary and subject to considerable variation. Table 3 shows the status of control board review of NASA return to flight budget estimates and the percent of the total estimate at each level of review. NASA provided us with the PRCB directives and in some cases, attachments which the agency believes support the estimate. However, we did not find this support to be sufficient. According to NASA's cost estimating handbook, estimates should be documented with sufficient detail to be reproducible by an independent analyst. Nevertheless, in many cases, there were no documents attached to the directive, and in cases where documents were attached to the directives, the documents generally provided high-level estimates with little detail and no documentation to show how NASA arrived at the estimate. For example, a request for $1.8 million to fund the network to support external tank camera transmissions indicated that $1.516 million of the amount would be needed for Goddard Space Flight Center to provide the necessary equipment at receiving stations, labor, subcontractor costs, and travel and that the remaining $290,000 would be needed for improvements to the receiving antennas ($104,000) and recurring costs ($62,000 per flight) for three trucks and the associated transponder time. However, the documents did not show how the requester for the $1.8 million arrived at the estimates. NASA officials told us that the reason for this was that the managers approving the directives trusted their employees to accurately calculate the estimate and maintain the support. In addition, our review of the documents indicated and NASA confirmed that quite a few of the estimates were based on undefinitized contract actions (UCA)--that is, unnegotiated contract changes. Under these actions, NASA officials can authorize work to begin before NASA and the contractor agree on a final estimated cost and fee. As we have stated in our high-risk series, relying on unnegotiated changes is risky because it increases the potential for unanticipated cost growth. This, in turn, may force the agency to divert scarce budget resources intended for other important programs. As of July 31, 2004, NASA records showed 17 UCAs related to return to flight with not-to-exceed amounts totaling $147.5 million. NASA's estimate for the entire effort under these UCAs totals about $325 million, or 15 percent of NASA's current $2.2 billion return to flight estimate. In June 2004, NASA established additional requirements for funding requests submitted to the PRCB. Under the new policy, an independent cost estimate must be developed for requests greater than $25 million, and a program-level cost evaluation must be completed for requests over $1 million. The program-level evaluation consists of a set of standard questions to document the rationale and background for cost-related questions. The responses to the questions are initially assessed by a cost analyst but are reviewed by the Space Shuttle Program Business Manager before submission to the PRCB. NASA provided us with two examples of requests falling under the new requirements. Both of the examples had better support than those with PRCB directives, but documentary support was still not apparent. For example, the funding request for a debris radar indicated that the estimate was based on a partnering agreement with the Navy and the Navy's use of the technology. However, the program-level evaluation pointed out that no detailed cost backup was provided. The other example, which was a funding request to change the processes currently in place for the Space Shuttle Program's problem reporting and corrective action system, was very well supported in terms of analysis, as the requester prepared detailed spreadsheets calculating the funding requirements according to a breakdown of the work to be performed, cited sources for labor rates, and provided assumptions underlying the calculations. However, as pointed out in the program evaluation of the request, there was no support provided for the estimate other than the initiator's knowledge of the change. We believe that future compliance with NASA's new policy establishing additional requirements for funding requests and the inclusion of documentary support could potentially result in more credible return to flight budget estimates. According to NASA, estimates for fiscal year 2005 and beyond will be refined as the Space Shuttle Program comes to closure on return to flight technical solutions and the return to flight plan is finalized. NASA expects that by late fall of 2004, a better understanding of the fiscal year 2005 financial situation will be developed. However, NASA cautions that the total cost of returning the shuttle to flight will remain uncertain until completion of the first shuttle missions to the space station, scheduled to begin in spring 2005. In written comments on a draft of this report, the NASA Deputy Administrator stated that the agency believes that both the estimate and methodology used in the calculation of costs for reinstating the Hubble Space Telescope servicing mission are sound and accurate, given the level of definition at this point in time. Notwithstanding that belief, the agency agreed that portions of the servicing mission activities lacked the design maturity required to estimate the costs according to accepted and established NASA procedures. Specifically, NASA agrees that the Hubble Space Telescope work breakdown structure was not constructed to collect program costs. At the same time, NASA believes it is erroneous to suggest that NASA has no valid basis for the numbers provided, citing the "Servicing Mission 4 Resources Management Plan," which describes the effort required for completion of a servicing mission. According to NASA, although the program's accounting system does not capture sustaining engineering costs in GAO's preferred format, the Servicing Mission 4 Resources Management Plan details mission schedules and staffing, and applying contractor and civil service rates to that staffing level can accurately reflect the effort required to execute a servicing mission. We requested this type of analysis and documentary support, but NASA representatives did not offer such a calculation. Rather, the officials stated that the sustaining engineering costs were based on management's assessment of contractor financial data and in-house service pool charges and that these activities could not be traced back to source documentation. Without adequate supporting data, we cannot assess the accuracy and reliability of such information. NASA acknowledged that the agency does not have a technical design from which to derive the cost for the on-orbit inspection and repair of the shuttle independent of support from the International Space Station. In the case of the unsupported cost estimate for delaying the phase out of the space shuttle in order to complete a manned Hubble servicing mission, NASA stated that it used approved budget projections for the operating years affected by the insertion of the Hubble servicing mission and prorated the extension of the service life. According to NASA, a range was added to the estimate to account for uncertainties and retention of critical skills. The estimates were presented as a rough order of magnitude. NASA stated that it provided its assumptions to demonstrate the reasonableness of the estimates. Nevertheless, in spite of the uncertainties in the estimate, which we recognized in our report, NASA guidance states that cost estimates should be documented during the entire cost estimating process and that the documentation should provide sufficient information on how an estimate was developed to be reproducible by independent cost analysts. NASA did not provide us with this type of documentation. Without adequate supporting data, we cannot assess the accuracy and reliability of such information. We do not agree that the use of approved budget projections is a reliable cost estimating methodology, particularly given the long-term budget implications of the extension of the space shuttle's service life. NASA believes that the examples it provided of the actions to implement several of the CAIB recommendations attest to the rigor of the process and approved procedures NASA utilized to validate the costs. According to NASA, the estimates will mature as the technical solutions mature, but the estimates were not refined at the time of our review. The agency believes the outstanding technical issues necessary to return to flight are beginning to be resolved. However, the examples that NASA provided were in support of estimates that the agency considers mature. We requested support for high dollar portions of NASA's estimate, which the agency did not provide. However, NASA selectively provided examples of what it considered to be mature estimates. We reviewed the examples but found that most of them contained insufficient documentation to assess the reliability of the estimates. In many cases, there were no documents in the approval packages to support the estimates, and in cases where there were documents, they generally provided high-level estimates with little detail and no documentation to show how NASA arrived at the estimates. We believe that because of its difficulty providing reliable cost estimates, NASA cannot provide the Congress assurance that its budget request for the shuttle program for fiscal year 2006 will be sufficient and that shortfalls would not need to be met through reductions in other NASA programs. NASA stated that it believes the use of UCAs is both reasonable and necessary for return to flight activities. We agree that UCAs may be justified to facilitate work outside the scope of existing contracts to expedite the return to flight activities. However, the use of UCAs appears to be a growing trend and is a risky contract management practice because it increases the potential for unanticipated cost growth. In the past, we cited the agency's use of UCAs as one of the reasons we retained contract management as a high-risk designation for NASA to focus management attention on problem areas that involve substantial resources. Finally, NASA agrees that cost estimates for significant development activities should be appropriately documented. According to NASA, additional requirements for cost estimates and internal controls recently established by the program represent a step in ensuring the appropriate documentation is developed as solutions are identified. As stated in our report, we believe that future compliance with this new policy could potentially result in more credible budget estimates. In a broader context, reliable and supportable cost estimating processes are important tools for managing programs. Without this knowledge, a program's estimated cost could be understated and thereby subject to underfunding and cost overruns, putting programs at risk of being reduced in scope or requiring additional funding to meet their objectives. Further, without adequate financial and nonfinancial data, programs cannot easily track an acquisition's progress and assess actions to be taken before it incurs significant cost increases and schedule delays. As agreed with your offices, unless you announce its contents earlier, we will not distribute this report further until 30 days from its date. At that time, we will send copies to the NASA Administrator and interested congressional committees. We will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-4841 or [email protected]. Key contributors to this report are acknowledged in appendix III. To assess the basis for NASA's Hubble servicing mission cost estimate, we analyzed NASA's estimate of the funding needed for a shuttle servicing mission and supporting documentation, and we reviewed NASA documents explaining the rationale for the decision and identifying alternatives to shuttle servicing. We interviewed program and project officials to clarify our understanding of the available cost information and NASA's rationale for the decision. To test the sufficiency of the support for the estimates provided by NASA, we requested the analytical basis and documentary support for selected portions of the estimates, primarily those with large dollar values. In addition, we compared NASA's decision- making process with relevant Office of Management and Budget and NASA guidance on information and analyses recommended to enable decision- makers to select the best alternative. To determine the basis for NASA's cost estimate for implementing all of the CAIB recommendations, we reviewed the CAIB report (volume 1), NASA's return to flight implementation plan and budget estimates, and agency documentation discussing the return to flight budget estimate. We interviewed program officials to obtain a better understanding of NASA's plans for returning the space shuttle to flight, the status of that effort, and the estimated cost. To test the sufficiency of the support for NASA's return to flight estimate, we requested the analytical basis and documentary support for selected high dollar portions of the estimate. To accomplish our work, we visited NASA Headquarters, Washington, D.C.; and Goddard Space Flight Center, Maryland. We performed our review from March through September 2004 in accordance with generally accepted government auditing standards. Staff making key contributions to this report were Jerry Herley, Erin Schoening, Karen Sloan, and Jonathan Watkins.	Hubble's continued operation has been dependent on manned servicing missions using the National Aeronautics and Space Administration's (NASA) shuttle fleet. The fleet was grounded in early 2003 following the loss of the Space Shuttle Columbia, as NASA focused its efforts on responding to recommendations made by the Columbia Accident Investigation Board (CAIB). In January 2004, NASA announced its decision to cancel the final planned Hubble servicing mission, primarily because of safety concerns. Without some type of servicing mission, NASA anticipates that Hubble will cease to support scientific investigations by the end of the decade. NASA's decision not to service the Hubble prompted debate about potential alternatives to prolong Hubble's mission and the respective costs of these alternatives. This report addresses the basis of NASA's cost estimates to (1) service Hubble using the shuttle and (2) implement recommendations made by the CAIB. GAO is continuing its work on the Congressional request that GAO examine the potential cost of a robotic servicing mission to the Hubble Telescope. Although a shuttle servicing mission is one of the options for servicing the Hubble Space Telescope, to date, NASA does not have a definitive estimate of the potential cost. At our request, NASA prepared an estimate of the funding needed for a shuttle servicing mission to the Hubble. NASA estimates the cost at between $1.7 billion to $2.4 billion. However, documentary support for portions of the estimate is insufficient. For example, NASA officials told us that the Hubble project's sustaining engineering costs run $9 to 10 million per month, but they were unable to produce a calculation or documents to support the estimate because they do not track these costs by servicing mission. Additionally, the agency has acknowledged that many uncertainties, such as the lack of a design solution for autonomous inspection and repair of the shuttle, could change the estimate. A t the same time, NASA has yet to develop a definitive cost estimate for implementing all of the CAIB's recommendations but has developed a budget estimate for safely returning the shuttle to flight--a subset of activities recommended by the CAIB as needed to return the shuttle to full operations. NASA currently estimates return to flight costs will exceed $2 billion, but that estimate will likely be refined as the agency continues to define technical concepts. NASA provided support for portions of the estimate, but we found the support to be insufficient--either because key documents were missing or the estimates lacked sufficient detail. Further, NASA cautions that return to flight costs will remain uncertain until the first return to flight shuttle mission, which is scheduled to go to the International Space Station in spring 2005.	4,831	551
The U.S. export control system for items with military applications is divided into two regimes. State licenses munitions items, which are designed, developed, configured, adapted, or modified for military applications, and Commerce licenses most dual-use items, which are items that have both commercial and military applications. Although the Commerce licensing system is the primary vehicle to control dual-use items, some dual-use items--those of such military sensitivity that stronger control is merited--are controlled under the State system. Commercial communications satellites are intended to facilitate civil communication functions through various media, such as voice, data, and video, but they often carry military data as well. In contrast, military communications satellites are used exclusively to transfer information related to national security and have one or more of nine characteristics that allow the satellites to be used for such purposes as providing real-time battlefield data and relaying intelligence data for specific military needs. In addition, the technologies used to integrate a satellite to its launch vehicle are similar to those used to integrate ballistic missiles to their launch vehicles. In March 1996, the executive branch announced a change in licensing jurisdiction transferring two items--commercial jet engine hot section technologies and commercial communications satellites--from State to Commerce. In October and November 1996, Commerce and State published regulations implementing this change, with Commerce defining enhanced export controls to apply when licensing these two items. State and Commerce's export control systems are based on fundamentally different premises. The Arms Export Control Act gives the State Department the authority to use export controls to further national security and foreign policy interests, without regard to economic or commercial interests. In contrast, the Commerce Department, as the overseer of the system created by the Export Administration Act, is charged with weighing U.S. economic and trade interests along with national security and foreign policy interests. Differences in the underlying purposes of the control system are manifested in the systems' structure. Key differences reflect who participates in licensing decisions, scope of controls, time frame for the decision, coverage by sanctions, and requirements for congressional notification. Participants. Commerce's process involves five agencies--the Departments of Commerce, State, Defense, Energy, and the Arms Control and Disarmament Agency. Other agencies can be asked to review specific license applications. For most items, Commerce approves the license if there is no disagreement from reviewing agencies. When there is a disagreement, the chair of an interagency group known as the Operating Committee, a Commerce official, makes the initial decision after receiving input from the reviewing agencies. This decision can be appealed to the Advisory Committee on Export Policy, a sub-cabinet level group comprised of officials from the same five agencies, and from there to the cabinet-level Export Administration Review Board, and then to the President. In contrast, the State system commonly involves only Defense and State. While no formal multi-level review process exists, Defense officials stated that license applications for commercial communications satellites are frequently referred to other agencies, such as the Arms Control and Disarmament Agency, the National Security Agency, and the Defense Intelligence Agency. Day-to-day licensing decisions are made by the Office of Defense Trade Controls, but disagreements could be discussed through organizational levels up to the Secretary of State. This difference in who makes licensing decisions underscores the weight the two systems assign to economic and commercial interests relative to national security concerns. Commerce, as the advocate for commercial interests, is the focal point for the process and makes the initial determination. Under State's system, Commerce is not involved, underscoring the primacy of national security and foreign policy concerns. Scope of controls. The two systems also differ in the scope of controls. Commerce controls items to specific destinations for specific reasons. Some items are subject to controls targeted to former communist countries while others are controlled to prevent them from reaching countries for reasons that include antiterrorism, regional stability, and nonproliferation. In contrast, munitions items are controlled to all destinations, and State has broad authority to deny a license; it can deny a request simply with the explanation that it is against U.S. national security or foreign policy interests. Time frames. Commerce's system is more transparent to the license applicant than State's system. Time frames are clearly established, the review process is more predictable, and more information is shared with the exporter on the reasons for denials or conditions on the license. Sanctions. The applicability of sanctions may also differ under the two export control systems. Commercial communications satellites are subject to two important types of sanctions: (1) Missile Technology Control Regime and (2) Tiananmen Square sanctions. Under Missile Technology sanctions, both State and Commerce are required to deny the export of identified, missile-related goods and technologies. Communications satellites are not so-identified but contain components that are identified as missile-related. When the United States imposed Missile Technology sanctions on China in 1993, exports of communications satellites controlled by State were not approved while exports of satellites controlled by Commerce were permitted. Under Tiananmen Square sanctions, satellites licensed by State and Commerce have identical treatment. These sanctions prohibit the export of satellites for launch from launch vehicles owned by China. However, the President can waive this prohibition if such a waiver is in the national interest. Congressional notification. Exports under State's system that exceed certain dollar thresholds (including all satellites) require notification to the Congress. Licenses for Commerce-controlled items are not subject to congressional notification, with the exception of items controlled for antiterrorism. However, the Congress is notified of presidential waivers of the Tiananmen Square sanctions under both the State and Commerce systems. Export control of commercial communications satellites has been a matter of contention over the years among U.S. satellite manufacturers and the agencies involved in their export licensing jurisdiction--the Departments of Commerce, Defense, State, and the intelligence community. To put their views in context, I would now like to provide a brief chronology of key events in the transfer of commercial communications satellites to the Commerce Control List. As the demand for satellite launch capabilities grew, U. S. satellite manufacturers looked abroad to supplement domestic facilities. In 1988, President Reagan decided to allow China to launch U.S.-origin commercial satellites. The United States and China signed an agreement in January 1989 under which China agreed to charge prices for commercial launch services similar to those charged by other competitors for launch services and to launch nine U.S.-built satellites through 1994. Following the June 1989 crackdown by the Chinese government on peaceful political demonstrations on Tiananmen Square in Beijing, President Bush imposed export sanctions on China. President Bush subsequently waived these sanctions for the export of three U.S.-origin satellites for launch from China. In February 1990, the Congress passed the Tiananmen Square sanctions law (P.L. 101-246) to suspend certain programs and activities relating to the Peoples Republic of China. This law also suspends the export of U.S. satellites for launch from Chinese-owned vehicles. In November 1990, the President ordered the removal of dual-use items from State's munitions list unless significant U.S. national security interests would be jeopardized. This action was designed to bring U.S. controls in line with the industrial (dual-use) list maintained by the Coordinating Committee for Multilateral Export Controls, a multilateral export control arrangement. Commercial communications satellites were contained on the industrial list. Pursuant to this order, State led an interagency review, including officials from Defense, Commerce, and other agencies to determine which dual-use items should be removed from State's munitions list and transferred to Commerce's jurisdiction. The review was conducted between December 1990 and April 1992. As part of this review, a working group identified and established performance parameters for the militarily-sensitive characteristics of communications satellites. During the review period, industry groups supported moving commercial communications satellites, ground stations, and associated technical data to the Commerce Control List. In October 1992, State issued regulations transferring jurisdiction of some commercial communications satellites to Commerce. These regulations also defined what satellites remained under its control by listing nine militarily sensitive characteristics that, if included in a commercial communication satellite, warranted their control on State's munitions list. (These characteristics are discussed in app. 1.) The regulations noted that parts, components, accessories, attachments, and associated equipment (including ground support equipment) remained on the munitions list, but could be included on a Commerce license application if the equipment was needed for a specific launch of a commercial communications satellite controlled by Commerce. After the transfer, Commerce noted that this limited transfer only partially fulfilled the President's 1990 directive. Export controls over commercial communications satellites were again taken up in September 1993. The Trade Promotion Coordinating Committee, an interagency body composed of representatives from most government agencies, issued a report in which it committed the administration to review dual-use items on the munitions list, such as commercial communications satellites, to expedite moving them to the Commerce Control List. Industry continued to support the move of commercial communications satellites, ground stations, and associated technical data from State to Commerce control. In April 1995, the Chairman of the President's Export Council met with the Secretary of State to discuss issues related to the jurisdiction of commercial communications satellites and the impact of sanctions that affected the export to and launch of satellites from China. Also in April 1995, State formed the Comsat Technical Working Group to examine export controls over commercial communications satellites and to recommend whether the militarily sensitive characteristics of satellites could be more narrowly defined consistent with national security and intelligence interests. This interagency group included representatives from State, Defense, the National Security Agency, Commerce, the National Aeronautics and Space Agency, and the intelligence community. The interagency group reported its findings in October 1995. Consistent with the findings of the Comsat Technical Working Group and with the input from industry through the Defense Trade Advisory Group, the Secretary of State denied the transfer of commercial communications satellites to Commerce in October 1995 and approved a plan to narrow, but not eliminate, State's jurisdiction over these satellites. Unhappy with State's decision to retain jurisdiction of commercial communications satellites, Commerce appealed it to the National Security Council and the President. In March 1996, the President, after additional interagency meetings on this issue, announced the transfer of export control authority for all commercial communications satellites from State to Commerce. A key part of these discussions was the issuance of an executive order in December 1995 that modified Commerce's procedures for processing licenses. This executive order required Commerce to refer all licenses to State, Defense, Energy, and the Arms Control and Disarmament Agency. This change addressed a key shortcoming that we had reported on in several prior reviews. In response to the concerns of Defense and State officials about this transfer, Commerce agreed to add additional controls to exports of satellites designed to mirror the stronger controls already applied to items on State's munitions list. Changes included the establishment of a new control, the significant item control, for the export of sensitive satellites to all destinations. The policy objective of this control--consistency with U.S. national security and foreign policy interests--is broadly stated. The functioning of the Operating Committee, the interagency group that makes the initial licensing determination, was also modified. This change required that the licensing decision for these satellites be made by majority vote of the five agencies, rather than by the chair of the Committee. Satellites were also exempted from other provisions governing the licensing of most items on the Commerce Control List. In October and November 1996, Commerce and State published changes to their respective regulations, formally transferring licensing jurisdiction for commercial communications satellites with militarily sensitive characteristics from State to Commerce. Additional procedural changes were implemented through an executive order and a presidential decision directive issued in October 1996. According to Commerce officials, the President's March 1996 decision reflected Commerce's long-held position that all commercial communications satellites should be under its jurisdiction. Commerce argued that these satellites are intended for commercial end use and are therefore not munitions. Commerce maintained that transferring jurisdiction to the dual-use list would also make U.S. controls consistent with treatment of these items under multilateral export control regimes. Manufacturers of satellites supported the transfer of commercial communications satellites to the Commerce Control List. They expressed concern that, under State's jurisdiction, the satellites were subject to Missile Technology sanctions requiring denial of exports and to congressional notifications. Satellite manufacturers also stated that such satellites are intended for commercial end use and are therefore not munitions subject to State's licensing process. They also believed that the Commerce process was more responsive to business due to its clearly established time frames and predictability of the licensing process. Satellite manufacturers also expressed the view that some of the militarily sensitive characteristics of communications satellites are no longer unique to military satellites. Defense and State point out that the basis for including items on the munitions list is the sensitivity of the item and whether it has been specifically designed for military applications, not how the item will be used. These officials have expressed concern about disclosure of technical data to integrate the satellite with the launch vehicle because satellite integration technologies can also be applied to launch vehicles that carry ballistic missiles to improve the missiles' performance and reliability. The process of planning a satellite launch takes several years, and there is concern that technical discussions between U.S. and foreign representatives may lead to the transfer of information on militarily sensitive components. They also expressed concern about the operational capability that specific characteristics, in particular antijam capability, crosslinks, and baseband processing, could give a potential adversary. Defense and State officials said they were particularly concerned about the technologies to integrate the satellite to the launch vehicle because this technology can also be applied to launch ballistic missiles to improve their performance and reliability. Accelerometers, kick motors, separation mechanisms, and attitude control systems are examples of equipment used in both satellites and ballistic missiles. According to State, such equipment and technology merit control for national security reasons. No export license application for a satellite launch has been denied under either the State or Commerce systems. Therefore, the conditions attached to the license are particularly significant. Exports of U.S. satellites for launch in China are governed by a government-to-government agreement addressing technology safeguards. This agreement establishes the basic authorities for the U.S. government to institute controls intended to ensure that sensitive technology is not inadvertently transferred to China. This agreement is one of three government-to-government agreements with China on satellites. The others address pricing and liability issues. During our 1997 review and in recent discussions, officials pointed to two principal safeguard mechanisms to protect technologies. Safeguard mechanisms include technology transfer control plans and the presence of Defense Department monitors during the launch of the satellites. Technology transfer control plans are prepared by the exporter and approved by Defense. The plans outline the internal control procedures the company will follow to prevent the disclosure of technology except as authorized for the integration and launch of the satellite. These plans typically include requirements for the presence of Defense monitors at technical meetings with Chinese officials as well as procedures to ensure that Defense reviews and clears the release of any technical data provided by the company. Defense monitors at the launch help ensure that the physical security over the satellite is maintained and monitor any on-site technical meetings between the company and Chinese officials. Authority for these monitors to perform this work in China is granted under the terms of the government-to-government safeguards agreement. Additional government control may be exercised on technology transfers through State's licensing of technical assistance and technical data. State technical assistance agreements detail the types of information that can be provided and give Defense an opportunity to scrutinize the type of information being considered for export. Technical assistance agreements, however, are not always required for satellite exports to China. While such licenses were required for satellites licensed for export by State, Commerce-licensed satellites do not have a separate technical assistance licensing requirement. The addition of new controls over satellites transferred to Commerce's jurisdiction in 1996 addressed some of the key areas where the Commerce procedures are less stringent than those at State. There remain, however, differences in how the export of satellites are controlled under these new procedures. Congressional notification requirements no longer apply, although the Congress is currently notified because of the Tiananmen waiver process. Sanctions do not always apply to items under Commerce's jurisdiction. For example, under the 1993 Missile Technology sanctions, sanctions were not imposed on satellites that included missile-related components. Defense's power to influence the decision-making process has diminished since the transfer. When under State jurisdiction, State and Defense officials stated that State would routinely defer to the recommendations of Defense if national security concerns were raised. Under Commerce jurisdiction, Defense must now either persuade a majority of other agencies to agree with its position to stop an export or escalate their objection to the cabinet-level Export Administration Review Board, an event that has not occurred in recent years. Technical information may not be as clearly controlled under the Commerce system. Unlike State, Commerce does not require a company to obtain an export license to market a satellite. Commerce regulations also do not have a separate export commodity control category for technical data, leaving it unclear how this information is licensed. Commerce has informed one large satellite maker that some of this technical data does not require an individual license. The additional controls applied to the militarily sensitive commercial communications satellites transferred to Commerce's control in 1996 were not applied to the satellites transferred in 1992. These satellites are therefore reviewed under the normal interagency process and are subject to more limited controls. 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. Antennas and/or antenna systems with the ability to respond to incoming interference by adaptively reducing antenna gain in the direction of the interference. Ensures that communications remain open during crises. Allows a satellite to receive incoming signals. An antenna aimed at a spot roughly 200 nautical miles in diameter or less can become a sensitive radio listening device and is very effective against ground-based interception efforts. Provide the capability to transmit data from one satellite to another without going through a ground station. Permit the expansion of regional satellite communication coverage to global coverage and provides source-to-destination connectivity that can span the globe. They are very difficult to intercept and permit very secure communications. Allows a satellite to switch from one frequency to another with an on-board processor. On-board switching can provide resistance to jamming of signals. Scramble signals and data transmitted to and from a satellite. Allow telemetry and control of a satellite, which provide positive control and deny unauthorized access. Certain encryption capabilities have significant intelligence features important to the National Security Agency. Provide protection from natural and man-made radiation environment in space, which can be harmful to electronic circuits. Permit a satellite to operate in nuclear war environments and may enable its electronic components to survive a nuclear explosion. Allows rapid changes when the satellite is on orbit. Military maneuvers require that a satellite have the capability to accelerate faster than a certain speed to cover new areas of interest. Provides a low probability that a signal will be intercepted. High performance pointing capabilities provide superior intelligence-gathering capabilities. Used to deliver satellites to their proper orbital slots. If the motors can be restarted, the satellite can execute military maneuvers because it can move to cover new areas. 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.	GAO discussed the military sensitivity of commercial communications satellites and the implications of the 1996 change in export licensing jurisdiction, focusing on: (1) key elements in the export control systems of the Departments of Commerce and State; (2) how export controls for commercial satellites have evolved over the years; (3) the concerns and issues debated over the transfer of commercial communications satellites to the export licensing jurisdiction of Commerce; (4) the safeguards that may be applied to commercial satellite exports; and (5) observations on the current export control system. GAO noted that: (1) the U.S. export control system--comprised of both the Commerce and State systems--is about managing risk; (2) exports to some countries involve less risk than to other countries and exports of some items involve less risk than others; (3) the planning of a satellite launch with technical discussions and exchanges of information taking place over several years involves risk no matter which agency is the licensing authority; (4) recently, events have focused concern on the appropriateness of Commerce jurisdiction over communication satellites; (5) this is a difficult judgment; (6) by design, Commerce's system gives greater weight to economic and commercial concerns, implicitly accepting greater security risks; and (7) by design, State's systems gives primacy to national security and foreign policy concerns, lessening--but not eliminating--the risk of damage to U.S. national security interests.	4,460	297
Authority for controlling the export of defense items is provided through the Arms Export Control Act, and these exports are regulated through the ITAR by State Department's Directorate of Defense Trade Controls. While most defense items require a license for export, the ITAR contains numerous exemptions from licensing requirements that have defined conditions and limitations. For exports that directly support DOD activities, such as exports related to defense cooperative programs, exporters may claim an exemption from licensing requirements pursuant to the written request, directive, or approval of DOD. In doing so, DOD certifies that the export appropriately qualifies for one or more of a limited number of applicable ITAR license exemptions. As with all exemptions, the exporter decides whether to export using an exemption and bears ultimate responsibility for complying with requirements in the ITAR. In May 2000, the Administration announced 17 proposals as part of its Defense Trade Security Initiative--an effort to facilitate cross-border defense cooperation and streamline U.S. export controls. One proposal was that DOD make more effective use of ITAR exemptions to facilitate exports that further U.S. government interests in defense cooperation with allies and friendly nations. To clarify exemption use, DOD's Defense Technology Security Administration (DTSA)--which is responsible for developing and implementing DOD security policies on international transfers of defense-related goods, services, and technologies--issued guidelines in March 2004 for certifying U.S. exporters' use of certain ITAR exemptions. These guidelines were provided to the military services, given that they are primarily responsible for managing and implementing international defense cooperative programs. In support of defense activities, DOD components prepare letters certifying the use of certain exemptions by exporters under State's export control regulations. The approach used by the military services for certifying the use of ITAR exemptions is set forth in DOD guidelines. Nonservice DOD components also certify the use of exemptions but are not subject to the guidelines, which were not issued departmentwide. Some of these nonservice components had created or were creating their own guidelines, which could lead to confusion regarding certain certification practices. State, as the regulator of defense exports, has raised concerns about the guidelines not clearly explaining the purpose and scope of the exemptions available to DOD, and State and DOD disagree on contractors' use of one exemption that has been certified by DOD components. Some ITAR exemptions apply to exports that directly benefit DOD activities, ranging from support of defense cooperative programs, such as the Joint Strike Fighter, to providing equipment and technical services necessary to support U.S. forces in foreign locations. For such exemptions, DOD confirms whether the export activity appropriately qualifies for the use of an exemption and typically documents this confirmation in a written letter directly to the exporter or sometimes to the cognizant DOD program office that the exemption will benefit. Typically, the letters identify the ITAR sections that pertain to the exemption, the type and purpose of the export, the destination country, and a time frame for the export to occur (see fig. 1). In March 2004, DOD issued guidelines to the military services that were intended to provide a level of oversight for the exemption certification process, such as establishing elements of authority and record-keeping requirements. The guidelines included the following procedures for certifying exporters' use of ITAR exemptions in support of DOD's activities: Established authorized exemption officials within each service to certify the use of ITAR exemptions. These designated general officers or senior executive service personnel in the military services are responsible for overall management and oversight of the exemption certification process. Provided elements for the certification, to include (1) a tracking number for the certification; (2) ITAR exemption citation number; (3) name of the exporter for whom use of the exemption is certified; (4) the reason/purpose for certifying use of the exemption and benefit to the U.S. government; (5) description of the specific defense article, service, or technical data exempted; (6) conditions and limitations as necessary to establish a clearly defined scope for defense articles, services, and technical data authorized for export and any handling, control, or accountability measures deemed necessary; (7) the foreign end users; and (8) the expiration date--not more than 1 year from date of issue. Required the military services to enter data on exemptions into a centralized DOD database. Stated that DTSA would annually report on the services' exemption certification data to State. Restated requirements in the ITAR that exemptions may only be certified for use by eligible U.S. persons registered with the Department of State, Director of Defense Trade Controls; and that U.S. persons must comply with ITAR requirements for use of exemptions, including applicable criteria and limitations. DOD certifications do not supersede other ITAR requirements for use of exemptions. Listed five exemptions that relate to exports of defense items--such as technical data pursuant to a written DOD request, shipments of defense items by or for U.S. government agencies, or plant visits (classified or unclassified) (see table 1). DTSA officials stated that DOD has not determined the need for a departmentwide directive or instruction on certifying the use of ITAR exemptions. Because all nonservice DOD components currently are not subject to existing DOD guidelines, officials at some nonservice components that we spoke with had created or were in the process of creating their own exemption guidelines. A lack of common guidelines could lead to inconsistent certification practices. In addition, some confusion exists regarding certain certification practices. For example, an official from one of the four nonservice components questioned whether the component could provide certifications for exporters with which it had contracts or whether the cognizant military service that maintained the overall contract would need to provide the certification. This official continues to certify exemptions for such exporters with which it contracts. State officials, who regulate and control the export of defense items, have raised concerns about DOD's exemption certification guidelines. Specifically, DTSA provided State with proposed revisions to its guidelines in April 2006, and in response, State provided DTSA with written comments raising concerns with the guidelines. According to senior-level export control officials at both State and DOD, they met to discuss areas of disagreement but were unable to reach resolution. To date, State and DOD have not resolved fundamental areas of concern. First, State disagreed with DOD's certification of exporters' use of the exemption under ITAR section 126.4(a). According to State officials, language in this section indicates that the exemption is only designed for use by U.S. government personnel for U.S. government end-use and is not designed to be used by contractors. DTSA disagreed on this point and stated that the section's phrase "by or for any agency of the U.S. government" indicates that the exemption can be used by contractors when their work is directed by DOD for its own benefit. In the most recent draft iteration of the guidelines, DTSA now plans to further define responsibility for certifying this ITAR exemption, removing some certification responsibility from the military services in an attempt to provide greater control over its use. However, DTSA officials stated that DOD plans to continue to certify the use of this exemption. Second, State indicated that the guidelines to the military services are not clear on the purpose and scope of the exemptions available to DOD. State suggested that DOD revise its guidelines to include (1) ITAR sections 126.6(a) and 126.6(c) on foreign military sales to provide further context, citing that their inclusion would inform the military services that other ITAR exemptions are provided for the exclusive use of DOD in the conduct of its official business, and (2) ITAR section 125.4(b)(3)--the provision of technical data in furtherance of a contract between the exporter and the U.S. government if the contract provides for the export of data--which State identified as one that may be certified by DOD for use by exporters when conducting DOD's mission. State also noted that the use of each exemption is pursuant to the conditions and terms specified in the ITAR and that the exporter should be directed to the relevant ITAR sections. DTSA officials stated that its guidelines only include those ITAR sections that specifically provide for exemption use for exports at the direction or approval of DOD. DTSA officials further stated that the foreign military sales process is defined separately in the ITAR and that DOD has its own system and process for reporting to State on foreign military sales. (The complete text of cited ITAR sections under discussion can be found in app. II.) Finally, State suggested that DTSA be the certifying entity for all other DOD components outside of the military services and that all certifying organizations be trained in the evaluation of certification requests and the application of DOD guidelines. DTSA officials plan to include in the revised guidelines a provision that nonservice DOD components seek guidance from their respective general counsel, as is the current practice. DOD is in the process of revising its guidelines, which are set to expire in December 2007. These revisions are partially in response to State's concerns, and DOD is planning to submit them to State for its review. However, to date, State and DOD officials have not reached agreement on these issues, and the lack of common understanding of regulatory exemption use could result in inconsistent application of the regulations. On the basis of over 1,100 certification letters that DOD components provided to us and our review of them, DOD components certified the use of over 1,900 exemptions for multiple companies and various programs from 2004 through 2006. Most of the exemptions were for exports of technical data or services for Air Force or missile defense programs and for exports to long-standing allies. We identified a number of DOD components that certified the use of ITAR exemptions by exporters. These components varied widely in the number of certifications they issued--ranging from 24 to more than 1,040. Table 2 summarizes highlights of our analysis of export exemptions certified by various DOD components. Of the components we identified, the Missile Defense Agency and the Air Force provided us about 80 percent of the exemption certification letters that we reviewed. Almost all of the certifications were for the export of technical data or for the temporary export of defense items "by or for any agency of the U.S. government for official use by such an agency." About half of the certifications were for the use of ITAR section 125.4(b)(1) for the export of technical data, including classified information, typically related to a particular program, such as Joint Strike Fighter or Upgraded Early Warning Radar, with allies during discussions at scheduled meetings or participation in technical conferences in foreign locations. In addition, almost 30 percent of the certifications were for ITAR section 126.4(a), such as exports of technical data, defense services, or hardware in support of joint military exercises. ITAR section 126.4(a) is the one that State and DOD disagree on its use by contractors. An additional 19 percent of the certifications cited both of these ITAR sections. Less than 3 percent of the ITAR exemptions identified were for transfers of software and hardware-- primarily for use by U.S. forces outside of the United States, sometimes in support of operations in Iraq. Twenty-one of the certifications issued by two nonservice components cited ITAR section 125.4(b)(3)--technical data in furtherance of a contract between the exporter and the U.S. government if the contract provides for the export of data. More than 270 exporters, including prime contractors and subcontractors, were identified in exemption certification letters we reviewed. The most frequently identified exporters were defense contractors, but university laboratories and federally funded research and development centers were also identified. Four major defense contractors represented one-fourth of the exemption certifications, with one receiving over 200 certifications. However, more than 80 percent of the exporters were identified five or fewer times in the certifications we reviewed from DOD components. A total of 266 different programs and activities were identified in the certifications, with the Missile Defense Agency having the largest number. Over 90 foreign destinations, including NATO, were identified on DOD certifications. The most frequently cited destination country was the United Kingdom--identified 900 times. Thirteen countries were only identified once as exempted export destinations--some of which were situations in which U.S. entities located in the countries were the recipients, not the foreign government or industry of that country. Some certifications were for exports to multiple countries within one geographic region, such as Latin America. State and DOD lack comprehensive data to oversee the use of DOD- certified exemptions, limiting their knowledge of defense activities under this process. DOD's annual report to State on the use of exemptions captures data from the military services but not from other DOD components. In addition, the data may not capture the magnitude of transfers certified for exemption use. Specifically, we found that one DOD component used one letter to certify multiple companies' use of an ITAR exemption during a 1-year period. This information was not included in the DOD component's reporting on exemption certification use. In addition, we found that some of the certification letters that we reviewed lacked key information that could be helpful in overseeing exemptions certified by DOD components. The DOD exemption guidelines state that the military services must record the exemption in a centralized DOD database. However, nonservice components, such as the Missile Defense Agency--which had the largest number of certifications from 2004 through 2006--do not record their exemption certification data in the centralized DOD database, known as USXPORTS. Instead, the nonservice components retain their own records on certified exemptions. In addition, DOD guidelines provide that DOD submit a report to State on exemptions certified for use on an annual basis. In July 2007, DOD submitted its 2006 report to State based on the data contained in USXPORTS. However, the utility of DOD's report to State on exemption use is limited in several areas. First, since DOD collects data for only the military services, its exemption report to State does not provide total exemption data for all DOD components. Specifically, DOD's report to State contained data on 161 certification letters issued by the military services in 2006; for the same year, we collected an additional 271 letters from nonservice components. Second, for each certification letter, the report contains (1) a certification tracking number, (2) certification date, (3) certifying organization, (4) destination country or countries, (5) description of export, and (6) exporter name. However, it does not contain other information that the DOD guidelines specify for inclusion in the certification letters and maintenance in the military services' records on exemption certifications, such as which ITAR exemption is being certified and the expiration date for each exemption. Therefore, State does not have a complete report for the exemptions certified for use by all of DOD's components. While the certification letters we reviewed frequently contained the information as called for in the DOD exemption guidelines, some differences existed that resulted in DOD not having insight into the magnitude of transfers certified for exemption use. For example, for its Joint Strike Fighter program, the Air Force issues an annual certification letter--to more than 50 companies--that certifies their use of one ITAR exemption for the purposes of responding to written requests from DOD for a quote or bid proposal. These letters are broad in scope and do not specify what technical data would be released for the program. When these companies listed on the certification letter cite a specific need for using this exemption throughout the year for an export, they submit their request directly to the program office. However, because the Air Force does not require the program office to report these specific data on these program office approvals for transfers, it is likely that the Air Force lacks comprehensive knowledge on exports transferred under the use of this ITAR exemption. From 2004 through 2006, we found that the Joint Strike Fighter program had authorized the release of more than 600 transfers of technical data under the quote or bid proposal exemption containing specific information--such as the types of technical data and related drawings exported and the frequency of these exports--which the Air Force lacks in its central record keeping on exemptions. Further, DOD's 2006 report to State includes only the certification letter that was broad in scope, but it does not include the magnitude of transfers under this certification. We found some variations in the type of information contained in the certification letters provided by the military services and non-service components, which can lessen DOD's insight into the specific export activities that DOD is certifying. For example, 163 did not specify whether the foreign export destination entity was a foreign government, foreign industry, or U.S. entity. Over 70 certifications--about 4 percent of the total certifications we reviewed--did not contain an expiration date for the exemption; for the remainder, the length of coverage from certification date to expiration date ranged from less than 1 day to more than 4.5 years. The scope of the letters ranged from covering one exporter to covering multiple exporters, and about 30 percent of the certifications that we reviewed included subcontractors. While covering more than one exporter under one certification letter may create some workforce efficiencies, it could limit DOD's insight into exporters receiving exemption certifications. In addition, this practice, while not specifically addressed in the DOD guidelines, has raised concern among some contractors that doing so could blur transparency and create some liability issues. Export control officials from each of the four companies we spoke with said they would prefer that each subcontractor have a separate certification letter from DOD to provide a clearer record of, and decrease their liability for, subcontractors' exports. While the exemption certification process is one way to facilitate defense cooperation with friendly nations and allies, the U.S. government needs a consistent approach to and knowledge of defense export activities certified through this process. However, State and DOD have disparate understandings of regulatory exemption use and guidance, and efforts to resolve these differences have proven unsuccessful. Further, neither State nor DOD has complete and accurate data to obtain sufficient knowledge of the extent to which all DOD components are certifying the use of exemptions for the export of defense items. Therefore, State and DOD cannot readily identify in total and on a program-by-program basis the defense items that DOD has certified for exemption use in support of DOD's activities. To ensure a common understanding of the use of ITAR exemptions available for DOD's activities, we recommend that the Secretary of State direct the Deputy Assistant Secretary for the Directorate of Defense Trade Controls and the Secretary of Defense direct the Director of the Defense Technology Security Administration to establish a work group to define and resolve disagreements on exemption use and guidelines and to document decisions reached. If the work group cannot reach agreement before the existing DOD exemption guidelines expire, then it should elevate the matter for resolution within its appropriate chain of command. If needed, the Secretary of State should direct the Deputy Assistant Secretary for the Directorate of Defense Trade Controls to revise the ITAR to incorporate any necessary changes. Once agreement is reached, the Secretary of Defense, with concurrence from the Secretary of State, should direct that the guidelines be revised and made applicable to all DOD components. We are also recommending that the Secretary of Defense should direct the Director of the Defense Technology Security Administration to ensure that the revised exemption certification guidelines provide the appropriate mechanisms for overseeing the exemption certification process, such as the collection of data from all DOD components on exemptions they certified. The Departments of Defense and State provided comments on a draft of this report. DOD also provided technical comments, which we incorporated as appropriate. In commenting on our first recommendation, Defense and State both concurred with the need to establish a work group to define and resolve disagreements on exemption use and guidelines, and to document decisions reached. State indicated that initial discussions with DOD have begun, and DOD stated that it plans to codify the understandings in a clear set of guidelines to be issued to DOD components. In its comments on our second recommendation, DOD did not agree, stating that there is no existing mechanism whereby the U.S. government can collect data from exporters to monitor exports of defense items made under exemptions. DOD further stated that such a mechanism would exceed DOD's existing statutory and regulatory authority because the ultimate responsibility for obtaining appropriate authorization to export defense items rests with the exporter. Our intent was not for DOD to collect information directly from exporters. Instead, our recommendation is intended for DOD to expand its existing data collection of exemptions certified by the military services to include those from all DOD components. To clarify this intent, we modified the language in the recommendation. Formal written comments provided by DOD and State are reprinted in appendixes III and IV, respectively. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. We will then provide copies of this report to interested congressional committees, as well as the Secretaries of Defense and State; the Attorney General; 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 V. To describe the approach used by the Department of Defense (DOD) for certifying the use of export exemptions for exporters, we reviewed export control regulations and discussed with the Department of State and DOD their interpretation of when DOD can certify that a specific export activity qualifies for the use of certain export exemptions. We reviewed DOD's exemption certification guidelines, State's response to the guidelines, DOD components' internal guidance on exemption certifications, and DOD components' practices. We also interviewed officials from State's Directorate of Defense Trade Controls--from the Licensing, Compliance, Management, and Policy offices, and DOD's Defense Technology Security Administration about their views on the International Traffic in Arms Regulations (ITAR) allowances for exemption use by exporters, requirements for DOD to direct the use of certain ITAR exemptions, and practices by DOD components that certify the use of exemptions by exporters in support of DOD activities. We collected and summarized DOD export exemption certification letters for calendar years 2004 through 2006 to summarize the use of DOD- certified exemptions. We selected 2004 because the Defense Technology Security Administration (DTSA) issued guidelines on the certification process to the military services in that year. Prior to 2004, no formal procedures existed for designating senior-level personnel in the military departments for the authorization of ITAR exemption certifications. Through interviews with knowledgeable State and DOD officials, we created a list of DOD components potentially certifying the use of exemptions. While this coordination helped identify the DOD components certifying the use of exemptions, there may be other components that were not included in this list and additional exemption letters might exist. We then contacted the DOD components on our list to ask if they certified exemptions between 2004 and 2006. While some components on our list stated that they did not certify export exemptions, we collected certification letters from those DOD components that did certify the use of exemptions--the Air Force, Army, Navy, Missile Defense Agency, National Geospatial-Intelligence Agency, National Security Agency, and the Office of Acquisition, Technology, and Logistics. We created a database to summarize information provided in these certification letters, such as the exemptions certified, types of exports, and foreign recipients. In some cases, DOD components provided separate letters for each exporter receiving an exemption certification for an activity, while other components combined all exporters onto one exemption certification letter for an activity. Therefore, to get an equitable count, we separated individual companies from exemption certifications granted for multiple companies on one letter. The total number of exemption certification letters provided by the DOD components to us was 1,142. After separating out the individual companies from the certification letters, the total number of ITAR exemptions certified by the DOD components for the calendar years 2004 through 2006 totaled 1,960. To examine the extent to which State and DOD oversee the use of export exemptions certified by DOD, we reviewed DOD's 2006 report on certified exemptions provided to State in July 2007. We also interviewed DTSA officials about the USXPORTS automation system and what it contains. To gain a DOD acquisition program office perspective, we interviewed the Joint Strike Fighter Program Office about its exemption certification processes and practices. We compared the data of the program office with the data from the cognizant military service. We also interviewed officials from four of the companies--Boeing, Lockheed Martin, Northrop Grumman, and Raytheon--who most often received certification letters to gain their perspective on DOD components' processes for and guidance to exporters on DOD-certified exemptions. We examined the certification letters we obtained from DOD components and identified differences among information contained in the letters. We discussed in this report a number of ITAR subparts and sections that are cited in DOD certification letters, identified in DOD's exemption certification guidelines, or are under discussion between State and DOD. These ITAR sections are cited below in their entirety. In addition to the contact name above, Anne-Marie Lasowski, Assistant Director; Lisa Gardner; Sharron Candon; Peter Grana; Arthur James, Jr.; Karen Sloan; and Marie Ahearn made key contributions to this report. Export Controls: Vulnerabilities and Inefficiencies Undermine System's Ability to Protect U.S. Interests. GAO-07-1135T. Washington, D.C.: July 26, 2007. High-Risk Series: An Update. GAO-07-310. Washington, D.C.: January 31, 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 List Rarely Informs Export Control and Other Policy Decisions. GAO-06-793. Washington, D.C.: July 28, 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. Joint Strike Fighter: Management of the Technology Transfer Process. GAO-06-364. Washington, D.C.: March 14, 2006. 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. Foreign Military Sales: DOD Needs to Take Additional Actions to Prevent Unauthorized Shipments of Spare Parts. GAO-05-17. Washington, D.C.: November 9, 2004. Nonproliferation: Improvements Needed to Better Control Technology Exports for Cruise Missiles and Unmanned Aerial Vehicles. GAO-04-175. Washington, D.C.: January 23, 2004. Export Controls: Post-Shipment Verification Provides Limited Assurance That Dual-Use Items Are Being Properly Used. GAO-04-357. Washington, D.C.: January 12, 2004. Nonproliferation: Strategy Needed to Strengthen Multilateral Export Control Regimes. GAO-03-43. Washington, D.C.: October 25, 2002. Export Controls: Processes for Determining Proper Control of Defense- Related Items Need Improvement. GAO-02-996. Washington, D.C.: September 20, 2002. Export Controls: Department of Commerce Controls over Transfers of Technology to Foreign Nationals Need Improvement. GAO-02-972. Washington, D.C.: September 6, 2002. Export Controls: More Thorough Analysis Needed to Justify Changes in High-Performance Computer Controls. GAO-02-892. Washington, D.C.: August 2, 2002. Export Controls: Rapid Advances in China's Semiconductor Industry Underscore Need for Fundamental U.S. Policy Review. GAO-02-620. Washington, D.C.: April 19, 2002. Defense Trade: Lessons to Be Learned from the Country Export Exemption. GAO-02-63. Washington, D.C.: March 29, 2002. Export Controls: Issues to Consider in Authorizing a New Export Administration Act. GAO-02-468T. Washington, D.C.: February 28, 2002. Export Controls: System for Controlling Exports of High Performance Computing Is Ineffective. GAO-01-10. Washington, D.C.: December 18, 2000. Defense Trade: Analysis of Support for Recent Initiatives. GAO/NSIAD-00-191. Washington, D.C.: August 31, 2000. Defense Trade: Status of the Department of Defense's Initiatives on Defense Cooperation. GAO/NSIAD-00-190R. Washington, D.C.: July 19, 2000. Export Controls: Better Interagency Coordination Needed on Satellite Exports. GAO/NSIAD-99-182. Washington, D.C.: September 17, 1999. Export Controls: Some Controls over Missile-Related Technology Exports to China Are Weak. GAO/NSIAD-95-82. Washington, D.C.: April 17, 1995. Export Controls: Actions Needed to Improve Enforcement. GAO/NSIAD-94-28. Washington, D.C.: December 30, 1993.	Defense (DOD) activities, U.S. defense companies may export defense items. The Department of State (State) controls such exports through its International Traffic in Arms Regulations (ITAR), which provides for some exemptions from export licensing requirements. For a limited number of these exemptions, DOD may confirm--or certify--that the export activity qualifies for the use of an ITAR exemption. As part of an initiative, DOD is to make more effective use of ITAR exemptions, but little is known about the extent to which this is done. This report (1) describes DOD's approach for certifying exporters' exemption use in support of defense activities, (2) summarizes the use of selected DOD-certified exemptions, and (3) examines State and DOD's oversight of exemption use. GAO's findings are based on its review of export control law, regulation, and DOD guidelines; interviews with State, DOD, and defense industry officials; and a GAO-developed database of DOD certification letters. In support of defense activities, DOD prepares letters certifying that a proposed export qualifies for the use of certain ITAR exemptions by exporters. To guide this approach, DOD issued exemption certification guidelines in March 2004 to the military services because they are the DOD components primarily responsible for managing and implementing defense international cooperative programs. However, GAO found other DOD components that also certify the use of exemptions in support of international activities but are not subject to the DOD guidelines. Officials from State, which regulates and controls defense exports, have raised several concerns to DOD about its guidelines, including the use of one ITAR exemption by contractors and the comprehensiveness of the guidelines. While State and DOD officials have met and exchanged correspondence on these issues, to date, they have not resolved fundamental disagreements. A lack of common understanding of regulatory exemption use could result in inconsistent application of the regulations. The exemption certification letters from DOD components that we reviewed showed that over 1,900 exemptions were certified for about 270 exporters in calendar years 2004 through 2006. The majority of the certifications related to missile defense and Air Force programs and included the export of technical data. While most of the exporters identified in the DOD-certified exemption letters were defense contractors, other exporters included university laboratories and federally funded research and development centers. The United Kingdom, Australia, Canada, and the North Atlantic Treaty Organization were the most frequently cited recipients for exports under exemptions certified by DOD components. State and DOD lack comprehensive data to oversee the use of DOD-certified exemptions, limiting their knowledge of defense activities under this process. While DOD's guidelines provide for annual reporting to State on certified exemptions, this report captures data from the military services, but not from other DOD components. GAO identified 271 letters from nonservice components that were not included in DOD's 2006 report to State. In addition, DOD's report to State may not capture the magnitude of transfers certified for exemption use. For example, one letter that GAO reviewed certified the use of an exemption for more than 50 companies, but only the certification letter--not the actual transfers, which totaled 600 over a 3-year period--was captured in the cognizant military service's record keeping on exemption certifications. Furthermore, the details on these transfers were not included in DOD's report to State, limiting insight into the number of transfers under this certification.	6,576	748
CBP's ability to inspect travelers at our nation's ports of entry has been hampered by weaknesses in travel inspection procedures, inadequate physical infrastructure, and lack of staff at the air, land, and sea ports of entry. The use of fraudulent identity and citizenship documents by some travelers to the United States as well as limited availability or use of technology and lack of timely and recurring training have also hampered CBP's efforts in carrying out thorough inspections. DHS has taken several actions to implement WHTI at air, land, and sea ports of entry nationwide so that it can better secure the border by requiring citizens of the United States, Bermuda, Canada, and Mexico to present documents to show identity and citizenship when entering the United States from certain countries in North, Central, or South America. DHS plans to move forward to deploy technology to implement WHTI at land ports of entry, and staff and train officers to use it. Finally, DHS has enhanced border security by deploying US-VISIT biometric entry capability at over 300 air, sea, and land ports of entry nationwide, but the prospects for successfully delivering an operational exit solution remain uncertain because DHS has not detailed how it plans to develop and deploy an exit capability at the ports. Each year individuals make hundreds of millions of border crossings into the United States through the 326 land, air, and sea ports of entry. About three-fourths of these crossings occur at land ports of entry. In November 2007, we reported that while CBP has had some success in interdicting inadmissible aliens and other violators, weaknesses in its traveler inspection procedures and related physical infrastructure increase the potential that dangerous people and illegal goods could enter the country. For example, CBP's analyses indicated that several thousand inadmissible aliens and other violators entered the country at land and air ports of entry in fiscal year 2006. One factor that contributed to failed inspections was weaknesses in travel inspection procedures. In mid-2006, CBP reviewed videotapes from about 150 large and small ports of entry and, according to CBP officials, determined that while CBP officers carried out thorough traveler inspections in many instances, they also identified numerous instances where traveler inspections at land ports of entry were weak in that they did not determine the citizenship and admissibility of travelers entering the country as required by law, such as officers not stopping vehicles for inspection and pedestrians crossing the border without any visual or verbal contact from a CBP officer despite operating procedures that required officers to do so. In the summer of 2006, CBP management took actions to place greater management emphasis on traveler inspections by holding meetings with senior management to reinforce the importance of carrying out effective inspections and by providing training to all supervisors and officers on the importance of interviewing travelers, checking travel documents, and having adequate supervisory presence. However, tests our investigators conducted in October 2006 and January 2007--as many as 5 months after CBP issued guidance and conducted the training--showed similar weaknesses as those on the videotape were still occurring in traveler inspections at ports of entry. At two ports, our investigators were not asked to provide a travel document to verify their identity--a procedure that management had called on officers to carry out--as part of the inspection. The extent of continued noncompliance is unknown, but these results point to the challenge CBP management faces in ensuring its directives are carried out. In July 2007, CBP issued new internal policies and procedures for agency officials responsible for its traveler inspection program at land ports of entry. The new policies and procedures require field office managers to conduct periodic audits and assessments to ensure compliance with the new inspection procedures. However, they do not call on managers to share the results of their assessments with headquarters management. Without this communication, CBP management may be hindering its ability to efficiently use the information to overcome weaknesses in traveler inspections. Another weakness involved inadequate physical infrastructure. While we could not generalize our findings, at several ports of entry of entry that we examined, barriers designed to ensure that vehicles pass through a CBP inspection booth were not in place, increasing the risk that vehicles could enter the country without inspection. CBP recognizes that it has infrastructure weaknesses and has estimated it needs about $4 billion to make the capital improvements needed at all 163 land crossings. CBP has prioritized the ports with the greatest need. Each year, depending upon funding availability, CBP submits its proposed capital improvement projects based upon the prioritized list it has developed. Several factors affect CBP's ability to make improvements, including the fact that some ports of entry are owned by other governmental or private entities, potentially adding to the time needed to agree on infrastructure changes and put them in place. As of September 2007, CBP had infrastructure projects related to 20 different ports of entry in various stages of development. Lack of inspection staff was also a problem. Based upon a staffing model it developed, CBP estimated it may need several thousand more CBP officers at its ports of entry. According to CBP field officials, lack of staff affected their ability to carry out border security responsibilities. For example, we examined requests for resources from CBP's 20 field offices and its pre-clearance headquarters office for January 2007 and reported that managers at 19 of the 21 offices cited examples of anti-terrorism activities not being carried out, new or expanded facilities that were not fully operational, and radiation monitors and other inspection technologies not being fully used because of staff shortages. At seven of the eight major ports we visited, officers and managers told us that not having sufficient staff contributes to morale problems, fatigue, lack of backup support, and safety issues when officers inspect travelers-- increasing the potential that terrorists, inadmissible travelers, and illicit goods could enter the country. CBP also had difficulty in providing required training to its officers. CBP developed 37 courses on such topics as how to carry out inspections and detect fraudulent documents and has instituted national guidelines for a 12-week on-the-job training program that new officers should receive at land ports of entry. However, managers at seven of the eight ports of entry we visited said that they were challenged in putting staff through training because staffing shortfalls force the ports to choose between performing port operations and providing training. Lastly, although CBP has developed strategic goals that call for, among other things, establishing ports of entry where threats are deterred and inadmissible people and goods are intercepted--a key goal related to traveler inspections--it faces challenges in developing a performance measure that tracks progress in achieving this goal. We made a number of recommendations to the Secretary of Homeland Security to help address weaknesses in traveler inspections, challenges in training, and problems with using performance data. DHS said it is taking steps to address our recommendations. We also reported that CBP's ability to do thorough inspections is made more difficult by a lack of technology and training to help CBP officers identify foreign nationals who attempt to enter the United States using fraudulent travel documents. In July 2007, we reported that although the State Department had improved the security features in the passports and visas it issues, CBP officers in primary inspection--the first and most critical opportunity at U.S. ports of entry to identify individuals seeking to enter the United States with fraudulent travel documents--were unable to take full advantage of the security features in passports and visas. This was due to (1) limited availability or use of technology at primary inspection and (2) lack of timely and recurring training on the security features and fraudulent trends for passports and visas. For example, at the time of our review, DHS had provided the technology tools to make use of the electronic chips in electronic passports, also known as e-passports, to the 33 airports of entry with the highest volume of travelers from Visa Waiver Program countries. However, not all inspection lanes at these air ports of entry had the technology nor did the remaining ports of entry. Further, CBP did not have a process in place for primary inspection officers to utilize the fingerprint features of visas, including Border Crossing Cards (BCC) which permit limited travel by Mexican citizens-- without additional documentation--25 miles inside the border of the United States (75 miles if entering through certain ports of entry in Arizona) for fewer than 30 days. For example, although BCC imposter fraud is fairly pervasive, primary officers at southern land ports of entry were not able to use the available fingerprint records of BCC holders to confirm the identity of travelers and did not routinely refer BCC holders to secondary inspection, where officers had the capability to utilize fingerprint records. Moreover, training materials provided to officers were not updated to include exemplars--genuine documents used for training purposes--of the e-passport and the emergency passport in advance of the issuance of these documents. As a consequence, CBP officers were not familiar with the look and feel of security features in these new documents before inspecting them. Without updated and ongoing training on fraudulent document detection, officers told us they felt less prepared to understand the security features and fraud trends associated with all valid generations of passports and visas. Although CBP faces an extensive workload at many ports of entry and has resource constraints, there are opportunities to do more to utilize the security features in passports and visas during the inspection process to detect their fraudulent use. We recommended that the Secretary of Homeland Security make better use of the security features in passports and visas in the inspection process and improve training for inspection officers on the features and fraud trends for these travel documents. We recommended that DHS take steps, including developing a schedule for deploying technology to other ports of entry and updating training. DHS generally concurred with our recommendations and outlined actions it had taken or planned to take to implement them. We currently have work ongoing to examine DHS efforts to identify and mitigate fraud associated with DHS documents used for travel and employment verification purposes, such as the Permanent Resident Card and the Employment Authorization Document. We expect to issue a report on efforts to address fraud with these DHS documents later this year. One of the major challenges for CBP officers at our nation's ports of entry is the ability to determine the identity and citizenship of those who present themselves for inspection. For years, millions of citizens of the United States, Canada, and Bermuda could enter the United States from certain parts of the Western Hemisphere using a wide variety of documents, including a driver's license issued by a state motor vehicle administration or a birth certificate, or in some cases for U.S. and Canadian citizens, without showing any documents. To help provide better assurance that border officials have the tools and resources to establish that people are who they say they are, section 7209 of the Intelligence Reform and Terrorism Prevention Act of 2004, as amended, requires the Secretary of Homeland Security, in consultation with the Secretary of State, to develop and implement a plan that requires a passport or other document or combination of documents that the Secretary of Homeland Security deems sufficient to show identity and citizenship for U.S. citizens and citizens of Bermuda, Canada, and Mexico when entering the United States from certain countries in North, Central, or South America. DHS' and the State Department's effort to specify acceptable documents and implement these document requirements is called the Western Hemisphere Travel Initiative (WHTI). In May 2006, we reported that DHS and State had not made decisions about what documents would be acceptable, had not begun to finalize those decisions, and were in the early stages of studying costs and benefits of WHTI. In addition, DHS and State needed to choose a technology to use with the new passport card--which State is developing specifically for WHTI. DHS also faced an array of implementation challenges, including training staff and informing the public. In December 2007, we reported that DHS and State had taken important actions toward implementing WHTI document requirements. DHS and State had taken actions in the five areas we identified in our 2006 report: DHS and State published a final rule for document requirements at air ports of entry. The agencies also published a notice of proposed rule making for document requirements at land and sea ports of entry. By publishing a final rule for document requirements at air ports of entry, DHS and State have established acceptable documents for air travel. DHS has also published a notice of proposed rule making which includes proposed documents for land and sea travel. Under current law, DHS cannot implement WHTI land and sea document requirements until June 1, 2009, or 3 months after the Secretary of Homeland Security and the Secretary of State have certified compliance with specified requirements, whichever is later. In the meantime, in January 2008, CBP ended the practice of oral declaration. According to CBP, until the WHTI document requirements are fully implemented, all U.S. and Canadian citizens are required to show one of the documents described in the proposed rule or a government issued photo identification, such as a driver's license, and proof of citizenship, such as a birth certificate. DHS has performed a cost-benefit study, but data limitations prevented DHS from quantifying the precise effect that WHTI will have on wait times at land ports of entry--a substantial source of uncertainty in its analysis. DHS plans to do baseline studies at selected ports before WHTI implementation so that it can compare the effects of WHTI document requirements on wait times after the requirements are implemented. DHS and State have selected technology to be used with the passport card. To support the card and other documents that use the same technology, DHS is planning technological upgrades at land ports of entry. These upgrades are intended to help reduce traveler wait times and more effectively verify identity and citizenship. DHS has outlined a general strategy for the upgrades at the 39 highest volume land ports, beginning in January 2008 and continuing over roughly the next 2 years. DHS has developed general strategies for implementing WHTI--including staffing and training. According to DHS officials, they also planned to work with a contractor on a public relations campaign to communicate clear and timely information about document requirements. In addition, State has approved contracting with a public relations firm to assist with educating the public, particularly border resident communities about the new passport card and the requirements of WHTI in general. Earlier this year, DHS selected a contractor for the public relations campaign and began devising specific milestones and deadlines for testing and deploying new hardware and training officers on the new technology. Another major initiative underway at the ports of entry is a program designed to collect, maintain, and share data on selected foreign nationals entering and exiting the United States at air, sea, and land ports of entry, called the US-VISIT Program. These data, including biometric identifiers like digital fingerprints, are to be used to screen persons against watch lists, verify identities, and record arrival and departure. The purpose of US-VISIT is to enhance the security of U.S. citizens and visitors, facilitate legitimate travel and trade, ensure the integrity of the U.S. immigration system, and protect visitors' privacy. As of October 2007, after investing about $1.5 billion since 2003, DHS has delivered essentially one-half of US-VISIT, meaning that biometrically enabled entry capabilities are operating at more than 300 air, sea, and land ports of entry, but comparable operational exit capabilities are not. That is, DHS still does not have the other half of US-VISIT (an operational exit capability) despite the fact that its funding plans have allocated about one- quarter of a billion dollars since 2003 to exit-related efforts. To the department's credit, operational entry capabilities have produced results, including, as of June 2007, more than 1,500 people having adverse actions, such as denial of entry, taken against them. Another likely consequence is the deterrent effect of having an operational entry capability, which officials have cited as a byproduct of having a publicized capability at the border to screen entry on the basis of identity verification and matching against watch lists of known and suspected terrorists. Related to identity verification, DHS has also taken steps to implement US- VISIT's Unique Identity program to enable CBP and other agencies to be better equipped to identify persons of interest and generally enhance law enforcement. Integral to Unique Identity is the capability to capture 10 fingerprints and match them with data in DHS and FBI databases. The capability to capture and match 10 fingerprints at ports of entry is not only intended to enhance CBP's ability to verify identity, but, according to DHS, is intended to quicken processing times and eliminate the likelihood of misidentifying a traveler as being on a US-VISIT watchlist. Nonetheless, the prospects for successfully delivering an operational exit solution remain uncertain. In June 2007, we reported that DHS's documentation showed that, since 2003, little has changed in how DHS is approaching its definition and justification of future US-VISIT exit efforts. As of that time, DHS indicated that it intended to spend about $27.3 million on air and sea exit capabilities. However, it had not produced either plans or analyses that adequately defined and justified how it intended to invest these funds. Rather, it had only described in general terms near-term deployment plans for biometric exit capabilities at air and sea ports of entry. Beyond this high-level schedule, no other exit program plans were available that defined what would be done by what entities and at what cost. In the absence of more detailed plans and justification governing its exit intentions, it is unclear whether the department's efforts to deliver near-term air and sea exit capabilities will produce results different from the past. The prospect for an exit capability at land ports of entry is also unclear. DHS has acknowledged that a near-term biometric solution for land ports of entry is currently not feasible. According to DHS, at this time, the only proven technology available for biometric land exit verification would necessitate mirroring the processes currently in use for entry at these ports of entry, which would create costly staffing demands and infrastructure requirements, and introduce potential trade, commerce, and environmental impacts. A pilot project to examine an alternative technology at land ports of entry did not produce a viable solution. US- VISIT officials stated that they believe that technological advances over the next 5 to 10 years will make it possible to utilize alternative technologies that provide biometric verification of persons exiting the country without major changes to facility infrastructure and without requiring those exiting to stop and/or exit their vehicles, thereby precluding traffic backup, congestion, and resulting delays. US-VISIT also faces technological and management challenges. In March 2007, we reported that while US-VISIT has improved DHS's ability to process visitors and verify identities upon entry, we found that management controls in place to identify and evaluate computer and other operational problems at land ports of entry were insufficient and inconsistently administered. In addition, DHS had not articulated how US-VISIT is to strategically fit with other land border security initiatives and mandates and could not ensure that these programs work in harmony to meet mission goals and operate cost effectively. DHS had drafted a strategic plan defining an overall immigration and border management strategy and the plan has been under review by OMB. Further, critical acquisition management processes had not been established to ensure that program capabilities and expected mission outcomes are delivered on time and within budget. These processes include effective project planning, requirements management, contract tracking and oversight, test management, and financial management. We currently have work underway examining DHS' strategic solution, including a comprehensive exit capability, and plan to issue a report on the results of our work in Spring 2008. As part of its Secure Border Initiative (SBI), DHS recently announced final acceptance of Project 28, a $20.6 million dollar project designed to secure 28 miles of southwestern border. However, DHS officials said that the project did not fully meet agency expectations and will not be replicated. Border Patrol agents in the Project 28 location have been using the system since December 2007 and 312 agents had received updated training. Still, some had not been trained to use the system at all. Deployment of fencing along the southwest border is on schedule, but meeting CBP's December 2008 goal to deploy 370 miles of pedestrian and 300 miles of vehicle fencing will be challenging because of factors that include difficulties acquiring rights to border land and an inability to estimate costs for installation. Besides undergoing technological and infrastructure improvements along the border, the Border Patrol has experienced unprecedented growth and plans to increase its number of agents by 6,000 by December 2008. Border Patrol officials are confident that the academy can accommodate this influx but are also concerned about the sectors' ability to provide sufficient field training. In November 2005, DHS announced the launch of SBI aimed at securing U.S. borders and reducing illegal immigration. Elements of SBI are to be carried out by several organizations within DHS. One component is CBP's SBI program office which is responsible for developing a comprehensive border protection system using people, technology, known as SBInet, and tactical infrastructure--fencing, roads, and lighting. In February 2008, we testified that DHS had announced its final acceptance of Project 28, a $20.6 million project to secure 28 miles along the southwest border, and was gathering lessons learned to inform future border security technology development. The scope of the project, as described in the task order between DHS and Boeing--the prime contractor DHS selected to acquire, deploy, and sustain the SBInet system across the U.S. borders--was to provide a system with the detection, identification, and classification capabilities required to control the border, at a minimum, along 28 miles in the Border Patrol's Tucson sector. After working with Boeing to resolve problems identified with Project 28, DHS formally accepted the system, noting that it met contract requirements. Officials from the SBInet program office said that although Project 28 did not fully meet their expectations, they are continuing to develop SBInet with a revised approach and have identified areas for improvement based on their experience with Project 28. For example, both SBInet and Border Patrol officials reported that Project 28 was initially designed and developed by Boeing with limited input from the Border Patrol, whose agents are now operating Project 28 in the Tucson sector; however, they said that future SBInet development will include increased input from the intended operators. The schedule for future deployments of technology to the southwest border that are planned to replace most Project 28 capabilities has been extended and officials estimated that the first planned deployment of technology will occur in other areas of the Tucson sector by the end of calendar year 2008. In February 2008, the SBI program office estimated that the remaining deployments of the first phase of technology development planned for the Border Patrol's Tucson, Yuma, and El Paso sectors are expected to be completed by the end of calendar year 2011. Border Patrol agents in the Project 28 location have been using the system as they conduct their border security activities since December 2007, and as of January 2008, 312 agents in the Project 28 location had received updated training. According to Border Patrol agents, while Project 28 is not an optimal system to support their operations, it has provided them with greater technological capabilities--such as improved cameras and radars--than the legacy equipment that preceded Project 28. Not all of the Border Patrol agents in the Project 28 location have been trained to use the system's equipment and capabilities, as it is expected to be replaced with updated technologies developed for SBInet. Deployment of tactical infrastructure projects along the southwest border is on schedule, but meeting the SBI program office's goal to have 370 miles of pedestrian fence and 300 miles of vehicle fence in place by December 31, 2008, will be challenging and the total cost is not yet known. As of February 21, 2008, the SBI program office reported that it had constructed 168 miles of pedestrian fence and 135 miles of vehicle fence. Although the deployment is on schedule, SBI program office officials reported that keeping on schedule will be challenging because of various factors, including difficulties in acquiring rights to border lands. In addition, SBI program office officials are unable to estimate the total cost of pedestrian and vehicle fencing because of various factors that are not yet known, such as the type of terrain where the fencing is to be constructed, the materials to be used, and the cost to acquire the land. Furthermore, as the SBI program office moves forward with tactical infrastructure construction, it is making modifications based on lessons learned from previous fencing efforts. For example, for future fencing projects, the SBI program office plans to buy construction items, such as steel, in bulk; use approved fence designs; and contract out the maintenance and repair of the tactical infrastructure. The SBI program office established a staffing goal of 470 employees for fiscal year 2008, made progress toward meeting this goal, and published its human capital plan in December 2007; however, the SBI program office is in the early stages of implementing this plan. As of February 1, 2008, SBI program office reported having 142 government staff and 163 contractor support staff for a total of 305 employees. SBI program office officials told us that they believe they will be able to meet their staffing goal of 470 staff by the end of September 2008. In December 2007, the SBI program office published the first version of its Strategic Human Capital Management Plan and is now in its early implementation phase. The plan outlines seven main goals for the office and activities to accomplish those goals, which align with federal government best practices. In addition to technological and infrastructure improvements along the border, the Border Patrol has experienced an unprecedented growth in the number of its agents. As we reported last year, in a little over 2 years, between fiscal year 2006 and December 2008, the Border Patrol plans to increase its number of agents by 6,000. This is nearly equivalent to the increase in the number of agents over the previous 10 years, from 1996 through 2006. As of September 30, 2007, CBP had 14,567 Border Patrol agents onboard. It plans to have 18,319 Border Patrol agents on board by the end of calendar year 2008. While Border Patrol officials are confident that the academy can accommodate the large influx of new trainees anticipated, they have expressed concerns over the sectors' ability to provide sufficient field training. For example, officials are concerned with having a sufficient number of experienced agents available in the sectors to serve as field training officers and first-line supervisors. The large influx of new agents and the planned transfer of more experienced agents from the southwest border to the northern border could further exacerbate the already higher than desired agent-to-supervisor ratio in some southwest border sectors. Because citizens of other countries seeking to enter the United States on a temporary basis generally must apply for and obtain a nonimmigrant visa, the visa process is important to homeland security. While it is generally acknowledged that the visa process can never be entirely failsafe, the government has done a creditable job since September 11 in strengthening the visa process as a first line of defense to prevent entry into the country by terrorists. Before September 11, U.S. visa operations focused primarily on illegal immigration concerns--whether applicants sought to reside and work illegally in the country. Since the attacks, Congress, the State Department, and DHS have implemented several measures to strengthen the entire visa process as a tool to combat terrorism. New policies and programs have since been implemented to enhance visa security, improve applicant screening, provide counterterrorism training to consular officials who administer the visa process overseas, and help prevent the fraudulent use of visas for those seeking to gain entry to the country. The State Department also has taken steps to mitigate the potential for visa fraud at consular posts by deploying visa fraud investigators to U.S. embassies and consulates and conducting more in-depth analysis of the visa information collected by consulates to identify patterns that may indicate fraud, among other things. (Notably, 2 of the 19 terrorist hijackers on September 11th used passports that were manipulated in a fraudulent manner to obtain visas.) The Visa Waiver Program allows nationals from 27 countries to travel to the United States for 90 days or less for business and tourism purposes without first having to obtain a visa. The program's purpose is to facilitate international travel for millions of people each year and promote the effective use of government resources. While valuable, the program can pose risks to U.S. security, law enforcement, and immigration interests because some foreign citizens may try to exploit the program to enter the United States. Effective oversight of the program entails balancing the benefits against the program's potential risks. To find this balance, we reported in July 2006 that the U.S. government needs to fully identify the vulnerabilities posed by visa waiver travelers, and be in a position to mitigate them. In particular, we recommended that DHS provide the program's oversight unit with additional resources to strengthen monitoring activities and improve DHS's communication with U.S. officials overseas regarding security concerns of visa waiver countries. We also recommended that DHS communicate to visa waiver countries clear reporting requirements for lost and stolen passports and that the department implement a plan to make Interpol's lost and stolen passport database automatically available during the primary inspection process at U.S. ports of entry. DHS is in the process of implementing these recommendations and we plan to report later this year on the department's progress. Until recently, U.S. law required that a country may be considered for admission into the Visa Waiver Program if its nationals' refusal rate for short-term business and tourism visas was less than 3 percent in the prior fiscal year. According to DHS, some of the countries seeking admission to the program are U.S. partners in the war in Iraq and have high expectations that they will join the program due to their close economic, political, and military ties to the United States. The executive branch has supported more flexible criteria for admission, and, in August 2007, Congress passed legislation that provides DHS with the authority to admit countries with refusal rates between 3 percent and 10 percent, if the countries meet certain conditions. For example, countries must meet all mandated Visa Waiver Program security requirements and cooperate with the United States on counterterrorism initiatives. Before DHS can exercise this new authority, the legislation also requires that the department complete certain actions aimed at enhancing security of the Visa Waiver Program. These actions include: Electronic Travel Authorization System: The August 2007 law requires that DHS certify that a "fully operational" electronic travel authorization (ETA) system is in place before expanding Visa Waiver Program to countries with refusal rates between 3 and 10 percent. This system would require nationals from visa waiver countries to provide the United States with biographical information before boarding a U.S.-bound flight to determine the eligibility of, and whether there exists a law enforcement or security risk in permitting, the foreign national to travel to the United States under the program. In calling for an ETA, members of Congress and the administration stated that this system was an important tool to help mitigate security risks in the Visa Waiver Program and its expansion. DHS has not yet announced when or how it will roll out the ETA system. The August 2007 law also required that, before DHS can admit countries with refusal rates between 3 percent and 10 percent to the Visa Waiver Program, DHS must certify that an air exit system is in place that can verify the departure of not less than 97 percent of foreign nationals who depart through U.S. airports. Last month, we testified that DHS's plan to implement this provision had several weaknesses. Using this methodology, DHS stated that it can attain a match rate above 97 percent, based on August 2007 data, to certify compliance with the air exit system requirement in the legislation. On December 12, 2007, DHS reported to us that it will match records, reported by airlines, of visitors departing the country to the department's existing records of any prior arrivals, immigration status changes, or prior departures from the United States. On February 21, 2008, DHS indicated that it had not finalized its decision on the methodology the department would use to certify compliance. Nevertheless, the department confirmed that the basic structure of its methodology would not change, and that it would use departure records as the starting point. Because DHS's approach does not begin with arrival records to determine if those foreign nationals stayed in the United States beyond their authorized periods of admission, information from this system will not inform overall and country-specific overstay rates--key factors in determining illegal immigration risks in the Visa Waiver Program. The inability of the U.S. government to track the status of visitors in the country, to identify those who overstay their authorized period of visit, and to use these data to compute overstay rates have been longstanding weaknesses in the oversight of the Visa Waiver Program. We reported that DHS's plan to meet the "97 percent" requirement in the visa waiver expansion legislation will not address these weaknesses. DHS has also has begun to pilot the Immigration Advisory Program (IAP), which is designed to provide additional scrutiny to passengers and their travel documents at foreign airports prior to their departure for the United States. This pilot program began in 2004 and was designed to identify and target potential high-risk passengers. Under the IAP pilot, CBP has assigned trained officers to foreign airports where they personally interview pre-identified high-risk passengers, conduct behavioral assessments, and evaluate the authenticity of travel documents prior to the passenger's departure to the United States. The pilot program has been tested in several foreign airports, and CBP is negotiating with other countries to expand it elsewhere and to make certain IAP sites permanent. CBP has reported several successes through the IAP pilot. According to CBP documents, from the start of the IAP pilot in June 2004 through February 2006, IAP teams made more than 700 no-board recommendations for inadmissible passengers and intercepted approximately 70 fraudulent travel documents. CBP estimated that these accomplishments equate to about $1.1 million in cost avoidance for the U.S. government associated with detaining and removing passengers who would have been turned away after their flights landed, and $1.5 million in air carrier savings in avoided fines and passenger return costs. According to CBP, these monetary savings have defrayed the costs of implementing the program. In May 2007, we reported that CBP has not taken all of the steps necessary to fully learn from its pilot sites in order to determine whether the program should be made permanent and the number of sites that should exist. These steps are part of a risk management approach to developing and evaluating homeland security programs. A risk management framework includes such elements as formally outlining the goals of the program, setting measurable performance measures, and evaluating program effectiveness. Although CBP is currently taking steps to make its IAP sites permanent and to expand the program to other foreign locations, CBP has not finalized a strategic plan for the program that delineates program goals, objectives, constraints, and evaluative criteria. CBP officials told us that they have drafted a strategic plan for the IAP, which contains program goals and performance measures. CBP stated that the plan has not yet been finalized. CBP has made progress in taking actions to secure our nation's borders. It has enhanced its ability to screen travelers before they arrive in the United States as well as once they arrive at a port of entry. Nevertheless, vulnerabilities still exist and additional actions are required to address them. How long it will take and how much it will cost are two questions that plague two of DHS's major border security initiatives. Whether DHS can implement the exit portion of US-VISIT is uncertain. For land ports of entry, according to DHS, there is no near-term solution. Completing the SBI initiative within time and cost estimates will be challenging, including the building of nearly 700 miles of fencing. These issues underscore Congress' need to stay closely attuned to DHS's progress in these programs to help ensure performance, schedule, and cost estimates are achieved and the nation's border security needs are fully addressed. This concludes my prepared testimony. I would be happy to respond to any questions that you or members of subcommittees may have. For questions regarding this testimony, please call 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. Other key contributors to this statement were John Brummet, Assistant Director; Deborah Davis, Assistant Director; Michael Dino, Assistant Director; John Mortin, Assistant Director; Teresa Abruzzo; Richard Ascarate; Katherine Bernet; Jeanette Espinola; Adam Hoffman; and Bintou Njie. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.	Since September 11, 2001, the need to secure U.S. borders has increased in importance and attracted greater public and Congressional attention. The Department of Homeland Security (DHS) has spent billions of dollars to prevent the illegal entry of individuals and contraband between ports of entry--government-designated locations where DHS inspects persons and goods to determine whether they may be lawfully admitted into the country. Yet, while DHS apprehends hundreds of thousands of such individuals each year, several hundreds of thousands more enter the country illegally and undetected. The U.S. Customs and Border Protection (CBP), a component of DHS, is the lead federal agency in charge of securing our nation's borders. This testimony summarizes GAO's work on DHS's efforts on selected border security operations and programs related to (1) inspecting travelers at U.S. ports of entry, (2) detecting individuals attempting to enter the country illegally between ports of entry, and (3) screening of international travelers before they arrive in the United States and challenges remaining in these areas. GAO's observations are based on products issued from May 2006 through February 2008. In prior reports, GAO has recommended various actions to DHS to, among other things, help address weaknesses in the traveler inspection programs and processes, and challenges in training officers to inspect travelers and documents. DHS has generally agreed with our recommendations and has taken various actions to address them. CBP has taken actions to improve traveler inspections at U.S. ports of entry, but challenges remain. First, CBP has stressed the importance of effective inspections and trained CBP supervisors and officers in interviewing travelers. Yet, weaknesses in travel inspection procedures and lack of physical infrastructure and staff have hampered CBP's ability to inspect travelers thoroughly and detect fraudulent documents. Second, CBP is implementing an initiative requiring citizens of the United States, Bermuda, Canada, and Mexico to present certain identification documents when entering the United States. As of December 2007, actions taken to meet the initiative's requirements include selecting technology to be used at land ports of entry and developing plans to train officers to use it. Finally, DHS has developed a program to collect, maintain, and share data on selected foreign nationals entering and exiting the country. As of October 2007, the agency has invested more than $1.5 billion on the program over 4 years and biometrically-enabled entry capabilities now operate at more than 300 ports of entry. However, though allocating about $250 million since 2003 to exit-related efforts, DHS has not yet detailed how it will verify when travelers exit the country. In November 2005, DHS announced the launch of a multiyear, multibillion-dollar program aimed at securing U.S. borders and reducing immigration of individuals who enter the United States illegally and undetected between ports of entry. One component of this program, which DHS accepted as complete in February 2008, was an effort to secure 28 miles along the southwest border using, among other means, improved cameras and radars. DHS plans to apply the lessons learned to future projects. Another program component, 370 miles of pedestrian fence and 300 miles of vehicle fence, has not yet been completed and DHS will be challenged to do so by its December 2008 deadline due to various factors, such as acquiring rights to border lands. Additionally, DHS is unable to estimate the total cost of this component because various factors are not yet known such as the type of terrain where the fencing is to be constructed. Finally, CBP has experienced unprecedented growth in the number of its Border Patrol agents. While initial training at the academy is being provided, Border Patrol officials expressed concerns about the agency's ability to provide sufficient field training. To screen international travelers before they arrive in the United States, the federal government has implemented new policies and programs, including enhancing visa security and providing counterterrorism training to overseas consular officials. As GAO previously recommended, DHS needs to better manage risks posed by a program that allows nationals from 27 countries to travel to the United States without a visa for certain durations and purposes. Regarding the prescreening of international passengers bound for the United States, CBP has a pilot program that provides additional scrutiny of passengers and their travel documents at foreign airports prior to their departure. CBP has reported several successes through the pilot but has not yet determined whether to make the program permanent.	7,957	936
The federal government levies excise taxes on entities and individuals for the purpose of financing general federal activities and specific government programs. Several different bureaus and offices within Treasury collected about $59 billion of excise taxes in fiscal year 1997. The Bureau of Alcohol, Tobacco, and Firearms accounted for about $13 billion in excise taxes on alcohol, tobacco products, and firearms while the U.S. Customs Service accounted for about $1 billion in excise taxes on imported and exported goods and services. However, the majority of excise taxes are accounted for by IRS. In fiscal year 1997, IRS collected about $45 billion in excise taxes on the purchase, use, or inventory of various types of goods or services, such as gasoline and airline tickets. The various excise taxes accounted for by IRS are deposited into the general fund of the Treasury and into nine different trust funds, which are administered by six agencies or federal entities. The trust funds that received fiscal year 1997 tax revenues are shown in table 1. A list of excise taxes by trust fund is included in appendix II. Administering agencies for the trust funds receiving excise tax revenue rely on the Treasury to accurately collect and distribute federal tax revenue to the appropriate trust funds. Because it collects federal tax revenue and then distributes it to government trust funds, Treasury is considered a servicing organization by agencies administering the trust funds as well as by the auditors of these agencies. Consequently, the administering agencies and their auditors need to rely on Treasury, through its various bureaus and offices, including IRS, to properly account for and distribute the amounts transferred from the government's general fund to the applicable trust funds. Excise taxes are deposited into the general fund as received. However, the information that ultimately determines how these receipts are actually distributed is generally submitted via the Form 720, Quarterly Federal Excise Tax Return. Because data are not available to allocate excise taxes to the appropriate trust funds when deposits are made, Treasury uses a process to estimate the initial distribution of excise taxes. This process involves the use of economic models prepared by the Office of Tax Analysis (OTA) to estimate the initial distribution of tax receipts. Treasury's Financial Management Service (FMS) uses these estimates to prepare entries for the initial distributions to the trust funds, which are recorded by the Bureau of the Public Debt (BPD) in the books and records of the trust funds maintained by Treasury. Subsequent to this initial distribution, IRS certifies quarterly the amounts that should have been distributed to the excise tax-related trust funds based on the tax returns. FMS uses these certifications to prepare adjustments to the initial trust fund distributions. These adjustments are recorded by BPD. There is typically a 6-month lag between the quarter end and the excise tax certification by IRS. Figure 1 provides an overview of the entire process of collecting, distributing, and certifying excise tax revenue reported to the trust funds. IRS relies on a combination of manual and automated procedures to prepare its certification of excise taxes to be distributed to the trust funds. IRS calculates the trust fund distributions based on assessment information in the master file. As quarterly excise tax returns are received, IRS personnel input the liability amounts by type of excise tax, such as Diesel Fuel Tax, into its master file. The tax types are identified by IRS numbers, or abstract numbers, which are preprinted on the Form 720. It is these abstract numbers that ultimately determine how amounts are distributed to the appropriate trust funds. The assessment information by type of excise tax is electronically transmitted from the master file to IRS' Automated Quarterly Excise Tax Listing (AQETL) system. An IRS analyst, who has sole responsibility for preparing the excise tax certifications, accesses this system, analyzes the data for reasonableness by, for example, comparing current period assessments to amounts reported in prior periods, and makes adjustments, as necessary. The analyst may identify necessary adjustments by analyzing significant variations from prior quarter reported assessment amounts. After making any needed adjustments, the analyst generates a report from the AQETL system which summarizes the assessment data by excise tax type. The analyst uses this report to prepare the certifications for all tax distributions other than taxes related to the Highway, Airport & Airway, and Inland Waterways Trust Funds. For the Highway, Airport & Airway, and Inland Waterways Trust Funds, the analyst manually enters the assessment data from the report generated from the AQETL system onto electronic spreadsheets. These spreadsheets contain distribution rates to allocate the assessments between the trust funds and the general fund based on the assessment data entered by the analyst. The distributions from these spreadsheets, and the AQETL-system report for the other taxes, become the basis for preparing the quarterly excise tax certification letters. IRS submits the certification letters to FMS, which uses it to prepare adjustments to the initial distributions based on the OTA estimates to bring them in line with the IRS certified amounts. These adjustments are sent to BPD, which records the entries in the books and records of the trust funds maintained by Treasury. Figure 2 shows IRS' process for certifying the trust fund distributions. Excise Tax Section (Cincinnati Service Center) Review Master File and AQETL data. Research apparent errors and correct data in Master File as necessary. Review assessment information, make any adjustments in AQETL, generate AQETL report. Enter assessment data for Highway Trust Fund into electronic spreadsheet. The objective of the agreed-upon procedures work was to assist the Inspectors General of the Department of Transportation and Department of Labor in ascertaining whether the net excise tax collections and excise tax certifications reported by IRS for the fiscal year ended September 30, 1997, were supported by the underlying records. The objectives of this report are to discuss the underlying internal control weaknesses that allowed errors identified in the agreed-upon procedures work to occur and to provide recommendations for correcting these weaknesses. See appendix I for a detailed discussion on the scope and methodology used to accomplish the objectives. We conducted our work primarily from October 1997 through February 1998, with some follow-up work through June 1998, in accordance with generally accepted government auditing standards. For the majority of excise taxes reported on the Form 720, taxpayers are required to provide the purchase, use, or inventory amounts of the goods or services (e.g., number of gallons of fuel) used in determining the tax assessment. The taxpayer multiplies these amounts against the preprinted tax rates on the Form 720 to report the excise tax assessment. Thus, information contained on the tax form allows IRS to mathematically verify liability amounts reported by the taxpayer. However, we found that IRS did not require its personnel to verify that the tax assessment amounts calculated by the taxpayers and reported on the returns agree with the supporting information provided on the tax returns. This led to inconsistencies between the assessed amount and supporting information provided by taxpayers, which IRS did not detect and correct. In 13 of the 230 taxpayer returns we reviewed, either assessment amounts we recalculated based on information contained in the return differed from the tax assessment reported on the return or all the required information was not included on the return to verify the assessment amount calculated by the taxpayer. IRS procedure manuals required that IRS personnel review tax returns that contain $1 million or more in excise tax assessments for reasonableness and accuracy. The manuals provided guidance for performing the reviews; however, this guidance was too general. As a result, the types of reviews performed by IRS analysts varied. In some cases, tax calculations were verified and taxpayers were contacted if data were missing, while in other cases, the return was only scanned for reasonableness. The lack of adequate and consistent review procedures increases the likelihood that incorrect assessment amounts reported by the taxpayer on the tax return would not be detected and corrected by IRS. As a result of our agreed upon procedures work, IRS officials indicated that IRS has acted to address the internal control weaknesses discussed above. Specifically, these officials indicated that IRS implemented procedures to improve the review of tax returns over $1 million. Also, IRS now requires the math verification of all tax assessments, as applicable, and analysts are required to follow-up with taxpayers to clarify inconsistent information on tax returns. We also noted that IRS centralized its excise tax processing in the Cincinnati Service Center to improve the consistency of processing and reviewing excise tax returns and to more closely monitor refund claims. Within that center, IRS established an Excise Program Section that specializes in reviewing excise tax returns and refund claims. It is significant that many of the errors we identified during our agreed upon procedures work related to tax returns processed at other service centers prior to IRS centralizing its excise tax processing. As discussed above, taxpayers report the majority of excise taxes to IRS quarterly using the Form 720. Taxpayers record on the Form 720 assessment amounts owed for each abstract number listed on the form. IRS uses the Form 720 to input assessment information into the master files. We found errors in this input process in fiscal year 1997. Specifically, we found that all or a portion of the assessment amounts for 13 of the 230 taxpayer returns reviewed were recorded in incorrect abstract numbers in the master file. In one case, IRS incorrectly recorded assessments of $176 million from the tax return in one abstract, yet the tax return indicated that this amount should have been divided among eight different abstracts. Because the abstract numbers identify the type of excise tax (for example, Diesel Fuel Tax) to which the assessment applies and are used in the certification of amounts ultimately distributed to the various trust funds, this directly affected the accuracy of IRS' certifications. IRS officials indicated that these errors would be corrected in subsequent certifications made in fiscal year 1998. The structure of the Form 720 itself contributed to several errors. The Form 720 tax return is a complex tax form consisting of three distinct parts and two additional schedules. Information on the schedules includes details on excise tax assessments by semimonthly period (Schedule A), and adjustments to correct errors in previously filed Form 720s and claims against previously paid taxes (Schedule C). The information on Schedule C containing the claim and adjustment data is broken down by abstract number; however, it is aggregated into one total line on page 2 of the Form 720. Consequently, taxpayers record on the Form 720 assessment amounts owed for each abstract number listed on the form but do not reflect claims and adjustments, by abstract, on pages 1 and 2 of the Form 720. To assist in processing the tax return, IRS requires its staff to copy claims and adjustments listed on Schedule C, by abstract, to pages 1 and 2 of the Form 720. This procedure provides the data entry staff with the capability of inputting assessment, claim, and adjustment amounts, by abstract, directly off the first two pages of the tax return form without having to scan the schedules for claim and adjustment amounts to be input. However, the procedure of IRS staff manually copying claim and adjustment amounts from the schedules prepared by taxpayers increases the risk of errors, and consequently the likelihood that assessment, claim, and adjustment amounts will be incorrectly recorded in the master files. Nine of the 13 errors that we identified were the result of (1) IRS personnel incorrectly copying the adjustment information from the Schedule C to pages 1 and 2 of the tax return, (2) IRS personnel failing to copy adjustment information from the Schedule C to pages 1 and 2 of the tax return, or (3) data entry personnel misreading the handwritten adjustments made by other IRS staff on the Form 720 when inputting this information into the master files. For example, in one case, a taxpayer claimed a credit of $683,000, consisting of a $685,000 decrease for gasoline tax and a $2,000 increase for aviation fuel tax. However, IRS staff incorrectly recopied the credit amounts from the Schedule C to page 1 of the Form 720, resulting in the entire amount being recorded as gasoline tax. In another case, a taxpayer claimed a credit for $681,000 for taxed diesel fuel. An IRS employee copied the abstract number unclearly to page 1 of the Form 720, and the amount was erroneously recorded as a credit to tax on dyed diesel fuel used in trains. In total, in the 13 cases, we identified $179 million of IRS errors in inputting excise tax return information to the master files. The Comptroller General's Standards for Internal Controls in the Federal Government specifies that transactions are to be promptly recorded and properly classified. The identified errors may have been avoided had procedures been in place to verify the input process. Also, errors resulting from the need for IRS staff to transfer information from the attached schedules to pages 1 and 2 of the Form 720 for each abstract could be avoided by revising the tax return form so that taxpayers, and not IRS personnel, enter the claim and adjustment amounts by abstract from Schedule C to pages 1 and 2 of the tax return. As discussed previously, one analyst is responsible for compiling the quarterly certifications. This involves accessing quarterly the assessment information from the AQETL system, analyzing and adjusting these data as necessary and, for the Highway Trust Fund, inputting these data into an electronic spreadsheet, provided by OTA, to derive the quarterly certifications. We found that there is no supervisory review of the analyst's work until the certification letters are prepared, at which point they are forwarded to the Branch Chief for a high-level review and signature. We found no evidence that a detailed supervisory review is performed of the documentation supporting the certifications at any point during the certification process. Finally, we found that IRS does not review the distribution rates contained on the OTA-provided spreadsheet used to allocate certain assessments between the general fund and the Highway Trust Fund. The absence of such reviews was a factor in not detecting numerous errors in the certifications performed in fiscal year 1997 with respect to the Highway Trust Fund and the general fund. IRS' AQETL system contains the assessment data electronically transmitted from the master file. Because it is not integrated with the electronic spreadsheet used to prepare the certifications for the Highway Trust Fund, manual data entry is necessary to accomplish the calculations and summarize the information. This information is a basis for preparing the certifications. Without adequate supervisory review of these tasks, all of which are performed by one individual, there is a high risk that errors will be made and not detected and corrected. The Comptroller General's Standards for Internal Controls in the Federal Government specifies that qualified and continuous supervision is to be provided to ensure that internal control objectives are achieved. The lack of adequate supervisory review can lead to incorrect certifications and inaccurate distributions to the trust funds. We found a number of such errors that occurred in fiscal year 1997. For example, we found that assessment amounts were (1) inadvertently omitted from the certifications and (2) did not agree with supporting documentation. In one case related to heavy vehicle use tax, the supporting schedule summarizing the tax return information reflected an assessment amount of $195 million but the amount certified was $128 million. As a result, the certified amount for the Highway Trust Fund was understated by $67 million. In another case, assessments for compressed natural gas totaling over $500,000 were omitted from the Highway Trust Fund certification. IRS officials indicated that both of these errors were corrected in a subsequent certification that was made in fiscal year 1998. However, proper supervisory review of the analyst's work would likely have detected these errors and prevented these inaccurate distributions. IRS does not have procedures for verifying the accuracy of distribution rates contained on the electronic spreadsheet provided by OTA. These rates, many of which are based on complex formulas derived from provisions of laws, are used to allocate assessments between the general fund and the Highway Trust Fund. The lack of IRS review of the distribution rates on this spreadsheet resulted in errors in the excise tax certifications for the Highway Trust Fund going undetected. For example, we found the following problems in the electronic spreadsheet provided by OTA: incorrect application rates to allocate gasohol taxes, which resulted in an overstatement to the Highway Trust Fund and a corresponding understatement to the general fund of $89,000; misapplied application rates between the Highway Account and Mass Transit Account for diesel fuel inventory in the certifications for the quarters ending December 1996 and March 1997, which resulted in a net understatement of the Highway Account and a corresponding net overstatement of the Mass Transit Account of $19,000; and missing distribution rate formulas from the spreadsheet, which resulted in tax assessment amounts of $1,000 and $7,000 being excluded from the Highway Trust Fund certification. An IRS review of the distribution rates contained on the spreadsheet could have identified these problems and prevented the distribution errors. The errors we found in the review of the fiscal year 1997 excise tax certification process are the direct result of weaknesses in fundamental internal controls, specifically the lack of appropriate verification and review procedures, at all critical points in the excise tax certification process. These weaknesses led to taxpayer, IRS, and OTA errors going undetected and directly resulted in inaccurate distributions of excise tax revenue to the trust funds in fiscal year 1997. To strengthen internal controls over IRS' process of inputting tax return information into the master file, we recommend that IRS: Determine if it would be cost effective to develop and implement procedures requiring either key verification of the assessment amount by excise tax type before final processing or to implement other post-input controls to verify the accuracy of assessment amounts by excise tax type on the master file. In making this determination, IRS should consider establishing a dollar threshold that would ensure coverage of 90 percent of total excise tax assessments from the tax returns. Revise the Form 720 tax return to reflect a separate column adjacent to the column for entering the tax assessment, by abstract number, for the taxpayer to report on pages 1 and 2 of the tax return claims and adjustments, by abstract number, based on the information the taxpayer reports on Schedule C. To strengthen internal controls over IRS' process of certifying excise tax distributions to the general fund and federal trust funds, we recommend that IRS: Develop, document, and implement review procedures over the adjustment and summarization of assessment data used in the certifications. Specifically, IRS should require detailed supervisory review be performed and documented to ensure that adjustments are reasonable and adequately supported, calculations are appropriately performed, and the certification letter agrees with the supporting schedules. IRS recently changed its procedures to certify excise taxes based on estimated collections. Despite this change, review procedures are still necessary. Establish and implement specific procedures requiring that IRS personnel review the distribution rates provided by OTA prior to those rates being used in the certification of Highway Trust Fund distributions and document evidence of these reviews. In commenting on this report, the IRS Commissioner stated that overall he agreed with our findings and recommendations. The Commissioner noted actions either planned or already in process or implemented to address most of the issues raised in this report. These include (1) implementing post-input controls to include a 100 percent review of all returns with tax assessments of $1 million or more, (2) developing review procedures over the adjustment and summarization of collection data used in the certifications, including supervisory reviews prior to final certification, and (3) reviewing, as part of a recently-formed Intra-Treasury Working Group, distribution rate charts provided by OTA prior to using these rates in the certification of Highway Trust Fund distributions. However, the Commissioner disagreed with our recommendation to revise the Form 720 tax return to require taxpayers to report claims and adjustments information on pages 1 and 2 of the tax return form. He expressed concern with how the draft report characterized the tax return form and the accompanying Schedules A and C of the form. Additionally, he noted it would be inappropriate to require the taxpayer to net the tax liability by the claim and adjustment amounts reported on the accompanying Schedule C. We have modified the report to more appropriately reflect the nature of the Form 720 and its accompanying schedules. Consistent with these changes, we modified the recommendation to eliminate the reference to having the taxpayer net the tax liability, by abstract number, for any adjustments or claims, by abstract number, as reported on the accompanying Schedule C. However, we believe that revisions to the tax return form are needed because of the frequency of errors made by IRS in either copying claim and adjustment information from Schedule C to pages 1 and 2 of the tax return or in inputting information copied from the tax return to the master files. Specifically, the Form 720 tax return should be revised to reflect a separate column in which the taxpayer would report claims and adjustments from the Schedule C, by abstract number, adjacent to the column reflecting the tax assessment, by abstract number, on pages 1 and 2 of the Form 720. The complete text of the IRS Commissioner's response to our draft report is presented in appendix IV. This report contains recommendations to you. The head of a federal agency is required by 31 U.S.C. 720 to submit a written statement on actions taken on these recommendations to the Senate Committee on Governmental Affairs and the House Committee on Government Reform and Oversight within 60 days after the date of this letter. A written statement also must be sent to the House and Senate Committees on Appropriations with the agency's first request for appropriations made over 60 days after the date of this letter. We are sending copies of this report to Director of the Office of Management and Budget, the Secretary of the Treasury, the Secretary of Transportation, the Secretary of Labor, and the Inspectors' General of the Department of Transportation and Department of Labor. Copies of this letter will be made available to others upon request. If you have any questions, please call me at (202) 512-9505 or Steven J. Sebastian, Assistant Director, at (202) 512-9521. The objective of the agreed-upon procedures work was to assist the Inspectors General of the Department of Transportation and Department of Labor in ascertaining whether the net excise tax collections and excise tax certifications reported by IRS for the fiscal year ended September 30, 1997, were supported by the underlying records. We did not perform work on excise taxes collected by other Treasury bureaus, such as the Customs Service and the Bureau of Alcohol, Tobacco, and Firearms. We did include in our review the Federal Aid to Wildlife Restoration Fund because IRS uses different procedures to certify this trust fund. In performing the agreed-upon procedures, we gained an understanding of the internal controls over the excise tax collection and certification process. The objectives of this report were to discuss the underlying internal control weaknesses that allowed errors identified in the agreed upon procedures work to occur and to provide recommendations for correcting these internal control weaknesses. To accomplish our objectives, we examined, on a test basis, evidence supporting the net excise tax collection amounts reported on the fiscal year 1997 Custodial Financial Statements; specifically, we used Dollar Unit Sampling to select a sample of 396 combined excise tax collection and refund transactions from the master file for the first 9 months of fiscal year 1997, using a confidence level of 80 percent, a test materiality of $400 million, and an expected error amount of $200 million. Of this total, 390 transactions represented collections and six transactions represented refunds; verified sampled excise tax transactions to source documents to determine if the transactions were accurately recorded, posted to the proper tax class, and reported in the appropriate period; performed a predictive test of excise tax revenue collections for the final 3 months of the fiscal year to determine if reported fiscal year 1997 revenue appears consistent and reasonable; reviewed IRS' revenue receipts and refund reconciliations between its records and Treasury for fiscal year 1997, to determine whether year-end excise tax collection balances from the general ledger materially agree with IRS' master files and Treasury records; and obtained an understanding of internal controls related to safeguarding assets, compliance with laws and regulations, and financial reporting. In addition, to assess the reliability of key data inputs and assumptions used in the excise tax certification, we: Recalculated the excise tax assessments on the 230 tax returns associated with the sample of 390 excise tax collections based on the information provided on the returns (e.g., number of gallons of fuel multiplied by the tax rate equals the assessed tax). We reviewed only 230 returns because in some instances more than one receipt transaction related to the same return. Because the sample was selected based on excise tax collections, we were not able to project any errors identified on the corresponding tax assessment amounts. Verified that the excise tax assessment amounts by abstract number on the 230 tax returns were accurately recorded in the IRS master file and in the AQETL report. Determined if the rates used to allocate assessments between selected trust funds and the general fund for the final quarter of fiscal year 1997 were adequately supported. verified the mathematical accuracy for selected excise tax certifications and traced, on a selected basis, excise tax certifications to supporting schedules. We conducted our work primarily from October 1997 through February 1998, with some follow-up work through June 1998, in accordance with generally accepted government auditing standards. Ticket tax Facilities use Air freight Aviation gasoline Aviation fuel (other than gasoline) Aviation fuel (other than gasoline) for use in commercial aviation Aviation fuel (floor stocks) Aviation gasoline (floor stocks) The following are GAO's comments on the Internal Revenue Service's letter dated September 25, 1998. 1. The technical comments from the Chief Counsel have been incorporated as appropriate, but the enclosure has not been included in this appendix. 2. Discussed in "Agency Comments and Our Evaluation" section. Charles Payton, Assistant Director Barbara House, Senior Evaluator Ted Hu, Senior Auditor Eric Johns, Senior Auditor Stacey Osborn, Auditor 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 legislative requirement, GAO conducted a follow-up review of the Internal Revenue Service's (IRS) controls over its process for certifying excise taxes for distribution to the federal trust funds. GAO noted that: (1) IRS does not have adequate controls over its process for certifying excise taxes for distribution to the federal government trust funds; (2) the lack of fundamental internal controls resulted in errors in the certifications going undetected; (3) these errors ultimately affected the amounts distributed to the trust funds during fiscal year 1997; (4) IRS' ineffective controls over the certification process resulted in undetected: (a) mistakes by taxpayers in preparing excise tax returns; (b) input errors by IRS when entering excise tax return information in its master files; and (c) errors by IRS in preparing the excise tax certifications; (5) as a result of these errors, trust funds did not receive the appropriate amount of excise tax revenue; (6) these errors are particularly important to the Highway Trust Fund, which receives over half of the excise taxes that are accounted for by IRS; (7) these weaknesses were a contributing factor in the Department of Transportation's (DOT) Inspectors General's: (a) qualified opinion on the Highway Trust Fund financial statements; (b) disclaimer of opinion on the Federal Aviation Administration's financial statements; and (c) disclaimer of opinion on DOT's consolidated financial statements; (8) the errors GAO found relating to taxpayer mistakes, IRS data input, and certification preparation could have been detected or prevented by effective IRS procedures; and (9) IRS has taken some actions to improve certain controls over the excise tax certification process.	5,852	378
The Aviation and Transportation Security Act (ATSA), enacted in November 2001, created TSA and gave it responsibility for securing all modes of transportation. TSA's aviation security mission includes strengthening the security of airport perimeters and restricted airport areas; hiring and training a screening workforce; prescreening passengers against terrorist watch lists; and screening passengers, baggage, and cargo at the over 400 commercial airports nationwide, among other responsibilities. While TSA has operational responsibility for physically screening passengers and their baggage at most airports, TSA exercises regulatory, or oversight, responsibility for the security of airports and air cargo. Specifically, airports, air carriers, and other entities are required to implement security measures in accordance with TSA security requirements, against which TSA evaluates their compliance efforts. TSA also oversees air carriers' efforts to prescreen passengers--in general, the matching of passenger information against terrorist watch lists prior to an aircraft's departure--and plans to take over operational responsibility for this function with the implementation of its Secure Flight program. CBP, which currently has responsibility for prescreening airline passengers on international flights departing from and bound for the United States, will continue to perform this function until TSA assumes this function under Secure Flight. DHS's S&T is responsible for researching and developing technologies to secure the transportation sector. TSA shares responsibility for securing surface transportation modes with federal, state, and local governments and the private sector. TSA's security mission includes establishing security standards and conducting assessments and inspections of surface transportation modes, including passenger and freight rail; mass transit; highways and commercial vehicles; and pipelines. The Federal Emergency Management Agency's Grant Programs Directorate provides grant funding to surface transportation operators and state and local governments, and in conjunction with certain grants, the National Protection and Programs Directorate conducts risk assessments of surface transportation facilities. Within the Department of Transportation (DOT), the Federal Transit Administration (FTA) and Federal Railroad Administration (FRA) have responsibilities for passenger rail safety and security. In addition, public and private sector transportation operators are responsible for implementing security measures for their systems. DHS, primarily through TSA, has undertaken numerous initiatives to strengthen the security of the nation's aviation and surface transportation systems. In large part, these efforts have been guided by legislative mandates designed to strengthen the security of commercial aviation following the September 11, 2001, terrorist attacks. These efforts have also been affected by events external to the department, including the alleged August 2006 terrorist plot to blow up commercial aircraft bound from London to the United States, and the 2004 Madrid and 2005 London train bombings. While progress has been made in many areas with respect to securing the transportation network, we found that the department can strengthen its efforts in some key areas outlined by Congress, the administration, and the department itself, as discussed below. Airport Perimeter Security and Access Controls. TSA has taken action to strengthen the security of airport perimeters and access to restricted airport areas. However, as we reported in June 2004, the agency can further strengthen its efforts to evaluate the effectiveness of security- related technologies and reduce the risks posed by airport employees, among other things. In 2006, TSA completed the last project in an access control pilot program that included 20 airports, and which was designed to test and evaluate new and emerging technologies in an airport setting. TSA is also conducting an airport perimeter security pilot at six airports, to test technologies such as vehicle inspection systems. However, TSA has not developed a plan to guide and support individual airports and the commercial airport system as a whole with respect to future technology enhancements for perimeter security and access controls. Without such a plan, TSA could be limited in assessing and improving the effectiveness of its efforts to provide technical support for enhancing security. In addition, we reported in September 2006 and October 2007 on the status of the development and testing of the Transportation Worker Identification Credential program--DHS's effort to develop biometric access control systems to verify the identity of individuals accessing secure transportation areas. However, DHS has not yet determined how and when it will implement a biometric identification system for access controls at commercial airports. In June 2004, we reported that while background checks were not required for all airport workers, TSA required most airport workers who perform duties in selected areas to undergo a fingerprint-based criminal history records check. TSA further required airport operators to compare applicants' names against TSA's security watch lists. In July 2004, consistent with our previous recommendation to determine the need for additional security requirements to reduce the risks posed by airport employees, TSA enhanced requirements for background checks for employees working in restricted airport areas. Also consistent with our recommendation, in 2007, TSA further expanded the Security Threat Assessment--which determines, among other things, whether an employee has any terrorist affiliations--to require airport employees who receive an airport-issued identification badge to undergo a review of citizenship status. Further, in March 2007, TSA implemented a random employee screening initiative-- the Aviation Direct Access Screening Program--that uses TSOs to randomly screen airport workers and their property for explosives and other threat items. TSA has allocated about 900 full-time equivalent positions to the program and has requested $36 million for FY 2009 for an additional 750 full-time equivalent positions. As directed by Congress in 2008, TSA plans to pilot test various employee screening methods at seven selected airports, including conducting 100 percent employee screening at three of these airports. TSA plans to begin pilot testing in May and report on the results of its efforts--as directed--by September 1, 2008. Finally, consistent with our previous recommendation to develop schedules and an analytical approach for completing vulnerability assessments, TSA has developed criteria for prioritizing vulnerability assessments at commercial airports. However, it has not compiled national baseline data to fully assess security vulnerabilities across airports. In 2004, TSA said an analysis of vulnerabilities on a nationwide basis was essential since it would allow the agency to assess the adequacy of security policies and help better direct limited resources. GAO is currently reviewing TSA's efforts to enhance airport perimeter and access control security and will report on our results later this year. Aviation Security Workforce. TSA has made progress in deploying, training, and assessing the performance of its federal aviation security workforce. For example, TSA has hired and deployed a federal screening workforce at over 400 commercial airports nationwide, and developed standards for determining TSO staffing levels at airports. These standards form the basis of TSA's Staffing Allocation Model, which the agency uses to determine TSO staffing levels at airports. In response to our recommendation, in December 2007 TSA developed a Staffing Allocation Model Rates and Assumptions Validation Plan that identifies the process the agency plans to use to review and validate the model's assumptions on a periodic basis. TSA also established numerous programs to train and test the performance of its screening workforce. Among other efforts, TSA has provided enhanced explosives-detection training, and recently reported developing a monthly recurrent (ongoing) training plan for all TSOs. In addition, TSA has trained and deployed federal air marshals on high-risk flights; established standards for training flight and cabin crews; and established a Federal Flight Deck Officer program to select, train, and allow authorized flight deck officers to use firearms to defend against any terrorist or criminal acts. In April 2006, TSA implemented a performance accountability and standards system to assess agency personnel at all levels on various competencies, including training and development, readiness for duty, management skills, and technical proficiency. Finally, in April 2007, TSA redesigned its local covert testing program conducted at individual airports. This new program, known as the Aviation Screening Assessment Program or ASAP, is intended to test the performance of the passenger and checked baggage screening systems, to include the TSO workforce. During our ongoing review of TSA's covert testing program, we identified that TSA has implemented risk-based national and local covert testing programs to identify vulnerabilities in and measure the performance of selected aspects of the aviation system. However, we found that TSA could strengthen its program by developing a more systematic process for (1) recording the causes of covert test failures, and (2) evaluating the test results and developing approaches for mitigating vulnerabilities identified in the commercial aviation security system. We will report on the complete results of this review later this year. Passenger Prescreening. Over the past several years, TSA has faced a number of challenges in developing and implementing an advanced prescreening system, known as Secure Flight, which will allow TSA to assume responsibility from air carriers for comparing domestic passenger information against the No Fly List and Selectee List. In February 2008, we reported that TSA had made substantial progress in instilling more discipline and rigor into Secure Flight's development and implementation, including preparing key systems development documentation and strengthening privacy protections. However, challenges remain that may hinder the program's progress moving forward. Specifically, TSA had not (1) developed program cost and schedule estimates consistent with best practices; (2) fully implemented its risk management plan; (3) planned for system end-to-end testing in test plans; and (4) ensured that information- security requirements are fully implemented. To address these challenges, we made several recommendations to DHS and TSA to incorporate best practices in Secure Flight's cost and schedule estimates and to fully implement the program's risk-management, testing, and information- security requirements. DHS and TSA officials generally agreed with these recommendations. We are continuing to assess TSA's efforts in developing and implementing Secure Flight--which, according to TSA's planned schedule, will allow the agency to fully assume the watch list matching function from air carriers in fiscal year 2010. TSA has also taken steps to integrate the domestic watch-list matching function with the international watch-list matching function currently operated by CBP, consistent with our past recommendations. Specifically, TSA and CBP have coordinated to develop a strategy called the One DHS Solution, which is to align the two agencies' domestic and international watch-list matching processes, information technology systems, and regulatory procedures to provide a seamless interface between DHS and the airline industry. TSA and CBP also agreed that TSA will take over the screening of passengers against the watch list for international flights from CBP, though CBP will continue to match passenger information to the watch list in fulfillment of its border-related functions. Full implementation of an integrated system is not planned to take place until after Secure Flight acquires the watch-list matching function for domestic flights. Checkpoint Screening. TSA has taken steps to strengthen passenger checkpoint screening procedures to enhance the detection of prohibited items and strengthen security; however, TSA could improve its evaluation and documentation of proposed procedures. In April 2007, we reported that modifications to checkpoint screening standard operating procedures (SOP) were proposed based on the professional judgment of TSA senior- level officials and program-level staff, as well as threat information and the results of covert testing. We also reported on steps TSA had taken to address new and emerging threats, such as establishing the Screening Passengers by Observation Technique (SPOT) program, which provides TSOs with a nonintrusive, behavior-based means of identifying potentially high-risk individuals. For proposed screening modifications deemed significant, such as SPOT, TSA operationally tested these proposed modifications at selected airports before determining whether they should be implemented nationwide. However, we reported that TSA's data collection and analysis of proposed SOP modifications could be improved, and recommended that TSA develop sound evaluation methods, when possible, to assess whether proposed screening changes would achieve their intended purpose. TSA has since reported taking steps to work with subject-matter experts to ensure that the agency's operational testing of proposed screening modifications are well designed and executed, and produce results that are scientifically valid and reliable. With regard to checkpoint screening technologies, TSA and S&T have researched, developed, tested, and initiated procurements of various technologies to address security vulnerabilities that may be exploited; however, limited progress has been made in fielding emerging technologies. For example, of the various emerging checkpoint screening projects funded by TSA and S&T, only the explosives trace portal and a bottled liquids scanning device have been deployed for use in day-to-day operations. However, due to performance and maintenance issues, TSA halted the acquisition and deployment of the portals in June 2006. Also, in February 2008, we testified that TSA lacked a strategic plan to guide its efforts to acquire and deploy screening technologies, which could limit its ability to deploy emerging technologies to airports deemed at highest risk. According to TSA officials, the agency plans to submit a strategic plan to Congress by June 2008. We have ongoing work reviewing S&T and TSA checkpoint screening technologies efforts and will report on our results later this year. Checked Baggage Screening. TSA has made progress in installing explosive detection systems to provide the capability to screen checked baggage at the nation's commercial airports, as mandated by law. From November 2001 through June 2006, TSA procured and installed about 1,600 Explosive Detection Systems (EDS) and about 7,200 Explosive Trace Detection (ETD) machines to screen checked baggage for explosives at over 400 commercial airports. In addition, based in part on recommendations we made, TSA moved stand-alone EDS machines that were located at airports that received new in-line EDS baggage screening systems to 32 airports that did not previously have them from May 2004 through December 2007. TSA also replaced ETD machines at 53 airports with 158 new EDS machines from March 2005 through December 2007. In response to mandates to field the equipment quickly and to account for limitations in airport design that made it difficult to quickly install in-line EDS systems, TSA generally placed baggage screening equipment in a stand-alone mode--usually in airport lobbies--to conduct the primary screening of checked baggage for explosives. Based, in part, on our recommendations, TSA later developed a plan to integrate EDS and ETD machines in-line with airport baggage conveyor systems. The installation of in-line systems can result in considerable savings to TSA through the reduction of personnel needed to operate the equipment, as well as increased security. In addition, according to TSA estimates, the number of checked bags screened per hour can more than double when EDS machines are placed in-line versus being placed in the stand alone mode. Despite delays in the widespread deployment of in-line systems due to the high upfront capital investment required, TSA is pursuing the installation of these systems and is seeking creative financing solutions to fund their deployment. However, It is incumbent upon airports of whether or not they will pursue the installation of in-line baggage systems. In February 2008, TSA submitted a legislative proposal to increase the Aviation Security Capital Fund (ASCF) through a new surcharge on the passenger security fee. According to TSA, this proposal, if adopted, would accelerate the deployment of optimal checked baggage screening systems and address the need to re-capitalize existing equipment deployed immediately after September, 2001. The Implementing Recommendations of the 9/11 Commission Act reiterates a requirement that DHS submit a cost-sharing study for the installation of in-line baggage screening systems, along with a plan and schedule for implementing provisions of the study, and requires TSA to establish a prioritization schedule for airport improvement projects related to the installation of in-line or other optimal baggage screening systems. As of April 3, 2008, TSA had not completed the prioritization schedule, corresponding timeline, and description of the funding allocation for these projects. Security: Enhancements Made in Passenger and Checked Baggage Screening, but Challenges Remain, GAO-06-371T (Washington, D.C.: April 4, 2006), and GAO-07-448T. inbound air cargo including defining TSA's and CBP's inbound air cargo security responsibilities. CBP subsequently issued its International Air Cargo Security strategic plan in June 2007, and TSA plans to revise its Air Cargo strategic plan during the third quarter of fiscal year 2008 to incorporate a strategy for addressing inbound air cargo security, including how the agency will partner with CBP. We also reported that TSA had not conducted vulnerability assessments to identify the range of air cargo security weaknesses that could be exploited by terrorists, and recommended that TSA develop a methodology and schedule for completing these assessments. In response in part to our recommendation, TSA implemented an Air Cargo Vulnerability Assessment program in November 2006 and, as of April 2008, had completed vulnerability assessments at five domestic airports. TSA plans to complete assessments of all high-risk airports by 2009. In addition, although TSA has established requirements for air carriers to randomly screen air cargo, the agency had exempted some domestic and inbound cargo from these requirements. While TSA has since revised its screening exemptions for domestic air cargo, it has not done so for inbound air cargo. TSA is also working with DHS S&T to develop and pilot test a number of technologies to assess their applicability to screening and securing air cargo. However, as of February 2008, TSA had provided a completion date for only one of its five air cargo technology pilot programs. According to TSA officials, the agency will determine whether it will require the use of these technologies once it has completed its assessments and analyzed the results. We also reported in April 2007 that TSA did not systematically compile and analyze information on air cargo security practices used abroad to identify those that may strengthen the department's overall air cargo security program, and we recommended that it do so. TSA has since begun development of a certified cargo screening program based in part on its review of screening models used in two foreign countries that rely on government-certified screeners to screen air cargo early in the supply chain. According to TSA, the agency plans to deploy this program to assist it in meeting the statutory requirement to screen 100 percent of air cargo transported on passenger aircraft by August 2010 (and to screen 50 percent of such cargo by February 2009), as mandated by the Implementing Recommendations of the 9/11 Commission Act. In January 2008, TSA began phase one of the program's pilot tests, and as of April 2008, had completed tests at six airports. TSA plans to conduct tests at three additional airports by June 2008. Strategic Approach for Implementing Security Functions. In September 2005, DHS completed the National Strategy for Transportation Security. This strategy identified and evaluated transportation assets in the United States that could be at risk of a terrorist attack and addressed transportation sector security needs. Further, in May 2007, DHS issued a strategic plan for securing the transportation sector and supporting annexes for each of the surface transportation modes, and reported taking actions to adopt the strategic approach outlined by the plan. The Transportation Systems Sector-Specific Plan describes the security framework that is intended to enable sector stakeholders to make effective and appropriate risk-based security and resource allocation decisions within the transportation network. TSA has begun to implement some of the security initiatives outlined in the sector-specific plan and supporting modal plans. Additionally, the Implementing Recommendations of the 9/11Commission Act imposes a deadline of May 2008, for the Secretary of DHS to develop and implement the National Strategy for Public Transportation Security. Our work assessing DHS's efforts in implementing its strategy for securing surface transportation modes is being conducted as part of our ongoing reviews of mass transit, passenger and freight rail, commercial vehicle, and highway infrastructure security. We will report on the results of this work later this year. Threat, Criticality, and Vulnerability Assessments. TSA has taken actions to assess risk by conducting threat, criticality, and vulnerability assessments of surface transportation assets, particularly for mass transit, passenger rail, and freight rail, but its efforts related to commercial vehicles and highway infrastructure are in the early stages. For example, TSA had conducted threat assessments of all surface modes of transportation. TSA has also conducted assessments of the vulnerabilities associated with some surface transportation assets. For example, regarding freight rail, TSA has conducted vulnerability assessments of rail corridors in eight High Threat Urban Areas where toxic-inhalation-hazard shipments are transported. With respect to commercial vehicles and highway infrastructure, TSA's vulnerability assessment efforts are ongoing. According to TSA, the agency performed 113 corporate security reviews on highway transportation organizations through fiscal year 2007, such as trucking companies, state Departments of Transportation, and motor coach companies. However, TSA does not have a plan or a time frame for conducting these reviews on a nationwide basis. Furthermore, DHS's National Protection and Programs Directorate's Office of Infrastructure Protection conducts vulnerability assessments of surface transportation assets to identify protective measures to reduce or mitigate asset vulnerability. With regard to criticality assessments, TSA reported in April 2008 that the agency had conducted 1,345 assessments of passenger rail stations. Additionally, the Implementing Recommendations of the 9/11Commission Act has several provisions related to security assessments. For instance, the act requires DHS to review existing security assessments for public transportation systems as well as conduct additional assessments as necessary to ensure that all high-risk public transportation agencies have security assessments. Moreover, the act also requires DHS to establish a federal task force to complete a nationwide risk assessment of a terrorist attack on rail carriers. We will continue to review threat, vulnerability, and criticality assessments conducted by TSA related to securing surface modes of transportation during our ongoing work. Issuance of Security Standards. TSA has taken actions to develop and issue security standards for mass transit, passenger rail, and freight rail transportation modes. However, TSA has not yet developed or issued security standards for all surface transportation modes, such as commercial vehicle and highway infrastructure, or determined whether standards are necessary for these modes of transportation. Specifically, TSA has developed and issued both mandatory rail security directives and recommended voluntary best practices--known as Security Action Items--for transit agencies and passenger rail operators to implement as part of their security programs to enhance both security and emergency- management preparedness. TSA also issued a notice of proposed rule making in December 2006, which if finalized as proposed, would include additional security requirements for passenger and freight rail transportation operators. For example, the rule would include additional security requirements designed to ensure that freight railroads have protocols for the secure custody transfers of toxic-inhalation-hazard rail cars in High Threat Urban Areas. DHS and other federal partners have also been collaborating with the American Public Transportation Association (APTA) and public and private security professionals to develop industry wide security standards for mass transit systems. APTA officials reported that they expect several of the voluntary standards to be released in mid- 2008. Additionally, the Implementing Recommendations of the 9/11Commission Act requires DHS to issue regulations establishing standards and guidelines for developing and implementing vulnerability assessments and security plans for high-risk railroad carriers and over-the- road bus operators. The deadlines for the regulations are August 2008 and February 2009, respectively. With respect to freight rail, TSA is developing a notice of proposed rulemaking proposing that high-risk rail carriers conduct vulnerability assessments and develop and implement security plans. We will continue to assess TSA's efforts to issue security standards for other surface transportation modes during our ongoing reviews. Compliance Inspections. TSA has hired and deployed surface transportation security inspectors who conduct compliance inspections for both passenger and freight rail modes of transportation; however, questions exist regarding how TSA will employ the inspectors to enforce new regulations proposed in its December 2006 Notice of Proposed Rulemaking and regulations to be developed in accordance with the Implementing Recommendations of the 9/11 Commission Act. TSA officials reported having 100 surface transportation inspectors during fiscal year 2005 and, as of December 2007, were maintaining an inspector workforce of about the same number. The agency's budget request for fiscal year 2009 includes $11.6 million to fund 100 surface transportation security inspectors--which would maintain its current staffing level. Inspectors' responsibilities include conducting on-site inspections of key facilities for freight rail, passenger rail, and transit systems; assessing transit systems' implementation of core transit security fundamentals and comprehensive security action items; conducting examinations of stakeholder operations, including compliance with security directives; identifying security gaps; and developing effective practices. To meet these compliance responsibilities, TSA reported in December 2007 that it had conducted voluntary assessments of 50 of the 100 largest transit agencies, including 34 passenger rail and 16 bus-only agencies, and has plans to continue these assessments with the next 50 largest transit agencies during fiscal year 2008. With respect to freight rail, TSA reported visiting, during 2007, almost 300 railroad facilities including terminal and railroad yards to assess the railroads' implementation of 17 DHS- recommended Security Action Items associated with the transportation of toxic-inhalation-hazard materials. TSA has raised concerns about the agency's ability to continue to meet anticipated inspection responsibilities given the new regulations proposed in its December 2006 Notice of Proposed Rulemaking and requirements of the Implementing Recommendations of the 9/11 Commission Act. For example, the act mandates that high-risk over-the-road bus operators, railroad carriers, and public transportation agencies develop and implement security plans which must include, among other requirements, procedures to be implemented in response to a terrorist attack. The act further requires the Secretary of DHS to review each plan within 6 months of receiving it. TSA officials stated that they believe TSA inspectors will likely be tasked to conduct these reviews. The act also requires that the Secretary of DHS develop and issue interim final regulations by November 2007, for a public transportation security training program. As of April 2008, these interim regulations have not been issued. According to TSA officials, TSA inspectors will likely be involved in ensuring compliance with these regulations as well. To help address these additional requirements, the Implementing Recommendations of the 9/11Commission Act authorizes funds to be appropriated for TSA to employ additional surface transportation inspectors, and requires that surface transportation inspectors have relevant transportation experience and appropriate security and inspection qualifications. However, it is not clear how TSA will meet these new requirements since the agency has not requested funding for additional surface transportation security inspectors for fiscal year 2009. We will continue to assess TSA's inspection efforts during our ongoing work. Grant Programs. DHS has developed and administered grant programs for various surface transportation modes, although stakeholders have raised concerns regarding the current grant process. For example, the DHS Office of Grants and Training, now called the Grant Programs Directorate, has used various programs to fund passenger rail security since 2003. Through the Urban Areas Security Initiative grant program, the Grant Programs Directorate has provided grants to urban areas to help enhance their overall security and preparedness level to prevent, respond to, and recover from acts of terrorism. The Grant Programs Directorate used fiscal year 2005, 2006, and 2007 appropriations to build on the work under way through the Urban Areas Security Initiative program, and create and administer new programs focused specifically on transportation security, including the Transit Security Grant Program, Intercity Passenger Rail Security Grant Program, and the Freight Rail Security Grant Program. However, some industry stakeholders have raised concerns regarding DHS's current grant process, including the shifting of funding priorities, the lack of program flexibility, and other barriers to the provision of grant funding. For example, transit agencies have reported that the lack of predictability in how TSA will assess grant projects against funding priorities makes it difficult to engage in long-term planning of security initiatives. Specifically, transit agencies have reported receiving funding to begin projects--such as retrofitting their transit fleet with security cameras or installing digital video recording systems--but not being able to finish these projects in subsequent years because TSA had changed its funding priorities. The Implementing Recommendations of the 9/11 Commission Act codifies surface transportation grant programs and imposes statutory requirements on the administration of the programs. For example, the act lists authorized uses of these grant funds and requires DHS to award the grants based on risk. It also requires that DHS and DOT determine the most effective and efficient way to distribute grant funds, authorizing DHS to transfer funds to DOT for the purpose of disbursement. According to the TSA fiscal year 2009 budget justification, to ensure that the selected projects are focused on increasing security, DHS grants are to be awarded based on risk. We will continue assessing surface transportation related grant programs as part of our ongoing work. Our work has identified homeland security challenges that cut across DHS's mission and core management functions. These issues have impeded the department's progress since its inception and will continue to confront DHS as it moves forward. These issues include (1) establishing baseline performance goals and measures and engaging in effective strategic planning efforts; (2) applying and strengthening a risk- management approach for implementing missions and making resource allocation decisions; and, (3) coordinating and partnering with federal, state, and local agencies, and the private sector. We have made numerous recommendations to DHS and its components, including TSA, to strengthen these efforts, and the department has made progress in implementing some of these recommendations. DHS has not always implemented effective strategic planning efforts and has not yet fully developed performance measures or put into place structures to help ensure that the agency is managing for results. For example, with regard to TSA's efforts to secure air cargo, we reported in October 2005 and April 2007 that TSA completed an Air Cargo Strategic Plan in November 2003 that outlined a threat-based risk-management approach to securing the nation's domestic air cargo system, and that this plan identified strategic objectives and priority actions for enhancing air cargo security based on risk, cost, and deadlines. However, TSA had not developed a similar strategy for addressing the security of inbound air cargo--cargo transported into the United States from foreign countries-- including how best to partner with CBP and international air cargo stakeholders. In another example, we reported in April 2007 that TSA had not yet developed outcome-based performance measures for its foreign airport assessment and air carrier inspection programs, such as the percentage of security deficiencies that were addressed as a result of TSA's on-site assistance and recommendations, to identify any aspects of these programs that may need attention. We recommended that DHS direct TSA and CBP to develop a risk-based strategy, including specific goals and objectives, for securing air cargo; and develop outcome-based performance measures for its foreign airport assessment and air carrier inspection programs. DHS generally concurred with GAO's recommendations with regard to air cargo, and is taking steps to strengthen its efforts in this area. Although DHS and TSA have made risk-based decision-making a cornerstone of departmental and agency policy, DHS and TSA could strengthen their application of risk management in implementing their mission functions. Several DHS component agencies and TSA have worked towards integrating risk-based decision making into their security efforts, but we reported that these efforts can be strengthened. For example, TSA has incorporated certain risk-management principles into securing air cargo, but has not completed assessments of air cargo vulnerabilities or critical assets--two crucial elements of a risk-based approach. TSA has also incorporated risk-based decision making when making modifications to airport checkpoint screening procedures, to include modifying procedures based on intelligence information and vulnerabilities identified through covert testing at airport checkpoints. However, in April 2007, we reported that TSA's analyses that supported screening procedural changes could be strengthened. For example, TSA officials based their decision to revise the prohibited items list to allow passengers to carry small scissors and tools onto aircraft based on their review of threat information--which indicated that these items do not pose a high risk to the aviation system--so that TSOs could concentrate on higher threat items. However, TSA officials did not conduct the analysis necessary to help them determine whether this screening change would affect TSO's ability to focus on higher-risk threats. As noted earlier in this statement, TSA is taking steps to strengthen its efforts in both of these areas. In addition to providing federal leadership with respect to homeland security, DHS also plays a large role in coordinating the activities of key stakeholders, but has faced challenges in this regard. Although improvements are being made, we have found that the appropriate homeland security roles and responsibilities within and between the levels of government, and with the private sector, are evolving and need to be clarified. For example, we reported that opportunities exist for TSA to work with foreign governments and industry to identify best practices for securing passenger rail and air cargo, and recommended that TSA systematically compile and analyze information on practices used abroad to identify those that may strengthen the department's overall security efforts. With regard to air cargo, TSA has subsequently reviewed the models used in two foreign countries that rely on government-certified screeners to screen air cargo to facilitate the design of the agency's proposed certified-cargo screening program. Further, in September 2005, we reported that TSA did not effectively involve private sector stakeholders in its decision making process for developing security standards for passenger rail assets. We recommended that DHS develop security standards that reflect industry best practices and can be measured, monitored, and enforced by TSA rail inspectors and, if appropriate, rail asset owners. DHS agreed with these recommendations. Regarding efforts to respond to in-flight security threats, which, depending on the nature of the threat, could involve more than 15 federal agencies and agency components, in July 2007 we also recommended that DHS and other departments document and share their respective coordination and communication strategies and response procedures, to which DHS agreed. The Implementing Recommendations of the 9/11 Commission Act includes provisions designed to improve coordination with stakeholders. For example, the act requires DHS and DOT to develop an annex to the Memorandum of Understanding between the two departments governing the specific roles, responsibilities, resources, and commitments in addressing motor carrier transportation security matters, including the processes the departments will follow to promote communications and efficiency, and avoid duplication of effort. The act also requires DHS, in consultation with DOT, to establish a program to provide appropriate information that DHS has gathered or developed on the performance, use, and testing of technologies that may be used to enhance surface transportation security to surface transportation entities. According to TSA, the agency has begun to provide transit agencies with information on recommended available security technologies through security roundtables for the top 50 transit agencies; the posting of an authorized equipment list on the Homeland Security Information Network Web site; and periodic briefings to other federal agencies. The magnitude of DHS's and TSA's responsibilities in securing the nation's transportation system is significant, and we commend the department on the work it has done and is currently doing to secure this network. Nevertheless, given the dominant role that TSA plays in securing the homeland, it is critical that the agency continually strive to strengthen its programs and initiatives to counter emerging threats and improve security. In the almost 6- 1/2 years since its creation, TSA has had to undertake its critical mission while also establishing and forming a new agency. At the same time, a variety of factors, including threats to and attacks on transportation systems around the world, as well as new legislative requirements, have led the agency to reassess its priorities and reallocate resources to address key events, and to respond to emerging threats. Although TSA has made considerable progress in addressing key aspects of commercial aviation security, more work remains in some key areas, such as the deployment of technologies to detect explosives at checkpoints and in air cargo. Further, although TSA has more recently taken action in a number of areas to help secure surface modes of transportation, its efforts are still largely in the early stage, and the nature of its regulatory role and relationship with transportation operators is still being defined. As DHS and TSA move forward, it will be important for the department to address the challenges that have affected its operations thus far, while continuing to adapt to new threats and needs, and well as increase the effectiveness and efficiency of existing programs and operations. We will continue to review DHS's and TSA's progress in securing the transportation network, and will provide information to Congress and the public on these efforts. Madam Chairwoman this concludes my statement. I would be pleased to answer any questions that you or other members of the subcommittee may have at this time. For further information on this testimony, please contact Cathleen Berrick at (202) 512- 3404 or at [email protected]. Individuals making key contributions to this testimony include Steve D. Morris, Assistant Director; Jason Berman; Kristy Brown; Martene Bryan; Tony Cheesebrough; Fatema Choudhury; Chris Currie; Joe Dewechter; Dorian Dunbar; Barbara Guffy; John Hansen; Dawn Hoff; Daniel Klabunde; Anne Laffoon; Gary Malavenda; Sara Margraf; Victoria Miller; Dan Rodriguez; Maria Strudwick; Spencer Tacktill; Gabriele A. Tonsil; Margaret A. Ullengren; Margaret Vo; and Su Jin Yon. 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.	Within the Department of Homeland Security (DHS), the Transportation Security Administration's (TSA) mission is to protect the nation's transportation network. Since its inception in 2001, TSA has developed and implemented a variety of programs and procedures to secure commercial aviation and surface modes of transportation. Other DHS components, federal agencies, state and local governments, and the private sector also play a role in transportation security. GAO has examined (1) the progress TSA and other DHS components have made in securing the nation's aviation and surface transportation systems, and the challenges that remain, and (2) crosscutting issues that have impeded TSA's efforts in strengthening security. This testimony is based on GAO reports and testimonies issued from February 2004 to February 2008 and ongoing work regarding the security of the nation's aviation and surface transportation systems, as well as selected updates to this work conducted in April 2008. To conduct this work, GAO reviewed documents related to TSA security efforts and interviewed TSA and transportation industry officials. DHS, primarily through TSA, has made progress in securing the aviation and surface transportation networks, but more work remains. With regard to commercial aviation, TSA has undertaken efforts to strengthen airport security; hire, train, and measure the performance of it screening workforce; prescreen passengers against terrorist watch lists; and screen passengers, baggage, and cargo. With regard to surface transportation modes, TSA has taken steps to develop a strategic approach for securing mass transit, passenger and freight rail, commercial vehicles, and highways; establish security standards for certain transportation modes; and conduct threat, criticality, and vulnerability assessments of surface transportation assets, particularly passenger and freight rail. TSA also hired and deployed compliance inspectors and conducted inspections of passenger and freight rail systems. While these efforts have helped to strengthen the security of the transportation network, DHS and TSA still face a number of key challenges in further securing these systems. For example, regarding commercial aviation, although TSA has made significant progress in its development of an advanced passenger prescreening system, known as Secure Flight, challenges remain, including unreliable program cost and schedule estimates, among other things. In addition, TSA's efforts to enhance perimeter security at airports may not be sufficient to provide for effective security. For example, TSA has initiated efforts to evaluate the effectiveness of security-related technologies, such as biometric identification systems, but has not developed a plan for guiding airports with respect to future technology enhancements. While TSA is pursuing the procurement of several checkpoint technologies to address key existing vulnerabilities, it has not deployed technologies on a wide-scale basis, and has not yet developed and implemented technologies needed to screen air cargo. Further, TSA's efforts to develop security standards for surface transportation modes have been limited to passenger and freight rail, and TSA has not determined what its regulatory role will be with respect to commercial vehicles or highway infrastructure. A number of crosscutting issues have impeded DHS's and TSA's efforts to secure the transportation network, including the need to strengthen strategic planning and performance measurement, and more fully adopt and apply risk-based principles in the pursuit of its security initiatives.	8,122	677
Congress authorized State's ATA program in 1983 through the Foreign Assistance Act. According to the legislation the purpose of ATA is "(1) to enhance the antiterrorism skills of friendly countries by providing training and equipment to deter and counter terrorism; (2) to strengthen the bilateral ties of the United States with friendly governments by offering concrete assistance in this area of great mutual concern; and (3) to increase respect for human rights by sharing with foreign civil authorities modern, humane, and effective antiterrorism techniques." ATA offers a wide range of counterterrorism assistance to partner nations, but most assistance consists of (1) training courses on tactical and strategic counterterrorism issues and (2) grants of counterterrorism equipment, such as small arms, bomb detection equipment, vehicles, and computers. ATA curricula and training focus on enhancing critical counterterrorism capabilities, which cover issues such as crisis management and response, cyberterrorism, dignitary protection, and related areas. According to DS/T/ATA, all its courses emphasize law enforcement under the rule of law and sound human rights practices. ATA is State's largest counterterrorism program, and receives appropriations under the Nonproliferation, Anti-Terrorism, Demining, and Related Programs account. Fiscal year 2002 appropriations for ATA increased to about $158 million--over six times the level of funding appropriated in fiscal year 2000. Appropriations have fluctuated since fiscal year 2002, but increased to almost $171 million in fiscal year 2007. From fiscal years 2002 to 2007, program assistance for the top 10 recipients of ATA allocations ranged from about $11 million to about $78 million. The top 10 recipients represented about 57 percent of ATA funding allocated for training and training-related activities over the 6-year period. ATA funding for the other 89 partner nations that received assistance during this period ranged from $9,000 to about $10.7 million. The Coordinator for Counterterrorism, the head of S/CT, is statutorily charged with the overall supervision (including policy oversight of resources) and coordination of the U.S. government's counterterrorism activities. The broadly mandated role of the Assistant Secretary for Diplomatic Security, the head of the Bureau of Diplomatic Security, includes implementing security programs to protect diplomatic personnel and advise chiefs of mission on security matters. Specific roles and responsibilities for S/CT and DS/T/ATA regarding ATA are described in a 1991 internal policy guidance memorandum, the Omnibus Diplomatic Security Act of 1986, and incorporated into State's Foreign Affairs Manual. S/CT is responsible for leading the initial assessment of a partner nation's counterterrorism needs, and DS/T/ATA is responsible for developing annual, country-specific plans. Under current program operations, DS/T/ATA conducts an initial assessment of a new participant nation's counterterrorism capabilities, and conducts subsequent assessments-- referred to as program reviews--every 2 to 3 years thereafter. In general, the needs assessments include input from the embassy teams, but the assessments themselves are conducted by technical experts contracted by DS/T/ATA. According to DS/T/ATA, the purpose of the needs assessment and program review process is to determine the forms of assistance for a partner nation to detect, deter, deny, and defeat terrorism; and to evaluate program effectiveness. S/CT provides minimal policy guidance to DS/T/ATA to help determine assistance priorities and ensure that it supports broader U.S. policy goals. In addition, S/CT and DS/T/ATA did not systematically use country- specific needs assessments and program reviews to plan what types of assistance to provide partner nations in accordance with State policy guidance. The assessments we reviewed had weaknesses and inconsistencies. According to State officials, S/CT places countries on a tiered list in one of four priority categories based on criteria that address several factors, including country-specific threats and the level and depth of diplomatic and political engagement in a country. State officials indicated that other factors also may be considered in determining whether and where a country is placed on the list, such as the presence of a U.S. military base or a planned international sporting or cultural event with U.S. participation. Since 2006, S/CT has reviewed and discussed the tiered list--including changes, additions, or deletions--with DS/T/ATA during quarterly meetings. In addition to the quarterly meetings, an S/CT official told us that they had established a series of regional roundtable discussions in 2006 between S/CT regional subject experts and DS/T/ATA counterparts. According to the S/CT official, the roundtables were intended as a means of identifying priority countries and their counterterrorism needs for purposes of developing budget requests. S/CT provides little guidance to DS/T/ATA beyond the tiered list, although the 1991 State policy guidance memorandum states that S/CT's written policy guidance for the program should include suggested country training priorities. While S/CT provides some additional guidance to DS/T/ATA during quarterly meetings and on other occasions, DS/T/ATA officials in headquarters and the field stated they received little or no guidance from S/CT beyond the tiered list. As a result, neither S/CT nor DS/T/ATA could ensure that program assistance provided to specific countries supports broader U.S. antiterrorism policy goals. Other factors beyond S/CT's tiered list of countries, such as unforeseen events or new governmental initiatives, also influence which countries receive program assistance. We found that 10 countries on the tiered list did not receive ATA assistance in fiscal year 2007, while 13 countries not on the tiered list received approximately $3.2 million. S/CT and DS/T/ATA officials stated that assistance does not always align with the tiered list because U.S. foreign policy objectives sometimes cause State, in consultation with the President's National Security Council, to provide assistance to a non-tiered-list country. According to the 1991 State policy guidance memorandum and DS/T/ATA standard operations procedures, ATA country-specific needs assessments and program reviews are intended to guide program management and planning. However, S/CT and DS/T/ATA did not systematically use the assessments to determine what types of assistance to provide to partner nations or develop ATA country-specific plans. Although the 1991 State policy memorandum states that S/CT should lead the assessment efforts, a senior S/CT official stated that S/CT lacks the capacity to do so. As a result, DS/T/ATA has led interagency assessment teams in recent years, but the assessments and recommendations for types of assistance to be provided may not fully reflect S/CT policy guidance concerning overall U.S. counterterrorism priorities. DS/T/ATA officials responsible for five of the top six recipients of ATA support--Colombia, Kenya, Indonesia, Pakistan, and the Philippines--did not consistently use ATA country needs assessments and program reviews in making program decisions or to create annual country assistance plans. In some instances, DS/T/ATA officials responsible for in-country programs had not seen the latest assessments for their respective countries, and some said that the assessments they had reviewed were either not useful or that they were used for informational purposes only. The Regional Security Officer, Deputy Regional Security Officer, and DS/T/ATA Program Manager for Kenya had not seen any of the assessments that had been conducted for the country since 2000. Although the in-country program manager for Kenya was familiar with the assessments from her work in a previous position with DS/T/ATA, she stated that in general, the assessments were not very useful for determining what type of assistance to provide. She said that the initial needs assessment for Kenya failed to adequately consider local needs and capacity. The Regional Security Officer and Assistant Regional Security Officer for Indonesia stated they had not seen the latest assessment for the country. The DS/T/ATA program manager for Indonesia said that he recalled using one of the assessments as a "frame of reference" in making program and resource decisions. The in-country program manager also recalled seeing one of the assessments, but stated that he did not find the assessment useful given the changing terrorist landscape; therefore, he did not share it with his staff. The DS/T/ATA Program Manager for Pakistan stated that decisions on the types of assistance to provide in Pakistan were based primarily on the knowledge and experience of in-country staff regarding partner nation needs, rather than the needs assessments or program reviews. He added that he did not find the assessments useful, as the issues identified in the latest (2004) assessment for the country were outdated. We reviewed 12 of the 21 ATA country-specific needs assessments and program reviews that, according to ATA annual reports, DS/T/ATA conducted between 2000 and 2007 for five of the six in-country programs. The assessments and reviews generally included a range of recommendations for counterterrorism assistance, but did not prioritize assistance to be provided or include specific timeframes for implementation. Consequently, the assessments did not consistently provide a basis for targeting program assistance to the areas of a partner nation's greatest counterterrorism assistance need. Only two of the assessments--a 2000 needs assessment for Indonesia and a 2003 assessment for Kenya--prioritized the recommendations, although a 2004 assessment for Pakistan and a 2005 assessment for the Philippines listed one or two recommendations as priority ATA efforts. In addition, the information included in the assessments was not consistent and varied in linking recommendations to capabilities. Of the 12 assessments we reviewed: Nine included narrative on a range of counterterrorism capabilities, such as border security and explosives detection, but the number of capabilities assessed ranged from 5 to 25. Only four of the assessments that assessed more than one capability linked recommendations provided to the relevant capabilities. Six included capability ratings, but the types of ratings used varied. For example, a 2003 assessment for Colombia rated eight capabilities from 1 through 5, but the 2004 assessment rated 24 capabilities, using poor, low, fair, or good. Two used a format that DS/T/ATA began implementing in 2001. The assessments following the new format generally included consistent types of information and clearly linked recommendations provided to an assessment of 25 counterterrorism capabilities. However, they did not prioritize recommendations or include specific timeframes for implementing the recommendations. Although the 1991 State policy memorandum states that DS/T/ATA should create annual country assistance plans that specify training objectives and assistance to be provided based upon the needs assessments and program reviews, we found that S/CT and DS/T/ATA did not systematically use the assessments to create annual plans for the five in-country programs. DS/T/ATA officials we interviewed regarding the five in-country programs stated that in lieu of relying on the assessments or country assistance plans, program and resource decisions were primarily made by DS/T/ATA officials in the field based on their knowledge and experience regarding partner nation needs. Some DS/T/ATA officials said they did not find the country assistance plans useful. The program manager for Pakistan stated that he used the country assistance plan as a guide, but found that it did not respond to changing needs in the country. The ATA program manager for Kenya said that he had not seen a country assistance plan for that country. We requested ATA country assistance plans conducted during fiscal years 2000-2006 for the five in-country programs included in our review, but S/CT and DS/T/ATA only provided three plans completed for three of the five countries. Of these, we found that the plans did not link planned activities to recommendations provided in the needs assessments and program reviews. For example, the plan for the Philippines included a brief reference to a 2005 needs assessment, but the plan did not identify which recommendations from the 2005 assessment were intended to be addressed by current or planned efforts. S/CT has mechanisms to coordinate the ATA program with other U.S. government international counterterrorism training assistance and to help avoid duplication of efforts. S/CT chairs biweekly interagency working group meetings of the Counterterrorism Security Group's Training Assistance Subgroup to provide a forum for high-level information sharing and discussion among U.S. agencies implementing international counterterrorism efforts. S/CT also established the Regional Strategic Initiative in 2006 to coordinate regional counterterrorism efforts and strategy. S/CT described the Regional Strategic Initiative as a series of regionally based, interagency meetings hosted by U.S. embassies to identify key regional counterterrorism issues and develop a strategic approach to addressing them, among other goals. In the four countries we visited, we did not find any significant duplication or overlap among U.S. agencies' country-specific training programs aimed at combating terrorism. Officials we met with in each of these countries noted that they participated in various embassy working group meetings, such as Counterterrorism Working Group and Law Enforcement Working Group meetings, during which relevant agencies shared information regarding operations and activities at post. DS/T/ATA officials also coordinated ATA with other counterterrorism efforts through daily informal communication among cognizant officials in the countries we visited. In response to concerns that ATA lacked elements of adequate strategic planning and performance measurement, State took action to define goals and measures related to the program's mandated objectives. S/CT and DS/T/ATA, however, did not systematically assess sustainability--that is, the extent to which assistance has enabled partner nations to achieve and maintain advanced counterterrorism capabilities. S/CT and DS/T/ATA lacked clear measures and processes for assessing sustainability, and program managers did not consistently include sustainability in ATA planning. State did not have measurable performance goals and outcomes related to the mandated objectives for ATA prior to fiscal year 2003, but has recently made some progress to address the deficiency, which had been noted in reports by State's Office of Inspector General. Similarly, State developed specific goals and measures for each of the program's mandated objectives in response to a 2003 Office of Management and Budget assessment. Since fiscal year 2006, State planning documents, including department and bureau-level performance plans, have stated that enabling partner nations to achieve advanced and sustainable counterterrorism capabilities is a key outcome. S/CT and DS/T/ATA officials further confirmed that sustainability is the principal intended outcome and focus of program assistance. In support of these efforts, DS/T/ATA appointed a Sustainment Manager in November 2006 to, among other things, coordinate with other DS/T/ATA divisions to develop recommendations and plans to assist partner nations in developing sustainable counterterrorism capabilities. Despite progress towards establishing goals and intended outcomes, State had not developed clear measures and a process for assessing sustainability and had not integrated the concept into program planning. The Government Performance and Results Act of 1993 requires agencies in charge of U.S. government programs and activities to identify goals and report on the degree to which goals are met. S/CT and DS/T/ATA officials noted the difficulty in developing direct quantitative measures of ATA outcomes related to partner nations' counterterrorism capabilities. Our past work also has stressed the importance of establishing program goals, objectives, priorities, milestones, and measures to use in monitoring performance and assessing outcomes as critical elements of program management and effective resource allocation. We found that the measure for ATA's principal intended program outcome of sustainability is not clear. In its fiscal year 2007 Joint Performance Summary, State reported results and future year targets for the number of countries that had achieved an advanced, sustainable level of counterterrorism capability. According to the document, partner nations that achieve a sustainable level of counterterrorism would graduate from the program and no longer receive program assistance. However, program officials in S/CT and DS/T/ATA directly responsible for overseeing ATA were not aware that the Joint Performance Summary listed numerical targets and past results for the number of partner nations that had achieved sustainability, and could not provide an explanation of how State assessed the results. DS/T/ATA's Sustainment Manager also could not explain how State established and assessed the numerical targets in the reports. The Sustainment Manager further noted that, to his knowledge, S/CT and DS/T/ATA had not yet developed systematic measures of sustainability. DS/T/ATA's mechanism for evaluating partner nation capabilities did not include guidance or specific measures to assess sustainability. According to program guidance and DS/T/ATA officials, needs assessments and program reviews are intended to establish a baseline of a partner nation's counterterrorism capabilities and quantify progress through subsequent reviews. DS/T/ATA officials also asserted that the process is intended to measure the results of program assistance. However, the process did not explicitly address sustainability, and provided no specific information or instruction regarding how reviewers are to assess sustainability. Moreover, the process focused on assessing a partner nation's overall counterterrorism capabilities, but did not specifically measure the results of program assistance. DS/T/ATA had not systematically integrated sustainability into country- specific assistance plans, and we found a lack of consensus among program officials about how to address the issue. In-country program managers, embassy officials, instructors, and partner nation officials we interviewed held disparate views on how to define sustainability across all ATA participant countries, and many were not aware that sustainability was the intended outcome. Several program officials stated that graduating a country and withdrawing or significantly reducing program assistance could result in a rapid decline in the partner nation's counterterrorism capabilities, and could undermine other program objectives, such as improving bilateral relations. Further, although State has listed sustainability in State-level planning documents since 2006, S/CT and DS/T/ATA had not issued guidance on incorporating sustainability into country-specific planning, and none of the country assistance plans we reviewed consistently addressed the outcome. As a result, the plans did not include measurable annual objectives targeted at enabling the partner nation to achieve sustainability. For example, Colombia's assistance plan listed transferring responsibility for the antikidnapping training to the Colombian government and described planned activities to achieve that goal. However, the plan did not include measurable objectives to determine whether activities achieved intended results. Since 1996, State has not complied with a congressional mandate to report to Congress on U.S. international counterterrorism assistance. Additionally, State's annual reports on ATA contained inaccurate data regarding basic program information, did not provide systematic assessments of program results, and lacked other information necessary to evaluate program effectiveness. In 1985, Congress amended the Foreign Assistance Act requiring the Secretary of State to report on all assistance related to international terrorism provided by the U.S. government during the preceding fiscal year. Since 1996, State has submitted ATA annual reports rather than the broader report required by the statute. A S/CT official noted confusion within State over what the statute required and he asserted that the ATA annual report, which is prepared by DS/T/ATA, and State's annual "Patterns of Global Terrorism" report were sufficiently responsive to congressional needs. He further noted that, in his view, it would be extremely difficult for State to compile and report on all U.S. government terrorism assistance activities, especially given the significant growth of agencies' programs since 2001. Officials in State's Bureau of Legislative Affairs indicated that, to their knowledge, they had never received an inquiry from congressional staff about the missing reports. Recent ATA annual reports have contained inaccurate data relating to basic program information on numbers of students trained and courses offered. For example, Afghanistan. According to annual reports for fiscal years 2002 to 2005, 15 Afghan students were trained as part of a single training event over the 4-year period. DS/T/ATA subsequently provided us data for fiscal year 2005, which corrected the participation total in that year from 15 participants in 1 training event to 1,516 participants in 12 training events. Pakistan. According to the fiscal year 2005 ATA annual report, ATA delivered 17 courses to 335 participants in Pakistan. Supporting tables in the same report listed 13 courses provided to 283 participants, and a summary report provided to us by DS/T/ATA reported 13 courses provided to 250 course participants. DS/T/ATA officials acknowledged the discrepancies and noted that similar inaccuracies could be presumed for prior years and for other partner nations. The officials indicated that inaccuracies and omissions in reports of the training participants and events were due to a lack of internal policies and procedures for recording and reporting program data. In the absence of documented policies and procedures, staff developed various individual processes for collecting the information that resulted in flawed data reporting. Additionally, DS/T/ATA officials told us that its inadequate information management system and a lack of consistent data collection procedures also contributed to inaccurate reporting. We reviewed ATA annual reports for fiscal years 1997 through 2005, and found that the reports varied widely in terms of content, scope, and format. Moreover, the annual reports did not contain systematic assessments of program performance or consistent information on program activity, such as number and type of courses delivered, types of equipment provided, and budget activity associated with program operations. In general, the reports contained varying levels of detail on program activity, and provided only anecdotal examples of program successes, from a variety of sources, including U.S. embassy officials, ATA instructors, and partner nation officials. DS/T/ATA program officials charged with compiling the annual reports for the past 3 fiscal years noted that DS/T/ATA did not have guidance on the scope, content, or format for the reports. Although ATA plays a central role in State's broader effort to fight international terrorism, deficiencies in how the program is guided, managed, implemented, and assessed could limit the program's effectiveness. Specifically, minimal guidance from S/CT makes it difficult to determine the extent to which program assistance directly supports broader U.S. counterterrorism policy goals. Additionally, deficiencies with DS/T/ATA's needs assessments and program reviews may limit their utility as a tool for planning assistance and prioritizing among several partner nations' counterterrorism needs. As a result, the assessments and reviews are not systematically linked to resource allocation decisions, which may limit the program's ability to improve partner nation's counterterrorism capabilities. Although State has made some progress in attempting to evaluate and quantitatively measure program performance, ATA still lacks a clearly defined, systematic assessment and reporting of outcomes, which makes it difficult to determine the overall effectiveness of the program. This deficiency, along with State's noncompliance with mandated reporting requirements, has resulted in Congress having limited and incomplete information on U.S. international counterterrorism assistance and ATA efforts. Such information is necessary to determine the most effective types of assistance the U.S. government can provide to partner nations in support of the U.S. national security goal of countering terrorism abroad. In our February 2008 report, we suggested that Congress should reconsider the requirement that the Secretary of State provide an annual report on the nature and amount of U.S. government counterterrorism assistance provided abroad, given the broad changes in the scope and nature of U.S. counterterrorism assistance abroad in conjunction with the fact that the report has not been submitted since 1996. We also recommended that the Secretary of State take the following four actions: 1. Revisit and revise internal guidance (the 1991 State policy memorandum and Foreign Affairs Manual, in particular) to ensure that the roles and responsibilities for S/CT and DS/T/ATA are still relevant and better enable State to determine which countries should receive assistance and what type, and allocate limited ATA resources. 2. Ensure that needs assessments and program reviews are both useful and linked to ATA resource decisions and development of country- specific assistance plans. 3. Establish clearer measures of sustainability, and refocus the process for assessing the sustainability of partner nations' counterterrorism capabilities. The revised evaluation process should include not only an overall assessment of partner nation counterterrorism capabilities, but also provide guidance for assessing the specific outcomes of ATA. 4. Comply with the congressional mandate to report to Congress on U.S. international counterterrorism assistance. In commenting on our report, State agreed overall with our principal findings and recommendations to improve its ATA program guidance, the needs assessment and program review process, and its assessments of ATA program outcomes. State noted that the report highlighted the difficulties in assessing the benefits of developing and improving long-term antiterrorism and law enforcement relationships with foreign governments. State also outlined a number of ongoing and planned initiatives to address our recommendations. As noted in our report, we will follow up with State to ensure that these initiatives have been completed, as planned. Although State supported the matter we suggested for congressional consideration, it did not specifically address our recommendation that it comply with the congressional mandate to report on U.S. counterterrorism assistance. Mr. Chairman and Members of the Subcommittee, this concludes my prepared statement. I will be happy to answer any questions you may have. For questions regarding this testimony, please contact Charles Michael Johnson, Jr. (202) 512-7331 or [email protected]. Albert H. Huntington, III, Assistant Director; Matthew E. Helm; Elisabeth R. Helmer; and Emily Rachman made key contributions in preparing this statement. 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 State's (State) Antiterrorism Assistance (ATA) program's objectives are to provide partner nations with counterterrorism training and equipment, improve bilateral ties, and increase respect for human rights. State's Office of the Coordinator for Counterterrorism (S/CT) provides policy guidance and its Bureau of Diplomatic Security, Office of Antiterrorism, Assistance (DS/T/ATA), manages program operations. GAO assessed (1) State's guidance for determining ATA priorities, (2) how State coordinates ATA with other counterterrorism programs, (3) the extent State established ATA program goals and measures, and (4) State's reporting on U.S. counterterrorism assistance. This statement is based on a February 2008, GAO report titled Combating Terrorism: State Department's Antiterrorism Program Needs Improved Guidance and More Systematic Assessments of Outcomes, GAO-08-336 (Washington, D.C.: Feb. 29, 2008). S/CT provides minimal guidance to help prioritize ATA program recipients, and S/CT and DS/T/ATA did not systematically align ATA assistance with U.S. assessments of foreign partner counterterrorism needs. S/CT provided policy guidance to DS/T/ATA through quarterly meetings and a tiered list of priority countries, but the list did not provide guidance on country counterterrorism-related program goals, objectives, or training priorities. S/CT and DS/T/ATA also did not consistently use country-specific needs assessments and program reviews to plan assistance. S/CT had established mechanisms to coordinate the ATA program with other U.S. international efforts to combat terrorism. S/CT held interagency meetings with officials from the Department of State, Defense, Justice, and Treasury and other agencies as well as ambassador-level regional strategic coordinating meetings. GAO did not find any significant duplication or overlap among the various U.S. international counterterrorism efforts. State had made progress in establishing goals and intended outcomes for the ATA program, but S/CT and DS/T/ATA did not systematically assess the outcomes and, as a result, could not determine the effectiveness of program assistance. For example, although sustainability is a principal focus, S/CT and DS/T/ATA had not set clear measures of sustainability or integrated sustainability into program planning. State reporting on U.S. counterterrorism assistance abroad was incomplete and inaccurate. S/CT had not provided a congressionally mandated annual report to Congress on U.S. government-wide assistance related to combating international terrorism since 1996. After 1996, S/CT has only submitted to Congress annual reports on the ATA program, such as the number of students trained and courses offered. Moreover, these reports contained inaccurate program information. Additionally, the reports lacked comprehensive information of the results on program assistance that would be useful to Congress.	5,545	620
The Secretary of Commerce is legally required to (1) conduct the census on April 1 of the decennial year, (2) report the state population counts to the President for purposes of congressional apportionment by December 31 of the decennial year, and (3) send population tabulations to the states for purposes of redistricting no later than April 1 of the year following Census Day. The Bureau has defined over 40 different operations in its high-level requirements document, describing all of the planned operations and systems needed to meet these mandates. For the 2010 Census, the Bureau is using a comprehensive master schedule to integrate the work to be carried out in the dozens of operations. The schedule provides a high-level roadmap for Bureau executives and is used to alert executives to activities that are behind schedule or experiencing issues, allowing problems to be addressed so the census can continue to proceed on track. Staying on schedule is crucial to accomplishing all of the tasks involved in conducting the census. In fact, scheduling and planning are so important that the Bureau has already established a high-level schedule for planning the 2020 Census. While the schedule can be used to manage census operations at a high level and dictates major time allocations and deadlines, local census offices across the nation require more detailed plans to conduct enumeration that exceed the detail included in the master schedule. A successful census depends, in large part, on the field work carried out in these local census offices where employees on the ground in local communities build a list of where to count people and count people who do not return their census forms. As we have previously reported, the Bureau had initially planned to carry out major field data collection activities using hand held computing devices. Development and performance problems with the hand held device led the Secretary of Commerce in April 2008 to abandon using the device for most of its intended operations and resulted in the Bureau removing the NRFU operation from the 2008 Dress Rehearsal. As a result, the Bureau was not able to use the dress rehearsal as a comprehensive end-to-end test of the interoperability of all of its planned systems, and the Bureau has had to develop plans to support and conduct the affected operations on paper as it did for the 2000 Census. For the 2010 Census, the Bureau will manage remaining fieldwork activities with PBOCS. This system is intended to provide managers with essential real-time information, such as worker productivity and completion rates for field operations. It also allows managers in the field to assign or reassign cases among workers. If the system does not work as intended, it could hinder or delay field operations and introduce errors into files containing collected data. Another responsibility of field offices is implementing the quality control process established by the Bureau to ensure that correct information is collected by field staff and data are not falsified. To ensure data quality and consistency of quality control procedures, the Bureau will manage, track, match, and review answers provided during re-interview operations using its Census Matching Review and Coding System (Census MaRCS). This system is also to designate quality control assignments where selected households will be re-interviewed in order to determine that the original enumerator correctly conducted the interview. Census MaRCS is also to assist in identifying interviews where the data from the re-interview do not match the data from the original interview, indicating that a mistake has been made. Both PBOCS and Census MaRCS are key systems that have not been fully tested. Since 2005, we have reported concerns with the Bureau's management and testing of key information technology systems. In March 2009, we reviewed the status of and plans for the testing of key 2010 Census systems. We reported that while the Bureau has made progress in conducting systems, integration, and end-to-end testing, critical testing against baseline requirements still remained to be performed before systems would be ready to support the 2010 Census and the planning for the testing needed much improvement. While the Bureau has made noteworthy progress in gearing up for the enumeration, with less than a year remaining until Census Day, uncertainties surround the Bureau's overall readiness for 2010. The Bureau has implemented processes around its master schedule that comply with a number of scheduling process criteria that are important to maintaining a schedule that is a useful management tool. Such a schedule can provide a road map for systematic execution of a program and the means by which to gauge progress, identify and address potential problems, and promote accountability. We have documented the importance of adhering to these criteria and of implementing associated best practices in our GAO Cost Estimating and Assessment Guide. According to these criteria, a schedule should be comprehensive, with logically sequenced activities spanning the scope of work to be performed so that the full picture is available to managers; current, with the progress on ongoing activities updated regularly so that managers can readily know the status of the project; and controlled, with a documented process for changes to the schedule so that the integrity of the schedule is assured. The Bureau's master schedule represents all 44 of the operations described by the broad requirements for the census in its 2010 Census Operational Plan. While the Bureau continues to add activities to its central schedule, by including at least all the activities described in these broad requirements, the Bureau is ensuring that it has a comprehensive schedule that will be less likely to miss critical interactions between operations. The Bureau ensured a complete scope of the schedule with input from stakeholders throughout the agency, with reviews of previous schedules, and building on a number of census tests during the decade. As a result, the schedule is the primary source for senior managers, on a weekly basis, to determine what census activity is ahead of or behind schedule and provides a resource for determining any impact to the overall project of delays in major activities. The Bureau has documented and implemented a formal process for keeping the data in the schedule current. Staff within each Bureau division are responsible for ensuring that schedule activities within their division have their status updated on a weekly basis. Staff update the actual start and finish dates, the percentage of an activity completed so far, and estimates of the time remaining to complete each activity in progress. The Bureau is recording status information on an average of more than 1,300 activities in the schedule ongoing during any given week, generating historical data that could provide valuable input to future schedule estimates. Finally, the Bureau has implemented a formal change control process that preserves a baseline of the schedule so that progress can be meaningfully measured. The Bureau's criteria for justifying changes are clearly documented and require approval by a team of senior managers and acknowledgment of the impact by each affected team within the Bureau. Since the master schedule was baselined in May 2008, about 300 changes have been approved. Even corrections to the schedule for known errors, such as incorrect links between activities, must be approved through the change control process, helping to ensure the integrity of the schedule. In addition to these practices, the Bureau has positioned itself to monitor the schedule regularly to help ensure that the census is progressing and that work is being completed as planned. A central team of staff working with the schedule implements a process that begins with the weekly updates of the schedule status and involves subject matter experts from multiple divisions, and monitors and resolves schedule-related issues, resulting in a weekly briefing to the Deputy Director and the Director of the Census, which includes documented explanations for critical activities scheduled to start late. For example, the central team began reporting from the master schedule in March 2009 that the printing of questionnaires for a field operation to validate locations of group quarters in September and October 2009 might be running late. The schedule showed that late printing of the questionnaires would trigger their late delivery and the late assembly of job assistance kits needed to support the operation, and thus put the timeliness of the operation in danger. According to a Bureau official, the Bureau then addressed the issue by deciding to unlink the kit assembly from the questionnaire printing, allowing kits to begin assembly on time and having questionnaires delivered directly to field offices when they were ready, letting the operation begin on time. When we began analyzing the Bureau's master schedule, we discovered a significant number of activities in the schedule that had either missing or inaccurate information describing their relationships with other activities in the schedule. We brought these to the Bureau's attention, and the Bureau has begun systematically identifying such activities and correcting their information in the schedule. In accordance with scheduling best practices, activities in the schedule should be linked logically with relationships to other activities that precede or follow them, and they should be linked in the correct order. Since reports that the Bureau uses to manage the census depend on the schedule having been built properly, inconsistent adherence to these scheduling practices has occasionally created false alarms about the schedule and created unnecessary work for those who have had to resolve them. In our analysis of the Bureau's schedule, we found that nearly all relationships between activities are generally in place in the schedule and some activities in the schedule do not need relationships. However, many activities appeared in the schedule missing one of their logical relationships. From January 2009 through August, an average of more than 1,200 of the more than 11,000 activities in the entire schedule were missing relationships to other activities from either their start or end dates. Each month, on average, over 1,100 of the over 6,100 as yet not completed activities were missing relationships. For example, within the Bureau's master schedule, an activity listed for receiving finished materials from the NRFU re-interview operation appeared in the schedule with no relationship to subsequent activities, making it appear that any delays in its completion would have no impact on subsequent census activities. While the absence of such a relationship in the schedule does not imply that the Bureau would miss the potential impact of any delays in the completion of this activity, the incidence of a large number of such missing relationships can confound attempts to trace the chain of impacts that any delays may have throughout the schedule. Similarly, we found a small number of activities in the schedule that had been linked together in the wrong order, so that one activity might appear to finish before a necessary prior activity had been completed. Such an incorrect relationship can unnecessarily complicate the use of the schedule to guide work or measure progress. The number of such apparent out-of-sequence activities in the entire schedule has decreased from on average more than 100 each month in January through March to 60 in August. Since June 2009, Bureau staff have been running structured queries on the data supporting the master schedule to identify activities with missing or incorrect data; researching each activity to determine what, if any, corrections to the data are needed; forwarding proposed changes to affected activities, operation by operation, to program officials for review; and submitting changes to the Bureau's formal change control process. The Bureau reports that since this concerted effort began to correct such errors that affect activities in 37 different census operations, the Bureau had completed research for activities in 15 of the operations and approved changes in 12 of them by early October 2009. The Bureau also informed us that this review process involving the program officials responsible for the logic errors has provided an educational opportunity for the officials to see how their programs can directly affect others, and as a result has heightened awareness about the importance of getting schedule information keyed in correctly. A schedule provides an estimate of how long a given work plan will take to complete. Since the duration of the work described by the activities listed in a schedule is generally uncertain, a schedule can be analyzed for the amount of risk that its underlying work plan is exposed to. Schedule risk analysis--the systematic analysis of the impact of a variety of "what if" scenarios--is an established best practice to help identify areas of a schedule that need additional management attention. Conducting a schedule risk analysis helps establish the level of confidence in meeting scheduled completion dates and the amount of contingency time needed for given levels of confidence, and helps identify high-priority risks to a schedule. The Bureau is tracking risks to the census and managing those risks on a regular basis, as documented in the 2010 Census Risk Management Plan, but these data are not being mapped into the schedule at a level that can be used for a systematic schedule risk analysis. A well-defined schedule should help identify the amount of human capital and financial resources that are needed to execute the programs within the scope of the schedule, providing a real-time link between time and cost and helping to reduce uncertainty in cost estimates and the risk of cost overruns. However, the Bureau does not link within its schedule estimates of resource requirements--such as labor hours and materials--to respective activities. Having this information linked in a schedule enhances an organization's capability to monitor, manage, and understand resource productivity; plan for the availability of required resources; and understand and report cost and staffing requirements. For example, if the Bureau were to find itself behind schedule with major operations to be completed, and resource requirements were linked in the schedule, the Bureau could then better assess the trade-offs between either adding more resources or reducing the scope of the operations. In addition, when resources are linked to activities in the schedule, scheduling tools can identify periods of their peak usage and assist managers with reordering activities to level out demands on potentially scarce or costly resources. When we met with Bureau officials and discussed this, they pointed out that incorporating this schedule best practice would be difficult to do late in the preparations for 2010, but they expressed interest in incorporating this schedule best practice as a step forward in the Bureau's use of the schedule to manage decennial censuses. Finally, the Bureau's use of a master schedule in 2010 that is, according to the Bureau, more highly integrated into the management of the decennial census provides an opportunity to draw many potential lessons for 2020. The Bureau learned lessons from its use of the 2000 master schedule as documented in a 2003 Bureau management evaluation, in particular with its adoption of the formal change control process implemented for 2010. Yet as noted in the evaluation, there were questions about the quality of the data maintained in the schedule. Without a reliable change control process, the schedule did not provide a reliable baseline, making evaluation of schedule and activity duration estimates difficult, if not impossible. The Bureau is generating a large amount of data--and experience--with its efforts in developing, maintaining, and using the 2010 master schedule. Unless the Bureau prioritizes the need for documenting lessons learned from the current experience--as it did for the 2000 Census--and formally puts in place an effort to capture and analyze schedule data, changes to baselines, and variances between estimated and actual durations, it runs the risk of missing out on another opportunity for using additional lessons some of its staff may already be learning. The automated control system that the Bureau plans to use to help manage the data collection operations of the decennial census still faces significant development and testing milestones, some of which are scheduled to be completed just before the system needs to be deployed before respective field operations begin. As a result, should the Bureau encounter any significant problems during final testing, there will be little time to make changes before systems are needed to support field operations. PBOCS will help manage both paper, and people, and it needs to exchange data successfully with several other Bureau systems, such as one used for processing payroll. The Bureau plans to complete development and testing of PBOCS in three major releases, grouping the releases of parts of PBOCS together loosely by the timing of the field operations those parts are needed to support. The Bureau already completed a preliminary release of PBOCS with limited functionality in June 2009 to support some initial testing. Figure 1 shows the development, testing, and operation periods for the three remaining releases and the operations that PBOCS supports. According to the baseline of the Bureau's master schedule, PBOCS should be deployed and operational anywhere from 1 to 6 weeks before each operation begins for operations leading up to and including NRFU. According to the Bureau, the system should ideally be ready for use during training periods so that managers can familiarize themselves with the system they will have to use and can begin using the system to assign work to new staff. This also requires that PBOCS be ready in time so that production data can be loaded into the system, as well as information about the employees to whom work will be assigned. For example, PBOCS for NRFU is to finish its final testing in March 2010, about 9 weeks before NRFU is scheduled to begin on May 1, 2010, and deployment is scheduled to take place about 6 weeks before NRFU starts, leaving 3 weeks of contingency time in the event that unexpected problems arise during PBOCS development. This means that if any significant problems are identified during the testing phases of PBOCS, there is generally little time to resolve the problems before the system needs to be deployed. In addition, it will be more difficult for the Bureau to integrate into PBOCS training for users on any late changes in the PBOCS software. While the Bureau relies on last-minute additions to training and procedures documents to communicate late changes to workers, Bureau officials agreed that it can be difficult to incorporate such last-minute additions into training sessions and for users to learn them, and doing so should be avoided if possible. The Bureau also faces the significant challenge of developing the detailed specifications for the software to be developed. As of early-September 2009, the Bureau had established high-level requirements for PBOCS and has reported completing development of release 1 of PBOCS. The Bureau reports that as of late-October its requirements development, system development, and system testing for phase 1 is largely completed. However, the Bureau has not yet finalized the detailed requirements for this release or for later releases. High-level requirements describe in general terms what functions the system will accomplish, such as producing specific management reports on the progress of specific paper- based operations. Detailed requirements describe more specifically what needs to be done in order to accomplish such functions. For example, a detailed requirement would specify the specific data that should be pulled from the specific data set to produce specific columns of a specific report. While high-level requirements provide software programmers with general guidelines on, for example, what types of reports should be produced, without a clear understanding of the detailed requirements, the programmers cannot be sure that they are identifying the correct source of information for producing such reports, and reports can thus be inaccurate. According to Bureau officials, previous contract programmers with little decennial census experience and no involvement with current development efforts made erroneous assumptions about which data to use when preparing some quality control reports that became problematic in the dress rehearsal. Without detailed requirements, the Bureau also cannot be sure how frequently such reports should be updated or which staff should have access to which reports. Further, software developers may not have the required information to meet the Bureau's needs. Also, as we have previously reported, detailed operational requirements determine system development, and without well-defined requirements, systems are at risk of cost increases, schedule delays, or performance shortfalls. As we have reported and testified numerous times, the Bureau experienced this with an earlier contract to automate the support of its field data collection activity, which included the failed handheld computing device. The Bureau's PBOCS development managers have told us that they are working closely with stakeholders in an iterative process of short development cycles to help mitigate PBOCS development risks caused by not having detailed requirements written in advance. Embedding subject matter experts within the software development process can help mitigate risk inherent in the short time frame the Bureau has remaining to develop and test PBOCS. Yet the absence of well-documented and prioritized detailed requirements for PBOCS, which still need to be developed and tested, remains among the most significant risks to getting PBOCS ready on time. Furthermore, the Bureau lacks reliable development progress measures that permit estimating which requirements may not get addressed and that are important to ensuring the visibility of the development program to Bureau leadership. Aggressive monitoring of system development and testing progress and of the effort remaining will help ensure that program officials who will rely on these systems can anticipate what risks they face and what mitigation activities they may need for shortfalls in the final systems. In recognition of the serious implications that a failed PBOCS would have for the conduct of the 2010 Census, and to see whether there were additional steps that could be taken to mitigate the outstanding risks to successful PBOCS development and testing, in June 2009 the Bureau chartered an assessment of PBOCS. The assessment team, chaired by the Bureau's Chief Information Officer (CIO), reported initially in late July 2009 and provided an update report in late August 2009. According to the August update and our discussion of it with the CIO, the team increased its risk rating in two areas of PBOCS that it is monitoring in part because of the absence of fully documented requirements, testing plans, progress measures, and deployment plans. In its comments on the draft of this report, the Department of Commerce provided information describing several steps the Bureau was taking to monitor the progress of PBOCS development. According to Commerce, the Bureau already does the following: Daily Project Management Standup meetings, which cover action item management, calendar review, activity sequencing, and any threats or action-blocking issues. Daily Architecture Review Board and team leads meetings. Weekly Program Management Review Board meetings, and thrice- weekly Product Architecture Review Board meetings. At least weekly review of progress by the PBOCS Internal Assessment Team--chaired by the CIO. The team briefs the Bureau Director at least monthly. Monthly Quality Assurance Board meetings and twice-monthly Risk Review Board meetings. At the end of our review, the PBOCS development team demonstrated two software tools it said it was using to help manage its iterative process of short development cycles. We did not fully assess their use of the tools. The progress measures they demonstrated with one of the tools predicted that the completion dates would be missed. It also showed that the development team was underestimating the development effort required to achieve its iterative development goals. When we noted this, the presenters told us that the information in their management system was not current. Until the Bureau completes the detailed requirements for PBOCS and prioritizes them and its PBOCS development monitoring is relying on current and reliable progress measures, such as those the development team attempted to demonstrate to us for estimating the effort needed to complete remaining development, it will not be able to fully gauge the PBOCS development progress and have reasonable assurance that PBOCS will meet the program's needs. The Bureau is continuing to examine how improvements will be made. The Bureau has experienced delays in the development and testing of software that will play a key role along with PBOCS in controlling and managing field data collection activity for the quality assurance programs of NRFU and Update/Enumerate. Census MaRCS will help manage the process of identifying systematic or regular violations in the door-to-door data collection procedures. In particular, Census MaRCS will be a tool to help target additional households needing reinterview as part of the quality assurance program for these two major census data collection operations in the field. Therefore, fully developing and testing Census MaRCS will be important to the successful conduct of the census. Like other systems at the Bureau, Census MaRCS had to undergo design changes when the Bureau made the April 2008 decision to switch to paper- based operations. Detailed performance requirements--such as the information to be included on reports and its sources, including performance metrics, such as the number of users the system is designed to handle--are documented and were baselined in May 2009. However, specifications have been added or clarified as software development has progressed and improvements have been suggested. Software development has at times been slower than expected, leading to delays in some testing. Test plans for Census MaRCS software and interfaces are in place, having been documented in May 2009. According to those plans, the Bureau is in the second of three stages of testing Census MaRCS and is scheduled to complete its final stage in December 2009, almost 2 months before its first deployment for the Update/Enumerate operation. Slower-than-expected development has delayed some parts of the second phase of testing, which will thus finish late according to the Bureau, but Bureau officials have indicated that they believe that delay can be absorbed into the schedule, and that the system will be delivered as scheduled in February 2010. The compressed testing schedule leaves little time for additional delays in writing software or conducting tests. The Bureau is working on additional plans to test the interfaces between systems like PBOCS and Census MaRCS to ensure that they work together, but those test plans have not yet been finalized. Since Census MaRCS was not used in the dress rehearsal, and a full end-to-end system test--that is, a test of whether all interrelated systems collectively work together as intended in an operational environment--is not planned for in the time remaining before the system is required to be deployed, successful testing of the interfaces with other systems is critical to the system's readiness. If development or testing delays persist, it will be more important than ever that system requirements be prioritized so that effort is spent on the "must haves" necessary for system operation. Our review of the Bureau's master schedule for conducting the 2010 Census and the processes the Bureau uses to manage it suggests that it is doing a commendable job conducting such a large and complex undertaking consistent with leading scheduling practices. Furthermore, the Bureau's systematic effort to correct errors that we have identified in the schedule will further improve the ability of the master schedule to support senior management oversight and decision making as 2010 approaches. Other improvements, such as embedding estimates of resource needs into the schedule, may take more time to implement. Yet, the Bureau's generally well-defined and integrated schedule provides an essential road map for the systematic execution of the census and the means by which to gauge progress, identify and address potential problems, and promote accountability. Leveraging the Bureau's experience with scheduling for 2010 by documenting it should provide lessons learned for similar efforts in 2020 as well. Moreover, since we testified on the status of the 2010 Census in March 2009, the Bureau has made progress on a number of key elements needed to manage the work flow in field operations. In particular, the Bureau has made progress in developing and testing systems to support paper-based operations in the wake of the Secretary of Commerce's April 2008 decision to switch to paper-based operations for most field data collection activity. That said, some delays are also occurring, and since so much still remains to be done in the months leading up to Census Day, the Bureau has limited time to fix any potential problems that arise in systems that are not thoroughly tested. While the Bureau has made significant progress in developing test schedules for key systems, careful monitoring of the progress in addressing, and setting priorities among, the remaining detailed requirements for the control system supporting paper-based operations is critical for the Bureau to anticipate what risks it faces and mitigations it may need for shortfalls in the final system. Based on the challenges faced in the earlier program implementing handheld computing devices, the Bureau has already experienced the ill effect of having to change its plans when a system does not fully meet planned program needs. With limited time before implementation, it is uncertain whether the Bureau may be able to complete development and fully test all key aspects of its systems, like PBOCS and Census MaRCS, which are still under development. Continued aggressive monitoring by the Bureau and improvements in the progress measures on system development and testing, of effort remaining, and of the risks relating to these efforts is needed. Such effort will help ensure that Bureau leadership, as well as Bureau program officials who will rely on these systems, have early warning on what, if any, desired system features will be unavailable in the final systems, maximizing time available to implement mitigation strategies as needed. We recommend that the Secretary of Commerce require the Director of the U.S. Census Bureau to take the following three actions: To improve the Bureau's use of its master schedule to manage the 2020 decennial census: Include estimates of the resources, such as labor, materials, and overhead costs, in the 2020 integrated schedule for each activity as the schedule is built, and prepare to carry out other steps as necessary to conduct systematic schedule risk analyses on the 2020 schedule. Take steps necessary to evaluate the accuracy of the Bureau's baselined schedule and determine what improvements to the Bureau's schedule development and management processes can be made for 2020. To improve the Bureau's ability to manage paper-based field operations in the 2010 Decennial Census, finalize and prioritize detailed requirements and implement reliable progress reporting on the development of the paper-based operations control system, including estimates of effort needed to complete remaining development. The Secretary of Commerce provided written comments on a draft of this report on November 3, 2009. The comments are reprinted in appendix II. Commerce did not comment on the first two recommendations, but provided additional information on steps it had already been taking to monitor progress of PBOCS development related to the third recommendation. Commerce commented on how we characterized the status of system development and testing, and provided additional statements about the status. Commerce also made some suggestions where additional context or clarification was needed, and where appropriate we made those changes. With respect to our third recommendation to finalize and prioritize detailed requirements and implement reliable progress reporting on PBOCS, including estimates of effort needed to complete remaining development, Commerce described numerous regular meetings that the development team holds, as well as efforts by others in the Bureau to monitor and report on PBOCS development progress. We added references to these monitoring efforts within the report. We agree that the monitoring efforts the department describes can help assess the progress being made; however, the monitoring efforts can only assess the progress being reported to them. First, a complete set of requirements is needed to understand the work that has been accomplished and the work remaining. As we have noted, the Bureau has not yet developed a full set of requirements. Second, the management tool's measurement of the development activity successfully addressing the requirements is directly related to the effectiveness of test cases developed for those requirements. However, as we have previously noted, if a requirement has not been adequately defined, it is unlikely that a test will discover a defect. Accordingly, until the Bureau completes the detailed requirements for PBOCS and prioritizes them it is unable to use these tools to fully gauge its progress toward meeting the overall project's goals and objectives of system development. We clarified our discussion of this in the report and reworded the recommendation to better focus on the need for reliable information. Commerce maintained that our draft report implied that no PBOCS development had begun and that no testing would be completed until March 2010. The draft report described development and testing dates that clearly illustrate that both development and testing have been occurring over several months leading up to their conclusion. We have included additional language in the text to clarify that development and testing take place over a period of time. We have also included a statement from Commerce that much of this activity has largely been completed for the first of three phases. Commerce commented on the accuracy of the dates used in the figures in the draft report. We verified that the dates we used were the correct dates that the Bureau had provided to us earlier. We made minor adjustments to some of the gridlines in the graphic for presentation purposes. The Bureau also provided additional information on the prior testing of matching software, the context for NRFU being dropped from the dress rehearsal, how PBOCS errors could potentially introduce errors into census files, and contract programmers we reported being involved in dress rehearsal PBOCS not being the same ones helping the Bureau with PBOCS development now. We revised the report as appropriate in response. Commerce commented on our discussion of the unreliability of information that the Bureau PBOCS development team provided us during a demonstration of two tools that it uses to help manage its iterative process of short development cycles. Commerce described the use of one of the two tools but not the one whose progress tracking measures were demonstrated to us and for which the team told us that data were not current. We have revised the text to more clearly state that more than one tool was used to demonstrate how development and testing was being managed by the PBOCS development team, and we have added additional language to describe the progress information that should have been current but that was not. Finally, as we had noted in the draft report, the Bureau has already begun taking action to address errors we had identified in its master schedule. Since we sent a draft of this report to Commerce, the Bureau provided additional information on the status of that effort, and we have updated this report accordingly. We are sending copies of this report to the Secretary of Commerce, the Director of the U.S. Census Bureau, and interested congressional committees. The report also is available at no charge on GAO's Web site at http://www.gao.gov. If you have any questions about this report please contact me at (202) 512- 2757 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 U.S. Census Bureau (Bureau) program's schedule estimates and compared them with relevant best practices in GAO Cost Estimating and Assessment Guide: Best Practices for Developing and Managing Capital Program Cost to determine the extent to which they reflect key practices that are fundamental to having a reliable schedule. These practices address whether the schedule is comprehensive, with logically sequenced activities spanning the scope of work to be performed so that the full picture is available to managers; current, with progress on ongoing activities updated regularly so that managers can readily know the status of the project; and controlled, with a documented process for changes to the schedule so that the integrity of the schedule is ensured. In doing so, we independently assessed a copy of the program's integrated master schedule and its underlying schedules against our best practices. We also interviewed knowledgeable program officials to discuss their use of best practices in creating the program's current schedule and we attended a schedule walk-through to better understand how the schedule was constructed and maintained. We tested the Bureau's schedule data for reliability by running a schedule check report in Pertmaster which is a scheduling analysis software tool that identifies missing logic, constraints, and so forth; using the schedule information from Pertmaster, copying the schedule data into Excel, and checking for specific problems that could hinder the schedule's ability to dynamically respond to changes; examining whether there were any open-ended activities (i.e., activities with no predecessors, successors, or both); searching for activities with poor logic; identifying whether there were any lags or leads that should only be used to show how two tasks interact and not to represent work; determining if activities were resource loaded, which helps to cost out the schedule and examine whether resources are overstretched or not available when needed; examining whether the schedule was baselined, when it had its status updated, and what deviations there were from the plan; and examining if there were any actual start or finish dates recorded in the future and whether there was any broken logic. In addition to the contact named above, Ty Mitchell, Assistant Director; Virginia Chanley; Vijay D'Souza; Jason Lee; Andrea Levine; Donna Miller; Crystal Robinson; Jessica Thomsen; Jonathon Ticehurst; and Katherine Wulff made key contributions to this report. 2010 Census: Census Bureau Continues to Make Progress in Mitigating Risks to a Successful Enumeration, but Still Faces Various Challenges. GAO-10-132T. Washington, D.C.: October 7, 2009. 2010 Census: Fundamental Building Blocks of a Successful Enumeration Face Challenges. GAO-09-430T. Washington, D.C.: March 5, 2009. Information Technology: Census Bureau Testing of 2010 Decennial Systems Can Be Strengthened. GAO-09-262. Washington, D.C.: March 5, 2009. Census 2010: Census Bureau's Decision to Continue with Handheld Computers for Address Canvassing Makes Planning and Testing Critical. GAO-08-936. Washington, D.C.: July 31, 2008. Census 2010: Census at Critical Juncture for Implementing Risk Reduction Strategies. GAO-08-659T. Washington, D.C.: April 9, 2008. Information Technology: Census Bureau Needs to Improve Its Risk Management of Decennial Systems. GAO-08-79. Washington, D.C.: October 5, 2007. 2010 Census: Basic Design Has Potential, but Remaining Challenges Need Prompt Resolution. GAO-05-9. Washington, D.C.: January 12, 2005.	To carry out the decennial census, the U.S. Census Bureau (Bureau) conducts a sequence of thousands of activities and numerous operations. As requested, The Government Accountability Office (GAO) examined (1) the Bureau's use of scheduling tools to maintain and monitor progress and (2) the status of two systems key to field data collection: the control system the Bureau will use to manage the work flow for paper-based operations, including nonresponse follow-up, and the system used to manage quality control of two major field operations. GAO applied schedule analysis tools; reviewed Bureau evaluations, planning documents, and other documents on work flow management; and interviewed Bureau officials. The Bureau's master schedule provides a useful tool to gauge progress, identify and address potential problems, and promote accountability as the Bureau carries out the census. GAO found that the Bureau's use of its master schedule generally follows leading scheduling practices that enable such high-level oversight. However, errors GAO found in the Bureau's schedule hinder the Bureau's ability to identify the effects of activity delays and to plan for the unexpected. The Bureau has recently begun taking systematic steps to identify and correct remaining errors. However, within its schedule, the Bureau does not identify the resources needed to complete activities, making it difficult for the Bureau to evaluate the costs of schedule changes or the resource constraints that may occur at peak levels of activity. Leveraging the 2010 scheduling experience and including resource needs in the 2020 schedule should facilitate planning for the 2020 Census, already underway. The automated control system that the Bureau plans to use to help manage major field data collection operations has significant development and testing milestones remaining, with some scheduled to finish shortly before the system needs to be deployed. This aggressive schedule leaves little time for resolving problems that may arise, and without prioritized and final software specifications and reliable progress measures, the Bureau may not get what it needs from the system to conduct the operations. Additionally, development of quality control software for two major field operations faces delays, although detailed specifications and test plans are final.	7,867	432
Congress established the Smithsonian in 1846 to administer a large bequest left to the United States by James Smithson, an English scientist, for the purpose of establishing, in Washington, D.C., an institution "for the increase and diffusion of knowledge among men." In accepting Smithson's bequest on behalf of the nation, Congress pledged the "faith of the United States" to carry out the purpose of the trust. To that end, the act establishing the Smithsonian provided for the administration of the trust, independent of the government itself, by a Board of Regents and a Secretary, who were given broad discretion in the use of the trust funds. The Board of Regents currently consists of nine private citizens as well as members of all three branches of the federal government, including the Chief Justice of the United States, the Vice President, and six congressional members, three from the Senate, and three from the House of Representatives. Over the last 160 years, the Smithsonian's facilities inventory has expanded to include 19 museums and galleries, 9 research centers, a zoo, and other facilities--most located in or near Washington, D.C. The major buildings owned by the Smithsonian range in age from about 160 years old to less than 1 year old, with most of the facilities' growth occurring since the 1960s. (See figure 1.) The Smithsonian's growth will continue with the construction of an aircraft restoration area--phase 2 of the National Air and Space Museum Steven F. Udvar-Hazy Center--and the design and construction of a National Museum of African American History and Culture, authorized by Congress in 2003. Beyond this, there has been Congressional interest in developing a National Museum of the American Latino. Although the Smithsonian is a trust instrumentality with a private endowment, it is largely funded by federal appropriations. In fiscal year 2006, the Smithsonian's operating revenues were about $947 million, of which about 65 percent came from federal appropriations. The facilities capital appropriation, which was about $98.5 million in fiscal year 2006, provides funds for construction and revitalization projects. The salaries and expenses appropriation, which was about $516.6 million in fiscal year 2006, includes funding for the program activities of each museum and research center; rents; utilities; and facilities' operations, maintenance, and security costs. The remaining operating revenues come from the Smithsonian's private trust funds. These are of two types: Restricted trust funds--which made up 29 percent of the Smithsonian's operating revenue in fiscal year 2006--include such items as gifts from individuals and corporations that specify the purpose of the funds. Restricted funds have been provided for some facilities' construction projects and enhancements related to revitalization projects. Unrestricted trust funds--which made up 6 percent of the Smithsonian's operating revenue in fiscal year 2006--include income from investment earnings and net proceeds from business activities, and can be used to support any Smithsonian activity. The Smithsonian typically has used unrestricted trust funds for fundraising, some salary costs, and central administration costs. Although the Smithsonian can use unrestricted trust funds for any purpose consistent with the Smithson Trust and therefore could use them for facilities revitalization and maintenance, it has not done so. Smithsonian officials stated that the unrestricted trust fund budget is small and that if these salary and central administration costs were not paid for with unrestricted trust funds, they would have to use federal funds or eliminate positions or programs to cover these expenses. With regard to real property management, the Smithsonian has made a number of facilities improvements since our 2005 report, but the continued deterioration of many facilities has caused access restrictions and threatened the collections, and the Smithsonian's cost estimate for facilities projects has increased. The Smithsonian follows many key security practices to protect its assets but faces communication and funding challenges. The Smithsonian has taken steps to improve its real property portfolio management but faces challenges related to funding constraints and its capital plan. The Smithsonian improved the condition of a number of facilities since our 2005 report. For example, the Smithsonian completed its revitalization of the Donald W. Reynolds Center for American Art and Portraiture, which houses the Smithsonian American Art Museum and the National Portrait Gallery. The Smithsonian also completed the construction of Pod 5, a fire- code-compliant space, to store alcohol-preserved specimens of the National Museum of Natural History. Many of these specimens are currently stored within the museum building on the National Mall in Washington, D.C., in spaces that do not meet fire-code standards. Collections are scheduled to be moved to Pod 5 over the next 2 years. At the same time, problems with the Smithsonian's facilities have resulted in additional access restrictions and damage and have continued to threaten collections and cause other problems, according to museum and facility directors: At the National Air and Space Museum, power capacity issues caused by inadequate electrical systems have forced the museum to occasionally close galleries to visitors. A lack of temperature and humidity control at storage facilities belonging to the National Air and Space Museum has caused corrosion to historic airplanes and increased the cost of restoring these items for exhibit. Chronic leaks in the roof of the Cultural Resources Center at Suitland, Maryland, which was completed in 1998 and opened in 1999 to hold collections of the National Museum of the American Indian, have forced staff to place plastic over several shelving units used to store collections, such as a set of wooden boats that includes an Eskimo kayak from Greenland and a rare Yahgan dugout canoe from Tierra del Fuego, according to officials at this facility (see fig. 2). The plastic sheeting limits visitors' visual access to the boats during open houses, which provide Native Americans and other groups with access to the collections. Leaks in a skylight since 2005 have at times forced the National Museum of African Art to cover the skylight with plastic to protect the building and its collections (see fig. 3). Leaks in the National Zoological Park's sea lion and seal pools as of July 2007 were causing an average daily water loss of 110,000 gallons, with a water replacement cost of $297,000 annually (see fig. 4). According to Smithsonian officials, repairs to some of these problems are scheduled to take place over the next several years. The Smithsonian's cost estimate for facilities projects from fiscal year 2005 through fiscal year 2013 has increased since April 2005 from about $2.3 billion to about $2.5 billion for the same time period. According to Smithsonian officials, this estimate includes only costs for which the Smithsonian expects to receive federal funds, and it could increase further. According to Smithsonian officials, the increase in this cost estimate was due to several factors. For example, Smithsonian officials said that major increases had occurred in projects for the National Zoological Park and the National Museum of American History because the two facilities had recently developed master plans that identified additional requirements. In addition, according to Smithsonian officials, estimates for antiterrorism projects had increased due to adjustments for higher costs for security-related projects at the National Air and Space Museum, and the increase in the cost estimate also reflects the effect of delaying corrective work in terms of additional damage and escalation in construction costs. The Smithsonian follows key security practices to protect its assets, but it faces two key challenges, one related to ensuring that museum and facility directors are aware of important security information and the other related to funding constraints. The Smithsonian follows key security practices we have identified in prior work, such as allocating resources to manage risk by contracting for a risk assessment report. This report, which includes individual assessments for over 30 Smithsonian facilities, was completed in 2005. The Smithsonian performs risk assessments for its facilities every 3 to 5 years to determine the need for security enhancements. Despite these efforts, we found that nine museum and facility directors we spoke with were unaware of the contents of the Smithsonian's risk assessment report. The Smithsonian's Office of Protection Services (OPS) is responsible for operating programs for security management at Smithsonian facilities. However, some museum and facility directors' lack of awareness of the risk assessment report limits their ability to work with OPS to identify, monitor, and respond to changes in the security of their facilities. Furthermore, some museum and facility directors cited an insufficient number of security officers to protect assets due to funding constraints. We found that the overall number of security officers had decreased since 2003, at a time when the Smithsonian's square footage had increased. Some of the Smithsonian's museum and facility directors said that in the absence of more security officers, some cases of vandalism and theft have occurred. In addition, two museum directors stated that it has become more difficult for them to acquire collections on loan because lenders have expressed concern with the lack of protection. In our September 2007 report, we recommended that the Smithsonian increase awareness of security issues. The Smithsonian concurred with this recommendation. Faced with deteriorating facilities and an increased cost estimate for facilities projects, the Smithsonian has taken steps to improve the management of its real property portfolio but faces challenges related to funding constraints and its capital plan. The Smithsonian's centralized office for real property management, known as the Office of Facilities Engineering and Operations (OFEO), has made significant strides in several areas related to real property portfolio management, including improving real property data, developing performance metrics, and refining its capital planning process. At the same time, however, funding constraints have presented considerable challenges to OFEO's efforts. For example, while a majority of museum and facility directors stated that OFEO does a good job of prioritizing and addressing problems with the amount of funds available, several museum and facility directors expressed frustration that projects at their facilities had been delayed. In addition, OFEO officials stated that a lack of sufficient funds for maintenance has limited their ability to optimally maintain equipment, leading to more expensive failures later on. The Smithsonian has omitted privately funded projects from its capital plan and its estimate of $2.5 billion for facilities projects through 2013, making it challenging for the Smithsonian and other stakeholders to comprehensively assess the funding and scope of facilities projects. In recent years, private funds have played an important role in funding some of the Smithsonian's highest-priority construction and revitalization projects, making up 39 percent of the Smithsonian's capital funds for facilities projects for fiscal years 2002 through 2007. Smithsonian officials noted that the majority of these private funds were donated for the construction of new facilities--namely, the National Museum of the American Indian and the National Air and Space Museum Steven F. Udvar- Hazy Center--and said there is no assurance that private funds would make up a similar percentage of the Smithsonian's funds for capital projects in future years. However, other organizations we visited during our review include both private and public investments in their capital plans to inform their stakeholders about the scope of projects and the extent of such partnerships used to fund capital needs. As a result, our September 2007 report recommends that the Smithsonian include privately funded projects in its capital plan. The Smithsonian concurred with this recommendation. Funding constraints are clearly a common denominator with regard to the Smithsonian's security and real property management, but while the Board of Regents has taken some steps to address our 2005 recommendation to develop a funding plan to address its facilities revitalization, construction, and maintenance needs, its evaluation of funding options has been limited. In September 2005, an ad-hoc Committee on Facilities Revitalization established by the Board of Regents reviewed nine funding options that had been prepared by Smithsonian management for addressing this estimated funding need. The nine options are briefly described in Table 1. After reviewing materials on these nine options prepared by Smithsonian management, the ad-hoc committee decided to request an additional $100 million annually in federal funds for facilities over its current appropriation for 10 years, starting in 2008, for a total of an additional $1 billion. To implement this recommendation, in September 2006, several members of the Board of Regents and the Secretary of the Smithsonian met with the President to discuss the issue of increased federal funding for the Smithsonian's facilities. According to two members of the Board of Regents, this option was selected because the board believed that the revitalization, construction, and maintenance of Smithsonian facilities are federal responsibilities. According to Smithsonian officials, it is the position of the Smithsonian, based on an historical understanding, that the maintenance and revitalization of facilities are a federal responsibility. Smithsonian officials pointed out that as early as the 1850s, the federal government has provided appropriations to the Smithsonian for the care and presentation of objects belonging to the United States. The President's fiscal year 2008 budget proposal included an increase of about $44 million over the Smithsonian's fiscal year 2007 appropriation, far short of what the Smithsonian requested, and it is not clear how much of this proposed increase would be used to support facilities. Our analysis of the Smithsonian's evaluations of the eight other funding options, including the potential benefits and drawbacks of each, showed that the evaluations were limited in that they did not always include a complete analysis, fully explain specific assumptions, or benchmark with other organizations--items crucial to determining each option's potential viability. For example, the Smithsonian's analysis of a general admission fee option included an adjustment of annual net gains to account for losses in revenue at restaurants and stores. However, the Smithsonian's materials did not discuss whether other museums had experienced such losses after establishing admission fees. We spoke with six other museums and a zoological park that stated that instituting or increasing admission fees did not decrease the amount of money visitors spent in restaurants and stores. In addition, although several of the nine options were dismissed because independently the options would not generate the amount of revenue required to address the Smithsonian's facilities projects, the evaluation did not consider the potential of combining options to generate more revenue. In our September 2007 report, we concluded that if the Smithsonian does not develop a viable strategy to address its growing cost estimate for facilities projects, its facilities and collections face increased risk, and the ability of the Smithsonian to meet its mission will likely decline. We therefore concluded that the Board of Regents' stewardship role obligates it to consider providing more private funds to meet the funding requirements of its overall mission. We recommended that the Smithsonian Board of Regents perform a more comprehensive analysis of alternative funding strategies beyond principally using federal funds to support facilities and submit a report to Congress and the Office of Management and Budget (OMB) describing a funding strategy for current and future facilities needs. The Smithsonian concurred with this recommendation. Recently, the Smithsonian Board of Regents has taken some additional steps towards developing a funding plan for facilities' projects. According to a Smithsonian official, at the Board of Regents' November 19, 2007, meeting, the Chair of the Committee on Facilities Revitalization, which became a standing committee in June 2007, reported to the board on the committee's activities. These activities included several meetings and conversations, including some with Smithsonian management, and the consideration of some new papers on funding options. The papers contained information on some previously identified options as well as on some new options. A Smithsonian official acknowledged, however, that these papers did not provide comprehensive analysis and that many were not significantly different from the previous materials. According to a Smithsonian official, the Smithsonian determined that it did not wish to spend resources further analyzing all options but instead will analyze those the board has decided to pursue. According to a Smithsonian official, at this November 19 meeting of the Board of Regents, the Regents concurred with a prioritized list of funding options that was presented by the committee. This list includes establishing a national campaign to raise private sector funds for Smithsonian programs and facilities, a request that Congress match funds raised in the national campaign with additional appropriations, and several other options. According to preliminary results of ongoing work, as of November 2007, the Board of Regents had largely implemented 12 of the Governance Committee's 25 recommendations. The board had taken steps towards implementing the other 13 recommendations, including, among other things, arranging for the implementation of some recommendations to be studied further and establishing target dates for implementation that range from December 2007 to mid 2008. The 12 recommendations implemented by the board include, for example, more clearly defining the roles and responsibilities of Regents and regent committees, improving access between the board and key members of senior management, and strengthening some policies regarding conflicts of interest and executive expenses. The board is also conducting studies on whether changes to the size and composition of the board would improve governance, how to effectively engage the Smithsonian's advisory boards, and executive compensation. Governance experts and others we interviewed stated that in general, the board appears to have taken some positive steps toward governance reform. However, according to the literature we reviewed and governance experts we interviewed, success will depend in part on how Regents embrace their new responsibilities and on their level of engagement, as good governance results from a board that consists of active and deeply engaged members. The board reports that it has largely implemented 12 of the 25 recommendations of the Governance Committee. Appendices II and III provide summaries of the implementation status of the Governance Committee and IRC recommendations. The following are descriptions of some of the key recommendations that have been implemented. Duties and responsibilities of Regents and regent committees have been clarified. Previously, the roles and responsibilities of Regents and regent committees were not clearly and explicitly stated. The Governance Committee found that without a formal job description, the role of a regent was subject to individual interpretation, and it determined that adopting a clear statement of regent duties and responsibilities would reaffirm that the board is the Smithsonian's ultimate governing authority. Accordingly, the board has taken several actions to clarify these responsibilities, including 1) adopting specific written responsibilities and expectations for all Regents, including that all Regents should participate in committees; 2) clarifying the duties of the Chancellor (who by tradition is the Chief Justice) and creating a new board Chair position to play a leadership role in guiding the board in the exercise of its oversight functions; and 3) appointing new leadership for all committees. These changes are now being put into practice and it is therefore too soon to evaluate whether they will be effective in improving governance at the Smithsonian. Access of key management to the board and information available have been improved. Several of the recent governance problems reported at the Smithsonian have been attributed to the isolation of certain members of senior management from the board and the office of the former Secretary's tight control of information available to the board. The board has taken a number of steps to address these issues, including 1) amending its bylaws to require the attendance of the General Counsel and Chief Financial Officer, or their designees, at all meetings of the board and relevant board committees, 2) strengthening the relationship between the Inspector General's office and the board, and 3) establishing an independent Office of the Regents that is responsible for, among other things, setting the agenda for the board in concert with the Secretary and through consultation with Smithsonian museum directors and others. While we have not independently validated these changes to assess whether they will be effective in improving oversight, both senior management and the Board of Regents' staff told us that communication between the Regents and senior management has improved. For example, the General Counsel and Chief Financial Officer both told us that they are now directly reporting to the Regents and are available at board meetings to discuss details and answer questions about information they bring to the Regents. Management policies have been strengthened. The Governance Committee found that previous policies regarding expense reimbursement (including travel) and conflict-of-interest policies were not well-defined, which contributed to the lack of oversight of certain practices of the former Secretary as well as the failure to actively manage apparent conflicts of interest at the Smithsonian. The board has clarified management policies on travel and expense reimbursement, and created new ones, such as prohibiting senior executives from serving on the boards of for-profit companies. We have not independently validated these changes to assess whether they will be effective in improving oversight, and it is not yet clear how these policies will improve the governance of the institution in practice. A compensation range to guide the search for a new secretary has been established. In response to concerns about the compensation of the former Secretary (which included, among other things, a housing allowance that some Regents were unaware of), the board contracted for a study to identify a compensation range to guide the search for a new secretary, with the goals of making the secretary's compensation transparent and balancing the Smithsonian's public trust status with the need to attract the best leader. According to a Board of Regents' staff member, the study included benchmarking with about 30 comparable organizations. In October, the Board of Regents approved the range recommended by the study to be used in the recruitment process. We have not independently validated this recommended range. Several recommendations have not yet been fully implemented but are actively being considered and debated. For example, at the direction of the Regents, the Smithsonian is examining the extent to which Smithsonian Business Ventures (SBV), a centralized business entity responsible for the Smithsonian's various business activities, should follow Smithsonian-wide policies for areas such as contracting and travel. Previously, SBV adopted its own policies and was not subject to all Smithsonian policies. The efforts underway are preliminary and final actions have not yet been taken, but the Regents report them as being on track toward implementation. In addition, in August 2007, the Acting Secretary established a task force to review the entirety of SBV and make recommendations on its governance, structure, and the role of revenue- generating activities within the Smithsonian. Those recommendations will be presented to the Acting Secretary by the end of the year and to the Regents at their January 2008 meeting. The Board of Regents is continuing to study other important issues related to improving governance at the Smithsonian. In particular, some observers have suggested that the size and composition of the board contributed to the lack of oversight of management practices, and in response, the Board of Regents, with the assistance of outside consultants, is evaluating potential structural changes to the board. The report is due in January 2008. Any changes to the size and composition of the board would require legislative action. Currently, the Board of Regents consists of 17 members--9 citizen Regents, 6 Congressional Regents, and 2 ex-officio Regents (the Vice President and the Chief Justice)--which is the average size for boards of nonprofit organizations. However, much of the work of the Board of Regents is conducted at the committee level, and in the past, not all Regents have served on committees, suggesting that in practice, the "working" size of the board has been somewhat smaller than 17. Nonetheless, based on our review of common non-profit governance practices, and according to governance experts and others we consulted, there is no "right" number of board members. A board that is small will have fewer members to serve on committees, whereas having too many board members can lead to increased difficulty in making decisions and can stifle the effectiveness of the board. Determining the appropriate size for a board entails balancing the need for a board that is of a manageable size with such things as ensuring the board has the expertise necessary to achieve its mission and achieving an appropriate diversity of values and perspectives among board members. Beyond the size and structure of the board, several governance experts we interviewed stressed that having board members who actively participate and are engaged is central to good governance, and some nonprofit organizations we met with stated that they focused on changing the governance culture at their organization. For example, representatives from one nonprofit organization we spoke with--which recently had similar issues related to executive compensation and expenses--stated that they have focused on creating a culture of accountability and transparency in the board's activities. They told us that they did not change the size or structure of the board, but rather clarified roles and responsibilities, improved communication throughout the various divisions of the organization, and took other actions aimed at improving the accountability and transparency of the board. In order to address other governance recommendations, the Board of Regents has planned another longer term study, due in May 2008, aimed at establishing a stronger link between the board and the Smithsonian's 30 advisory boards. These boards include the Smithsonian National Board as well as advisory boards that focus on individual museums or research centers. According to the Governance Committee, the advisory boards provide a key link between the Regents and the public and a direct connection to the museums. Based on preliminary findings of our ongoing work, the Regents generally have had limited interaction with the advisory boards, although the advisory boards serve important functions in the operations of the individual museums and other facilities across the Smithsonian. Preliminary results from our ongoing work indicate that several museum directors are concerned about the Regents' level of interaction with advisory boards and most museum directors see additional value from having a more direct relationship between the Board of Regents and the various museums, research facilities, and other institutions within the Smithsonian. Governance experts and others we spoke with said that, in general, the board appears to have taken some positive steps toward governance reform. However, according to the literature we reviewed and governance experts we interviewed, success will depend in part on how Regents embrace their new responsibilities and on their level of engagement, as good governance results from a board that consists of active and deeply engaged members. In our ongoing work, we will continue to assess the Board of Regents' governance changes and how the board is addressing long-term governance challenges facing the Smithsonian. We expect to report on these issues in 2008. Madam 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 L. Goldstein at (202) 512-2834 or [email protected]. Individuals making key contributions to this testimony include Brandon Haller, Carol Henn, Jennifer Kim, Margaret McDavid, Susan Michal-Smith, Amanda Miller, Sara Ann Moessbauer, Dave Sausville, Stanley Stenerson, Andrew Von Ah, and Alwynne Wilbur. We conducted our work for this testimony from October to December 2007 in accordance with generally accepted government auditing standards. Our testimony regarding the Smithsonian's real property management is based on our past report on the Smithsonian's facilities, including their condition, security, management, and funding, and information provided by Smithsonian officials on steps taken to develop a funding plan for facilities projects. Our testimony regarding preliminary results of our ongoing work on the Smithsonian's governance changes is based on our review of Smithsonian and other documents, and interviews with Smithsonian Regents and officials and others. Specifically, we reviewed laws relating to the Smithsonian, the Independent Review Committee report, and the Smithsonian's Governance Committee Report, and spoke to Smithsonian Regents and officials on their progress towards implementing governance recommendations. We also interviewed all Smithsonian museum directors. We conducted a literature search to help identify governance experts and organizations that had recently undergone governance reforms. We identified and interviewed ten specialists on nonprofit or museum governance, including academics and representatives of associations dedicated to nonprofit governance. This included four governance or museum experts who had advised or consulted with the Smithsonian during its governance review, as well as six that we identified through a literature search or were referred to us by other experts in the field. We also reviewed literature on nonprofit governance to identify common nonprofit governance practices, including literature from organizations such as the American Association of Museums, BoardSource, Council on Foundations, and Independent Sector. In addition, we met with several organizations that had characteristics similar to those of the Smithsonian and that had recently undergone governance reforms. We focused on organizations that had had similar governance problems, conducted a governance review, and changed their practice or structure; organizations that had a structure that consisted of a central or national governing body with multiple programming units; and organizations with similar missions and stewardship challenges. As of December 5, 2007, we had met with officials from American University, American National Red Cross, Getty Trust, National Trust for Historic Preservation, and United Way of America. In ongoing work, we are continuing to evaluate the Smithsonian Board of Regents' governance reforms. Our objectives for this ongoing work include assessing (1) how governance changes being made by the Board of Regents address recent governance problems and how changes will be implemented and evaluated, and (2) how the Board of Regents is addressing other long-term governance challenges facing the Smithsonian, such as funding, strategic planning, facilities, collections and museum management, and what, if any, additional oversight activities would be beneficial to the board in achieving its mission. We are also continuing to interview recognized experts in nonprofit governance selected through the process described above to obtain their independent views on the Smithsonian's governance problems and whether recent governance changes will address those problems; and we are conducting interviews and reviewing documents from organizations selected through the process described above that have recently changed their governance structure and practice. We expect to report on these issues in 2008. According to Smithsonian Institution (Smithsonian) officials, the Smithsonian Board of Regents has largely implemented 12 of the 25 recommendations made by the Board of Regents' Governance Committee based on its internal study, and has taken steps towards implementing the other recommendations. The implementation of some of these recommendations is under further study by the board. Figure 5 provides a summary of the board's efforts towards implementing these recommendations, as described by Smithsonian officials. The Smithsonian Institution (Smithsonian) Board of Regents has stated that the Governance Committee's 25 recommendations generally encompass the recommendations made by the Independent Review Committee (IRC) as part of its study to address governance problems at the Smithsonian. As such, the Smithsonian is not tracking its implementation of these recommendations individually, except that it notes which IRC recommendations are relevant to each Governance Committee recommendation. Based on information provided to us by Smithsonian officials, the board has implemented 3 of the IRC's 12 recommendations, and has taken steps towards implementing the others, with the exception of one recommendation (IRC recommendation number 12) that was not issued directly to the board. Several of these recommendations are being considered as part of ongoing studies undertaken by the board to address the Governance Committee recommendations. Figure 6 provides a summary of the board's efforts towards implementing the IRC recommendations, as described by Smithsonian officials.	The Smithsonian Institution (Smithsonian) is the world's largest museum complex. Its funding comes from its own private trust fund assets and federal appropriations, with the majority of funds for facilities coming from federal appropriations. In 2005, GAO reported that the Smithsonian's current funding would not be sufficient to cover its estimated $2.3 billion in facilities projects through 2013 and recommended that the Smithsonian Board of Regents, its governing body, develop and implement a funding plan. Recently, problems related to a lack of adequate oversight of executive compensation and other issues have raised concerns about governance at the Smithsonian. This testimony discusses GAO's recently issued work on the Smithsonian's real property management efforts and its efforts to develop and implement strategies to fund its facilities projects. In addition, it describes preliminary results of GAO's ongoing work on the Smithsonian's governance challenges. The work for this testimony is based on GAO's September 2007 report, Smithsonian Institution: Funding Challenges Affect Facilities' Conditions and Security, Endangering Collections, which included recommendations. For ongoing governance work, GAO reviewed Smithsonian documents and interviewed Smithsonian officials, academics, and representatives of nonprofit associations. While the Smithsonian has made some improvements to its real property management, the continued deterioration of many Smithsonian facilities has caused problems, and the Smithsonian's real property management efforts face challenges. The deterioration of facilities has caused access restrictions and threatened collections. In addition, the Smithsonian's estimate for facilities projects increased to $2.5 billion. While the Smithsonian follows key security practices, communication of security information and funding constraints pose challenges. The Smithsonian has made significant strides in improving its real property portfolio management. However, the Smithsonian omitted privately funded projects from its capital plan, making it challenging to assess the total funding and scope of projects. GAO's September 2007 report recommended that the Smithsonian increase awareness of security issues and include privately funded projects in its capital plan. The Smithsonian concurred. To address GAO's 2005 recommendation that the Smithsonian develop a funding plan for facilities projects, the Board of Regents created an ad-hoc committee that reviewed nine options and chose to request increased federal funding. Some of the Smithsonian's evaluations of the nine funding options were limited in that they did not always provide complete analysis, fully explain assumptions, benchmark with other organizations, or consider combining options to increase revenue. GAO's September 2007 report recommended that the Smithsonian more comprehensively analyze funding options and report to Congress and the Office of Management and Budget on a funding strategy. The Smithsonian concurred. The Board of Regents recently established a prioritized list of funding options. Preliminary results of GAO's ongoing work on broader governance issues indicate that the Board of Regents has made some changes to strengthen governance, such as more clearly defining the Regents' oversight responsibilities and improving access between the board and key members of senior management. The board is also studying whether changes to its size and composition would strengthen governance. GAO's preliminary work suggests that the Board appears to have taken some positive steps toward governance reform, but that success will depend in part on how Regents embrace their new responsibilities and on their level of engagement.	6,883	747
Patch management is a critical process used to help alleviate many of the challenges involved with securing computing systems from attack. A component of configuration management, it includes acquiring, testing, applying, and monitoring patches to a computer system. Flaws in software code that could cause a program to malfunction generally result from programming errors that occur during software development. The increasing complexity and size of software programs contribute to the growth in software flaws. For example, Microsoft Windows 2000 reportedly contains about 35 million lines of code, compared with about 15 million lines for Windows 95. As reported by the National Institute of Standards and Technology (NIST), based on various studies of code inspections, most estimates suggest that there are as many as 20 flaws per thousand lines of software code. While most flaws do not create security vulnerabilities, the potential for these errors reflects the difficulty and complexity involved in delivering trustworthy code. From 1995 through 2003, the CERT Coordination Center (CERT/CC) reported just under 13,000 security vulnerabilities that resulted from software flaws. Figure 1 illustrates the dramatic growth in security vulnerabilities during this period. As vulnerabilities are discovered, attackers can cause major damage in attempting to exploit them. This damage can range from defacing Web sites to taking control of entire systems and thereby being able to read, modify, or delete sensitive information; destroy systems; disrupt operations; or launch attacks against other organizations' systems. Attacks can be launched against specific targets or widely distributed through viruses and worms. The sophistication and effectiveness of cyber attacks have steadily advanced. According to security researchers, reverse-engineering patches has become a leading method for exploiting vulnerabilities. By using the same tools used by programmers to analyze malicious code and perform vulnerability research, hackers can locate the vulnerable code in unpatched software and build to exploit it. Reverse engineering starts by locating the files or code that changed when a patch was installed. Then, by comparing the patched and unpatched versions of those files, a hacker can examine the specific functions that changed, uncover the vulnerability, and exploit it. A spate of new worms has been released since February--most recently last month--and more than half a dozen new viruses were unleashed. The worms were variants of the Bagle and Netsky viruses. The Bagle viruses typically included an infected e-mail attachment containing the actual virus; the most recent versions have protected the infected attachment with a password, preventing anti-virus scanners from examining it. The recent Netsky variants attempted to deactivate two earlier worms and, when executed, reportedly make a loud beeping sound. Another worm known as Sasser, like the Blaster worm discussed later, exploits a vulnerability in the Microsoft Windows operating system, while the Witty worm exploits a flaw in certain Internet security software products. The number of computer security incidents within the past decade has risen in tandem with the dramatic growth in vulnerabilities, as the increased number of vulnerabilities provides more opportunities for exploitation. CERT/CC has reported a significant growth in computer security incidents--from about 9,800 in 1999 to over 82,000 in 2002 and over 137,500 in 2003. And these are only the reported attacks. The director of the CERT Centers has estimated that as much as 80 percent of actual security incidents go unreported, in most cases because there were no indications of penetration or attack, the organization was unable to recognize that its systems had been penetrated, or the organization was reluctant to report the attack. Figure 2 shows the number of incidents reported to CERT/CC from 1995 through 2003. According to CERT/CC, about 95 percent of all network intrusions could be avoided by keeping systems up to date with appropriate patches; however, such patches are often not quickly or correctly applied. Maintaining current patches is becoming more difficult, as the length of time between the awareness of a vulnerability and the introduction of an exploit is shrinking. For example, the recent Witty worm was released only a day after the announcement of the vulnerability it attacked. As figure 3 illustrates, in the last 3 years, the time interval between the announcement of a particular vulnerability and the release of its associated worm has diminished dramatically. Although the economic impact of a cyber attack is difficult to measure, a recent Congressional Research Service study cites members of the computer security industry as estimating that worldwide, major virus attacks in 2003 cost $12.5 billion. They further project that economic damage from all forms of digital attacks in 2004 will exceed $250 billion. Following are examples of significant damage caused by worms that could have been prevented had the available patches been effectively installed: * On January 25, 2003, Slammer reportedly triggered a global Internet slowdown and caused considerable harm through network outages and other unforeseen consequences. As discussed in our April 2003 testimony on the security of federal systems and critical infrastructures, the worm reportedly shut down a 911 emergency call center, canceled airline flights, and caused automated teller machine failures. According to media reports, First USA Inc., an Internet service provider, experienced network performance problems after an attack by the Slammer worm, due to a failure to patch three of its systems. Additionally, the Nuclear Regulatory Commission reported that Slammer also infected a nuclear power plant's network, resulting in the inability of its computers to communicate with each other, disrupting two important systems at the facility. In July 2002, Microsoft had released a patch for its software vulnerability that was exploited by Slammer. Nevertheless, according to media reports, Slammer infected some of Microsoft's own systems. Reported cost estimates of Slammer damage range between $1.05 billion and $1.25 billion. * On August 11, 2003, the Blaster worm was launched to exploit a vulnerability in a number of Microsoft Windows operating systems. When successfully executed, it caused the operating system to fail. Although the security community had received advisories from CERT/CC and other organizations to patch this critical vulnerability, Blaster reportedly infected more than 120,000 unpatched computers in its first 36 hours. By the following day, reports began to state that many users were experiencing slowness and disruptions to their Internet service, such as the need to reboot frequently. The Maryland Motor Vehicle Administration was forced to shut down, and systems in both national and international arenas were also affected. Experts consider Blaster, which affected a range of systems, to be one of the worst exploits of 2003. Microsoft reported that the Blaster worm has infected at least 8 million Windows computers since last August. * On May 1 of this year, the Sasser worm was reported, which exploits a vulnerability in the Windows Local Security Authority Subsystem Service component. This worm can compromise systems by allowing a remote attacker to execute arbitrary code with system privileges. According to US-CERT (the United States Computer Emergency Readiness Team), systems infected by this worm may suffer significant performance degradation. Sasser, like last year's Blaster, exploits a vulnerability in a component of Windows by scanning for vulnerable systems. Estimates by Internet Security Systems, Inc., place the Sasser infections at 500,000 to 1 million machines. Microsoft has reported that 9.5 million patches for the vulnerability were downloaded from its Web site in just 5 days. The federal government has taken several steps to address security vulnerabilities that affect agency systems, including efforts to improve patch management. Specific actions include (1) requiring agencies to annually report on their patch management practices as part of their implementation of FISMA, (2) identifying vulnerability remediation as a critical area of focus in the President's National Strategy to Secure Cyberspace, and (3) creating US-CERT. FISMA permanently authorized and strengthened the information security program, evaluation, and reporting requirements established for federal agencies in prior legislation. In accordance with OMB's reporting instructions for FISMA implementation, maintaining up-to-date patches is part of system configuration management requirements. The 2003 FISMA reporting instructions that specifically address patch management practices include agencies' status on (1) developing an inventory of major IT systems, (2) confirming that patches have been tested and installed in a timely manner, (3) subscribing to a now-discontinued governmentwide patch notification service, and (4) addressing patching of security vulnerabilities in configuration requirements. The President's National Strategy to Secure Cyberspace was issued on February 14, 2003, to identify priorities, actions, and responsibilities for the federal government--as well as for state and local governments and the private sector--with specific recommendations for action to DHS. This strategy identifies the reduction and remediation of software vulnerabilities as a critical area of focus. Specifically, it identifies the need for (1) a better- defined approach on disclosing vulnerabilities, to reduce their usefulness to hackers in launching an attack; (2) creating common test beds for applications widely used among federal agencies; and (3) establishing best practices for vulnerability remediation in areas such as training, use of automated tools, and patch management implementation processes. US-CERT was created last September by DHS's National Cyber Security Division (NCSD) in conjunction with CERT/CC and the private sector. Specifically, US-CERT is intended to aggregate and disseminate cyber security information to improve warning and response to incidents, increase coordination of response information, reduce vulnerabilities, and enhance prevention and protection. This free service--which includes notification of software vulnerabilities and sources for applicable patches--is available to the public, including home users and both government and nongovernment entities. Common patch management practices--such as establishing and enforcing standardized policies and procedures and developing and maintaining a current technology inventory--can help agencies establish an effective patch management program and, more generally, assist in improving an agency's overall security posture. Our survey results showed that the 24 agencies are implementing some practices for effective patch management, but not others. Specifically, all report that they have some level of senior executive involvement in the patch management process and cited the chief information security officer (CISO) as being the individual most involved in the patch management process. The CISO is involved in managing risk, ensuring that appropriate resources are dedicated, training computer security staff, complying with policies and procedures, and monitoring the status of patching activities. Other areas in which agencies report implementing common patch management practices are in performing a systems inventory and providing information security training. All 24 agencies reported that they develop and maintain an inventory of major information systems as required by FISMA and do so using a manual process, an automated tool, or an automated service. Additionally, most of the 24 agencies reported that they provide both on-the-job and classroom training in computer security, including patch management, to system owners, administrators, and IT security staff. However, agencies are inconsistent in developing patch management policies and procedures, testing of patches, monitoring systems, and performing risk assessments. Specifically, not all agencies have established patch management policies and procedures. Eight of the 24 surveyed agencies report having no policies and 10 do not have procedures in place. Additionally, most agencies are not testing all patches before deployment. Although all 24 surveyed agencies reported that they test some patches against their various systems configurations before deployment, only 10 agencies reported testing all patches, and 15 agencies reported that they do not have any testing policies in place. Moreover, although all 24 agencies indicated that they perform some monitoring activities to assess their network environments and determine whether patches have been effectively applied, only 4 agencies reported that they monitor all of their systems on a regular basis. Further, just under half of the 24 agencies said they perform a documented risk assessment of all major systems to determine whether to apply a patch or an alternative workaround. Without consistent implementation of patch management practices, agencies are at increased risk of attacks that exploit software vulnerabilities in their systems. More refined information on key aspects of agencies' patch management practices--such as their documentation of patch management policies and procedures and the frequency with which systems are monitored to ensure that patches are installed--could provide OMB, Congress, and agencies themselves with data that could better enable an assessment of the effectiveness of an agency's patch management processes. Several automated tools and services are available to assist agencies with patch management. A patch management tool is an application that automates a patch management function, such as scanning a network and deploying patches. Patch management services are third-party resources that provide services such as notification, consulting, and vulnerability scanning. Tools and services can make the patch management process more efficient by automating otherwise time-consuming tasks, such as keeping current on the continuous flow of new patches. Commercially available tools and services include, among others, methods to inventory computers and the software applications and patches installed; identify relevant patches and workarounds and gather them in one location; group systems by departments, machine types, or other logical manage patch deployment; scan a network to determine the status of patches and other corrections made to network machines (hosts and/or clients); assess machines against set criteria, including required system configurations; access a database of patches; report information to various levels of management about the status of the network. In addition to automated tools and services, agencies can use other methods to assist in their patch management activities. For example, although labor-intensive, they can maintain a database of the versions and latest patches for each server and each client in their network, and track the security alerts and patches manually. Agencies can also employ systems management tools with patch- updating capabilities to deploy the patches. This method requires that agencies monitor for the latest security alerts and patches. Further, software vendors may provide automated tools with customized features to alert system administrators and users of the need to patch and, if desired, to automatically apply patches. We have previously reported on FedCIRC's Patch Authentication and Dissemination Capability (PADC), a service initiated in February 2003 to provide users with a method of obtaining information on security patches relevant to their enterprise and access to patches that had been tested in a laboratory environment. According to FedCIRC officials, this service was terminated on February 21, 2004, for a variety of reasons, including low levels of usage. In the absence of this service, agencies are left to independently perform all components of effective patch management. A centralized resource that incorporates lessons learned from PADC's limitations could provide standardized services, such as testing of patches and a patch management training curriculum. Security experts and agency officials have identified several obstacles to implementing effective patch management; these include the following: * High volume and increasing frequency of patches. Several of the agencies we surveyed indicated that the sheer quantity and frequency of needed patches posed a challenge to the implementation of the recommended patch management practices. As increasingly virulent computer worms have demonstrated, agencies need to keep systems updated with the latest security patches. * Patching heterogeneous systems. Variations in platforms, configurations, and deployed applications complicate agencies' patching processes. Further, their unique IT infrastructures can make it challenging for agencies to determine which systems are affected by a software vulnerability. * Ensuring that mobile systems receive the latest patches. Mobile computers--such as laptops, digital tablets, and personal digital assistants--may not be on the network at the right time to receive appropriate patches that an agency deploys and are at significant risk of not being patched. * Avoiding unacceptable downtime when patching systems that require high availability. Reacting to new security patches as they are introduced can interrupt normal and planned IT activities, and any downtime incurred during the patching cycle interferes with business continuity, particularly for critical systems that must be continuously available. * Dedicating sufficient resources to patch management. Despite the growing market of patch management tools and services that can track machines that need patches and automate patch downloads from vendor sites, agencies noted that effective patch management is a time-consuming process that requires dedicated staff to assess vulnerabilities and test and deploy patches. As with the challenges to patch management identified by agencies, our report also identified a number of steps that can be taken to address the risks associated with software vulnerabilities. These include: * Better software engineering. More rigorous engineering practices, including a formal development process, developer training on secure coding practice, and code reviews, can be employed when designing, implementing, and testing software products to reduce the number of potential vulnerabilities and thus minimize the need for patching. * Implementing "defense-in-depth." According to security experts, a best practice for protecting systems against cyber attacks is for agencies to build successive layers of defense mechanisms at strategic points in their IT infrastructures. This approach, commonly referred to as defense-in-depth, entails implementing a series of protective mechanisms such that if one fails to thwart an attack, another will provide a backup defense. * Using configuration management and contingency planning. Industry best practices and federal guidance recognize the importance of configuration management when developing and maintaining a system or network to ensure that additions, deletions, or other changes to a system do not compromise the system's ability to perform as intended. Contingency plans provide specific instructions for restoring critical systems, including such elements as arrangements for alternative processing facilities, in case usual facilities are significantly damaged or cannot be accessed due to unexpected events such as temporary power failure, accidental loss of files, or major disaster. * Ongoing improvements in patch management tools. Security experts have noted the need for improving currently available patch management tools. Several patch management vendors have been working to do just that. * Research and development of new technologies. Software security vulnerabilities can also be addressed through the research and development of automated tools to uncover hard-to- see security flaws in software code during the development phase. * Federal buying power. The federal government can use its substantial purchasing power to demand higher quality software that would hold vendors more accountable for security defects in released products and provide incentives for vendors that supply low-defect products and products that are highly resistant to viruses.	Flaws in software code can introduce vulnerabilities that may be exploited to cause significant damage to federal information systems. Such risks continue to grow with the increasing speed, sophistication, and volume of reported attacks, as well as the decreasing period of the time from vulnerability announcement to attempted exploits. The process of applying software patches to fix flaws--patch management--is critical to helping secure systems from attacks. At the request of the House Committee on Government Reform and the Subcommittee on Technology, Information Policy, Intergovernmental Relations, and the Census, GAO reviewed the (1) reported status of 24 selected agencies in performing effective patch management practices, (2) tools and services available to federal agencies, (3) challenges to this endeavor, and (4) additional steps that can be taken to mitigate risks created by software vulnerabilities. This testimony highlights the findings of GAO's report, which is being released at this hearing. Agencies are generally implementing certain common patch management-related practices, such as inventorying their systems and providing information security training. However, they are not consistently implementing other common practices. Specifically, not all agencies have established patch management policies and procedures. Moreover, not all agencies are testing all patches before deployment, performing documented risk assessments of major systems to determine whether to apply patches, or monitoring the status of patches once they are deployed to ensure that they are properly installed. Commercial tools and services are available to assist agencies in performing patch management activities. These tools and services can make patch management processes more efficient by automating time-consuming tasks, such as scanning networks and keeping up-to-date on the continuous releases of new patches. Nevertheless, agencies face significant challenges to implementing effective patch management. These include, among others, (1) the high volume and increasing frequency of needed patches, (2) patching heterogeneous systems, (3) ensuring that mobile systems such as laptops receive the latest patches, and (4) dedicating sufficient resources to assessing vulnerabilities and deploying patches. Agency officials and computer security experts have identified several additional measures that vendors, the security community, and the federal government can take to address the risks associated with software vulnerabilities. These include, among others, adopting more rigorous software engineering practices to reduce the number of coding errors that create the need for patches, implementing successive layers of defense mechanisms at strategic points in agency information systems, and researching and developing new technologies to help uncover flaws during software development.	3,868	502
Before addressing these issues in detail, we would like to review two primary reasons why effective and efficient supply chain management is important for DOD. First, supply support to the warfighter affects readiness and military operations. In fact, the supply chain is a critical link in determining outcomes on the battlefield and can affect the military's ability to meet national security goals. We previously reported on problems with supply distribution support in Iraq, including shortages of critical supply items and weaknesses in requirements forecasting, asset visibility, and distribution. DOD took steps to address such issues, for example, by establishing a joint deployment and distribution operations center to coordinate the flow of materiel into the theater. Second, given the high demand for goods and services to support ongoing U.S. military operations, the investment of resources in the supply chain is substantial. DOD spends billions of dollars to purchase, manage, store, track, and deliver supplies. It is particularly important that these substantial resources are effectively and efficiently invested in light of the nation's current fiscal environment. In fact, the Secretary of Defense has recently stated that given the nation's difficult economic circumstances and fiscal condition, DOD will need to reduce overhead costs and transfer those savings to force structure and modernization priorities. Congressional interest has likewise focused attention on areas within DOD's logistics portfolio that are in need of improvement. One such area is inventory management. The Fiscal Year 2010 National Defense Authorization Act requires DOD to prepare a comprehensive plan for improving the inventory management systems of the military departments and the Defense Logistics Agency (DLA), with the objective of reducing the acquisition and storage of secondary inventory that is excess to requirements. We understand that DOD is finalizing the development of its comprehensive plan and expects to release that plan later this year. As noted earlier, DOD supply chain management has been designated by GAO as a high-risk area. GAO's high-risk designation is intended to place special focus on programs and functions that need sustained management attention in order to resolve identified problems. We have reported that in order to successfully resolve supply chain management problems, DOD needs to sustain top leadership commitment and long-term institutional support for its strategic planning efforts for supply chain management, obtain necessary commitments for its initiatives from the military services and other DOD components, make substantial progress in implementing improvement initiatives and programs across the department, and demonstrate progress in achieving the objectives identified in supply chain management-related strategic planning documents. We have also encouraged DOD to develop an integrated, comprehensive plan for improving logistics. While we have previously noted progress DOD has made toward improving some aspects of supply chain management, demonstrating sustained improvement has been a continuing challenge due in part to a lack of outcome-oriented performance measures that are consistent across the department and that are linked to focus areas, such as requirements forecasting, asset visibility, and materiel distribution, and related initiatives. In addition, successful resolution of weaknesses in supply chain management depends on improvements in some of DOD's other high-risk areas. For example, modernized business systems and the related investments in needed information technology are essential to the department's effort to achieve total asset visibility, an important supply chain management issue. Regarding financial management, we have repeatedly reported that weaknesses in business management systems, processes, and internal controls not only adversely affect the reliability of reported financial data but also the management of DOD operations. Such weaknesses have adversely affected the ability of DOD to control costs, ensure basic accountability, anticipate future costs and claims on the budget, measure performance, maintain funds control, and prevent fraud. DOD's new Logistics Strategic Plan is intended to support other recent strategic planning efforts in the department, including the completion of the 2010 Quadrennial Defense Review and the publication of the 2009 Strategic Management Plan. The Quadrennial Defense Review is a congressionally mandated report that provides a comprehensive examination of the national defense strategy, force structure, force modernization plans, infrastructure, budget plan, and other elements of defense programs and policies. The review is to occur every 4 years, with a view toward determining and expressing the nation's defense strategy and establishing a defense program for the next 20 years. Also in response to legislative requirements, DOD issued the Strategic Management Plan in 2008 and updated it in 2009. The Strategic Management Plan serves as DOD's strategy for improving its business operations, and describes the steps DOD will take to better integrate business with the department's strategic planning and decision processes in order to manage performance. A key starting point in developing and implementing an effective results- oriented management framework is an agency's strategic planning effort. Our prior work has shown that strategic planning is the foundation for defining what the agency seeks to accomplish, identifying the strategies it will use to achieve desired results, and then determining how well it succeeds in reaching results-oriented goals and achieving objectives. Developing a strategic plan can help clarify organizational priorities and unify the agency's staff in the pursuit of shared goals. If done well, strategic planning is continuous, provides the foundation for the most important things the organization does each day, and fosters informed communication between the organization and its stakeholders. Combined with effective leadership, strategic planning provides decision makers with a framework to guide program efforts and the means to determine if these efforts are achieving the desired results. The Government Performance and Results Act (GPRA) and associated guidance from the Office of Management and Budget (OMB) require, among other things, that government agencies periodically develop agencywide strategic plans that contain certain necessary elements to be used by the agency and external stakeholders in decision making. Furthermore, recent OMB guidance concerning GPRA-related strategic plans stated that such a strategic plan should also provide sufficient context to explain why specific goals and strategies were chosen. The strategic planning requirements of GPRA and its implementation guidance generally only apply to agencywide strategic plans. While GPRA does not apply to DOD's Logistics Strategic Plan, our prior work has identified many of GPRA's requirements as the foundation for effective strategic planning. Our prior work has shown that organizations conducting strategic planning need to develop a comprehensive, results- oriented management framework to provide an approach whereby program effectiveness is measured in terms of outcomes or impact, rather than outputs, such as activities or processes. Such a framework includes critical elements such as a comprehensive mission statement, long-term goals, strategies to achieve the goals, use of measures to gauge progress, identification of key external factors that could affect the achievement of goals, a description of how program evaluations will be used, and stakeholder involvement in developing the plan. DOD internally has recognized the importance of these critical elements. For example, the Office of the Assistant Secretary of Defense for Logistics and Materiel Readiness directed each of the services to conduct strategic planning for depot maintenance and to submit plans that focus on achieving DOD's strategy. The services were directed to include in their depot maintenance plans many of the same strategic planning elements just mentioned. In addition, we have reported that a strategic planning process should align lower-level goals and measures with departmentwide goals and measures, assign accountability for achieving results, be able to demonstrate results and provide a comprehensive view of performance, and link resource needs to performance. Further, such a strategic planning process and the resulting plan should set strategic direction, prioritize initiatives and resources, establish investment priorities and guide key resource decisions, and monitor progress through the establishment of performance goals and measures. Finally, we found in previous work that DOD's prior strategic planning efforts for logistics lacked information necessary to be more useful tools for senior leaders, such as the inclusion of identified logistics problems, performance measures, and a method for integrating plans into existing decision-making processes. Over a number of years prior to the publication of its Logistics Strategic Plan, DOD issued a series of strategic planning documents for logistics and the management of its supply chain. These plans have differed in scope and focus, although they have typically included a number of high- level goals and related initiatives. For example, for a period of several years beginning in the mid-1990s, DOD issued a series of strategic plans for logistics. Later, the 2004 DOD Logistics Transformation Strategy attempted to reconcile several of DOD's ongoing logistics approaches, namely focused logistics, force-centric logistics enterprise, and sense and respond logistics. In 2005, DOD issued the first iteration of its Supply Chain Management Improvement Plan to address some of the systemic weaknesses that were highlighted in our reports. That same year, DOD produced its Focused Logistics Roadmap, which catalogued current ("as is") efforts and initiatives. Building on the "as is" Focused Logistics Roadmap, DOD recognized the need for a comprehensive, integrated strategy for transforming logistics and released its Logistics Roadmap in July 2008 to provide a more coherent and authoritative framework for logistics improvement efforts, including supply chain management. DOD indicated that the roadmap would be a "living" document and that future updates would incorporate new initiatives and programs, report progress toward achieving logistics capability performance targets, and help connect capability performance targets to current and planned logistics investment for an overarching view of DOD's progress toward transforming logistics. The roadmap documented numerous initiatives and programs that were then under way and organized these around goals, joint capabilities, and objectives. However, we found that the roadmap was missing information that would make it more useful for DOD's senior leaders. First, it did not identify the scope of DOD's logistics problems or gaps in logistics capabilities. Second, it lacked outcome-based performance measures that would enable DOD to assess and track progress toward meeting stated goals and objectives. Third, DOD had not clearly stated how it intended to integrate the roadmap into DOD's logistics decision-making processes or who within the department was responsible for this integration. A comprehensive, integrated strategy that includes these three elements is critical, in part, because of the diffuse organization of DOD logistics, which is spread across multiple DOD components with separate funding and management of logistics resources and systems. Moreover, we stated that without these elements, the roadmap would likely be of limited use to senior DOD decision makers as they sought to improve supply chain management and that DOD would have difficulty fully tracking progress toward meeting its goals. To address these weaknesses, we recommended that DOD include in future updates of its Logistics Roadmap the elements necessary to have a comprehensive, integrated strategy for improving logistics and to clearly state how this strategy would be used within existing decision-making processes. Specifically we recommended that DOD identify the scope of logistics problems and capability gaps to be addressed through the roadmap and associated efforts; develop, implement, and monitor outcome-focused performance measures to assess progress toward achieving the roadmap's objectives and goals; and document specifically how the roadmap will be used within the department's decision-making processes used to govern and fund logistics and who will be responsible for its implementation. DOD officials concurred with our recommendations and stated that they planned to remedy some of these weaknesses in their follow-on efforts to the roadmap. DOD officials subsequently stated that they had begun a series of assessments of the objectives included in the roadmap in order to identify capability gaps, shortfalls, and redundancies and to recommend solutions. As part of this assessment process, DOD officials stated that supply, maintenance, deployment, and distribution managers had been tasked with determining which specific outcome-oriented performance metrics could be linked to each of the objectives and goals within the roadmap in order to assess progress toward achieving desired results. DOD officials said that the results of these assessments would be included in the next version of the roadmap, which was scheduled for release in 2009. DOD further stated that a joint Executive Advisory Committee made up of senior leaders responsible for implementing logistics programs and initiatives had been established to guide the roadmap process to ensure that it is a useful tool in decision making. The 2010 Logistics Strategic Plan is DOD's most recent effort to provide high-level strategic direction for future logistics improvement efforts, including those in the area of supply chain management. According to DOD officials, the plan serves as an update to the 2008 Logistics Roadmap. They further explained that the plan is an effort to identify the enduring and ongoing logistics efforts within the department and provide a good balance between the need for specificity and generality, without the level of detail included in the prior roadmap and with a broader scope than that provided in the Supply Chain Management Improvement Plan. The Logistics Strategic Plan articulates the department's logistics mission and vision. The plan further states that to continue improving logistics support to the warfighter, it is essential that all elements of DOD's logistics community take steps to better integrate logistics with strategic planning and decision processes and to manage logistics performance. To drive the department's logistics enterprise toward that end, the plan includes goals, key initiatives, and some information on how DOD plans to track progress, including general performance measures. Through the inclusion of these elements, the plan provides unifying themes for improvement efforts. The Logistics Strategic Plan reiterates high-level department goals drawn from both the Quadrennial Defense Review and the Strategic Management Plan. For example, the Logistics Strategic Plan incorporates two of the Strategic Management Plan's business priorities: support contingency business operations to enhance support to the deployed warfighter and reform the department's acquisition and support processes. In addition, the Logistics Strategic Plan contains four logistics goals: Goal 1: Provide logistics support in accordance with warfighter requirements. Goal 2: Institutionalize operational contract support. Goal 3: Ensure supportability, maintainability, and costs are considered throughout the acquisition cycle. Goal 4: Improve supply chain processes, synchronizing from end-to-end and adopting challenging but achievable standards for each element of the supply chain. The plan lists 30 key initiatives related to the four logistics goals. According to a senior DOD official, the initiatives were selected based on the determination of officials within the Office of Assistant Secretary of Defense for Logistics and Materiel Readiness and were subsequently provided to the military services for review. In our review of the plan, we noted that key initiatives appear to focus on issues that we have identified as needing management attention. For example, our prior work on warfighter and logistics support in Iraq and Afghanistan has identified issues that directly relate to initiatives that support Goal 1--provide logistics support in accordance with warfighter requirements. We recently testified that DOD has taken steps to improve distribution of materiel to deployed forces in Afghanistan; however, we found several challenges that included difficulties with transporting cargo through neighboring countries and around Afghanistan, limited airfield infrastructure, and lack of full visibility over cargo movements. The Logistics Strategic Plan contains an initiative to facilitate logistics support for Afghanistan, including interagency coordination and development of transportation and distribution alternatives, as needed. In addition, our work has also raised concerns about the lack of risk assessments conducted for DOD's Civil Reserve Air Fleet program, and DOD's management of the program has not provided air carrier participants with a clear understanding of some critical areas of the program. DOD's Logistics Strategic Plan includes a related initiative. With regard to Goal 2--institutionalize operational contract support--we have issued reports over a period of many years on progress and problems with contract support during contingency operations. We testified in March 2010 that DOD had taken steps to institutionalize operational contract support by appointing a focal point to lead efforts, issuing guidance, and beginning to determine its reliance on contractors; but we also identified ongoing challenges associated with contractor support. These challenges include inadequate oversight and management of contractors, providing training on how to work effectively with contractors during operations, ensuring proper screening of local and third-country nationals, compiling reliable data on the number of contractors supporting U.S. forces in contingencies, and identifying contractor requirements. Our prior work related to Goal 3--ensure supportability, maintainability, and costs are considered throughout the acquisition cycle--includes reviews of weapon system life cycle management, depot maintenance, and sustainment costs. For example, while we have noted that DOD has placed increased emphasis on life cycle management, we reported recently that DOD lacks key information on weapon system operating and support costs and therefore may not be well-equipped to analyze, manage, and ultimately reduce these costs. Although all four goals of the Logistics Strategic Plan have aspects relating to supply chain management, Goal 4 explicitly addresses the need to improve supply chain processes. DOD identifies four success indicators and three performance measures for this goal. The success indicators address both the efficiency and effectiveness of DOD's supply chain management. For example, one success indicator states that enterprisewide solutions for the management of inventories and services will optimize total supply chain costs, and another states that effective demand planning will increase forecast accuracy and reduce costs. The performance measures, which are listed separately from the success indicators, include the percent of negotiated time definite delivery standards met globally (by combatant command), the percent of actual demand compared to forecasted demand, and number of days of customer wait time (time from submission of order to receipt of order) by lift area. The Logistics Strategic Plan lists 12 key initiatives that support Goal 4. The key initiatives focus on, among others issues, life cycle forecasting, the distribution process, automatic identification technology, and the department's human capital strategy for logistics personnel. We have reported on some of these issues. For example, we reported in 2009 that DOD has taken steps to implement automatic identification technologies, such as item unique identification and passive radio frequency identification, to identify and track equipment and supplies, but has experienced difficulty in fully demonstrating return on investment to the military services responsible for implementation. The Logistics Strategic Plan also includes some information on how DOD plans to track progress. The plan lists success indicators and performance measures under each goal, and it states that the plan will be implemented by following the performance management framework found in the Strategic Management Plan. This framework contains six steps: plan, set targets, cascade measures, align processes, assess and report, and correct. By modeling the performance management framework of the Logistics Strategic Plan after that of the broader Strategic Management Plan, DOD officials expect that this alignment will naturally have a complementary, behavior-shaping influence on organizations subject to both plans. Although the Logistics Strategic Plan contains some key elements of an effective strategic plan and provides unifying themes for improvement efforts, it lacks detailed information regarding strategies and time frames that would help to specify how and when goals will be achieved. In our review of Goal 4, which focuses on supply chain processes, we found that detailed information was lacking in several areas, which may limit the plan's usefulness as a tool for decision makers, including: Performance measurement information. While the plan presents three performance measures associated with Goal 4, it lacks baseline or trend data for past performance, measurable target-level information, or time frames for the achievement of goals or completion of initiatives. These are among the characteristics of successful performance measures that we have identified in our prior work. Such elements are needed to monitor the progress of implementation efforts and to determine how far DOD and its components must go to achieve success. In addition, there is not a clear linkage between the three measures and the success indicators or key initiatives under Goal 4. A senior DOD official stated that the performance measures in Goal 4 were included to present information about the overall functioning of the supply chain rather than specific improvement efforts. Key concepts. Some concepts in the plan express broad, positive ideas but are not fully defined. For example, Goal 4 states that processes should be "synchronized end-to-end," and a success indicator states that supply chain costs should be "optimized." The plan, however, does not define what aspects of the supply chain need further synchronization, how costs should be further optimized, or how DOD will gauge progress in these efforts. Problems and capability gaps. The plan does not include a discussion about overall departmentwide or DOD component-specific logistics problems or challenges, nor does it indicate the extent or severity of any identified capability gaps. Such information is necessary to establish a clear and common understanding of what problems and gaps the plan is trying to address. For example, the plan does not discuss logistics problems encountered during operations in Iraq and Afghanistan. We raised a similar concern about the 2008 Logistics Roadmap. Resource needs. The plan does not discuss resources needed to implement improvement efforts. As noted, an effective strategic planning process should be able to link resource needs to performance, prioritize initiatives and resources, establish investment priorities, and guide key resource decisions. In the absence of more detailed information in these areas, the usefulness of the Logistics Strategic Plan for decision making may be limited. Measuring performance, for example, allows for tracking progress toward goals and gives managers crucial information on which to base their decisions. In addition, if the plan included information on problems, capability gaps, and resource needs, managers could use the plan as a basis for establishing priorities for formulating, funding, and implementing corrective actions. DOD has recognized the need to include some of this information, and the plan states DOD's intent to establish baseline performance and then measure that performance against interim targets through an annual assessment process. Although the Logistics Strategic Plan is linked to some broader strategic plans, it does not show explicit links with other strategic plans of supply chain or logistics defense components, and the link between that plan and some major logistics activities is not clear. These plans and activities could have a major role in shaping future logistics capabilities and functions. Some DOD components have issued their own strategic plans, but the linkages between the logistics-related issues in those plans and the Logistics Strategic Plan are not transparent. DOD states in the Logistics Strategic Plan that the combatant commands, military departments, and defense agencies should review and revise their respective strategic plans and associated goals, objectives, measures, and targets to reflect the Logistics Strategic Plan's broader priorities. Moreover, DOD indicates that logistics leaders at the component level may find it necessary to realign operations and organizational structures to better integrate functional activities with larger end-to-end processes. However, the mechanism for ensuring that needed changes are made is not specified. Further, the plan does not reflect some activities and information that could affect supply chain management. For example, the military services have ongoing supply chain management improvement efforts under way; however, there is no explicit mention of these service-level efforts or goals, initiatives, or measures, even though the services have important responsibilities for carrying out logistics and supply chain functions. In addition, officials from various components stated that the Joint Supply Joint Integrating Concept, co-led by the Joint Staff and DLA, is a major ongoing effort. However, this concept is not discussed in the Logistics Strategic Plan. The purpose of this concept is to guide development and employment of future joint supply capabilities. It is not clear how the Logistics Strategic Plan will be used within the existing logistics governance framework to assist decision makers and influence resource decisions and priorities. For example, the plan states that the Joint Logistics Board and executive-level functional logistics governance bodies play critical roles in providing oversight and guidance to implementation of the Logistics Strategic Plan. While the Joint Logistics Board and other bodies may play critical roles in DOD's supply chain management improvement efforts, their roles are not defined in the plan. In addition, the organizations responsible for key initiatives included in the plan are not identified. Similarly, the plan does not clearly define how oversight of plan implementation will occur. The plan briefly mentions the development of a Logistics Strategic Management Report that, along with a management dashboard of measures maintained by the Under Secretary of Defense for Acquisition, Technology and Logistics, will be used to report progress. However, the specific process or responsibilities for ensuring that corrective actions are taken in response to underperformance are not detailed in the plan. DOD officials stated that corrective actions are the responsibility of process or activity owners, while the responsibilities defined in the Logistics Strategic Plan include "implement corrective actions" as a responsibility of the Assistant Secretary of Defense for Logistics and Materiel Readiness. In its description of performance management, the plan states that accountable individuals will identify and implement corrections. Lastly, budget development is an important aspect of the existing governance framework, yet DOD has not shown how the plan will be used to help shape logistics budgets developed departmentwide or by individual components. In conclusion, strategic plans need to remain at a high enough level to provide a clear vision and direction for improvement, but without more specific information in the Logistics Strategic Plan, it will be difficult for DOD to demonstrate progress in addressing supply chain management problems and provide Congress with assurance that the DOD supply chain is fulfilling the department's goal of providing cost-effective joint logistics support for the warfighter. Mr. Chairman, this concludes our prepared remarks. We would be happy to answer any questions you or other Members of the Subcommittee may have at this time. For further information regarding this testimony, please contact Jack E. Edwards at (202) 512-8246 or [email protected] or William M. Solis at (202) 512-8365 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 contributions to this testimony include Tom Gosling, Assistant Director; Jeffrey Heit; Suzanne Perkins; Pauline Reaves; and William Varettoni. 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 Defense's (DOD) management of its supply chain network is critical to supporting military forces in Iraq, Afghanistan, and elsewhere and also represents a substantial investment of resources. As a result of weaknesses in DOD's management of supply inventories and responsiveness to warfighter requirements, supply chain management is on GAO's list of high-risk federal government programs and operations. In July 2010, DOD issued a new Logistics Strategic Plan that represents the department's current vision and direction for supply chain management and other logistics areas. Today's testimony draws from GAO's prior related work and observations from an ongoing review of DOD supply chain management, and, as requested, will (1) describe DOD's prior strategic planning efforts in the area of logistics, (2) highlight key elements in the new Logistics Strategic Plan, and (3) discuss opportunities for improvement in future iterations of this plan. In conducting its ongoing audit work, GAO reviewed the Logistics Strategic Plan, compared elements in the plan with effective strategic planning practices, and met with cognizant officials from DOD, the military services, and other DOD components as appropriate. Prior to the publication of its new Logistics Strategic Plan, DOD issued a series of strategic planning documents for logistics over a period of several years. In 2008, DOD released its Logistics Roadmap to provide a more coherent and authoritative framework for logistics improvement efforts, including supply chain management. While the roadmap discussed numerous ongoing initiatives and programs that were organized around goals and joint capabilities, it fell short of providing a comprehensive, integrated strategy for logistics. GAO found, for example, that the roadmap did not identify gaps in logistics capabilities and that DOD had not clearly stated how the roadmap was integrated into DOD's logistics decision-making processes. GAO's prior work has shown that strategic planning is the foundation for defining what an agency seeks to accomplish, identifying the strategies it will use to achieve desired results, and then determining how well it succeeds in reaching results-oriented goals and achieving objectives. DOD said that it would remedy some of the weaknesses GAO identified in the roadmap. The July 2010 Logistics Strategic Plan, which updates the roadmap, is DOD's most recent effort to provide high-level strategic direction for future logistics improvement efforts, including those in the area of supply chain management. The plan provides unifying themes for improvement efforts, for example, by including a logistics mission statement and vision for the department, and it presents four goals for improvement efforts with supporting success indicators, key initiatives, and general performance measures. One goal focuses specifically on supply chain processes. The plan is aligned to and reiterates high-level departmentwide goals drawn from both the 2010 Quadrennial Defense Review and the 2009 Strategic Management Plan for business operations. Key initiatives in the plan appear to focus on issues that GAO has identified as needing management attention. While the Logistics Strategic Plan contains some of the elements necessary for strategic planning, it lacks some detailed information that would benefit decision makers and guide DOD's logistics and supply chain improvement efforts. The plan lacks specific and clear performance measurement information (such as baseline or trend data for past performance, measurable target-level information, or time frames for the achievement of goals or completion of initiatives), definition of key concepts, identification of problems and capability gaps, and discussion of resources needed to achieve goals. Further, linkages to other plans and some key related activities under way within logistics are unclear, and it is similarly unclear how the plan will be used within the existing governance framework for logistics. Without more specific information in the Logistics Strategic Plan, it will be difficult for DOD to demonstrate progress in addressing supply chain management problems and provide Congress with assurance that the DOD supply chain is fulfilling the department's goal of providing cost-effective joint logistics support for the warfighter.	5,456	802
The HUBZone program was established by the HUBZone Act of 1997 to stimulate economic development by providing federal contracting preferences to small businesses operating in economically distressed communities known as HUBZones. The SBA is responsible for administering the program and certifying applicant firms that meet HUBZone program requirements. To be certified, in general, firms must meet the following criteria: 1) the company must be small by SBA size standards; 2) the company's principal office--where the greatest number of employees perform their work--must be located in a HUBZone; 3) the company must be at least 51 percent owned and controlled by U.S. citizens; and 4) at least 35 percent of the company's full-time (or full-time equivalent) employees must reside in a HUBZone. As of March 2010, approximately 9,300 firms were listed in the SBA's Dynamic Small Business database as participating in the HUBZone program. A certified HUBZone firm is eligible for a variety of federal contracting benefits, such as sole source contracts and set-aside contracts. Contracting officers may award a sole source contract to a HUBZone firm if, among other things, the officer does not have a reasonable expectation that two or more qualified HUBZone firms will submit offers and the anticipated award price of the proposed contract, including options, will not exceed $5.5 million for manufacturing contracts or $3.5 million for all other contracts. Once a qualified firm receives a HUBZone contract, the firm is required to spend at least 50 percent of the personnel costs of the contract on its own employees. The company must also represent, as provided in the application, that it will ''attempt to maintain'' having 35 percent of its employees reside in a HUBZone during the performance of any HUBZone contract it receives. The SBA must ensure that both applicant and participant firms meet and maintain eligibility criteria at the time of application and, if they are granted certification, throughout their tenure in the program. During the application process, firms attest to the authenticity of the information that they submit to the SBA regarding their eligibility. Subsequent to certification, SBA regulations require firms to immediately notify the agency if any material changes occur that affect their eligibility, such as changes to the number of employees residing in a HUBZone or the location of the firm's principal office. Moreover, certified HUBZone firms competing for government contracts must verify in the government's Online Representations and Certifications Application (ORCA) that there have been "no material changes in ownership and control, principal office, or the percentage of employee's living in a HUBZone since it was certified by the SBA." Firms and individuals who misrepresent their eligibility during the application process or while participating in the program are subject to civil and criminal penalties; decertification from the HUBZone program; or debarment from all federal contracts. The SBA continues to struggle with reducing fraud risks in its HUBZone certification process despite reportedly taking steps to bolster its controls. The agency certified three of our four bogus firms based on fraudulent information, including fabricated explanations and supporting documentation. The SBA lost documentation for our fourth application on multiple occasions, forcing us to abandon our application. Our testing revealed that the SBA does not adequately authenticate self-reported information--especially as it pertains to information regarding whether a firm's principal office location meets program requirements. For example, for our successful firms, we used the addresses of the Alamo, a public storage facility in Florida, and a city hall in Texas as our principal office locations--locations that a simple Internet search could have revealed as ineligible for the program. While ensuring that a HUBZone applicant's principal office is legitimately located in a HUBZone is a complicated process, the SBA's failure to verify principal office locations leaves the program vulnerable to firms misrepresenting the locations of their principal offices and thus, benefits of the program not going to areas that are economically disadvantaged. Figure 1 below shows one of the acceptance letters we received. In contrast to our last test of the HUBZone certification process, the SBA considerably increased the amount of documentation it requested to support each application and its attempts to contact and communicate with the owners we represented in our applications. However, the SBA also increased the amount of time it takes to certify firms and, by all indications, suspended the use of agency processing time guidelines as indicated by an e-mail that we received from an SBA official and information that the agency posted on its Web site. The SBA took at least 7 months to process each of the three applications from our bogus companies that it certified. In our previous test, the SBA certified our firms in as little as 2 weeks, with minimal requests for documentary evidence. SBA's increased processing times failed to prevent our fraudulent firms from being certified. As we indicated in our March 2009 report, the SBA initiated a process of reengineering the HUBZone program in response to our findings and recommendations. Though we did not assess the effectiveness of the actions that the SBA undertook to strengthen its internal controls, we were still able to exploit those weaknesses in order to obtain program certification for our bogus firms. Specific details about each of our fraudulent applications are reported below. Fictitious Application 1: We received HUBZone certification about 7 months after submitting this application to the SBA. For the principal office location, we used the address of the Alamo, a National Historic Landmark in Texas. We claimed that both the firm's employees were HUBZone residents. Nearly 3 months after submission, we received an e- mail from the SBA requesting a copy of the HUBZone maps that we used to verify the residency of our employees, birth certificates, copies of tax returns for the last 3 years, corporate documents, and a copy of our firm's rental agreement and a recent utility bill. We fabricated these documents using publicly available materials and software and submitted them to the SBA. The SBA then requested a copy of the firm's most recent official payroll records and sought clarification between the number of employees who worked at our firm's principal office and those who worked off site. We were also required to provide additional payroll records and corresponding banking statements with the line-by-line transactions that supported the payments that we claimed to make to our fictitious employees. After all of the requested information was provided, we were approved for HUBZone certification. Figure 2 provides a timeline highlighting the major interactions that occurred with the SBA during the processing of this application. Fictitious Application 2: The SBA certified this bogus company 14 months after our investigators applied for HUBZone certification. The address we used for our principal office was the same as a rental storage unit in Florida. We claimed the firm was a partnership that employed two individuals who both resided in a HUBZone. To substantiate our firm's principal address, the agency requested that we submit a lease, a recent utility and telephone bill, and a copy of our firm's business registration. To verify the firm's business activity and ownership, the SBA requested copies of our firm's federal business income tax returns for the last 3 years and birth certificates of the two owners, and a copy of our firm's partnership agreement. To verify employee information, the SBA requested copies of each of the HUBZone resident employees' driver's licenses or voter registration cards, a copy of our firm's quarterly unemployment tax filings, and certified copies of the firm's quarterly payroll. SBA also requested tax information and a copy of our firm's most recent payroll documents, which we fabricated and provided to the SBA. Several months thereafter, our bogus firm was granted HUBZone certification. Fictitious Application 3: After 7 months of processing, SBA approved this bogus firm for HUBZone participation. The address of this firm's principal office was a city hall in Texas. We indicated that two of the firm's employees who worked for the bogus firm lived in a HUBZone. Several months after processing our application, the SBA requested documentary evidence of the firm's location, business activity, ownership, and employee information. After the SBA deemed the fabricated information that we submitted regarding payroll as insufficient to determine our employee information, the agency put our application on hold until we provided further documentation. We then provided SBA with a sworn statement to support information regarding payroll. SBA requested clarification about the frequency that our bogus employees worked from the principal office and granted HUBZone certification soon after. Fictitious Application 4: After 4 months of processing, the SBA withdrew this application after we abandoned it. We abandoned this application because the SBA claimed that it did not receive supplementary documentation that we repeatedly provided. Two months after the initial submission of this application, we followed up with the SBA to inquire about its status. At the point of inquiry, SBA indicated that our application was being assigned to an analyst for processing. Two months after our inquiry, we received a request for supporting documentation that was similar to those we received in our previous applications. We provided the requested information 3 days after receiving the request. Two weeks later, we followed up to confirm receipt of our documents. The SBA indicated that it did not receive the information that we provided, so we resent the information and requested that the agency confirm receipt. Three weeks later, after failing to receive confirmation on the receipt of our documentation, we inquired about the status of our application. Again, the agency told us that it did not receive the documentation and subsequently gave us one day to resubmit it. If not provided, the agency indicated, our application would be withdrawn. We decided to abandon the application and our application was withdrawn from the program. As of March 2010, the SBA has reviewed the status of all 29 firms we referred to it from our prior HUBZone investigations. Since our March 2009 report, these firms have received more than $66 million in federal obligations for new contracts. Not all of these obligations are necessarily improper, and some do not relate to HUBZone contracts. Of the 29 firms, 16 were decertified by the SBA, 8 voluntarily withdrew from the HUBZone program, and 5 were found by the agency to be in compliance with program requirements and remain certified. We did not attempt to verify SBA's work. And although SBA indicated that firms sometimes come in and out of compliance while in the program, we maintain that the firms represented in the cases that the SBA reviewed and determined to meet HUBZone program requirements were out of compliance at the time of our review. In addition, we found that five decertified firms continued to market themselves, through their Web sites, as HUBZone certified even after the SBA removed them from the HUBZone program. Tables 1 and 2 below show the results of the SBA's review of the 29 firms we referred from our July 2008 testimony and March 2009 report. We also found that one firm continued to benefit from another SBA program even though it misrepresented its eligibility for the HUBZone program and was decertified by the SBA. This firm, a construction firm that was a part of our recent investigation into fraud and abuse in the SBA's 8(a) Business Development Program, also had been 8(a) certified while in the HUBZone program. During that investigation, we found that the firm misrepresented its status as a qualified 8(a) firm because it was being controlled by individuals who did not qualify for the program. Because the SBA did not promptly suspend or debar the firm, this firm was able to receive nearly $600,000 in additional noncompetitive 8(a) contracts since our last report. According to SBA officials, SBA has recently proposed debarment for this firm. We briefed SBA officials on the results of our investigation on June 17, 2010. Regarding our proactive testing, SBA officials indicated that it was unreasonable to expect them to have identified our fictitious firms due to the bogus documentation that we included in our applications. For example, SBA officials stated that the submission of false affidavits would subject an applicant to prosecution. SBA officials also stated that competitors may identify fraudulent firms and likely protest if those firms were awarded a HUBZone contract. While competitors may identify some ineligible firms that were awarded contracts, it is SBA's responsibility to ensure that only eligible firms participate in the HUBZone program. We suggested that SBA conduct Internet searches on the addresses of applicant firms to help validate principal office locations. We also indicated that if SBA had conducted site visits at the addresses of the firms represented in our applications, those applications would have been identified as fraudulent. SBA officials stated that due to resource constraints, they primarily conduct site visits on certified firms that receive large prime HUBZone contracts. Regarding our 29 referred firms, SBA officials stated that debarment has recently been proposed for an additional firm. We suggested that if SBA determines that a HUBZone firm is not eligible for the program, it should consider conducting a review of that firm's eligibility if that firm is also certified in other SBA programs. SBA agreed with our suggestion. In addition, SBA provided technical comments which we incorporated into our report. As arranged 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 Administrator of the Small Business Administration, interested congressional committees and members, and other interested parties. In addition, this report will also be available at no charge on GAO's Web site at http://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. Key contributors to this report were Andy O'Connell, Assistant Director; Matthew Valenta, Assistant Director; Lerone Reid, Analyst-In-Charge; Eric Eskew, Agent-In-Charge; Jason Kelly; Barbara Lewis; Jeff McDermott; and Timothy Walker.	The Small Business Administration's (SBA) Historically Underutilized Business Zone (HUBZone) program provides federal contracting assistance to small firms located in economically distressed areas, with the intent of stimulating economic development. In July 2008 and March 2009, GAO reported on substantial vulnerabilities to fraud and abuse in the HUBZone application and monitoring process. GAO also found 10 HUBZone firms in the Washington, D.C., area and 19 firms in four other metropolitan areas in Alabama, California, and Texas that made fraudulent or inaccurate representations to get into or remain in the HUBZone program. Given the Committee's continued concern over fraud and abuse in the HUBZone program, GAO (1) performed additional proactive testing of SBA's HUBZone certification process, and (2) determined whether SBA has taken any actions against the 29 case study firms GAO identified in its prior work. Using publicly available resources to fabricate documents, GAO proactively tested SBA's application process by applying for HUBZone certification for four bogus businesses with fictitious owners and employees. GAO also interviewed SBA officials and reviewed SBA data about the 29 case study firms. GAO did not attempt to project the extent of fraud and abuse in the program nor systematically assess HUBZone program controls. The HUBZone program remains vulnerable to fraud and abuse. Using falsified documents and employee information, GAO obtained HUBZone certification for three bogus firms using the addresses of the Alamo in Texas, a public storage facility in Florida, and a city hall in Texas as principle office locations. A simple Internet search by SBA could have revealed these as phony applications. While the agency has required more documentation in its application process since GAO's July 2008 report, GAO's testing shows that SBA does not adequately authenticate self-reported information and, for these cases, did not perform site visits to validate the addresses. Further, the changes have significantly increased the time it takes SBA to process applications. Specifically, SBA took 7 or more months to process each of the bogus applications--at least 6 months longer than for GAO's previous investigations. SBA continually lost documentation for GAO's fourth application, and eventually withdrew it after GAO failed to resubmit the same materials for the fourth time. On its Web site, SBA reported that applicants are experiencing delays during the application process. SBA has taken some action on most of the 29 firms that GAO previously reported did not meet HUBZone program requirements. The SBA decertified 16 firms from the HUBZone program, and another 8 firms voluntarily withdrew. While GAO maintains all 29 firms did not meet requirements at the time of its review, SBA stated that the other 5 firms were in compliance at the time of its own review and so remain certified. Since GAO's March 2009 report, 17 of the 29 companies have received more than $66 million in federal obligations for new contracts. GAO recently reported that one firm has also defrauded the SBA 8(a) program. Because the SBA did not promptly debar the firm from federal contracts, it was able to fraudulently receive an additional $600,000 in noncompetitive 8(a) federal contracts since GAO's last report. SBA recently proposed debarring this firm. National Historic Landmark Address (The Alamo) Used by GAO as Principle	3,173	749
EPA administers and oversees grants primarily through the Office of Grants and Debarment, 10 program offices in headquarters, and program offices and grants management offices in EPA's 10 regional offices. Figure 1 shows EPA's key offices involved in grants activities for headquarters and the regions. The management of EPA's grants program is a cooperative effort involving the Office of Administration and Resources Management's Office of Grants and Debarment, program offices in headquarters, and grants management and program offices in the regions. The Office of Grants and Debarment develops grant policy and guidance. It also carries out certain types of administrative and financial functions for the grants approved by the headquarters program offices, such as awarding grants and overseeing the financial management of these grants. On the programmatic side, headquarters program offices establish and implement national policies for their grant programs, and set funding priorities. They are also responsible for the technical and programmatic oversight of their grants. In the regions, grants management offices carry out certain administrative and financial functions for the grants, such as awarding grants approved by the regional program offices, while the regional program staff provide technical and programmatic oversight of their grantees. As of June 2003, 109 grant specialists in the Office of Grants and Debarment and the regional grants management offices were largely responsible for administrative and financial grant functions. Furthermore, 1,835 project officers were actively managing grants in headquarters and regional program offices. These project officers are responsible for the technical and programmatic management of grants. Unlike grant specialists, however, project officers generally have other primary responsibilities, such as using the scientific and technical expertise for which they were hired. In fiscal year 2002, EPA took 8,070 grant actions totaling about $4.2 billion. These awards were made to six main categories of recipients as shown in figure 2. EPA offers two types of grants--nondiscretionary and discretionary: Nondiscretionary grants support water infrastructure projects, such as the drinking water and clean water state revolving fund programs, and continuing environmental programs, such as the Clean Air Program for monitoring and enforcing Clean Air Act regulations. For these grants, Congress directs awards to one or more classes of prospective recipients who meet specific eligibility criteria; the grants are often awarded on the basis of formulas prescribed by law or agency regulation. In fiscal year 2002, EPA awarded about $3.5 billion in nondiscretionary grants. EPA has awarded these grants primarily to states or other governmental entities. Discretionary grants fund a variety of activities, such as environmental research and training. EPA has the discretion to independently determine the recipients and funding levels for grants. In fiscal year 2002, EPA awarded about $719 million in discretionary grants. EPA has awarded these grants primarily to nonprofit organizations, universities, and government entities. The grant process has the following four phases: Preaward. EPA reviews the application paperwork and makes an award decision. Award. EPA prepares the grant documents and instructs the grantee on technical requirements, and the grantee signs an agreement to comply with all requirements. Postaward. After awarding the grant, EPA provides technical assistance, oversees the work, and provides payments to the grantee; the grantee completes the work, and the project ends. Closeout of the award. EPA ensures that all technical work and administrative requirements have been completed; EPA prepares closeout documents and notifies the grantee that the grant is completed. As part of its oversight of grantee performance, EPA conducts in-depth reviews to analyze grantees' compliance with grant regulations and specific grant requirements. EPA conducts two types of in-depth reviews. Administrative reviews, conducted by the grants management offices, are designed to evaluate grantees' financial and administrative capacity. In contrast, programmatic reviews, conducted by the program offices, are designed to assess the grantees' activities in five key areas: (1) assessing progress of work, (2) reviewing financial expenditures, (3) meeting the grant's terms and conditions, (4) meeting all programmatic, statutory, and regulatory requirements, and (5) verifying that equipment purchased under the award is managed and accounted for. Both administrative and programmatic reviews are conducted either at the grantee's location (on- site) or at EPA's office or another location (off-site). Furthermore, to determine how well offices and regions oversee grantees, EPA conducts internal management reviews of headquarters and regional offices. EPA's September 2002 competition policy requires that most discretionary grants be competed. These grants totaled about $719 million of the $4.2 billion in grants awarded in fiscal year 2002. The policy applies to most discretionary grant programs or individual grants of more than $75,000.The policy also promotes widespread solicitation for competed grants by establishing specific requirements for announcing funding opportunities in, for example, the Federal Register and on Web sites. EPA has also appointed a grant competition advocate to coordinate this effort. EPA's competition policy faces implementation barriers because it represents a major cultural shift for EPA staff and managers, who historically awarded most grants noncompetitively and thereby have had limited experience with competition, according to the Office of Grants and Debarment. The policy requires EPA officials to take a more planned, rigorous approach to awarding grants. That is, EPA staff must determine the evaluation criteria and ranking of these criteria for a grant, develop the grant announcement, and generally publish it at least 60 days before the application deadline. Staff must also evaluate applications--potentially from a larger number of applicants than in the past--and notify applicants of their decisions. These activities will require significant planning and take more time than awarding grants noncompetitively. Office of Grants and Debarment officials anticipate a learning curve as staff implement the policy and will evaluate the policy's effectiveness in 2005, including the $75,000 threshold level. While the policy and subsequent implementing guidance have been in effect for a number of months, it is too early to tell if the policy has resulted in increased competition over the entire fiscal year. EPA officials believe that preliminary results indicate that the policy is increasing the use of competition. EPA's December 2002 oversight policy makes important improvements in monitoring grantees, but it does not enable the agency to identify and address systemic problems with grant recipients. Specifically, EPA cannot develop systemic information because the policy does not (1) incorporate a statistical approach to selecting grantees for review; (2) require a standard reporting format for in-depth reviews to ensure consistency and clarity in reporting review results; and (3) identify needed data elements or develop a plan for analyzing data in its grantee compliance database to identify and act on systemic grantee problems. Therefore, EPA cannot use data from these reviews to determine the overall compliance of grantees or be assured that it is using its resources to effectively target its oversight efforts. With a more rigorous statistical approach to selecting grantees, standard reporting format, and a plan for using information from in-depth and other reviews, EPA could identify problem areas and develop trends to assess the effectiveness of corrective actions in order to better target its oversight efforts. EPA's new policy allows each office to determine what criteria it will use to select at least 10 percent of its grant recipients for in-depth review. However, because this policy does not employ a statistical method to selecting grantees for review, it limits the usefulness of these reviews as a tool to determine the overall compliance of grant recipients. Furthermore, EPA cannot determine whether 10 percent or any other percentage is the appropriate number of reviews. With a statistical approach, EPA could increase the efficiency and effectiveness of its oversight of grantees by (1) adjusting the number and allocation of its in-depth reviews to match the level of risk associated with each type of grant recipient and (2) projecting the results of its reviews to all EPA grantees. EPA's in-depth reviews can provide valuable information that the agency can use to identify problems and implement corrective actions. However, EPA does not have a standard reporting format to ensure consistency, clarity, and usefulness in reporting review results. Consequently, EPA is not able to effectively and efficiently analyze these data to determine systemic grantee problems. Although EPA was requiring offices to conduct in-depth review of grantees in 2002, it did not systematically collect and analyze information from these reviews as part of its oversight efforts. We requested that EPA provide us with its in-depth reviews conducted in 2002 so we could do the analysis. Many of the documents EPA provided were, not in fact, in-depth reviews, but various types of other oversight documents. We sorted through these documents to identify the in-depth reviews using a data collection instrument. Through this approach, we identified 1,232 in-depth reviews. Using a data collection instrument, we collected and analyzed information from each of these in-depth reviews on, among other things, problems with grantees, and significant actions taken against grantees. The full results of our analysis are presented in our report. According to our analysis of EPA's 1,232 in-depth reviews in 2002, EPA grant specialists and project officers identified 1,250 problems in 21 areas. Tables 1 and 2 show the most frequently identified problems for the 189 administrative and 1,017 programmatic reviews we examined. For example, 73 of 189 administrative reviews found problems with grantees' written procedures, while 308 of the 1,017 programmatic reviews identified technical issues. The differences in types of problems frequently identified, as shown in tables 1 and 2, reflect differences in the focus of administrative and programmatic reviews. Table 3 describes the nature of these problems. Despite the importance of standard information, our analysis of EPA's 2002 in-depth reviews shows that EPA officials across the agency report in various formats that do not always clearly present the results of the review. For example, some EPA officials provided a narrative report on the results of their reviews, while others completed a protocol that they used in conducting their review. In 349 instances, the project officer or grant management specialist did not clearly explain whether he or she had discovered a problem. EPA has recognized the importance of the information in its in-depth reviews by establishing a grantee compliance database to store the reviews, forming a database work group, and collecting a limited amount of data from its in-depth reviews. However, as of August 29, 2003, EPA had not yet developed data elements or a plan for using data from all its oversight efforts--in-depth reviews, corrective actions, and other compliance efforts--to fully identify systemic problems and then inform grants management officials about oversight areas that need to be addressed. As our analysis of EPA's 2002 in-depth reviews showed, valuable information could be collected from them for assessing such issues as the (1) types of grantees having problems, (2) types of problem areas needing further attention, (3) types of reviews--on-site or off-site--that provide the best insights into certain problems areas, and (4) corrective actions required or recommended to resolve problems. With a statistical approach to selecting grantees for review, standard reporting format, and a plan for using information from in-depth and other reviews, EPA could identify problem areas and develop trends to assess the effectiveness of corrective actions to better target its oversight efforts. In particular, according to our analysis of EPA's 2002 in-depth reviews, administrative reviews identify more problems when conducted on site, while the number of problems identified by programmatic reviews does not differ by on-site or off-site reviews. However, nearly half of the programmatic reviews, which constituted more than 80 percent of the 2002 reviews, were conducted on-site. Since on-site reviews are resource intensive because of travel costs and staff used, a systematic analysis could enable EPA to better target its resources. Similarly, EPA could incorporate other information into its grantee compliance database, such as Inspector General reports, to identify problem areas, and target oversight resources. In addition, EPA could use the database to track the resolution of problems. Successful implementation of EPA's 5-year grants management plan requires all staff--senior management, project officers, and grant specialists--to be fully committed to, and accountable for, grants management. Recognizing the importance of commitment and accountability, the plan has as one of its objectives the establishment of clear lines of accountability for grants oversight. The plan, among other things, calls for (1) ensuring that performance standards established for grant specialists and project officers adequately address grants management responsibilities in 2004; (2) clarifying and defining the roles and responsibilities of senior resource officials, grant specialists, project officers, and others in 2003; and (3) analyzing project officers' and grant specialists' workload in 2004. In implementing this plan, however, EPA faces challenges to enhancing accountability. First, although the plan calls for ensuring that project officers' performance standards adequately address their grants management responsibilities, agencywide implementation may be difficult. Currently, project officers do not have uniform performance standards, according to officials in EPA's Office of Human Resources and Organizational Services. Instead, each supervisor sets standards for each project officer, and these standards may or may not include grants management responsibilities. It could take up to a year to establish and implement a uniform performance standard, according to these officials. Instead, the Assistant Administrator for the Office of Administration and Resources Management is planning to issue guidance this month including grants management responsibilities in individual performance agreements for the next performance cycle beginning in January 2004. Once individual project officers' performance standards are established for the approximately 1,800 project officers, strong support by managers at all levels, as well as regular communication on performance expectations and feedback, will be key to ensuring that staff with grants management duties successfully meet their responsibilities. Although EPA's current performance management system can accommodate the development of performance standards tailored to each project officer's specific grants management responsibilities, the current system provides only two choices for measuring performance-- satisfactory or unsatisfactory--which may make it difficult to make meaningful distinctions in performance. Such an approach may not provide enough information and dispersion in ratings to recognize and reward top performers, help everyone attain their maximum potential, and deal with poor performers. GAO has identified key practices that federal agencies can use to establish effective performance management systems, which include making distinctions in performance. Furthermore, it is difficult to implement performance standards that will hold project officers accountable for grants management because (1) grants management is often a small part of a wide range of project officers' responsibilities, (2) some project officers manage few grants, and (3) project officers' grants management responsibilities often fall into the category of "other duties as assigned." To address this issue, EPA officials are considering, among other options, whether the agency needs to develop a smaller cadre of well-trained project officers to oversee grantees, rather than rely on the approximately 1,800 project officers with different levels of grants management responsibilities and skills. Some EPA officials believe that having a cadre may help the agency more effectively implement revised grants management performance standards because fewer officers with greater expertise would oversee a larger percentage of the grants. Second, EPA will have difficulty achieving the plan's goals unless, not only project officers, but all managers and staff are held accountable for grants management. The plan does not call for including grants management standards in all managers' and supervisors' agreements. Senior grants managers in the Office of Grants and Debarment as well as other Senior Executive Service managers have performance standards that address grants management responsibilities, but middle-level managers and supervisors, who oversee many of the staff that have important grants management responsibilities, do not. According to Office of Grants and Debarment officials, they are working on developing performance standards for all managers and supervisors with grants responsibilities. Third, it may be difficult to hold all managers and staff accountable because the Office of Grants and Debarment does not have direct control over many of the managers and staff who perform grants management duties--particularly the approximately 1,800 project officers in headquarters and regional program offices. The division of responsibilities between the Office of Grants and Debarment and program and regional offices will continue to present a challenge to holding staff accountable and improving grants management, and will require the sustained commitment of EPA's senior managers. If EPA is to better achieve its environmental mission, it must more effectively manage its grants programs--which account for more than half of its annual budget. EPA's new policies and 5-year grants management plan show promise, but they are missing several critical elements necessary for the agency to address past grants management weaknesses. Specifically to improve EPA's oversight of grantees, our report recommends that EPA' (1) incorporate appropriate statistical methods to identify grantees for review; (2) require EPA staff to use a standard reporting format for in-depth review so that the results can be entered into the grantee compliance database and analyzed agency wide; and (3) develop a plan, including modifications to the grantee compliance database, to integrate and analyze compliance information from multiple sources. These actions would help EPA identify systemic problems with its grantees and better target its oversight resources. To enhance accountability, our report further recommends establishing performance standards for all managers and staff responsible for grants management and holding them accountable for meeting these standards. Until EPA does so, it cannot be assured that is fulfilling its grants management responsibilities. While EPA's 5-year grants management plan shows promise, we believe that, given EPA's historically uneven performance in addressing its grants management challenges, congressional oversight is important to ensure that EPA's Administrator, managers, and staff implement the plan in a sustained, coordinated fashion to meet the plan's ambitious targets and time frames. To help facilitate this oversight, our report recommends that EPA annually report to Congress on its progress in improving grants management. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or Members of the Subcommittee may have. For further information about this testimony, please contact John B. Stephenson at (202) 512-3841. Individuals making key contributions to this testimony were Andrea Wamstad Brown, Carl Barden, Christopher Murray, Paul Schearf, Rebecca Shea, Carol Herrnstadt Shulman, Bruce Skud, Kelli Ann Walther, and Amy Webbink. 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 Environmental Protection Agency (EPA) has faced persistent challenges in managing its grants, which, at about $4 billion annually constitute over one-half of the agency's total budget. EPA awards grants to thousands of recipients to implement its programs to protect human health and the environment. Given the size and diversity of EPA's programs, its ability to efficiently and effectively accomplish its mission largely depends on how well it manages its grant resources and builds accountability into its efforts. In our comprehensive report on EPA's management of its grants, released last week, we found that EPA continues to face four key grants management challenges despite past efforts to address them--(1) selecting the most qualified grant applicants, (2) effectively overseeing grantees, (3) measuring the results of grants, and (4) effectively managing its grant staff and resources. The report also discusses EPA's latest competition and oversight policies and its new 5-year plan to improve the management of its grants. This testimony, based on our report, focuses on the extent to which EPA's latest policies and plan address (1) awarding grants competitively, (2) improving oversight of grantees, and (3) holding staff and managers accountable for fulfilling their grants management responsibilities. Late in 2002, EPA launched new efforts to address some of its long-standing grants management problems. It issued two policies--one to promote competition in awarding grants and one to improve its oversight of grants. Furthermore, in April 2003, EPA issued a 5-year grants management plan to address its long-standing grants management problems. These policies and plan focus on the major grants management challenges we identified but will require strengthening, enhanced accountability, and sustained commitment to succeed. EPA's September 2002 competition policy should improve EPA's ability to select the most qualified applicants by requiring competition for more grants. However, effective implementation of the policy will require a major cultural shift for EPA managers and staff because the competitive process will require significant planning and take more time than awarding grants noncompetitively. EPA's December 2002 oversight policy makes important improvements in monitoring grantees, but it does not build in a process for effectively and efficiently analyzing the results of its monitoring efforts to address systemic grantee problems. Specifically, EPA does not (1) use a statistical approach to selecting grantees for review, (2) collect standard information from the reviews, and (3) analyze the results to identify and resolve systemic problems with grantees. As a result, EPA may not be using its oversight resources as efficiently as it could. With improved analysis, EPA could better identify problem areas and assess the effectiveness of its corrective actions to more efficiently target its oversight efforts. EPA's 5-year grants management plan recognizes the importance of accountability, but it does not completely address how the agency will hold all managers and staff accountable for successfully fulfilling their grants management responsibilities. For example, the plan calls for developing performance standards for staff overseeing grantee performance, but it does not call for including grants management performance standards in their managers' and supervisors' performance agreements. Unless all managers and staff are held accountable for grants management, EPA cannot ensure the sustained commitment required for the plan's success. Our report, Grants Management: EPA Needs to Strengthen Efforts to Address Persistent Challenges, GAO-03-846 , details EPA's historically uneven performance in addressing its grants management challenges. Over the years, EPA's past actions to improve grants management have had mixed results because of the complexity of the problems, weaknesses in policy design and implementation, and insufficient management attention to overseeing grants. While EPA's latest policies and new 5-year grants management plan show promise, it is too early to tell if these will succeed more than past actions. If EPA is to better achieve its environmental mission, it must more effectively manage its grants. Our report contains specific recommendations to address critical weaknesses in EPA's new oversight policy and plan. EPA stated that it agreed with GAO's recommendations and it will implement them as part of its 5- year grants management plan.	4,057	871
We substantiated the allegation of gross mismanagement of property at IHS. Specifically, we found that thousands of computers and other property, worth millions of dollars, have been lost or stolen over the past several years. We analyzed IHS reports for headquarters and the 12 regions from the last 4 fiscal years. These reports identified over 5,000 property items, worth about $15.8 million, that were lost or stolen from IHS headquarters and field offices throughout the country. The number and dollar value of this missing property is likely much higher because IHS did not conduct full inventories of accountable property for all of its locations and did not provide us with all inventory documents as requested. Despite IHS attempts to obstruct our investigation, our full physical inventory at headquarters and our random sample of property at 7 field locations, identified millions of dollars of missing property. Our analysis of Report of Survey records from IHS headquarters and field offices show that from fiscal year 2004 through fiscal year 2007, IHS property managers identified over 5,000 lost or stolen property items worth about $15.8 million. Although we did receive some documentation from IHS, the number and dollar value of items that have been lost or stolen since 2004 is likely much higher for the following reasons. First, IHS does not consistently document lost or stolen property items. For example, 9 of the 12 IHS regional offices did not perform a full physical inventory in fiscal year 2007. Second, an average of 5 of the 12 regions did not provide us with all of the reports used to document missing property for each year since fiscal year 2004, as we requested. Third, we found about $11 million in additional inventory shortages from our analysis of inventory reports provided to us by IHS, but we did not include this amount in our estimate of lost or stolen property because IHS has not made a final determination on this missing property. Some of the egregious examples of lost or stolen property include: In April 2007, a desktop computer containing a database of uranium miners' names, social security numbers, and medical histories was stolen from an IHS hospital in New Mexico. According to an HHS report, IHS attempted to notify the 849 miners whose personal information was compromised, but IHS did not issue a press release to inform the public of the compromised data. From 1999 through 2005, IHS did not follow required procedures to document the transfer of property from IHS to the Alaska Native Tribal Health Consortium, resulting in a 5-year unsuccessful attempt by IHS to reconcile the inventory. Our analysis of IHS documentation revealed that about $6 million of this property--including all-terrain vehicles, generators, van trailers, pickup trucks, tractors, and other heavy equipment--was lost or stolen. In September 2006, IHS property staff in Tucson attempted to write off over $275,000 worth of property, including Jaws of Life equipment valued at $21,000. The acting area director in Tucson refused to approve the write-off because of the egregious nature of the property loss. To substantiate the whistleblower's allegation of missing IT equipment, we performed our own full inventory of IT equipment at IHS headquarters. Our results were consistent with what the whistleblower claimed. Specifically, of the 3,155 pieces of IT equipment recorded in the records for IHS headquarters, we determined that about 1,140 items (or about 36 percent) were lost, stolen, or unaccounted for. These items, valued at around $2 million, included computers, computer servers, video projectors, and digital cameras. According to IHS records, 64 of the items we identified as missing during our physical inventory were "new" in April 2007. During our investigation of the whistleblower's complaint, IHS made a concerted effort to obstruct our work. For example, the IHS Director over property misrepresented to us that IHS was able to find about 800 of the missing items from the whistleblower's complaint. In addition, an IHS property specialist attempted to provide documentation confirming that 571 missing items were properly disposed of by IHS. However, we found that the documentation he provided was not dated and contained no signatures. Finally, IHS provided us fabricated receiving reports after we questioned them that the original reports provided to us were missing key information on them. Figure 1 shows the fabricated receiving report for a shipment of new scanners delivered to IHS. ? As shown in figure 1, there is almost a 3-month gap between the date the equipment was received in September and the date that the receiving report was completed and signed in December--even though the document should have been signed upon receipt. In fact, the new receiving report IHS provided was signed on the same date we requested it, strongly suggesting that IHS fabricated these documents in order to obstruct our investigation. We selected a random sample of IT equipment inventory at seven IHS field offices to determine whether the lack of accountability for inventory was confined to headquarters or occurred elsewhere within the agency. Similar to our finding at IHS headquarters, our sample results also indicate that a substantial number of pieces of IT equipment were lost, stolen, or unaccounted for. Specifically, we estimate that for the 7 locations, about 1,200 equipment items or 17 percent, with a value of $2.6 million were lost, stolen or unaccounted for. Furthermore, some of the missing equipment from the seven field locations could have contained sensitive information. We found that many of the missing laptops were assigned to IHS hospitals and, therefore, could have contained patient information and social security numbers and other personal information. IHS has also exhibited ineffective management over the procurement of IT equipment, which has led to wasteful spending of taxpayer funds. Some examples of wasteful spending that we observed during our audit of headquarters and field offices include: Approximately 10 pieces of IT equipment, on average, are issued for every one employee at IHS headquarters. Although some of these may be older items that were not properly disposed, we did find that many employees, including administrative assistants, were assigned two computer monitors, a printer and scanner, a blackberry, subwoofer speakers, and multiple computer laptops in addition to their computer desktop. Many of these employees said they rarely used all of this equipment, and some could not even remember the passwords for some of their multiple laptops. IHS purchased numerous computers for headquarters staff in excess of expected need. For example, IHS purchased 134 new computer desktops and monitors for $161,700 in the summer of 2007. As of February 2008, 25 of these computers and monitors--valued at about $30,000--were in storage at IHS headquarters. In addition, many of the computer desktops and monitors purchased in the summer of 2007 for IHS headquarters were assigned to vacant offices. The lost or stolen property and waste we detected at IHS can be attributed to the agency's weak internal control environment and its ineffective implementation of numerous property policies. In particular, IHS management has failed to establish a strong "tone at the top" by allowing inadequate accountability over property to persist for years and by neglecting to fully investigate cases related to lost and stolen items. Furthermore, IHS management has not properly updated its personal property management policies, which IHS has not revised since 1992. Moreover, IHS did not (1) conduct annual inventories of accountable property; (2) use receiving agents for acquired property at each location and designate property custodial officers in writing to be responsible for the proper use, maintenance, and protection of property; (3) place barcodes on accountable property to identify it as government property; (4) maintain proper individual user-level accountability, including custody receipts, for issued property; (5) safeguard IT equipment; or (6) record certain property in its new property management information system. To strengthen IHS's overall control environment and "tone at the top", we made 10 recommendations to IHS to update its policy and enforce property management policies of both the HHS and IHS. Specifically, we recommended that the Director of IHS should direct IHS property officials to take the following 10 actions: Update IHS personal property management policies to reflect any policy changes that have occurred since the last update in 1992. Investigate circumstances surrounding missing or stolen property instead of writing off losses without holding anyone accountable. Enforce policy to conduct annual inventories of accountable personal property at headquarters and all field locations. Enforce policy to use receiving agents to document the receipt of property and distribute the property to its intended user and to designate property custodial officers in writing to be responsible for the proper use, maintenance, and protection of property. Enforce policy to place bar codes on all accountable property. Enforce policy to document the issuance of property using hand receipts and make sure that employees account for property at the time of transfer, separation, change in duties, or on demand by the proper authority. Maintain information on users of all accountable property, including their buildings and room numbers, so that property can easily be located. Physically secure and protect property to guard against loss and theft of equipment. Enforce the use of the property management information system database to create reliable inventory records. Establish procedures to track all sensitive equipment such as blackberries and cell phones even if they fall under the accountable dollar threshold criteria. HHS agreed with 9 of the 10 recommendations. HHS disagreed with our recommendation to establish procedures to track all sensitive equipment such as blackberries and cell phones even if they fall under the accountable dollar threshold criteria. We made this recommendation because we identified examples of lost or stolen equipment that contained sensitive data, such as a PDA containing medical data for patients at a Tucson, Arizona area hospital. According to an IHS official, the device contained no password or data encryption, meaning that anyone who found (or stole) the PDA could have accessed the sensitive medical data. While we recognize that IHS may have taken steps to prevent the unauthorized release of sensitive data and acknowledge that it is not required to track devices under a certain threshold, we are concerned about the potential harm to the public caused by the loss or theft of this type of equipment. Therefore, we continue to believe that such equipment should be tracked and that our recommendation remains valid. 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]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. In addition to the individual named above, the individuals who made major contributions to this testimony were Verginie Amirkhanian, Erika Axelson, Joonho Choi, Jennifer Costello, Jane Ervin, Jessica Gray, Richard Guthrie, John Kelly, Bret Kressin, Richard Kusman, Barbara Lewis, Megan Maisel, Andrew McIntosh, Shawn Mongin, Sandra Moore, James Murphy, Andy O'Connell, George Ogilvie, Chevalier Strong, Quan Thai, Matt Valenta, and David Yoder. 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 June 2007, GAO received information from a whistleblower through GAO's FraudNET hotline alleging millions of dollars in lost and stolen property and gross mismanagement of property at Indian Health Service (IHS), an operating division of the Department of Health and Human Services (HHS). GAO was asked to conduct a forensic audit and related investigations to (1) determine whether GAO could substantiate the allegation of lost and stolen property at IHS and identify examples of wasteful purchases and (2) identify the key causes of any loss, theft, or waste. GAO analyzed IHS property records from fiscal years 2004 to 2007, conducted a full physical inventory at IHS headquarters, and statistically tested inventory of information technology (IT) equipment at seven IHS field locations in 2007 and 2008. GAO also examined IHS policies, conducted interviews with IHS officials, and assessed the security of property. Millions of dollars worth of IHS property has been lost or stolen over the past several years. Specifically: IHS identified over 5,000 lost or stolen property items, worth about $15.8 million, from fiscal years 2004 through 2007. These missing items included all-terrain vehicles and tractors; Jaws of Life equipment; and a computer containing sensitive data, including social security numbers. GAO's physical inventory identified that over 1,100 IT items, worth about $2 million, were missing from IHS headquarters. These items represented about 36 percent of all IT equipment on the books at headquarters in 2007 and included laptops and digital cameras. Further, IHS staff attempted to obstruct GAO's investigation by fabricating hundreds of documents. GAO also estimates that IHS had about 1,200 missing IT equipment items at seven field office locations worth approximately $2.6 million. This represented about 17 percent of all IT equipment at these locations. However, the dollar value of lost or stolen items and the extent of compromised data are unknown because IHS does not consistently document lost or stolen property, and GAO only tested a limited number of IHS locations. Information related to cases where GAO identified fabrication of documents and potential release of sensitive data was referred to the HHS Inspector General for further investigation. GAO identified that the loss, theft, and waste can be attributed to IHS's weak internal control environment. IHS management has failed to establish a strong "tone at the top," allowing property management problems to continue for more than a decade with little or no improvement or accountability for lost and stolen property and compromise of sensitive personal data. In addition, IHS has not effectively implemented numerous property policies, including the proper safeguards for its expensive IT equipment. For example, IHS disposed of over $700,000 worth of equipment because it was "infested with bat dung."	2,464	585
EPA offers two types of grants--nondiscretionary and discretionary: Nondiscretionary grants support water infrastructure projects, such as renovating municipal drinking water facilities, and continuing environmental programs, such as the Clean Air Program for monitoring and enforcing Clean Air Act regulations. For these grants, Congress directs awards to one or more classes of prospective recipients who meet specific criteria for eligibility. These continuing environmental grants are often awarded on the basis of formulas prescribed by law or agency regulation. In fiscal year 2002, EPA awarded about $3.5 billion in nondiscretionary grants. EPA has primarily awarded these grants to states or other governmental entities. Discretionary grants fund a variety of activities, such as environmental research and training. EPA has the discretion to independently determine the recipients and funding levels for these grants. In fiscal year 2002, EPA awarded about $719 million in discretionary grants. EPA has awarded these grants to nonprofit organizations and universities in addition to governmental entities. EPA administers and oversees grants through the Grants Administration Division within the Office of Grants and Debarment, 12 program offices in headquarters, and EPA's 10 regional offices. The Grants Administration Division develops overall grants policy. About 102 grant specialists in headquarters and the regions are responsible for overseeing the administration of grants. EPA also has approximately 3,000 project officers within headquarter program offices and the regions. These officers are responsible for overseeing the technical or programmatic aspects of the grants. While grant specialists are dedicated to grants management, EPA staff members who serve as project officers have other primary responsibilities. The grant process has four phases: Pre-award. EPA reviews the application paperwork and makes an award decision. Award. EPA prepares the grant documents and instructs the grantee on technical requirements, and the grantee signs an agreement to comply with all requirements. Post-award. EPA provides technical assistance and oversight; the grantee completes the work, and the project ends. Closeout of the award. The project officer ensures that the project is completed; the grants management office prepares closeout documents and notifies the grantee that the grant is completed. EPA has had persistent problems in managing its grants. In 1996, EPA's Inspector General testified before Congress that EPA did not fulfill its obligation to properly monitor grants. Acknowledging these problems, EPA identified oversight, including grant closeouts, as a material weakness--a management control weakness that the EPA Administrator determines is significant enough to report to the President and Congress. EPA's fiscal year 1999 Integrity Act report indicated that this oversight material weakness had been corrected, but the Inspector General testified that the weakness continued. In 2002, the Inspector General and the Office of Management and Budget recommended that EPA, once again, designate grants management as a material weakness. EPA ultimately decided to maintain this issue as an agency-level weakness, which is a lower level of risk than a material weakness. EPA made this decision because it believes its ongoing corrective action efforts will help to resolve outstanding grants management problems. However, in adding EPA's grants management to GAO's list of EPA's major performance and accountability challenges in January 2003, we signaled our concern that EPA has not yet taken action to ensure that it can manage its grants effectively. EPA faces four major, persistent problems in managing its grants. It must resolve these problems in order to improve its grants management. Specifically, EPA has not always awarded its discretionary grants competitively or ensured that it solicits these grants proposals from a large pool of applicants; effectively overseen its grantees' progress and compliance with the terms managed its grants so that they are effectively used to achieve effectively managed its grants management resources by holding its staff accountable for performing their duties, ensuring that the staff are adequately trained and appropriately allocated, and providing them with adequate management information. Until September 2002, EPA did not have a policy for competing the discretionary grants that might be eligible for competition--about $719 million of its total $4.2 billion in grant funding in fiscal year 2002. Consequently, EPA was not promoting competition. According to EPA's own internal management reviews and an Inspector General report, EPA did not always compete its discretionary grants when competition might have been warranted. By competitively soliciting grants, EPA would be able to choose the best project at the least cost to the government and is encouraged by the Federal Grant and Cooperative Agreement Act of 1977. EPA can award its discretionary grants noncompetitively; however, it is required by agency guidance to document the reasons for these decisions in a "decision memorandum." It has not consistently done so, according to EPA's internal management reviews. Lack of documentation raises questions about the award process and ultimately about whether EPA is providing its grant funds to the best-qualified applicants. Furthermore, EPA has not always engaged in widespread solicitation when it could be beneficial to do so. This type of solicitation would provide greater assurance that EPA receives proposals from a variety of eligible and highly qualified applicants who otherwise may not have known about grant opportunities. According to a 2001 EPA Inspector General report, program officials indicated that widespread solicitation was not necessary because "word gets out" to eligible applicants. Applicants often sent their proposals directly to these program officials who funded them using "uniquely qualified" as the justification for a noncompetitive award. This procedure creates the appearance of preferential treatment by not offering the same opportunities to all potential applicants. In addition, the agency provided incomplete or inconsistent public information on its grant programs in the Catalog of Federal Domestic Assistance and therefore the public and potential applicants may not have been adequately informed of funding opportunities. EPA has faced five persistent problems in overseeing its grants. First, EPA's internal reviews found that grantees' progress reports, one of the best sources of information for monitoring recipients, did not include required financial information, and grantees had not always submitted progress reports in a timely fashion. EPA generally requires recipients to submit progress reports to the project officer within a specified time frame. These reports are to include progress to date, any difficulties encountered, a discussion of expenditures compared to work completed, and an explanation of significant discrepancies. Although the recipient is responsible for submitting timely progress reports that discuss the project's financial status, the project officer is responsible for ensuring that the recipient has done so. Second, project officers and grant specialists did not always document their monitoring activities, which raises questions about the extent of the monitoring they did conduct. According to an EPA internal review, for example, one grants management office developed a form to ensure monitoring activities were completed, but the form was missing from 50 percent of the grant files reviewed, and when the monitoring form was used, it was not always completed. Furthermore, project officers did not always document that they had monitored required key areas, such as ensuring compliance with the terms and conditions of the grant award. Third, EPA has not always ensured that different types of grantees have adequate financial and internal controls to ensure that they use federal funds properly. For example, in 2001, we reported that EPA's oversight of nonprofit grantees' costs did not ensure that grant funds were used for costs allowed under guidance published by the Office of Management and Budget. In particular, EPA's on-site reviews were flawed. The reviews did not include transaction testing to identify expenditures that are not allowed, such as lobbying. We also found that EPA had conducted on-site reviews at only 4 percent of nonprofit grantees who might have had inexperienced staff and inadequate financial and internal controls. In 2000 and 2002, the EPA Inspector General reported that one state's department of environmental management and two tribes, respectively, lacked adequate financial and internal controls. These problems could have been identified through EPA oversight of grantees. Fourth, EPA has sometimes not ensured that grantees are complying with certain grant regulations, such as those pertaining to grantee procurement and conflict-of-interest. In 2002, the EPA Inspector General reported that EPA did not monitor grantees' procurements to determine if the grantees were using a competitive process to obtain the best products, at the best price, from the most qualified firms. In 1999 and 2002, the EPA Inspector General reported conflict-of-interest problems because grant recipients had awarded contracts to parties who had assisted them in preparing their grants and therefore had advance knowledge about grantees' plans to award contracts. Finally, EPA has not fully ensured that recipients are submitting final reports in a timely manner and meeting grant objectives. For example, in 2000, we reported that EPA had not adequately tracked its Science To Achieve Results research grants to ensure their on-time completion. We found that 144 of the nearly 200 grants we reviewed had missed their deadline for submitting final reports, even after some extensions had been given. Also, in 1998, EPA's Inspector General reported that EPA had not monitored training assistance grants to nonprofit grantees to determine how many students were being trained or how much the training cost. EPA awarded some grants before considering how the results of the grantees' work would contribute to achieving environmental results. In 2001, we reported that EPA program officials treated EPA's strategic goals and objectives not as a tool to guide the selection of grants, but rather as a clerical tool for categorizing grants after the funds were already awarded. By assessing the relevance of these grants to EPA's strategic plan after selecting the grantees, EPA cannot ensure that it is selecting the projects that will best help it accomplish its mission. EPA has also not developed environmental measures and outcomes for all of its grant programs. In 2000, we reported that EPA did not have program criteria to measure the effectiveness of its Science To Achieve Results program. Instead, EPA's management of the program focused on the procedures and processes of awarding grants. As a result, EPA was uncertain what the program was achieving. Similarly, the Office of Management and Budget recently evaluated four EPA grant programs to assess the programs' effectiveness at achieving and measuring results. The office found that these four EPA grant programs lacked outcome- based measures--measures that demonstrated the impact of the programs on improving human health and the environment. The office concluded that one of EPA's major challenges was demonstrating program effectiveness in achieving public health and environmental results. EPA often does not require grantees to submit work plans that explain how a project would achieve measurable environmental results. The grantee work plan describes the project, its objectives, and the method the grantee will use to accomplish the objectives. An effective work plan should, among other things, list the grant's expected outcomes. The project officer uses the work plan to evaluate performance under the agreement. In 2002, EPA's Inspector General reported that EPA approved some grantees' work plans without determining the projects' long-term human health and environmental outcomes. In fact, for almost half of the 42 grants reviewed, EPA did not even attempt to measure the projects' outcomes. Instead, EPA funded grants on the basis of work plans that focused on short-term procedural results, such as meetings or conferences. In some cases, it was unclear what the grant funding had accomplished. Both EPA's internal management reviews and its Inspector General reports have noted several problems in how effectively and efficiently EPA manages its grants staff and other resources. In terms of staff, the agency has not always held accountable its staff responsible for grants management, such as project officers and grant specialists. EPA's internal management reviews have found that, in some cases, job descriptions or performance standards were inadequate. The Inspector General recently reported similar findings. According to the Inspector General, agency leadership had not always emphasized the importance of project officer duties, nor held project officers accountable for performing certain duties. More specifically, project officer responsibilities were not clearly defined in their performance agreements and position descriptions, and there were no consequences when required duties were not performed. EPA has also not provided all grant staff with the training necessary to properly manage all aspects of grants. EPA's internal management reviews have noted that some staff who were managing grants had not completed the basic project officer training. Other staff may have completed the basic training but needed additional training to refresh their skills or to become familiar with all of their grants management responsibilities and requirements. For example, in some instances, project officers were not familiar with the five key areas they were to review when monitoring grantees, such as the financial aspects of a grantee's performance. Internal management reviews also identified other staff-related problems. For example, some internal reviews stated that EPA did not have enough staff to adequately manage the number of grants it awards. Furthermore, other reviews noted that uneven distribution of workload among staff resulted in poor grants management. EPA has also not adequately managed its resources for supporting grant staff. Some EPA internal management reviews noted a lack of resource commitment--time and money--to conduct grant management activities and develop staff. This lack of resources has hampered staff in performing their duties, according to these reviews. For example, some of these reviews noted that grantee oversight, particularly the on-site reviews, was limited by the scarcity of such resources as travel funds. Finally, staff did not always have the information they needed to effectively manage grants. According to several EPA internal management reviews, staff lacked accessible or useable reference material--such as policy and guidance documents, and other information resources, such as reports of grantee expenditures. Additionally, we and others have reported that EPA does not use information from performance evaluations or information systems to better manage its grants. For example, one EPA region did not analyze the results of its own internal surveys, which were designed to assess the effectiveness of its internal grants management operations. In recent years, EPA has taken a series of actions to address two of its key problem areas: grantee oversight and resource management. It has issued several oversight policies, conducted training, and developed a new data system for grants management. However, EPA's corrective actions have not been consistently successful because of weaknesses in their implementation and insufficient management emphasis. Between 1998 and 2002, EPA issued three policies to improve its oversight of its grant recipients. These policies have tried to improve oversight by establishing, expanding, and refining the activities of EPA staff involved in managing grants. EPA took additional actions to reduce the backlog of grants needing closeout. EPA's first policy, issued in May 1998, required grants management office staff to monitor the financial progress and administrative compliance of grant recipients' activities. The policy also required the staff to conduct site visits or desk reviews to review the adequacy of some grantees' administrative and financial systems for managing their grants. Furthermore, the grants management offices had to submit biennial monitoring plans, which included their proposed monitoring activities. Finally, the policy included suggested criteria for selecting grantees to be reviewed and guidelines for how to conduct the oversight activities. EPA's second policy, issued in April 1999, added oversight responsibilities for program staff in headquarters and the regions. The policy required headquarters and regional program offices to submit annual plans outlining their proposed monitoring activities. The policy also suggested activities to be included in these plans, such as monitoring grantees' progress of work, documenting their efforts, and closing out grants in a timely manner. EPA's third policy, issued in February 2002, further refined its oversight requirements by having grant management and program offices conduct in-depth monitoring on at least 5 to 10 percent of their grant recipients. The grant management offices had to assess grantees' financial and administrative capacity, while the program offices had to assess the grantees' activities in five key areas, such as progress of work and financial expenditures. Furthermore, the grant management offices, as well as regional and headquarters program offices, had to report quarterly on their in-depth monitoring activities. Additionally, the policy committed the Office of Grants and Debarment to the development of a database, which, according to an EPA official, the grants management offices would use to store the results of their in-depth monitoring activities. Finally, the policy included suggested guidance for how to conduct program office reviews. One of the final steps in monitoring is "closing out" grants to ensure that the project was completed and that any remaining funds are recovered. In 1996, EPA had a backlog of over 19,000 grants needing closeout. To reduce such backlogs and prevent future backlogs, EPA, among other things, developed specific procedures for closing out nonconstruction grants and identified a strategy for closing construction grants that included assessing impediments to closing out grants. In terms of resource management, EPA provided grants management training for its staff and some grant recipients. It developed and periodically updated a training manual for project officers. EPA also required project officers to attend a 3-day training course based on this manual and periodically take a refresher course. EPA developed a database to certify that project officers had completed this training. According to an EPA official, grants specialists have also received some training. Finally, EPA conducted a 1-day grants management training course for nonprofit grantees and pilot-tested a standard training course for grants specialists. Finally, EPA has taken steps to improve another critical resource--its primary data system for managing grants. In 1997, it began developing the Integrated Grants Management System (IGMS), which, according to an EPA official, will allow electronic management throughout the life of the grant. EPA believes IGMS could help resolve some of the long-standing problems in grants management by implementing controls to prevent certain documents from being submitted without required elements and providing electronic reminders of when certain activities or documents are due. Additionally, EPA designed the system to reduce the potential for data entry errors. According to an EPA official, IGMS is being developed through modules. In 2001, EPA began implementing the system to control the application and award phases of a grant. Using IGMS, EPA will be able to review the grantee's application, prepare and review EPA's documents, and approve the award electronically. In April 2003, EPA will begin using the post- award module of IGMS. This module will allow project officers to enter project milestones into the system, communicate with other staff involved in overseeing grants, receive electronic reports from grantees, and initiate closeout activities electronically. EPA expects that all staff will be using IGMS to electronically manage grants by September 2004. EPA continues to face grant management problems, despite the corrective actions it has taken to date. In 2002, EPA's Inspector General reported that EPA's corrective actions were not effectively implemented and specifically, for monitoring, found, among other things, inconsistent performance of monitoring responsibilities, inadequate preparation of monitoring plans, incomplete submission of quarterly compliance reports, and considerable differences among the programs and the regions in the number of on-site evaluations they conducted. As part of our ongoing review, we are assessing EPA's corrective actions for monitoring and have found mixed results. On the one hand, we have seen some problems. For example, we identified two weaknesses in the database EPA created to store the results of its in-depth reviews. First, only grant management offices--not program offices--had to enter the results of their reviews into this database, and according to an EPA official familiar with the database, not all of them did so. Second, according to the same official, EPA did not design the database so that it could analyze the results of the in-depth reviews to make management improvements. On the other hand, however, we found that EPA's corrective actions increased the oversight of its grant recipients. In 2002, EPA reported that it had conducted 578 on-site reviews, and 629 desk reviews, which is an increase in both the number of on-site reviews and the number of reviews some offices conducted. In addition, EPA's 2002 internal reviews indicated some improvements in oversight compared with the prior year's performance. On another positive note, EPA has made improvements in closing out grants. In 1998, we reported that in some instances EPA's corrective actions to close out grants were not initially successful. For example, we had found that strategies to reduce the closeout backlog were not always consistently implemented or failed to close out a considerable number of grants, despite making some progress. However, EPA had successfully resolved its backlog problem by 2002. As a result, EPA has been able to eliminate this backlog as a material weakness and receive better assurance that grant commitments have been met. With respect to resource management, EPA implemented corrective actions to improve training, but these actions have not been fully successful. For training, the EPA Inspector General reported that the agency did not have adequate internal controls in place to ensure that project officers were in compliance with the training requirements. Specifically, one region did not track the names and dates of project officers who received training, the agencywide database on training for project officers was inaccurate and had limited functionality, and the on- line refresher course did not have the controls necessary to prevent staff from obtaining false certifications. In addition to the weaknesses in the corrective actions for specific problem areas, the EPA Inspector General found two other problems. First, the agency's internal grant management reviews did not consistently examine issues to identify and address systemic weaknesses, did not adequately identify the causes of specific weaknesses or how the proposed corrective actions would remedy the identified weakness, and were not sufficiently comprehensive. Furthermore, the Grants Administration Division did not assess the results of these reviews to make management improvements. Second, EPA's senior resource officials did not ensure compliance with EPA policies or sufficiently emphasize grantee oversight. The Inspector General concluded that the lack of emphasis contributed to the identified implementation weaknesses. In response to this assertion, senior resource officials stated that monitoring is affected by the limited availability of resources, and that they lack control over how regional program offices set priorities. The Inspector General pointed out that these officials are responsible for providing adequate resources; however, none of the officials interviewed had conducted assessments to determine whether they had adequate resources. EPA has recently issued new policies to address two of the key problems we have identified--competition and oversight--and developed a 5-year plan to address its long-standing grants management problems. In September 2002, EPA issued a policy to promote competition in awarding grants by requiring that certain grants be competed. These grants may be awarded noncompetitively only if certain criteria are met, in which case, a detailed justification must be provided. The new policy also created a senior-level advocate for grants competition to oversee the implementation of the policy. In December 2002, EPA also issued a new oversight policy that increases the amount of in-depth monitoring--desk reviews and on-site reviews--that EPA conducts of grantees; mandating that all EPA units enter compliance activities into a database; and requiring transaction testing for unallowable expenditures, such as lobbying, during on-site evaluations reviews. In April 2003, EPA issued a 5-year Grants Management Plan. EPA's Assistant Administrator for Administration and Resources Management has called implementation of this plan the most critical part of EPA's grants management oversight efforts. The grants management plan has five goals and accompanying objectives: Promote competition in the award of grants by identifying funding priorities, encouraging a large and diverse group of applicants, promoting the importance of competition within the agency, and providing adequate support for the grant competition advocate. Strengthen EPA's oversight of grants by improving internal reviews of EPA offices, improving and expanding reviews of EPA grant recipients, developing approaches to prevent or limit grants management weaknesses, establishing clear lines of accountability for grants oversight, and providing high-level coordination, planning, and priority setting. Support identifying and achieving environmental outcomes by including expected environmental outcomes and performance measures in grant workplans, and improving the reporting on progress made in achieving environmental outcomes. Enhance the skills of EPA personnel involved in grants management by updating training materials and courses and improving delivery of training to project officers and grants specialists. Leverage technology to improve program performance by, for example, enhancing and expanding information systems that support grants management and oversight. Although we have not fully assessed EPA's new policies and grants management plan, I would like to make a few preliminary observations on these recent actions based on our ongoing work. Specifically, EPA's plan: Recognizes the need for greater involvement of senior officials in ensuring effective grants management throughout the agency. The plan calls for a senior-level grants management council to provide high-level coordination, planning, and priority-setting for grants management. Appears to be comprehensive in that it addresses the four major management problems--competitive grantee selection, oversight, environmental results, and resources--that we identified in our ongoing work. Previous EPA efforts did not address all these problems, nor did they coordinate corrective actions, as this plan proposes. EPA's plan ties together recent efforts, such as the new policies and ongoing efforts in staff and resource management, and proposes additional efforts to resolve its major grants management problems. Identifies the objectives, milestones, and resources needed to help ensure that the plan's goals are achieved. Furthermore, EPA is developing an annual companion plan that will outline specific tasks for each goal and objective, identify the person responsible for completing the task, and set an expected completion date. Begins to build accountability into grants management by establishing performance measures for each of the plan's five goals. Each performance measure establishes a baseline from which to measure progress and target dates for achieving results. For example, as of September 2002, 24 percent of new grants to nonprofit recipients that are subject to the competition policy were competed--EPA's target is to increase the percentage of these competed grants to 30 percent in 2003, 55 percent in 2004, and 75 percent in 2005. The plan further builds accountability by identifying the need for performance standards for project officers and grants specialists that address grant management responsibilities. Although these actions appear promising, EPA has a long history of undertaking initiatives to improve grants management that have not solved its problems. If the future is to be different from the past, EPA must work aggressively to implement its new policies and its ambitious plan through a sustained, coordinated effort. It will be particularly important for all agency officials involved in managing grants to be committed to and held accountable for achieving the plan's goals and objectives. Mr. Chairman, this concludes my testimony. I would be happy to answer any questions that you or Members of the Subcommittee may have. For further information, please contact John B. Stephenson at (202) 512- 3841. Individuals making key contributions to this testimony were Andrea Wamstad Brown, Christopher Murray, Paul Schearf, Rebecca Shea, Carol Herrnstadt Shulman, Bruce Skud, and Amy Webbink. 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 years, EPA has had persistent problems in managing its grants. Grants constituted one-half of the agency's annual budget, or about $4.2 billion in fiscal year 2002. EPA uses grants to implement its programs to protect human health and the environment and awards them to over 3,300 recipients, including state and local governments, tribes, universities, and nonprofit organizations. EPA's ability to efficiently and effectively accomplish its mission largely depends on how well it manages its grant resources and builds in accountability. Since 1996, GAO and EPA's Office of Inspector General have repeatedly reported on EPA's problems in managing its grants. Because these problems have persisted, in January 2003, GAO cited grants management as a major management challenge for EPA. GAO is currently reviewing EPA's efforts to improve grants management at the request of the Chairman of the House Committee on Transportation and Infrastructure and Representative Anne Northup. For this testimony GAO is reporting on results of its previously issued reports and on the grants problems EPA faces, past actions to address these problems, and recently issued EPA policies and a 5-year grants management plan to address its long-standing grants management problems. EPA faces four key problems in managing its grants: (1) selecting the most qualified grant recipients from a large applicant pool, (2) effectively overseeing grantees throughout the life of the grant, (3) measuring the results of the grantees' work, and (4) effectively managing its grants staff and resources. EPA must resolve these problems in order to improve its management of grants. In recent years, EPA has taken a series of actions to address two of its key problem areas: grantee oversight and resource management. EPA actions include issuing several oversight policies, conducting training, and developing a new data system for grants management. However, these past actions were not consistently successful in resolving grants management problems because of weaknesses in implementation and insufficient management emphasis. For example, between 1998 and 2002, EPA issued three policies designed to improve oversight of grantees, but EPA staff did not consistently carry them out. Late in 2002, EPA launched new efforts to address some of its grants management problems. In September 2002, EPA, for the first time, issued a policy to promote competition in awarding grants. In December 2002, it issued a new policy designed to better ensure effective grant oversight. Finally, in April 2003, EPA issued a 5-year grants management plan to address its long-standing grants management problems. GAO is still reviewing these new efforts. Although EPA's recent actions seem promising, the agency has a long history of undertaking initiatives to improve grants management that have not solved its problems. If the future is to be different from the past, EPA must work to aggressively implement its new policies and its ambitious 5-year plan through a sustained, coordinated effort. It will be particularly important for all agency officials involved in managing grants to be committed to and held accountable for achieving the plan's goals and objectives.	5,929	640
The federal government recognizes Indian tribes as distinct, independent political communities with inherent powers of self-government that include enacting substantive law over internal matters and enforcing that law in their own forums. The United States has a trust responsibility to federally recognized Indian tribes and maintains a government-to- government relationship with those tribes. The Bureau of Indian Affairs (BIA) within DOI provides law enforcement on Indian reservations unless tribes opt to assume responsibility for law enforcement or the state in which the reservation is located has criminal jurisdiction. Federal crimes such as illegally crossing the border or drug smuggling across the border fall under the authority of federal law enforcement whether they occur on Indian reservations or not. However, tribal law enforcement generally has the authority to arrest offenders on Indian reservations and detain them until they can be turned over to the proper authorities, even if the tribe itself lacks criminal jurisdiction. Further, tribal law enforcement officers can be cross-deputized to enforce federal laws. For example, ICE designated a tribal law enforcement officer with customs authority and this officer provides intelligence to ICE and assists with ICE investigations. DHS and its components have established a number of different offices to assist with facilitating tribal coordination on all homeland security issues, including border security. As shown in table 1, these components and offices have a variety of roles in supporting border security efforts on Indian reservations. Fusion centers, while not DHS components or offices, also support border security on Indian reservations by providing information to tribes. DHS and its components also have strategies, as shown in table 2, that help facilitate coordination between DHS and tribes to address border security on Indian reservations. The Border Patrol is coordinating and sharing information with tribes in a number of ways to address border security issues. The Border Patrol and six tribes reported using one or more of the following coordination methods: Operation Stonegarden--a DHS grant program intended to enhance coordination among local, tribal, territorial, state, and federal law enforcement agencies in securing United States borders--task forces such as BESTs and IBETs, fusion centers, tribal and public land liaisons, and joint operations and shared facilities to coordinate on border security. Border Patrol and tribal officials report that they share border security-related information through the BEST and IBET forums, and tribal officials reported receiving border security-related information from fusion centers. In addition, according to Border Patrol and tribal officials, the Border Patrol uses tribal or public lands liaisons to coordinate with tribes on border security. Another way Border Patrol and tribal officials said they coordinate on these issues is by tribal law enforcement using Operation Stonegarden funds to support daily coordination with the Border Patrol, including participating in joint patrols with the Border Patrol. In addition to these methods, the Border Patrol and tribes reported using joint operations, such as patrolling together in the same vehicles and using shared facilities, to coordinate on border security. Table 3 contains more detailed information regarding these coordination methods. In addition to these mechanisms, tribal and Border Patrol officials reported using other coordination methods, such as agent-to-tribal police officer interaction, meetings, and e-mails to coordinate on border security. For instance, although officials from two of the tribes in our review said their tribes do not use any of the coordination methods described in table 3, both tribes reported using meetings to coordinate as the need arises with the Border Patrol on border security issues. Officials from six of the eight tribes and 4 of the 10 Border Patrol stations we contacted reported that these methods of contact are the most beneficial for coordinating on border security. Officials from one tribe in our review reported that the timely sharing of information via e-mail is the tribe's most important coordination mechanism with federal agencies. Officials from another tribe explained that leadership from the responsible Border Patrol Sector regularly calls the tribal chairman to discuss border security issues, as well as holding frequent meetings. Officials from four of the eight tribes and 4 of the 10 stations we interviewed also reported that they communicate daily with each other. Officials from some of the tribes and Border Patrol sectors and stations we contacted reported positive aspects of coordinating to address border security issues. Specifically, officials from five of the eight tribes we contacted reported having a good or effective relationship with the Border Patrol. In particular, officials from two of the tribes we reviewed, as well as the corresponding Border Patrol sectors and stations, reported that there are positive aspects of DHS's overall coordination with the tribes to address border security threats. For example, officials from one of the tribes explained that tribal law enforcement officers have a good working relationship with the Border Patrol and that the Border Patrol is the best federal agency they have worked with in terms of coordinating with the tribe. Tribal officials cautioned that while the tribe has a good relationship with the Border Patrol, the majority of tribal community members do not want any Border Patrol presence on the reservation and that the tribal community is very mistrusting of nontribal entities, including law enforcement agencies. Border Patrol sector officials--who staff the sector responsible for border security on one of the two reservations--stated that in addition to productive monthly Border Patrol-tribal leadership meetings and daily interaction between Border Patrol agents and tribal law enforcement, the Border Patrol was the first federal law enforcement agency invited to speak at tribal schools and community meetings. Officials from one of the tribes in our review also reported that DHS and the Border Patrol at both the national and local levels are more sensitive to tribal concerns now than in the past and that the Border Patrol is willing to work with tribal law enforcement in sharing intelligence and keeping the lines of communication open. For instance, tribal officials explained that they have quarterly meetings with the Border Patrol sector during which the Border Patrol shares existing and future border security strategies with the tribe, including the decision of whether to deploy surveillance towers on the reservation. As a result of this interaction, the tribe, according to tribal officials, feels involved in the decision to potentially install towers on the reservation to help monitor and better secure the border. In the past, these types of decisions would have occurred without consulting the tribe, according to tribal officials. Border Patrol sector officials--who staff the sector responsible for border security on the Indian reservation--stated that the sector has never enjoyed a better level of communication or mutual understanding with the tribe and much of this can be attributed to the level of coordination with the tribe, particularly the regular meetings held between Border Patrol agents and tribal officials. Although Border Patrol and tribal officials reported positive aspects of coordination, officials from seven of the eight tribes we contacted reported coordination challenges related to border security. According to tribal officials, the Border Patrol does not consistently communicate to the tribes information that would be useful in tribal law enforcement efforts to assist in securing the border. Specifically, officials from five of the eight tribes we reviewed reported coordination challenges related to not receiving notification and information from federal agencies, including the Border Patrol, regarding federal law enforcement activity on their respective reservations. The following examples illustrate these coordination challenges. Officials from one of the tribes in our review reported that they are not given advance notification of Border Patrol law enforcement actions, such as independently patrolling the reservation or the deployment of undercover surveillance teams, occurring on their reservation. These officials reported that they would be in a better position to support federal agencies with border security efforts if they received information regarding planned federal law enforcement actions in a more timely manner. Border Patrol officials from the sector stated that the Border Patrol notifies tribal law enforcement of its own operations, as well as joint operations, which often involve tribal law enforcement, on the reservation. However, the Border Patrol does not provide detailed information on its patrol schedule and dates and times of operations, among other enforcement activities, to non-law- enforcement entities. A tribal official from another Indian reservation stated that there are numerous law enforcement agencies with different enforcement objectives working on the reservation and that there have been a few instances in which a tribal law enforcement unit and another federal agency were tracking the same suspects unaware of each other's presence. These situations, according to tribal officials, were problematic because the agencies were concerned that the overall operation would fail because of the lack of notification by each agency of its respective operations. Although a Border Patrol official with border security responsibilities on this Indian reservation was not aware of the Border Patrol being involved in such incidents, according to tribal officials, when tribal officials and the Border Patrol work together, they can complement each other and act as force multipliers by utilizing their respective resources. We have previously reported on the importance of deconfliction and coordinating to prevent law enforcement entities from unknowingly interrupting each other or duplicating each other's efforts. Moreover, CBP reports that in some areas along the border, surveillance and response capabilities are limited, so the success of its border security initiatives depends on leveraging intelligence and partnerships with federal, state, local, and tribal governments. Officials from a third tribe in our review reported that although the tribe provides information to federal agencies, these agencies do not consistently provide information, particularly information related to tribal members, to the tribe. For instance, in 2009, Border Patrol and a county sheriff's deputy responded to an incident involving two individuals who tried to illegally cross the border on tribal lands. Although the tribe was conducting operations in the area and could have responded to this incident, tribal officials stated that they did not receive information about the illegal crossing from the Border Patrol. Border Patrol officials from the sector with responsibility for this Indian reservation were not able to confirm Border Patrol involvement in this incident. Further, according to Border Patrol officials, in some cases, coordination challenges with tribes have affected the Border Patrol's ability to patrol and monitor the border so as to prevent and detect illegal immigration and smuggling. Border Patrol officials from three of the seven Border Patrol sectors and 5 of the 10 stations we contacted reported coordination challenges related to understanding and collaborating with tribes within tribal government rules. Specifically, officials from two sectors that include Indian reservations and corresponding stations reported coordination challenges related to tribal government rules that hindered law enforcement in working together to secure the border. Border Patrol officials from one of the sectors with border security responsibilities on an Indian reservation in our review stated that the reservation faces border threats and is vulnerable, in part, because the Border Patrol cannot patrol as frequently as it would like to on the reservation. The Border Patrol is limited, because of tribal decisions, in the type of border security enforcement, particularly the implementation of visible countermeasures, such as mobile surveillance systems or integrated fixed towers, it can implement on the reservation, according to these Border Patrol officials. Further, these Border Patrol officials stated that some tribal members are opposed to the Border Patrol's presence on the reservation, which, because of the potential for volatile protests by these tribal members, impedes the Border Patrol's ability to patrol certain areas of the reservation, including a road in a major smuggling area. As a result of these issues, Border Patrol officials reported that the Border Patrol cannot apply all of its capabilities, particularly technology, to address border security threats and vulnerabilities on the reservation. Tribal officials from this Indian reservation stated that although the Border Patrol is not permitted to implement border security technologies on the reservation because of tribal community preferences, the Border Patrol is able to implement technologies and checkpoints just off of the reservation. Border Patrol headquarters officials stated that the implementation of these countermeasures off of instead of on the reservation adjacent to the border hampers the Border Patrol's ability to secure the border. Border Patrol officials from a sector with an Indian reservation reported that the tribe has negotiated with the Border Patrol via its tribal resolution process and other means to limit the tactical infrastructure the Border Patrol sector uses to support the border security mission on the reservation. For example, the Border Patrol is limited in the deployment of tactical checkpoints and must negotiate regarding the deployment location of vehicle-mounted radar systems.mounted radar system had to be moved to a tactically less According to the Border Patrol, in one case, a vehicle- advantageous position because of tribal concerns over its location on a sacred mountain. According to the Border Patrol, the tribal resolution process for gaining approval from the tribe to implement border security countermeasures is difficult to navigate, which significantly affects the Border Patrol's ability to quickly respond to threats, and reduces the Border Patrol's presence on the border. The tribal resolution process, according to Border Patrol officials, includes several steps for soliciting feedback and approval for all proposed Border Patrol actions from all of the tribe's districts and communities. Border Patrol sector and station officials expressed concerns about individual community members, including those possibly involved in cross-border crime, being able to prevent passage of the resolution. These officials also stated that the tribe has changed the approval process without communicating these changes to the Border Patrol, which makes it difficult for the Border Patrol to adapt to the changes for both new projects and projects already under consideration by the tribe. Tribal officials stated that the Border Patrol established temporary camps on its own initiative without gaining approval from the tribal real estate office, so the tribal officials had the Border Patrol remove the However, these officials acknowledged that the resolution camps.process is lengthy and can be tedious for Border Patrol officials, particularly since the Border Patrol has deadlines it must meet to receive funding for projects. They also recognized that some of the tribal districts were not familiar with the steps required by the resolution process. As a result, tribal officials have established a tribal committee to ensure the districts and the Border Patrol better understand the approval process. Given these coordination challenges, written agreements between the Border Patrol and tribes could provide a mechanism to help resolve coordination issues, such as the tribes' lack of notification and information from federal agencies regarding law enforcement activity on their reservations, when they emerge. We have previously reported on practices that can enhance and sustain effective collaboration, such as establishing common standards, policies, or procedures to use in collaborative efforts and the development of written agreements to document collaboration. We reported that as agencies bring diverse cultures to the collaborative effort, it is important to address these differences to enable a cohesive working relationship and to create the mutual trust required to enhance and sustain the collaborative effort. Regarding the use of written agreements to document collaborative efforts, we have reported on the utility and benefits of written government- to-government agreements between U.S. government agencies and foreign governments or other sovereign entities to improve cooperation.These agreements, in part, provide a legal framework for improving partnerships, facilitate information exchange, define tasks to be accomplished by each entity, and establish written assurances of each entity's commitments. A government-to-government agreement could help DHS and tribal governments to come together as partners to establish complementary goals and strategies for achieving shared results in securing the border on tribal lands. Border Patrol headquarters officials reported that they have considered the potential utility and benefits of written government-to-government agreements with individual tribes to address border security challenges. In addition, DHS has entered into memorandums of agreements (MOA) with individual tribes on other security-related issues, which have benefited DHS and the tribes. For example, DHS entered into MOAs with individual tribes regarding the implementation of the Enhanced Tribal Card, which is a DHS program that allows all federally recognized tribes to work with CBP to produce a card denoting citizenship and identity that can be accepted for entry at the POEs. A DHS official from CBP's Land Border Integration Project Management Office responsible for negotiating these MOAs with the tribes reported that the MOAs were designed to protect tribal sovereignty, as well as describe the steps the tribes must take to produce a card. These MOAs, according to this official, are binding and protect both the tribes and CBP from expending resources on developing the card without assurances that the card will meet the requirements of the program. Both Border Patrol and tribal officials reported that a written government- to-government agreement could benefit their border security coordination. Border Patrol sector officials responsible for border security on one of the reservations stated that the establishment of such an agreement explicitly describing the steps required to obtain approval for Border Patrol actions, including the tribe's resolution process and mechanisms for notifying the Border Patrol when changes are made to the process or approval requirements, could help resolve challenges for the Border Patrol in coordinating with the tribe. Tribal officials also reported that a government-to-government agreement could assist with resolving remaining coordination challenges by supporting overall coordination and ensuring that coordination processes are followed. Officials from another tribe in our review stated that they would also be receptive to an agreement that shows respect for the tribe and its practices, is developed with tribal participation, and involves senior DHS officials with negotiating capabilities. Border Patrol sector officials with responsibility for another of the reservations in our review stated that they considered pursuing an agreement with the tribe, but decided instead to actively engage tribal council officials, law enforcement officers, and community members in resolving issues, a course of action that has, according to Border Patrol officials, been effective in gaining the support of tribal leadership and law enforcement. The Border Patrol sector officials noted, though, that if agreements with tribal officials were pursued, senior DHS officials would need to be involved in the negotiation of any government-to-government agreements because tribal leadership officials do not view the Border Patrol, as a law enforcement agency, as the appropriate federal government representative for negotiating these types of agreements. Officials from both of these tribes emphasized the importance of tribal sovereignty and the need for the federal government to interact with tribes on a government-to-government basis. An assessment of the utility of written, government-to-government agreements between DHS and individual tribal governments to address and mitigate specific coordination challenges, particularly for tribes facing border security threats, could help DHS build on its tribal partnerships. Further, agreements that are tailored to help resolve specific challenges, such as not receiving notification and information from federal agencies regarding federal law enforcement activity on the tribes' respective reservations could bring greater transparency to tribal government rules for the Border Patrol. Utilizing written agreements to help ensure the partners are working together to secure the borders could better position the Border Patrol and tribes to address their coordination challenges. DHS IGA and Tribal Desk officials reported that they have taken various actions to coordinate with tribes on a range of homeland security-related issues, including border security. For instance, DHS components, including the Border Patrol, have tribal liaisons who manage their components' tribal outreach efforts. The Tribal Desk, which is responsible for coordinating tribal consultation and outreach with the component liaisons, holds monthly teleconferences with these liaisons to discuss tribal issues and programs, according to IGA and Tribal Desk officials. DHS also has a Tribal Consultation Policy that outlines the guiding principles under which DHS engages with the tribal governments. DHS, according to DHS IGA and Tribal Desk officials, disseminated this policy to all federally recognized tribes and presented the policy at national tribal conferences. DHS's Tribal Desk, according to DHS IGA and Tribal Desk officials, is working with the tribes daily to address tribal issues and improve its tribal partnerships. However, DHS IGA and Tribal Desk officials reported that the Tribal Desk does not have oversight of the components' tribal outreach efforts, including border security coordination, because their role is one of a coordination mechanism. The Tribal Desk is aware of the components' outreach to the tribes, but it does not have the authority to track the effectiveness of such outreach to determine if the outreach is occurring and if any changes to outreach efforts are needed. According to DHS IGA and Tribal Desk officials, each component, including CBP, is responsible for conducting its own tribal outreach and is only required to report to the leadership of its respective components and is not required to report to the Tribal Desk on its coordination efforts. As a result, there is no department-wide oversight mechanism for ensuring the effectiveness of components' border security coordination with the tribes. According to Standards for Internal Control in the Federal Government, controls should generally be designed to ensure that ongoing monitoring occurs in the course of normal operations and assesses the quality of performance over time. Such monitoring should be performed continually; ingrained in the agency's operations; and clearly documented in directives, policies, or manuals to help ensure operations are carried out as intended. We have also previously reported that federal agencies can enhance and sustain collaborative efforts by, in part, developing oversight mechanisms--or mechanisms to monitor and evaluate their results--to identify areas for improvement. Oversight mechanisms can assist with reinforcing agency accountability for its collaborative efforts. DHS, in accordance with a 2009 Presidential Memorandum on tribal consultation, developed an Action Plan and corresponding Progress Report in 2010 that described various action items designed to establish regular and meaningful collaboration with tribal officials, and to monitor at the department level tribal partnerships to protect the safety and security of all people on tribal lands and throughout the nation. The 2009 memorandum requires all federal agencies to submit to OMB a detailed action plan of the steps the agency will take to ensure meaningful and timely input by tribal officials in the development of regulatory policies that have tribal implications. As DHS was formulating the Action Plan, tribes recommended, among other things, that DHS develop accountability and tracking mechanisms to ensure that the agency is responding to issues that are raised through tribal consultation. The Action Plan and its 2010 Progress Report call for the implementation of various action items designed to monitor and oversee DHS's tribal coordination efforts at the department level, including appointing a Senior Advisor for tribal affairs to provide policy advice and leadership on tribal issues and determining the feasibility and usefulness of establishing an internal leadership advisory council on tribal affairs. According to the Action Plan, this intra-agency council, staffed by DHS IGA and composed of officials from the department and components, would provide ongoing advice to the Secretary of Homeland Security on issues and policies that affect tribes, including border security, as well as bringing together DHS leadership from across the department's divisions and components to ensure consistency on policies affecting tribes. According to DHS officials, while DHS took steps to hire a Senior Advisor, the position was ultimately not sustainable because of staff turnover and a lack of funding for the position. DHS officials further noted that the position of Director of Tribal Affairs within the Intergovernmental Affairs office was established to help fulfill this role. Additionally, DHS officials reported that they did not establish an advisory council because of personnel limitations, among other issues. The implementation of such action items, or another oversight and monitoring mechanism, could better position DHS to assess the effectiveness of partnerships with tribes at the department level. We have identified coordination challenges related to border security since the establishment of the Action Plan by DHS. For example, officials from seven of the eight tribes we contacted reported coordination challenges related to border security, such as the Border Patrol's lack of consistent communication of border security-related information with the tribes. As DHS was developing its Action Plan, it received feedback from tribes regarding the need to establish accountability and tracking mechanisms to ensure that DHS is responding to issues raised by tribes. For example, in summarizing feedback received from tribes, DHS noted in the Action Plan that tribal leaders expressed frustration regarding the expenditure of significant time and resources engaging with a federal agency only to see very little response or consideration of tribal recommendations. However, DHS does not have a mechanism to monitor and provide accountability for coordination efforts, as suggested by the tribes and the Action Plan, to position DHS to, for example, identify departmental and component coordination successes as well as areas needing improvement, including addressing coordination challenges that have remained since DHS obtained feedback from tribes in developing the plan. An oversight mechanism, such as one or more of those identified in DHS's Action Plan, could help identify and address these coordination challenges as well as determine which coordination efforts work well. Further, such a mechanism could help DHS enhance its awareness of and accountability for components' border security coordination efforts with the tribes and better look across the department to determine the progress being made and the improvements needed to more effectively coordinate border security with the tribes. The nature and complexity of Indian reservations on or near the border, along with the vulnerabilities and threats they face, highlight the importance of DHS and tribes working together to enhance border security. The Border Patrol, in particular, is coordinating and sharing information with tribes in a variety of ways to address border security on Indian reservations. However, these coordination efforts could be strengthened. Government-to-government agreements with tribes to address specific challenges, such as federal agency notification to tribes of law enforcement actions occurring on the reservation, that have emerged between the Border Patrol and individual tribes could help better position the Border Patrol and the tribes to resolve their coordination challenges and better work together to secure the border. Further, DHS does not have a mechanism to monitor and provide oversight for its tribal coordination efforts--including border security--that would allow the agency to hold components accountable for effective coordination and, as a result, is not well positioned to identify areas of coordination needing improvement. We have reported on the importance of monitoring and oversight for sustaining and enhancing collaboration, and DHS's Action Plan contains action items designed, in part, to assist with its monitoring and oversight of its tribal partnerships. A monitoring and oversight mechanism could yield additional information and insights on the effectiveness of DHS's coordination with tribes, as well as help reinforce accountability when coordinating to address border security issues. To enhance DHS-tribal coordination on border security on Indian reservations, including DHS's monitoring and oversight of these coordination efforts, we recommend that the Secretary of Homeland Security take the following two actions: examine, or direct CBP to examine, as appropriate, the potential benefits of government-to-government written agreements with tribes facing border security threats, and develop and implement a mechanism to monitor DHS's department- wide border security coordination efforts with tribes. We provided a draft of this report to DHS, DOJ and DOI for comment. We received written comments from DHS on the draft report, which are summarized below and reproduced in full in appendix I. DHS concurred with both recommendations. DOJ and DOI did not provide written comments to include in this report. DOJ provided technical comments via an e-mail received on December 7, 2012, which we incorporated as appropriate. DOI provided oral technical comments on December 7, 2012, which we incorporated as appropriate. Regarding the first recommendation, that DHS examine or direct CBP to examine, as appropriate, the potential benefits of government-to- government written agreements with tribes facing border security threats, DHS concurred. DHS stated that more formalized government-to- government agreements between CBP and tribal nations should be developed for substantive issues. DHS further noted that written agreements, subject to legal review prior to signature, will memorialize both the issues and solutions. DHS stated that the DHS Intergovernmental Affairs office will work with CBP in the coming year to determine how the recommendation can be implemented. We will continue to monitor DHS's efforts. Regarding the second recommendation, that DHS develop and implement a mechanism to monitor DHS's department-wide border security coordination with tribes, DHS concurred. DHS agreed that developing an agency-wide program could further enhance the interests of the tribes and the department for border security and many other programs. DHS stated that, in consultation with tribes, it will convene an internal group to discuss the feasibility of establishing a permanent program or an intra-agency oversight committee to address border security and other issues related to interaction and program delivery with tribes. This action, if implemented effectively, should address the intent of the recommendation. If you or your staff have any questions about this report, please contact me at (202) 512-8777 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix II. Rebecca Gambler, (202) 512-8777 or [email protected] In addition to the contact named above, Dawn Locke (Assistant Director), David Alexander, Frances Cook, Kevin Copping, Corey Guilmette, Eric Hauswirth, Linda Miller, John Mingus, Robin Nye, Jessica Orr, and Jerry Sandau made key contributions to this report.	Individuals seeking to enter the United States illegally may attempt to avoid screening procedures at ports of entry by crossing the border in areas between these ports, including Indian reservations, many of which have been vulnerable to illicit cross-border threat activity, such as drug smuggling, according to DHS. GAO was asked to review DHS's efforts to coordinate border security activities on Indian reservations. This report examines DHS's efforts to coordinate with tribal governments to address border security threats and vulnerabilities on Indian reservations. GAO interviewed DHS officials at headquarters and conducted interviews with eight tribes, selected based on factors such as proximity to the border, and the corresponding DHS field offices that have a role in border security for these Indian reservations. While GAO cannot generalize its results from these interviews to all Indian reservations and field offices along the border, they provide examples of border security coordination issues. This is a public version of a sensitive report that GAO issued in December 2012. Information that DHS, the Department of Justice (DOJ) and the Department of the Interior (DOI) deemed sensitive has been redacted. The Department of Homeland Security (DHS) is coordinating in a variety of ways with tribes, such as through joint operations and shared facilities and Operation Stonegarden--a DHS grant program intended to enhance coordination among local, tribal, territorial, state, and federal law enforcement agencies in securing United States borders. However, the Border Patrol and tribes face coordination challenges. Officials from five tribes reported information-sharing challenges with the Border Patrol, such as not receiving notification of federal activity on their lands. Border Patrol officials reported challenges navigating tribal rules and decisions. Border Patrol and DHS have existing agreements with some, but not all, tribes to address specific border security issues, such as for the establishment of a law enforcement center on tribal lands. These agreements could serve as models for developing additional agreements between the Border Patrol and other tribes on their specific border security coordination challenges. Written government-to-government agreements could assist Border Patrol and tribal officials with enhancing their coordination, consistent with practices for sustaining effective coordination. DHS established an office to coordinate the components' tribal outreach efforts, which has taken actions such as monthly teleconferences with DHS tribal liaisons to discuss tribal issues and programs, but does not have a mechanism for monitoring and overseeing outreach efforts, consistent with internal control standards. Such monitoring should be performed continually; ingrained in the agency's operations; and clearly documented in directives, policies, or manuals to help ensure operations are carried out as intended. Implementing an oversight mechanism could help enhance DHS's department-wide awareness of and accountability for border security coordination efforts with the tribes while identifying those areas that work well and any needing improvement. GAO recommends that DHS examine the benefits of government-to-government agreements with tribes and develop and implement a mechanism to monitor border security coordination efforts with tribes. DHS concurred with our recommendations.	6,083	639
As of June 30, 2001, Amex was the third-largest U.S. market in terms of the number of companies whose common stock it listed. With the common stock of 704 companies listed, Amex trailed only Nasdaq, which had 4,378 listings, and NYSE, which had 2,814 listings. Overall, about 98 percent of the common stocks listed on U.S. markets were listed on Amex, Nasdaq, or NYSE. The remaining markets had significantly fewer listings. For example, the fourth-largest market in terms of the number of companies listed was the Boston Stock Exchange, with 84 listings, 46 of which were also listed on Nasdaq. In 1998, the National Association of Securities Dealers (NASD), which also owns and operates Nasdaq, purchased Amex. Although Amex retained its independence as an exchange, in July 1999 its equity listing program was moved from New York City to Gaithersburg, Maryland, and integrated with the Nasdaq listing program. In June 2000, NASD completed the first phase of its plan to restructure Nasdaq as a stand-alone stock-based organization. According to Amex officials, as a result of this restructuring, the Amex equity listing department began moving back to New York in November 2000, and the move was completed about 6 months later. Under federal law and consistent with its responsibilities as an SRO, each U.S. market establishes and implements the rules that govern equity listings in its market with the intent of maintaining the quality of the markets and public confidence in them. In general, a company applies to have its stock listed for trading in a specific market, subject to that market's rules. This process includes submitting an application for review, together with supporting information such as financial statements, a prospectus, a proxy statement, and relevant share distribution information. As part of making an initial listing decision, the market's equity listing department reviews these submissions for compliance with its listing requirements and conducts background checks of company officers and other insiders. The equity listing department will also monitor companies for compliance with the market's continued listing requirements and, in accordance with the market's rules, will take action when these requirements are not met. SEC's oversight of a market's equity listing requirements includes reviewing the SRO's proposed rules to ensure that they are consistent with the requirements of the Securities and Exchange Act of 1934. These rules, which make up the market's initial and continued equity listing guidelines or standards, must be approved by SEC and can be changed only with SEC's approval. SEC also reviews the SRO's listing decisions, either on appeal or by its own initiative, and SEC's OCIE periodically inspects the SRO's listing program to ensure compliance with the market's listing requirements. In all U.S. markets, quantitative and qualitative listing requirements for equities have generally addressed the same or similar factors. Two aspects of the quantitative listing requirements are noteworthy. First, the minimum thresholds for meeting them varied according to the characteristics of the companies the markets sought to attract. Second, initial listing requirements were generally higher than continued listing requirements. Qualitative listing requirements addressed corporate governance and other factors. The most significant difference between the equity listing requirements of Amex and those of other U.S. stock markets was that Amex was one of only two markets that retained the discretion to initially list companies that did not meet all of its quantitative requirements. Amex's quantitative initial listing guidelines for equities have generally addressed factors that are the same as or similar to those addressed by the initial listing standards of the other U.S. stock markets, including factors such as minimum share price, stockholders' equity, income, market value of publicly held shares, and number of shareholders. However, the minimum thresholds for meeting the requirements of each market have varied to reflect the differences in the characteristics--such as size--of the companies that each market targeted for listing. For example, Amex has marketed itself as a niche market designed to give growth companies access to capital and to the markets. A company could qualify for initial listing on Amex under one of two alternatives. Under both alternatives, a company was required to have a minimum share price of $3 and minimum stockholders' equity of $4 million (see table 1). In addition, under one alternative, a company could qualify for listing with no pretax income, a minimum market value of publicly held shares of $15 million, and a 2-year operating history. Under the other alternative, a company was required to have minimum pretax income of $750,000, either in the latest fiscal year or in 2 of the most recent 3 fiscal years, and a minimum market value of publicly held shares of $3 million. The Nasdaq SmallCap Market focused on smaller companies that were generally similar in size to those listed on Amex, and its listing standards and minimum thresholds were similar to Amex's. To be eligible for listing on the Nasdaq SmallCap Market, a company was required to have, among other things, a minimum share price of $4, a minimum market value of publicly held shares of $5 million, a 1-year operating history, and either a minimum net income of $750,000 in the latest fiscal year or in 2 of the most recent 3 fiscal years, or $5 million of stockholders' equity. Alternatively, if the company did not meet the operating history, income, or equity requirements, the minimum market value of all shares was required to be $50 million. In contrast to Amex and the Nasdaq SmallCap Market, the Nasdaq National Market and NYSE targeted larger companies, and their listing standards had higher minimum thresholds. For example, the Nasdaq National Market required in part that listing companies have a minimum of $1 million in pretax income in the latest fiscal year or in 2 of the 3 most recent fiscal years, along with a minimum market value of publicly held shares of $8 million, depending on the listing alternative. In comparison, NYSE required a company to have, among other things, a minimum total pretax income of $6.5 million for the most recent 3 years and a minimum market value of publicly held shares of $60 million or $100 million, depending on the listing alternative. The quantitative continued listing requirements (the minimum thresholds that listed companies must maintain to continue to be listed) were generally lower than those for the initial listing requirements (see table 1). For example, although Amex's initial listing guidelines required, under one alternative, that a company have at least $4 million of stockholders' equity and $750,000 in pretax income, a company could remain in compliance with the continued listing guidelines even if it had losses in 3 of the last 4 years (beginning with its listing date), provided that it maintained $4 million in stockholders' equity. Such differences between initial and continued listing requirements were typical of all the U.S. markets. The qualitative listing requirements for equities in all U.S. markets addressed corporate governance requirements as well as various other factors. Corporate governance requirements are generally concerned with the independence of corporate management and boards of directors, as well as with the involvement of shareholders in corporate affairs. These requirements address such factors as conflicts of interest by corporate insiders, the composition of the audit committee, shareholder approval of certain corporate actions, annual meetings of shareholders, the solicitation of proxies, and the distribution of annual reports. U.S. markets may also consider various other qualitative factors when considering a company for listing. These factors are inherently subjective and are not subject to comparison among markets. For example, Amex's guidelines stated that even though a company may meet all of the exchange's quantitative requirements, it may not be eligible for listing if it produces a single product or line of products, engages in a single service, or sells products or services to a limited number of companies. In addition, in making a listing decision, Amex would consider such qualitative factors as the nature of a company's business, the market for its products, the reputation of its management, and the history or recorded pattern of its growth, as well as the company's financial integrity, demonstrated earning power, and future outlook. Although all U.S. markets had rules giving them the discretion to apply additional or more stringent requirements in making an initial or continued listing decision, only Amex and Nasdaq retained the discretion to initially list companies that did not meet their quantitative requirements. The Amex listing guidelines stated that the exchange's quantitative guidelines are considered in evaluating listing eligibility but that other factors are also considered. As a result, Amex might approve a listing application even if the company did not meet all the exchange's quantitative guidelines. Amex believed that it was important for the exchange to retain discretion to approve securities for initial listing that did not fully satisfy each of its quantitative requirements because it would be impossible to include every relevant factor in the guidelines, especially in an evolving marketplace. As of September 7, 2001, Amex had not agreed to implement OCIE's recommendations related to the exchange's use of its discretion in making listing decisions. Amex was unwilling to relinquish its discretionary authority or to modify its stock symbols to address OCIE's concerns. OCIE officials told us that if these recommendations were not addressed, OCIE would include them among the open significant recommendations that are to be reported annually to the SEC Commissioners. OCIE reported in April 2001 that the Amex listing department was generally thorough in its financial and regulatory reviews of companies seeking to be listed on the exchange. However, OCIE also reported that Amex was using its discretionary authority more often than was appropriate to approve initial listings that did not meet the exchange's quantitative guidelines, and that it did so without providing sufficient disclosure to the investing public. OCIE reported that the percentage of companies Amex listed that did not meet the exchange's initial quantitative guidelines increased from approximately 9 percent for the 20 months between January 1, 1998, and August 31, 1999, to approximately 22 percent for the subsequent 14.5 months ending on November 13, 2000. OCIE noted that although Amex's listing guidelines are discretionary, investors rightfully presume that the companies listed on Amex generally meet its quantitative and qualitative guidelines. In response to concerns that the investing public was not receiving sufficient information about the eligibility of companies to trade on Amex, OCIE recommended that Amex amend its rules to provide mandatory initial quantitative listing requirements. Until the mandatory listing requirements are in place, OCIE recommended that Amex provide some form of public disclosure to identify companies that do not meet its initial listing guidelines. For example, Amex could attach a modifier to the trading symbols of these companies. The report indicated that another alternative would be to issue a press release each time Amex lists a company that does not meet its quantitative guidelines. However, OCIE officials said that a press release was not the preferred form of public disclosure because it was a one-time occurrence, while a symbol modifier would accompany a listing until the company complied with Amex listing requirements. OCIE also expressed concerns about Amex's use of its discretionary authority in making continued listing decisions. The concerns it raised in its April 2001 inspection report were similar to those raised in a 1997 report. In both reports, OCIE concluded that Amex did not identify noncompliant companies in a timely manner and that it deferred delisting actions for too long and without good cause. In addition to citing lapses in Amex's timely identification of companies that did not meet its continued listing guidelines, OCIE reported in 2001 that for 5 of 34 companies reviewed, or 15 percent, Amex either granted excessive delisting deferrals or did not begin delisting proceedings in a timely manner. Also, we learned from Amex that 71 companies--about 10 percent of the exchange's 704 listings--did not meet all aspects of its continued listing guidelines as of July 31, 2001. Of these, 12 companies had been out of compliance with its guidelines for more than 2 years, and 20 companies had been out of compliance for between 1 and 2 years (see table 2). In addition, under a November 2000 Amex rule change, listed companies were required to issue a press release to inform current and potential investors when Amex notified the companies of a pending delisting decision. According to Amex, the exchange had sent notices to 18 companies of potential delisting between the time of the rule change and August 30, 2001. Amex informed us that these companies had not been in full compliance with the continued listing guidelines for an average of about 6.5 months before receiving the notice. In response to the concerns OCIE expressed in 1997 about Amex deferring delisting action without good cause, the exchange agreed to review on a quarterly basis the status of companies that did not meet its continued listing standards and to document its rationale for allowing noncompliant companies to remain listed. OCIE believed that by more closely scrutinizing the actions that companies were taking to comply with the exchange's continued listing guidelines, Amex would be more likely to delist companies that were noncompliant for excessive periods. However, OCIE found in its most recent inspection that although Amex had performed the agreed-upon quarterly reviews, the exchange was still not taking timely action to delist noncompliant companies. OCIE recommended in its 2001 inspection report, as it had in its 1997 report, that Amex identify in a more timely manner the companies that did not comply with its continued listing guidelines, grant delisting deferrals to noncompliant companies only if the companies could show that a reasonable basis existed for assuming they would return to compliance with the listing guidelines, document reviews of each company's progress in coming into compliance with the listing guidelines, and place firm time limits on the length of delisting deferrals. The report also recommended that Amex append a modifier to the company's listing symbol or devise an alternative means of disclosure to denote that a company was not in compliance with Amex's continued listing guidelines. As of September 7, 2001, OCIE and Amex were in ongoing discussions about the actions Amex would take to address OCIE's recommendations. However, in responding to OCIE's 2001 inspection report and in subsequent discussions with OCIE officials, Amex indicated that it did not want to relinquish its discretionary authority or to modify its stock symbols. Amex stressed the importance of being able to evaluate a company's suitability for listing on a case-by-case basis. The exchange further responded that its published listing policies put potential investors on notice that Amex would evaluate an applicant based on a myriad of factors and might approve companies for listing that did not meet all of its quantitative guidelines. In addition, Amex cited the November 2000 rule change under which companies are required to issue a press release to inform investors of a pending delisting decision. Amex officials also told us that investors could obtain sufficient information about a company's operating condition from other public sources, obviating the need for a stock symbol modifier or other public notice. OCIE officials said that they believed additional disclosure to the investing public would be necessary until Amex turned its equity guidelines into firm standards. The officials remained concerned that individual investors were unaware that Amex's listing guidelines provided broad discretion in making listing decisions. They emphasized that they were concerned about Amex's discretion to list companies that did not meet its quantitative guidelines, stressing that they did not want to remove Amex's discretion to apply additional or more stringent requirements in making listing decisions. Further, although the OCIE report acknowledged that alternative disclosure mechanisms existed, OCIE officials said that attaching a modifier to a stock's listing symbol to indicate that a stock did not meet either the initial or continued listing standards would provide the broadest and therefore most preferred type of disclosure. For example, a company's press release making public a delisting decision would not be a preferred form of disclosure because, depending on the circumstances, a company could remain out of compliance with Amex's continued listing requirements for months or years without being subject to a delisting decision. To address this concern, NYSE requires a company to issue a press release when the exchange notifies the company that it does not meet the continued listing requirements. Nonetheless, a press release is a one-time notice and, as such, may limit potential investors' awareness of a company's listing status. Amex also expressed concern that OCIE was imposing strict requirements on its market that would not be applicable to other markets. Amex specifically noted that neither the Nasdaq National Market nor NYSE appended a symbol to listed securities that did not meet their continued listing requirements. Amex officials told us that requiring Amex to do so could mislead investors into believing that other markets do not follow listing practices similar to those of Amex. Amex also said that a modifier would place an unwarranted negative label on the company and send an inappropriate message to the market. As noted above, companies listed on Amex have more closely resembled those listed on the Nasdaq SmallCap Market than those listed on the Nasdaq National Market. According to a Nasdaq official, the Nasdaq SmallCap Market has used a modified listing symbol for all companies that fall below its continued listing requirements since the market began operating in 1982, and 10 stocks had modified symbols as of August 15, 2001. Nonetheless, OCIE officials said that they are in the process of inspecting the listing programs at Nasdaq and NYSE and would, if they determined that companies were listed that did not meet the markets' equity listing standards, recommend that stock symbol modifiers be used to identify such companies. Finally, Amex said that a November 2000 rule change, as well as significant staffing changes that include a new department head, were having the effect of reducing the number of stocks approved for listing that did not meet the exchange's quantitative guidelines. According to Amex, from November 1, 2000, through August 27, 2001, 6 of the 39 new listings--approximately 15 percent--were granted exemptions to the exchange's quantitative listing guidelines. Five companies were approved for listing based on an appeal to the Committee on Securities, and one company was approved by the listing department staff because it had "substantially" met all of the exchange's initial listing guidelines. According to Amex, the determination of substantial compliance was based on the fact that the applicant had met all the exchange's guidelines, except that the company's price at the time of approval was $2.9375, instead of the $3.00 minimum required by the guidelines. As discussed earlier, OCIE had found that 22 percent of new listings for a prior period had been granted exemptions. Amex officials said that they expected the downward trend to continue in the number of stocks approved for listing that did not meet the exchange's quantitative guidelines. OCIE officials told us that they had considered the changes to the Amex listing program in making their recommendations. In a 1998 report, we recommended that the SEC Chairman require OCIE to report periodically on the status of all open, significant recommendations to the SEC Commissioners. Our rationale was that involving the Commissioners in following up on recommendations would provide them with information on the status of corrective actions that OCIE had deemed significant. Also, because the Commissioners have the authority to require the SROs to implement the staff's recommendations, reporting to them would provide the SROs with an additional incentive to implement these recommendations. After preparing its first annual report in August 1998, including both significant recommendations on which action had been agreed to but not completed and recommendations that had been rejected, OCIE determined that future reports would include only the status of significant recommendations that an SRO had expressly declined to adopt or had failed to adequately address. Reflecting the seriousness of their concerns about the open recommendations related to Amex's use of its discretionary authority in making initial and continued listing decisions, OCIE officials told us that in the absence of an Amex agreement to adequately address these recommendations, OCIE would include them among the open significant recommendations to be reported annually to the SEC Commissioners. Amex officials told us that the exchange was fulfilling its SRO responsibilities related to its equity listing operations in part by individually monitoring the status of companies that did not meet its continued listing guidelines and, beginning in January 2001, by summarizing related information in monthly reports to management. These monthly reports provided information on the output of the department's activities, including the names and total number of companies that did not meet the continued listing guidelines, the reasons that individual companies did not meet the guidelines, the date of the latest conference with each company to discuss its listing status, the total number of such conferences held, and the total number of decisions made on the basis of these conferences. The Amex listing department did not, however, prepare management reports that aggregated and analyzed overall statistics to measure program results over time. As a result, Amex could not demonstrate the effectiveness of its exceptions-granting policies or its initial and continued listing guidelines. For example, Amex did not routinely aggregate or analyze statistics on the percentage of applicants listed that were granted exceptions to initial or continued listing guidelines, or on the length of time that companies were not in compliance with the continued listing guidelines and their progress in coming back into compliance with them. Collecting and analyzing such data over time, especially in conjunction with the outcomes for these companies--whether they achieved compliance or were delisted--could provide Amex and OCIE with an indicator of the effectiveness of Amex's process for granting exceptions. Analysis of this information could also help Amex and OCIE determine whether a significant difference exists between the outcomes for companies that meet the listing guidelines and those that do not. Also, although Amex told OCIE that it continually "monitors" to determine whether its guidelines need to be revised, Amex did not develop and aggregate statistics on the number of companies delisted or on the reasons for delistings, such as noncompliance with listing requirements or a move to another market. As indicated above, Amex provided us with some of this information in response to a specific request but also told us that the listing department did not routinely aggregate such information for management purposes. Collected and analyzed over time, this information could provide Amex and OCIE with an indicator of the effectiveness of Amex's initial and continued listing guidelines and, therefore, could be useful in identifying appropriate revisions to them. Other markets have developed this kind of management report. In response to concerns about the effectiveness of Nasdaq's listing department, we recommended in 1998 that SEC require NASD to develop management reports based on overall program statistics. The resulting quarterly reports to senior Nasdaq management and OCIE include data on the number and disposition of listing applications, number and reasons for noncompliance with continued listing standards, disposition of companies that do not comply with the continued listing standards, requests for and results of hearings, status of companies granted temporary exceptions to the continued listing standards as a result of hearings, and number of and reasons for delistings. As a result of a 1998 OCIE recommendation, NYSE submits reports containing similar information to the NYSE Board of Directors and, upon request, to OCIE. According to an OCIE official, the resulting quarterly reports are useful for monitoring the listing activities of these markets. Amex's use of its discretion to initially list and continue to list companies that do not meet the exchange's quantitative guidelines for equities could mislead investors, who are likely to assume that the companies listed on Amex meet the exchange's listing guidelines. Because investors are entitled to clear information for use in making investment decisions, they should be informed when listed companies do not meet these guidelines. Amex has reiterated its concern about the potentially negative impact of being the only market to publicly identify listings that do not meet its guidelines. The Nasdaq SmallCap Market already uses stock symbol modifiers for companies that do not meet its continued listing standards. Also, OCIE officials told us they would recommend that other markets disclose noncompliance with their continued listing standards. (OCIE did not identify noncompliance with initial listing standards as an issue.) Ultimately, Amex could avoid concerns about the negative impact of public disclosure by adopting firm quantitative guidelines. In the meantime, including the recommendations that Amex rejected in the OCIE annual reports to the SEC Commissioners--who have the authority to require their implementation--would provide an additional incentive for Amex to act. Notwithstanding Amex's expectation that changes to its listing program would result in diminished use of its discretion, the ongoing concerns about weaknesses in program operations and the potentially negative impact of exchange practices on public confidence warrant continued monitoring of Amex's listing program. Both Amex and OCIE could use routine management reports that reflect the performance of the exchange listing program to improve oversight of the program. Amex officials did not use aggregated and analyzed information on the results of the listing process to help judge its overall effectiveness, including that of its exceptions-granting policies or its initial and continued listing guidelines. Such information would include, among other things, the number and percentages of companies listed that have exceptions to the initial and continued listing guidelines, the number and percentages of companies in each group that are delisted, the reasons for the delistings, and the turnover rate for listings. Aggregating and analyzing such information could help Amex and OCIE to identify and address weaknesses in Amex's listing program operations. As part of SEC's ongoing efforts to ensure that Amex addresses weaknesses in the management of its equity listing program, we recommend that the Chairman, SEC, direct Amex to implement mandatory quantitative equity listing requirements or provide ongoing public disclosure of noncompliant companies, and require Amex to report quarterly to its Board of Governors on the operating results of its equity listing program and make these reports available to OCIE for review. Such reports should contain sufficient information to demonstrate the overall effectiveness of the Amex equity listing program, including, at a minimum, that of its exceptions-granting policies and its initial and continued listing guidelines. We obtained written comments on a draft of this report from Amex and SEC officials. The written comments are presented in appendixes I and II, respectively. Amex committed to taking action to address our recommendation for improving public disclosure of its listing requirements by replacing its discretionary guidelines with mandatory initial and continued listing standards (see appendix I, exhibits A and B). Also in response to our recommendation, Amex committed to enhancing its management reports as they relate to its initial listing program. SEC officials commented that they were pleased that Amex would be making changes to its listing program that would address the findings and recommendations outlined in our report, and they said they would continue working with Amex to ensure that the proposed changes are implemented effectively. Amex noted in its comment letter that its proposals are broad and that the various details would be finalized as part of the rule approval process, which involves SEC. In earlier discussions with Amex about its draft proposals, we expressed the view that Amex's rules would provide for greater investor protection if they included specific time frames for notifying the public about material events related to a company's listing status. For example, such time frames would provide for expeditiously notifying the public after Amex advises a company that delisting proceedings are to be initiated. We also observed that Amex had not established other critical time frames for procedures such as advising a company that it does not meet the exchange's continued listing requirements. Amex indicated in its comment letter that it intends to include applicable time frames as it works out the details of its proposals. SEC officials told us that they would work with Amex to ensure that appropriate time frames are established. In agreeing to enhance its management reports to address our recommendation, Amex acknowledged the potential value of these reports in light of proposed changes to its initial listing requirements. Under these proposed changes, companies could qualify for initial listing under Amex's "regular" listing standards or, subject to mitigating circumstances, under its less stringent "alternative" standards. Amex committed to enhancing its management reports with information on companies that have been approved under the proposed alternative standards to provide for executive management review of the continued status of such companies, as compared with those approved for listing pursuant to its regular listing standards. Amex believes that its enhanced management reports should be useful in providing feedback on the application of the alternative standards to the Amex Board of Governors, Amex Committee on Securities, and SEC. SEC officials told us that they would use the enhanced reports to monitor implementation of the alternative standards. Although we support the changes proposed by Amex, we believe that the management reports would be of even greater use to Amex and SEC in their oversight if they included data on the effectiveness of Amex's practices for continued listings in addition to data on the exchange's exceptions-granting practices for initial listings. Our report discussed the kinds of aggregated and analyzed data that would be important to include in Amex's management reports and that Nasdaq and NYSE include in their reports. Amex would benefit by working with SEC to ensure that the exchange's reports contain similar information. To describe the key differences between the Amex initial and continued equity listing guidelines and the equity listing standards of other U.S. stock markets, we compared the quantitative and qualitative guidelines and standards of the seven U.S. markets that are registered to trade stock and that have listing requirements. These markets include six national securities exchanges--Amex, the Boston Stock Exchange, the Chicago Stock Exchange, NYSE, the Pacific Exchange, and the Philadelphia Stock Exchange--and one national securities association, the Nasdaq Stock Market. The seventh national securities exchange, the Cincinnati Stock Exchange, trades only stocks that are listed on other exchanges and does not have listing standards. We also interviewed officials from SEC's OCIE and from Amex, Nasdaq, and NYSE to gain a further understanding of the initial and continued listing requirements of each market. This report places greater emphasis on the results of our comparison of Amex guidelines with the standards of Nasdaq and NYSE, because about 98 percent of U.S. common stocks were subject to the listing requirements of one of these three markets at the time of our review. In reviewing OCIE recommendations to Amex for improving its equity listing program, we discussed the contents of the April 2001 inspection report and Amex's written response to it with officials of OCIE and Amex's Listings Qualifications Department and Office of General Counsel, focusing on the areas of disagreement between OCIE and Amex. Additionally, we examined OCIE's 1997 inspection report on Amex's listing activities, Amex's response, and associated correspondence to determine the nature of weaknesses identified in the OCIE inspection and how they were resolved. We also reviewed related GAO reports. To examine how Amex monitors the effectiveness of its equity listing department operations, we interviewed Amex and OCIE officials. We also reviewed related GAO reports and examined the Nasdaq and NYSE quarterly management reports that are provided to OCIE. We conducted our work in Chicago, IL; New York, NY; and Washington, D.C., from November 2000 through October 2001, in accordance with generally accepted government auditing standards. As agreed with you, unless you publicly release its contents earlier, we plan no further distribution of this letter until 30 days from its issuance date. At that time, we will send copies to the Chairmen and Ranking Minority Members of the Senate Committee on Banking, Housing, and Urban Affairs and the House Committee on Financial Services; the Chairman of the House Energy and Commerce Committee; and other interested congressional committees and organizations. We will also send copies to the Chairman of SEC and to the Chairman and Chief Executive Officer of Amex. Copies will also be made available to others upon request. If you or your staff have any questions regarding this report, please contact me at (202) 512-8678, [email protected], or contact Cecile Trop, Assistant Director, at (312) 220-7705, [email protected]. Key contributors include Neal Gottlieb, Roger Kolar, Anita Zagraniczny, and Emily Chalmers.	The Securities and Exchange Commission (SEC) has indicated that one-third of Amex's new listings did not meet the exchange's equity listing standards. Amex's listing guidelines address factors that are the same or similar to those addressed by other U.S. stock markets. Quantitative requirements addressed share price, stockholders' equity, income, and market value of publicly held shares. However, the minimum thresholds for meeting these requirements varied to reflect the differences in the companies that each market targeted for listing. The most significant difference between Amex's guidelines and the listing standards of other U.S. stock markets was that Amex was one of only two markets that retained discretion to initially list companies that did not meet all of its quantitative requirements. Amex had not implemented the Office of Compliance Inspections and Examinations' (OCIE) recommendations on the exchange's discretionary listing decisions. OCIE officials told GAO that in the absence of an Amex agreement to address the recommendations, they would include them among the open significant recommendations to be reported to the SEC Commissioners as a result of a 1998 GAO recommendation. The Commission can require Amex to implement OCIE's recommendations. Amex officials said that the exchange was fulfilling its self-regulatory organization responsibilities by individually monitoring the status of companies that did not meet its continued listing guidelines and by summarizing information in monthly reports to management.	7,041	299
We last provided you an overview of federal information security in September 1996. At that time, serious security weaknesses had been identified at 10 of the largest 15 federal agencies, and we concluded that poor information security was a widespread federal problem. We recommended that the Office of Management and Budget (OMB) play a more active role in overseeing agency practices, in part through its role as chair of the then newly established Chief Information Officers (CIO) Council. Subsequently, in February 1997, as more audit evidence became available, we designated information security as a new governmentwide high-risk area in a series of reports to the Congress. During 1996 and 1997, federal information security also was addressed by the President's Commission on Critical Infrastructure Protection, which had been established to investigate our nation's vulnerability to both "cyber" and physical threats. In its October 1997 report, Critical Foundations: Protecting America's Infrastructures, the Commission described the potentially devastating implications of poor information security from a national perspective. The report also recognized that the federal government must "lead by example," and included recommendations for improving government systems security. This report eventually led to issuance of Presidential Decision Directive 63 in May 1998, which I will discuss in conjunction with other governmentwide security improvement efforts later in my testimony. As hearings by this Committee have emphasized, risks to the security of our government's computer systems are significant, and they are growing. The dramatic increase in computer interconnectivity and the popularity of the Internet, while facilitating access to information, are factors that also make it easier for individuals and groups with malicious intentions to intrude into inadequately protected systems and use such access to obtain sensitive information, commit fraud, or disrupt operations. Further, the number of individuals with computer skills is increasing, and intrusion, or "hacking," techniques are readily available. Attacks on and misuse of federal computer and telecommunication resources are of increasing concern because these resources are virtually indispensable for carrying out critical operations and protecting sensitive data and assets. For example, weaknesses at the Department of the Treasury place over a trillion dollars of annual federal receipts and payments at risk of fraud and large amounts of sensitive taxpayer data at risk of inappropriate disclosure; weaknesses at the Health Care Financing Administration place billions of dollars of claim payments at risk of fraud and sensitive medical information at risk of disclosure; and weaknesses at the Department of Defense affect operations such as mobilizing reservists, paying soldiers, and managing supplies. Moreover, Defense's warfighting capability is dependent on computer-based telecommunications networks and information systems. These and other examples of risks to federal operations and assets are detailed in our report Information Security: Serious Weaknesses Place Critical Federal Operations and Assets at Risk (GAO/AIMD-98-92), which the Committee is releasing today. Although it is not possible to eliminate these risks, understanding them and implementing an appropriate level of effective controls can reduce the risks significantly. Conversely, an environment of widespread control weaknesses may invite attacks that would otherwise be discouraged. As the importance of computer security has increased, so have the rigor and frequency of federal audits in this area. During the last 2 years, we and the agency inspectors general (IG) have evaluated computer-based controls on a wide variety of financial and nonfinancial systems supporting critical federal programs and operations. Many of these audits are now done annually. This growing body of audit evidence is providing a more complete and detailed picture of federal information security than was previously available. The most recent set of audit results that we evaluated--those published since March 1996--describe significant information security weakness in each of the 24 federal agencies covered by our analysis. These weaknesses cover a variety of areas, which we have grouped into six categories of general control weaknesses. The most widely reported weakness was poor control over access to sensitive data and systems. This area of control was evaluated at 23 of the 24 agencies, and weaknesses were identified at each of the 23. Access control weaknesses make systems vulnerable to damage and misuse by allowing individuals and groups to inappropriately modify, destroy, or disclose sensitive data or computer programs for purposes such as personal gain or sabotage. Access controls limit or detect inappropriate access to computer resources (data, equipment, and facilities), thereby protecting them against unauthorized modification, loss, and disclosure. Access controls include physical protections, such as gates and guards, as well as logical controls, which are controls built into software that (1) require users to authenticate themselves through the use of secret passwords or other identifiers and (2) limit the files and other resources that an authenticated user can access and the actions that he or she can execute. In today's increasingly interconnected computing environment, poor access controls can expose an agency's information and operations to potentially devastating attacks from remote locations all over the world by individuals with minimal computer and telecommunications resources and expertise. Common types of access control weaknesses included overly broad access privileges inappropriately provided to very large access that was not appropriately authorized and documented; multiple users sharing the same accounts and passwords, making it impossible to trace specific transactions or modifications to an individual; inadequate monitoring of user activity to deter and identify inappropriate actions, investigate suspicious activity, and penalize perpetrators; improperly implemented access controls, resulting in unintended access or gaps in access control coverage; and access that was not promptly terminated or adjusted when users either left an agency or when their responsibilities no longer required them to have access to certain files. The second most widely reported type of weakness pertained to service continuity. Service continuity controls ensure that when unexpected events occur, critical operations continue without undue interruption and critical and sensitive data are protected. In addition to protecting against natural disasters and accidental disruptions, such controls also protect against the growing threat of "cyber-terrorism," where individuals or groups with malicious intent may attack an agency's systems in order to severely disrupt critical operations. For this reason, an agency should have (1) procedures in place to protect information resources and minimize the risk of unplanned interruptions and (2) a plan to recover critical operations should interruptions occur. To determine whether recovery plans will work as intended, they should be tested periodically in disaster simulation exercises. Losing the capability to process, retrieve, and protect information maintained electronically can significantly affect an agency's ability to accomplish its mission. If controls are inadequate, even relatively minor interruptions can result in lost or incorrectly processed data, which can cause financial losses, expensive recovery efforts, and inaccurate or incomplete financial or management information. Service continuity controls were evaluated for 20 of the agencies included in our analysis, and weaknesses were reported for all of these agencies. Common weaknesses included the following: Plans were incomplete because operations and supporting resources had not been fully analyzed to determine which were the most critical and would need to be resumed as soon as possible should a disruption occur. Disaster recovery plans were not fully tested to identify their weaknesses. One agency's plan was based on an assumption that key personnel could be contacted within 10 minutes of the emergency, an assumption that had not been tested. The third most common type of weakness involved inadequate entitywide security program planning and management. Each organization needs a set of management procedures and an organizational framework for identifying and assessing risks, deciding what policies and controls are needed, periodically evaluating the effectiveness of these policies and controls, and acting to address any identified weaknesses. These are the fundamental activities that allow an organization to manage its information security risks cost effectively, rather than reacting to individual problems ad hoc only after a violation has been detected or an audit finding has been reported. Weaknesses were reported for all 17 of the agencies for which this area of control was evaluated. Many of these agencies had not developed security plans for major systems based on risk, had not formally documented security policies, and had not implemented a program for testing and evaluating the effectiveness of the controls they relied on. The fourth most commonly reported type of weakness was inadequate segregation of duties. Segregation of duties refers to the policies, procedures, and organizational structure that help ensure that one individual cannot independently control all key aspects of a process or computer-related operation and thereby conduct unauthorized actions or gain unauthorized access to assets or records without detection. For example, one computer programmer should not be allowed to independently write, test, and approve program changes. Segregation of duties is an important internal control concept that applies to both computerized and manual processes. However, it is especially important in computerized environments, since an individual with overly broad access privileges can initiate and execute inappropriate actions, such as software changes or fraudulent transactions, more quickly and with greater impact than is generally possible in a nonautomated environment. Although segregation of duties alone will not ensure that only authorized activities occur, inadequate segregation of duties increases the risk that erroneous or fraudulent transactions could be processed, that improper program changes could be implemented, and that computer resources could be damaged or destroyed. Controls to ensure appropriate segregation of duties consist mainly of documenting, communicating, and enforcing policies on group and individual responsibilities. Enforcement can be accomplished by a combination of physical and logical access controls and by effective supervisory review. Segregation of duties was evaluated at 17 of the 24 agencies. Weaknesses were identified at 16 of these agencies. Common problems involved computer programmers and operators who were authorized to perform a wide variety of duties, thus enabling them to independently modify, circumvent, and disable system security features. For example, at one agency, all users of the financial management system could independently perform all of the steps needed to initiate and complete a payment--obligate funds, record vouchers for payment, and record checks for payment--making it relatively easy to make a fraudulent payment. The fifth most commonly reported type of weakness pertained to software development and change controls. Such controls prevent unauthorized software programs or modifications to programs from being implemented. Key aspects are ensuring that (1) software changes are properly authorized by the managers responsible for the agency program or operations that the application supports, (2) new and modified software programs are tested and approved prior to their implementation, and (3) approved software programs are maintained in carefully controlled libraries to protect them from unauthorized changes and ensure that different versions are not misidentified. Such controls can prevent both errors in software programming as well as malicious efforts to insert unauthorized computer program code. Without adequate controls, incompletely tested or unapproved software can result in erroneous data processing that depending on the application, could lead to losses or faulty outcomes. In addition, individuals could surreptitiously modify software programs to include processing steps or features that could later be exploited for personal gain or sabotage. Weaknesses in software program change controls were identified for 14 of the 18 agencies where such controls were evaluated. One of the most common types of weakness in this area was undisciplined testing procedures that did not ensure that implemented software operated as intended. In addition, procedures did not ensure that emergency changes were subsequently tested and formally approved for continued use and that implementation of locally-developed unauthorized software programs was prevented or detected. The sixth area pertained to operating system software controls. System software controls limit and monitor access to the powerful programs and sensitive files associated with the computer systems operation. Generally, one set of system software is used to support and control a variety of applications that may run on the same computer hardware. System software helps control and coordinate the input, processing, output, and data storage associated with all of the applications that run on the system. Some system software can change data and programs without leaving an audit trail or can be used to modify or delete audit trails. Examples of system software include the operating system, system utilities, program library systems, file maintenance software, security software, data communications systems, and database management systems. Controls over access to and modification of system software are essential in providing reasonable assurance that operating system-based security controls are not compromised and that the system will not be impaired. If controls in this area are inadequate, unauthorized individuals might use system software to circumvent security controls to read, modify, or delete critical or sensitive information and programs. Also, authorized users of the system may gain unauthorized privileges to conduct unauthorized actions or to circumvent edits and other controls built into application programs. Such weaknesses seriously diminish the reliability of information produced by all of the applications supported by the computer system and increase the risk of fraud, sabotage, and inappropriate disclosures. Further, system software programmers are often more technically proficient than other data processing personnel and, thus, have a greater ability to perform unauthorized actions if controls in this area are weak. A common type of system software control weakness reported was insufficiently restricted access that made it possible for knowledgeable individuals to disable or circumvent controls in a wide variety of ways. For example, at one facility, 88 individuals had the ability to implement programs not controlled by the security software, and 103 had the ability to access an unencrypted security file containing passwords for authorized users. Significant system software control weaknesses were reported at 9 of the 24 agencies. In the remaining 15 agencies, this area of control had not been fully evaluated. We are working with the IGs to ensure that it receives adequate coverage in future evaluations. I would now like to describe in greater detail weaknesses at the two agencies that you have chosen to feature today: the Department of Veterans Affairs and the Social Security Administration. The Department of Veterans Affairs (VA) relies on a vast array of computer systems and telecommunications networks to support its operations and store the sensitive information the department collects in carrying out its mission. In a report released today, we identify general computer control weaknesses that place critical VA operations, such as financial management, health care delivery, benefit payments, life insurance services, and home mortgage loan guarantees, at risk of misuse and disruption. In addition, sensitive information contained in VA's systems, including financial transaction data and personal information on veteran medical records and benefit payments, is vulnerable to inadvertent or deliberate misuse, fraudulent use, improper disclosure, or destruction--possibly occurring without detection. VA operates the largest health care delivery system in the United States and guarantees loans on about 20 percent of the homes in the country. In fiscal year 1997, VA spent over $17 billion on medical care and processed over 40 million benefit payments totaling over $20 billion. The department also provided insurance protection through more than 2.5 million policies that represented about $24 billion in coverage at the end of fiscal year 1997. In addition, the VA systems support the department's centralized accounting and payroll functions. In fiscal year 1997, VA's payroll was almost $11 billion, and the centralized accounting system generated over $7 billion in additional payments. In our report, we note significant problems related to the department's control and oversight of access to its systems. VA did not adequately limit the access of authorized users or effectively manage user identifications (ID) and passwords. At one facility, the security software was implemented in a manner that provided all of the more than 13,000 users with the ability to access and change sensitive data files, read system audit information, and execute powerful system utilities. Such broad access authority increased the risk that users could circumvent the security software to alter payroll and other payment transactions. This weakness could also provide users the opportunity to access and disclose sensitive information on veteran medical records, such as diagnoses, procedures performed, inpatient admission and discharge data, or the purpose of outpatient visits, and home mortgage loans, including the purpose, loan balance, default status, foreclosure status, and amount delinquent. At two facilities, we found that system programmers had access to both system software and financial data. This type of access could allow the programmers to make unauthorized changes to benefit payment information without being detected. At four of the five facilities we visited, we identified user ID and password management control weaknesses that increased the risk of passwords being compromised to gain unauthorized access. For example, IDs for terminated or transferred employees were not being disabled, many passwords were common words that could be easily guessed, numerous staff were sharing passwords, and some user accounts did not have passwords These types of weaknesses make the financial transaction data and personal information on veteran medical records and benefits stored on these systems vulnerable to misuse, improper disclosure, and destruction. We demonstrated these vulnerabilities by gaining unauthorized access to VA systems and obtaining information that could have been used to develop a strategy to alter or disclose sensitive patient information. We also found that the department had not adequately protected its systems from unauthorized access from remote locations or through the VA network. The risks created by these issues are serious because, in VA's interconnected environment, the failure to control access to any system connected to the network also exposes other systems and applications on the network. While simulating an outside hacker, we gained unauthorized access to the VA network. Having obtained this access, we were able to identify other systems on the network, which makes it much easier for outsiders with no knowledge of VA's operations or infrastructure to penetrate the department's computer resources. We used this information to access the log-on screen of another computer that contained financial and payroll data, veteran loan information, and sensitive information on veteran medical records for both inpatient and outpatient treatment. Such access to the VA network, when coupled with VA's ineffective user ID and password management controls and available "hacker" tools, creates a significant risk that outside hackers could gain unauthorized access to this information. At two facilities, we were able to demonstrate that network controls did not prevent unauthorized users with access to VA facilities or authorized users with malicious intent from gaining improper access to VA systems. We were able to gain access to both mainframe and network systems that could have allowed us to improperly modify payments related to VA's loan guaranty program and alter sensitive veteran compensation, pension, and life insurance benefit information. We were also in a position to read and modify sensitive data. The risks created by these access control problems were also heightened significantly because VA was not adequately monitoring its systems for unusual or suspicious access activities. In addition, the department was not providing adequate physical security for its computer facilities, assigning duties in such a way as to properly segregate functions, controlling changes to powerful operating system software, or updating and testing disaster recovery plans to ensure that the department could maintain or regain critical functions in emergencies. Many similar access and other general computer control weaknesses had been reported in previous years, indicating that VA's past actions have not been effective on a departmentwide basis. Weaknesses associated with restricting access to sensitive data and programs and monitoring access activity have been consistently reported in IG and other internal reports. A primary reason for VA's continuing general computer control problems is that the department does not have a comprehensive computer security planning and management program in place to ensure that effective controls are established and maintained and that computer security receives adequate attention. An effective program would include guidance and procedures for assessing risks and mitigating controls, and monitoring and evaluating the effectiveness of established controls. However, VA had not clearly delineated security roles and responsibilities; performed regular, periodic assessments of risk; implemented security policies and procedures that addressed all aspects of VA's interconnected environment; established an ongoing monitoring program to identify and investigate unauthorized, unusual, or suspicious access activity; or instituted a process to measure, test, and report on the continued effectiveness of computer system, network, and process controls. In our report to VA, we recommended that the Secretary direct the CIO to (1) work with the other VA CIOs to address all identified computer control weaknesses, (2) develop and implement a comprehensive departmentwide computer security planning and management program, (3) review and assess computer control weaknesses identified throughout the department and establish a process to ensure that these weaknesses are addressed, and (4) monitor and periodically report on the status of improvements to computer security throughout the department. In commenting on our report, VA agreed with these recommendations and stated that the department would immediately correct the identified computer control weaknesses and implement oversight mechanisms to ensure that these problems do not reoccur. VA also stated that the department was developing plans to correct deficiencies previously identified by the IG and by internal evaluations and that the VA CIO will report periodically on VA's progress in correcting computer control weaknesses throughout the department. We have discussed these actions with VA officials, and, as part of our upcoming review, we will be examining completed actions and evaluating their effectiveness. The Social Security Administration (SSA) relies on extensive information processing resources to carry out its operations, which, for 1997, included payments that totaled approximately $390 billion to 50 million beneficiaries. This was almost 25 percent of the $1.6 trillion in that year's federal expenditures. SSA also issues social security numbers and maintains earnings records and other personal information on virtually all U. S. citizens. Through its programs, SSA processes approximately 225 million wage and tax statements (W-2 forms) annually for approximately 138 million workers. Few federal agencies affect so many people. The public depends on SSA to protect trust fund revenues and assets from fraud and to protect sensitive information on individuals from inappropriate disclosure. In addition, many current beneficiaries rely on the uninterrupted flow of monthly payments to meet their basic needs. In November 1997, the SSA IG reported serious weaknesses in controls over information resources, including access, continuity of service, and software program changes that unnecessarily place these assets and operations at risk. These weaknesses demonstrate the need for SSA to do more to assure that adequate controls are provided for information collected, processed, transmitted, stored, or disseminated in general support systems or major applications. Internal control testing identified information protection-related weaknesses throughout SSA's information systems environment. Affected areas included SSA's distributed computer systems as well as its mainframe computers. These vulnerabilities exposed SSA and its computer systems to external and internal intrusion; subjected sensitive SSA information related to social security numbers, earnings, disabilities, and benefits to potential unauthorized access, modification, and/or disclosure; and increased the risks of fraud, waste, and abuse. Access control and other weaknesses also increased the risks of introducing errors or irregularities into data processing operations. For example, auditors identified numerous employee user accounts on SSA networks, including dial-in modems, that were either not password protected or were protected by easily guessed passwords. These weaknesses increased the risk that unauthorized outsiders could access, modify, and delete data; create, modify, and delete users; and disrupt services on portions of SSA's network. In addition, auditors identified network control weaknesses that could result in accidental or intentional alteration of birth and death records, as well as unauthorized disclosure of personal data and social security numbers. These weaknesses were made worse because security awareness among employees was not consistent at SSA. As a result, SSA was susceptible to security penetration techniques, such as social engineering, whereby users disclose sensitive information in response to seemingly legitimate requests from strangers either over the phone or in person. The auditors reported that during testing, they were able to secure enough information through social engineering to allow access to SSA's network. Further, by applying intrusion techniques in penetration tests, auditors gained access to various SSA systems that would have allowed them to view user data, add and delete users, modify network configurations, and disrupt service to users. By gaining access through such tests, auditors also were able to execute software tools that resulted in their gaining access to SSA electronic mailboxes, public mailing lists, and bulletin boards. This access would have provided an intruder the ability to read, send, or change e-mail exchanged among SSA users, including messages from or to the Commissioner. In addition to access control weaknesses and inadequate user awareness, employee duties at SSA were not appropriately segregated to reduce the risk that an individual employee could introduce and execute unauthorized transactions without detection. As a result, certain employees had the ability to independently carry out actions such as initiating and adjudicating claims or moving and reinstating earnings data. This weakness was exacerbated because certain mitigating monitoring or detective controls could not be relied on. For example, SSA has developed a system that allows supervisors to review sensitive or potentially fraudulent activity. However, key transactions or combinations of transactions are not being reviewed or followed up promptly and certain audit trail features have not been activated. Weaknesses such as those I have just described increase the risk that a knowledgeable individual or group could fraudulently obtain payments by creating fictitious beneficiaries or increasing payment amounts. Similarly, such individuals could secretly obtain sensitive information and sell or otherwise use it for personal gain. The recent growth in "identity theft," where personal information is stolen and used fraudulently by impersonators for purposes such as obtaining and using credit cards, has created a market for such information. According to the SSA IG's September 30, 1997, report to the Congress (included in the SSA's fiscal year 1997 Accountability Report), 29 criminal convictions involving SSA employees were obtained during fiscal year 1997, most of which involved creating fictitious identities, fraudulently selling SSA cards, misappropriating refunds, or abusing access to confidential information. The risk of abuse by SSA employees is of special concern because, except for a very few individuals, SSA does not restrict access to view sensitive data based on a need-to-know basis. As a result, a large number of SSA employees can browse enumeration, earnings, and claims records for many other individuals, including other SSA employees, without detection. SSA provides this broad access because it believes that doing so facilitates its employees' ability to carry out SSA's mission. An underlying factor that contributes to SSA's information security weaknesses is inadequate entitywide security program planning and management. Although SSA has an entitywide security program in place, it does not sufficiently address all areas of security, including dial-in access, telecommunications, certain major mainframe system applications, and distributed systems outside the mainframe environment. A lack of such an entitywide program impairs each group's ability to develop a security structure for its responsible area and makes it difficult for SSA management to monitor agency performance in this area. In two separate letters to SSA management, the IG and its contractor made recommendations to address the weaknesses reported in November 1997. SSA has agreed with the majority of the recommendations and is developing related corrective action plans. Substantively improving federal information security will require efforts at both the individual agency level and at the governmentwide level. Agency managers are primarily responsible for securing the information resources that support their critical operations. However, central oversight also is important to monitor agency performance and address crosscutting issues that affect multiple agencies. Over the last 2 years, a number of efforts have been initiated, but additional actions are still needed. First, it is important that agency managers implement comprehensive programs for identifying and managing their security risks in addition to correcting specific reported weaknesses. Over the last 2 years, our reports and IG reports have included scores of recommendations to individual agencies, and agencies have either implemented or planned actions to address most of the specific weaknesses. However, there has been a tendency to react to individual audit findings as they were reported, with little ongoing attention to the systemic causes of control weaknesses. In short, agencies need to move beyond addressing individual audit findings and supplement these efforts with a framework for proactively managing the information security risks associated with their operations. Such a framework includes determining which risks are significant, assigning responsibility for taking steps to reduce risks, and ensuring that these steps are implemented effectively and remain effective over time. Without a management framework for carrying out these activities, information security risks to critical operations may be poorly understood; responsibilities may be unclear and improperly implemented; and policies and controls may be inadequate, ineffective, or inconsistently applied. In late 1996, at the Committee's request, we undertook an effort to identify potential solutions to this problem, including examples that could supplement existing guidance to agencies. To do this, we studied the security management practices of eight nonfederal organizations known for their superior security programs. These organizations included two financial services corporations, a regional electric utility, a state university, a retailer, a state agency, a computer vendor, and an equipment manufacturer. We found that these organizations managed their information security risks through a cycle of risk management activities, and we identified 16 specific practices that supported these risk management principles. These practices are outlined in an executive guide titled Information Security Management: Learning From Leading Organizations (GAO/AIMD-98-68), which was released by the Committee in May 1998 and endorsed by the CIO Council. Upon publication, the guide was distributed to all major agency heads, CIOs, and IGs. The guide describes a framework for managing information security risks through an ongoing cycle of activities coordinated by a central focal point. Such a framework can help ensure that existing controls are effective and that new, more advanced control techniques are prudently and effectively selected and implemented as they become available. The risk management cycle and the 16 practices supporting this cycle of activity are depicted in the following figures. In addition to effective security program planning and management at individual agencies, governmentwide leadership, coordination, and oversight are important to ensure that federal executives understand the risks to their operations, monitor agency performance in mitigating these risks, ensure implementation of needed improvements, and facilitate actions to resolve issues affecting multiple agencies. To help achieve this, the Paperwork Reduction Act of 1980 made OMB responsible for developing information security policies and overseeing related agency practices. In 1996, we reported that OMB's oversight consisted largely of reviewing selected agency system-related projects and participating in various federal task forces and working groups. While these activities are important, we recommended that OMB play a more active role in overseeing agency performance in the area of information security. Since then, OMB's efforts have been supplemented by those of the CIO Council. In late 1997, the Council, under OMB's leadership, designated information security as one of six priority areas and established a Security Committee, an action that we had recommended in 1996. The Security Committee, in turn, has established relationships with other federal entities involved in security and developed a very preliminary plan. While the plan does not yet comprehensively address the various issues affecting federal information security or provide a long-range strategy for improvement, it does cover important areas by specifying three general objectives: promote awareness and training, identify best practices, and address technology and resource issues. During the first half of 1998, the committee has sponsored a security awareness seminar for federal agency officials and developed plans for improving agency access to incident response services. More recently, in May 1998, Presidential Decision Directive (PDD) 63 was issued in response to recommendations made by the President's Commission on Critical Infrastructure Protection in October 1997. PDD 63 established entities within the National Security Council, the Department of Commerce, and the Federal Bureau of Investigation to address critical infrastructure protection, including federal agency information infrastructures. Specifically, the directive states that "the Federal Government shall serve as a model to the private sector on how infrastructure assurance is best achieved" and that federal department and agency CIOs shall be responsible for information assurance. The directive requires each department and agency to develop a plan within 180 days from the issuance of the directive in May 1998 for protecting its own critical infrastructure, including its cyber-based systems. These plans are then to be subject to an expert review process. Other key provisions related to the security of federal information systems include a review of existing federal, state, and local bodies charged with enhanced collection and analysis of information on the foreign information warfare threat to our critical infrastructures; establishment of a National Infrastructure Protection Center within the Federal Bureau of Investigation to facilitate and coordinate the federal government's investigation and response to attacks on its critical infrastructures; assessments of U. S. government systems' susceptibility to interception and exploitation; and incorporation of agency infrastructure assurance functions in agency strategic planning and performance measurement frameworks. We plan to follow up on the these activities as more specific information becomes available. The CIO Council's efforts and the issuance of PDD 63 indicate that senior federal officials are increasingly concerned about information security risks and are acting on these concerns. Improvements are needed both at the individual agency level and in central oversight, and coordinated actions throughout the federal community will be needed to substantively improve federal information security. What needs to emerge is a coordinated and comprehensive strategy that incorporates the worthwhile efforts already underway and takes advantage of the expanded amount of evidence that has become available in recent years. The objectives of such a strategy should be to encourage agency improvement efforts and measure their effectiveness through an appropriate level of oversight. This will require a more structured approach for (1) ensuring that risks are fully understood, (2) promoting use of the most cost-effective control techniques, (3) testing and evaluating the effectiveness of agency programs, and (4) acting to address identified deficiencies. This approach needs to be applied at individual departments and agencies and in a coordinated fashion across government. In our report on governmentwide information security that is being released today, we recommended that the Director of OMB and the Assistant to the President for National Security Affairs develop such a strategy. As part of our recommendation, we stated that such a strategy should ensure that executive agencies are carrying out the responsibilities outlined in laws and regulations requiring them to protect the security of their information resources; clearly delineate the roles of the various federal organizations with responsibilities related to information security; identify and rank the most significant information security issues facing federal agencies; promote information security risk awareness among senior agency officials whose critical operations rely on automated systems; identify and promote proven security tools, techniques, and management best practices; ensure the adequacy of information technology workforce skills; ensure that the security of both financial and nonfinancial systems is adequately evaluated on a regular basis; include long-term goals and objectives, including time frames, priorities, and annual performance goals; and provide for periodically evaluating agency performance from a governmentwide perspective and acting to address shortfalls. In commenting on a draft of our report, the OMB's Acting Deputy Director for Management said that a plan is currently being developed by OMB and the CIO Council, working with the National Security Council. The comments stated that the plan is to develop and promote a process by which government agencies can (1) identify and assess their existing security posture, (2) implement security best practices, and (3) set in motion a process of continued maintenance. The comments also describe plans for a CIO Council-sponsored interagency assist team that will review agency security programs. As of September 17, a plan had not yet been finalized and, therefore, was not available for our review, according to an OMB official involved in the plan's development. We intend to review the plan as soon as it is available. Although information security, like other types of safeguards and controls, is an ongoing concern, it is especially important, now and in the coming 18 months, as we approach and deal with the computer problems associated with the Year 2000 computing crisis. The Year 2000 crisis presents a number of security problems with which agencies must be prepared to contend. For example, it is essential that agencies improve the effectiveness of controls over their software development and change process as they implement the modifications needed to make their systems Year 2000 compliant. Many agencies have significant weaknesses in this area, and most are under severe time constraints to make needed software changes. As a result, there is a danger that already weak controls will be further diminished if agencies bypass or truncate them in an effort to speed the software modification process. This increases the risk that erroneous or malicious code will be implemented or that systems that do not adequately support agency needs will be rushed into use. Also, agencies should strive to improve their abilities to detect and respond to anomalies in system operations that may indicate unauthorized intrusions, sabotage, misuse, or damage that could affect critical operations and assets. As illustrated by VA and SSA, many agencies are not taking full advantage of the system and network monitoring tools that they already have and many have not developed reliable procedures for responding to problems once they are identified. Without such incident detection and response capabilities, agencies may not be able to readily distinguish between malicious attacks and system-induced problems, such as those stemming from Year 2000 noncompliance, and respond appropriately. The Year 2000 crisis is the most dramatic example yet of why we need to protect critical computer systems because it illustrates the government's widespread dependence on these systems and the vulnerability to their disruption. However, the threat of disruption will not end with the advent of the new millennium. There is a longer-term danger of attack from malicious individuals or groups, and it is important that our government design long-term solutions to this and other security risks. Mr. Chairman, this concludes our statement. We would be happy to respond to any questions you or other members of the Committee 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. A recorded menu will provide information on how to obtain these lists.	GAO discussed the state of information security in the federal government, focusing on the Department of Veterans Affairs' (VA) and the Social Security Administration's (SSA) efforts to develop and maintain an effective security management program. GAO noted that: (1) as the importance of computer security has increased, so have the rigor and frequency of federal audits in this area; (2) during the last 2 years, GAO and the agency inspectors general (IG) have evaluated computer-based controls on a wide variety of financial and nonfinancial systems supporting critical federal programs and operations; (3) the most recent set of audit results described significant information security weakness in each of the 24 federal agencies covered by GAO's analysis; (4) these weaknesses cover a variety of areas, which GAO has grouped into six categories of general control weaknesses; (5) in GAO's report, it noted significant problems related to VA's control and oversight of access to its systems; (6) VA did not adequately limit the access of authorized users or effectively manage user identifications and passwords; (7) GAO also found that the department had not adequately protected its systems from unauthorized access from remote locations or through the VA network; (8) a primary reason for VA's continuing general computer control problems is that the department does not have a comprehensive computer security planning and management program in place to ensure that effective controls are established and maintained and that computer security receives adequate attention; (9) the public depends on SSA to protect trust fund revenues and assets from fraud and to protect sensitive information on individuals from inappropriate disclosure; (10) in addition, many current beneficiaries rely on the uninterrupted flow of monthly payments to meet their basic needs; in November 1997, the SSA IG reported serious weaknesses in controls over information resources, including access, continuity of service, and software program changes that unnecessarily place these assets and operations at risk; (11) internal control testing identified information protection-related weaknesses throughout SSA's information systems environment; (12) an underlying factor that contributes to SSA's information security weaknesses is inadequate entitywide security program planning and management; (13) substantively improving federal information security will require efforts at both the individual agency level and at the governmentwide level; and (14) over the last 2 years, a number of efforts have been initiated, but additional actions are still needed.	8,149	496
The Results Act is designed to improve the efficiency and effectiveness of federal programs by establishing a system to set goals for program performance and to measure results. Specifically, the Act requires executive agencies to prepare multiyear strategic plans, annual performance plans, and annual performance reports. The strategic plan serves as the starting point and basic underpinning of the performance-based management system and includes the agency's mission statement and its long-term goals and objectives for implementing the mission. Treasury submitted its first strategic plan under the Results Act to Congress and the Director of OMB, as required, by September 30, 1997. The annual performance plan links the agency's day-to-day activities to its long-term strategic goals. The first plans, covering fiscal year 1999, were submitted to OMB in the fall of 1997 and to Congress after the President's budget in February 1998. Finally, the first annual performance reports for fiscal year 1999 are due to Congress and the President no later than March 31, 2000. Performance reports are to include, among other things, an evaluation of the agencies' progress toward achieving the goals in their annual plans. These reports are to provide feedback to federal managers, policymakers, and the public on the results achieved each year. The Treasury Department has responsibilities in key governmental roles, including tax administrator, revenue collector, law enforcer, and financial manager. Treasury also formulates and recommends economic, financial, tax, and fiscal policies and manufactures coins and currency. To carry out its diverse responsibilities, Treasury houses more than a dozen bureaus and offices. For its fiscal year 1999 budget, Treasury requested about $12.301 billion and about 147,900 full-time equivalent (FTE) staff years. Public sector organizations, like Treasury, are faced with demands to be more effective and accountable for the results of their programs. To meet such demands, Treasury began moving toward a performance-based approach to management before the Results Act requirements became mandatory. This is the third year that Treasury has included performance goals derived from its strategic plan in its budget request. Treasury's fiscal year 1999 performance plan under Results Act requirements is combined with its budget request and includes reports on performance goals for the past 2 fiscal years. As the Results Act requires, the annual performance plan is to provide a basis for an agency to compare actual results with performance goals. To do this, the agency needs to set goals and develop appropriate performance measures and show how it will use them to assess performance across the agency. By showing the relationship between the annual performance goals and the agency's mission and strategic goals, an agency's performance plan can demonstrate how the agency intends to make progress toward the achievement of its strategic goals. An agency's performance plan should also reflect and discuss the crosscutting nature of its programs and how they will contribute to achieving performance related to crosscutting functions. Treasury's performance plan does not provide a succinct and concrete statement of expected performance for subsequent comparison with actual performance for several reasons. First, many of the annual performance goals in Treasury's plan are necessarily abstract and not directly measurable. IRS, for example, has established three performance goals--improve customer service, increase compliance, and increase productivity--for defining its intended performance. Each of these broad goals is complemented with program-level measures to assess progress toward achieving the three goals. IRS' performance goal relating to improving customer service is particularly difficult to quantify because achieving it implies that IRS can measure and reduce taxpayer burden. IRS currently does not know how to realistically measure taxpayer burden. Reliable data for measuring burden do not exist because taxpayers normally do not track the time they spend complying with their tax and filing obligations. IRS recognizes the limitations of these goals on defining its performance and is looking for alternatives. Because reducing taxpayer burden affects IRS' ability to achieve its performance goals and IRS' measure of taxpayer burden is not based on reliable data, its performance measures based on burden may not be very useful. However, devising ways to measure the burden that IRS influences and developing reliable measures of taxpayer burden and the impact of IRS' programs on burden will be challenging. IRS is not alone; Treasury as a whole faces similar challenges. Second, the quality of some measures in Treasury's plan could be improved so that they directly relate to the performance goals. The relationship between some measures and goals is not clear, making it difficult to define the level of expected performance. Also, the measures do not always appear to cover key aspects of performance. Examples from OCC's plan illustrate this. One of OCC's strategic goals is to "improve the efficiency of bank supervision and reduc burden by streamlining supervisory processes." This strategic goal has three performance goals, and each has a single indicator or measure. One such performance goal is to "continue with the regulatory reinvention process to improve efficiency and reduce unnecessary burden." The single measure in the plan for this goal is "percentage time meeting the application processing time frames," with a performance target of 95 percent in calendar year 1998. This measure only addresses application processing time frames and does not clearly relate to the goal of continuing with the regulatory reinvention process. OCC has two measures for its performance goal to "support efforts to foster a national bank charter that will effectively compete with other financial service providers and continue to meet the financial service needs of all types of customers." However, these measures--"rating on customer satisfaction in connection with the licensing process" and "average processing time for analysis of customer complaints"--do not clearly relate to the performance goal. Third, Treasury's plan is also incomplete in that some of the performance measures for its bureaus and offices are still being developed and defined. For example, many IRS measures are coded "TBD," or to be determined. For these proposed measures, IRS does not have complete information, such as definitions, data sources, level of detail, and data reliability. During fiscal year 1998, IRS is working with OMB, a contractor, and others to develop a balanced scorecard measurement system that is to evaluate IRS on customer satisfaction, employee satisfaction, and business results. Finally, many of the measures in Treasury's plan are output measures. While output measures are expected to be in the plan, Treasury could better convey its expected results and show how goals are to be achieved by developing additional outcome measures and better explaining how the outputs that are measured relate to the goals. For the most part, the performance goals of the Department's bureaus and offices are connected to their missions, strategic goals, and program activities in the budget request. Specifically, the plan contains tables that align the Departmentwide strategic goals, bureau missions and strategic goals, and performance goals and measures. However, the linkages between the program-level measures and performance goals are not consistently clear. IRS, for example, has tables that show the linkage between its strategic goals or objectives and the Departmentwide strategic plan and its performance goals and annual performance measures. However, the plan does not discuss how the intended results of its many performance measures will be assessed to indicate IRS' success in achieving its performance goals. For example, the number of individual refunds issued, paper processing accuracy rate, and number of calls answered are 3 of the 19 performance measures under the goal to improve customer service. The plan does not explain how any of these measures should be rolled up to indicate progress toward achieving the customer service goal. We recognize the difficulty IRS faces in explaining this, especially since its performance goals are necessarily abstract and not directly measurable. However, some discussion of how IRS plans to evaluate progress toward achieving its performance goals would help explain how the results of its performance measures affect the attainment of its performance goals. Although Customs' plan provides information to align its strategic goals and performance goals, the information is not consistent. Customs' plan has a table that shows the linkage between its strategic goals and performance goals. Later in the plan, other tables show the exact same strategic goals as performance goals; and what are shown in the earlier table as performance goals are now called performance measures. The Results Act requires that annual performance plans identify annual performance goals that cover all the program activities in the agency's budget. Treasury's plan complies with this requirement, as each component and major office generally has one or more performance goals for each of the budget activities in the budget request. For one new IRS budget activity relating to the earned-income tax credit compliance initiative, the plan listed one performance goal--overclaim rate--but the definition and targets for the goal have not yet been determined. Also, IRS' budget activity, "Modernization Investments," did not list any performance goals. However, the plan noted that the performance measures are discussed in a separate document relating to modernization proposals. Treasury's performance plan could be improved if it better addressed the crosscutting nature of its programs and how they will contribute to achieving performance related to crosscutting functions. Specifically, we found that Treasury's annual performance plan generally did not identify performance goals that reflect activities being undertaken to support crosscutting programs, and the plan does not consistently address the crosscutting nature of its programs. Treasury has responsibilities for functions and issues that involve other agencies. As such, its plan should indicate how Treasury will coordinate those programs with other federal programs having related strategic or performance goals. In crosscutting program areas, Treasury should present output goals and intermediate outcome goals that would clarify its contribution to the intended outcomes of the crosscutting program. This information would be helpful to Congress and other stakeholders in identifying areas in which agencies should be coordinating efforts to efficiently and effectively meet national concerns. A focus on results, as envisioned by the Results Act, implies that federal programs contributing to the same or similar outcomes should be coordinated to ensure that goals are consistent and that program efforts are mutually reinforcing. Customs, for example, is involved in several crosscutting activities--drug interdiction, counterterrorism, and investigations of money laundering. These activities are recognized in Customs' plan as crosscutting activities, but there is no clear evidence in the plan that its fiscal year 1999 performance goals have been coordinated with other agencies. The plan does mention some past coordination efforts--such as between Customs and the Office of National Drug Control Policy to develop measures for a strategy to reduce the supply of narcotics. The plan did not clearly discuss the results of those efforts or indicate whether Customs' fiscal year 1999 performance goals were based on them. However, Customs' plan does mention coordination efforts with the Immigration and Naturalization Service and the Department of Agriculture in establishing performance goals to improve customer service when processing passengers through ports of entry. ATF's plan recognizes the role of other law enforcement agencies in achieving the goals of contributing to a safer America, and the plan mentions partnerships with various law enforcement agencies to achieve its goals. However, the plan does not clearly indicate that ATF coordinated with the other agencies in setting its fiscal year 1999 annual goals or targets. FMS states that one part of its mission focuses on efforts to increase the collection of delinquent debts owed the federal government and that its success is achieved through such activities as providing debt collection and management services to all federal agencies and developing and implementing governmentwide debt management policies. The debt collection program activity in FMS' plan, for example, has a measure on the percentage of market share of federal agencies with debt servicing requirements that have referred their debts to FMS as required by the Debt Collection Improvement Act of 1996 and another measure to increase governmentwide delinquent nontax debt collections over the fiscal year 1995 baseline. However, FMS does not provide any information to show how it plans to coordinate with other agencies to achieve these goals. IRS plays a role in administering tax code provisions pertaining to several billions of dollars in tax expenditures, such as the earned-income tax credit, the low-income housing credit, and the research credit, and there is no discussion of these crosscutting programs. IRS, too, shares responsibilities with other agencies, such as the Social Security Administration (SSA), in processing and reconciling information on employee wages and social security benefits, but the plan does not explicitly discuss or describe whether any performance goals were coordinated with SSA or other agencies. Conversely, IRS' plan does state that its narcotics conviction rate is dependent upon prosecutions within the Department of Justice and that national priorities for criminal investigations are determined, in part, by Justice. The Results Act requires that annual performance plans briefly describe the strategies and resources the agency intends to use to achieve its performance goals. We found that Treasury's performance plan adequately discusses, with some exceptions, the resources to support the achievement of its performance goals. The usefulness of the plan, which includes the budget justification, would be enhanced with a fuller description of how its strategies relate to achieving the goals. Strategies to facilitate achieving performance goals include activities such as administrative processes, training, and the application of technology and efforts to improve efficiency and effectiveness through approaches such as reengineering work processes. We found that the information in Treasury's plan on how strategies were connected to results did not always list strategies and, in other cases, did not adequately describe the strategies. The plan also does not consistently discuss how the strategies will help the Department achieve its goals. IRS provides an example where strategies relating to its goal to "improve customer service" were clear and complete. The plan lists nine strategies to enhance customer service and eight customer service standards for related products and services. The strategies and standards include improving the clarity of notices, forms, and tax publications; increasing the hours for its telephone service; opening district offices on Saturdays during the filing season; providing additional telephone assistance to small businesses; and creating citizen advocacy panels. The descriptions of the strategies are succinct; and they outline methods that, if followed, should enhance customer service. In contrast, Customs' plan provides only a partial description of the strategies it expects to use in fiscal year 1999 to achieve its projected results. For example, Customs indicates that it plans to improve drug interdiction results by focusing attention on areas of increased vulnerability, exploiting intelligence leads, and improving technology. However, Customs offered no strategies for its goals in the revenue-producing and antimoney-laundering areas. In addition, OCC's plan does not fully describe strategies to achieve its performance goals. Those goals included general references to an approach, such as streamlining, but OCC did not provide detailed strategies for achieving the goals. In some cases, regulatory requirements were mentioned as a means for achieving goals. Although the Act does not require agencies' annual performance plans to disclose how external factors might affect performance and results, including this information in the plans would enhance their overall usefulness as it would more fully describe Treasury's potential to achieve the expected performance. Treasury's strategic plan did mention some of the external factors that may affect its ability to achieve its strategic goals. In our opinion, Treasury's performance plan could be improved by more explicitly addressing how external factors may affect strategies and intended results and discussing how it will mitigate or use the identified conditions to achieve its performance goals. With some exceptions, the Treasury plan adequately discusses the resources the Department will use to achieve its performance goals. In addition to information on dollar amounts and staffing levels, the plan frequently explains how the resources that Treasury is requesting specifically contribute to one or more performance goals. For example: The IRS plan notes that its goals for improving the accuracy and timeliness of tax return processing depend largely on the agency's ability to use or acquire four specific information systems. The IRS plan also notes that the accomplishment of its performance goal of "$290 million in increased collections" is contingent upon completing the rollout of the Integrated Collection System to its district and international offices and obtaining an additional 57 FTEs to expand office hours and conduct problem-solving days. The Customs plan explains that continuing the acquisition and installation of the Land Border automation equipment is needed to allow inspectors to perform more careful screening and questioning of vehicle occupants, which should help to achieve Customs' goal of improving its efficiency at targeting arriving vehicles for enforcement purposes. The ATF plan explains that expanding its youth crime gun interdiction initiative, including providing additional agents for the program, would (1) "provide comprehensive crime gun tracing by State and local law enforcement"; (2) "provide rapid, high volume crime gun tracing and crime gun market analysis by the National Tracing Center (NTC)"; and (3) "train ATF, State, and local law enforcement personnel." As described, the requested dollars and staffing would seem to contribute to achieving ATF's performance targets for the number of persons trained, the number of traces, and the average trace response time. Treasury's plan could be improved in some areas, however, with a more thorough discussion of the resources required to achieve its performance goals. For example, in the FMS plan, the resources needed for accomplishing the performance goals are not always evident. One of the measures in the "Payments" program activity, for example, relates to increasing the number of states in which the direct federal electronic benefits transfer system is available. However, the FMS plan does not indicate the resources FMS intends to use to accomplish this measure. Treasury's performance plan does not consistently address the use of information technology (IT) resources to achieve performance goals across its bureaus and offices. The Departmental Offices' performance plan includes a goal to "pursue and maintain fully integrated financial systems Departmentwide by standardizing core financial information into a Departmental data warehouse." However, the plan does not include any strategy or approach to achieve this goal. Similarly, one of Customs' goals is to "maximize trade compliance through a balanced program of informed compliance, targeted enforcement actions, and the facilitation of complying cargo." However, in its description of its strategy to meet this goal, Customs does not mention its major initiative to automate its commercial operations, known as the Automated Commercial Environment, or describe how this system will help achieve the goal. Treasury's performance plan does not provide sufficient confidence that its performance information will be credible because it does not adequately describe procedures for verifying and validating performance data or sufficiently discuss the ramifications of known data limitations. The Results Act requires performance plans to describe the procedures an agency will use to verify and validate its performance measures. The descriptions of the procedures should also identify any significant data limitations and discuss the impact they may have on the credibility of the performance information. Treasury's performance plan does not adequately discuss procedures for verifying and validating performance information that will ensure that it is sufficiently complete, accurate, and consistent. Several of Treasury's bureaus propose to use data from various information systems to measure performance; but the plan does not adequately discuss system controls or procedures for ensuring the reliability, integrity, and security of the data. Specifically, IRS often uses short descriptions, such as "excellent," "good," and "low," to describe the reliability of data for its performance measures. These descriptions and other information on IRS' measures do not adequately explain what general procedures are to be used to control data quality and ensure accuracy. For example, IRS describes the reliability of data it plans to use from its Criminal Investigation Management Information System to determine its narcotics and fraud conviction rates as "excellent." However, IRS' performance plan does not describe procedures for verifying the accuracy and completeness of the data. IRS indicates that the data needed to determine the narcotics and fraud conviction rates come from the Department of Justice, an external source, but it does not comment on the credibility of Justice's data or its own data even though it is aware that the credibility of the IRS data has been questioned by a private research group. In the past, we have identified obstacles IRS and Customs face as they attempt to measure the performance of their programs. One area of concern has been IRS' inability to adequately measure the performance of some of its programs because of the lack of reliable data to measure such key indicators as taxpayer compliance and burden. We have raised concerns that some of IRS' program-level performance indicators need to be balanced with indicators designed to measure whether taxpayers are treated properly. Concerning Customs, we have pointed out that the agency has traditionally measured the success of its drug interdiction efforts by the resulting number of seizures, arrests, indictments, and convictions. These measures do not sufficiently cover key aspects of performance. In addition, it is not clear whether an increase in seizures indicates that Customs has become more effective or that the amount of smuggling has increased and Customs is still seizing the same percentage of drugs. Data limitations can affect the credibility of performance information. Treasury's performance plan falls short in identifying data limitations and their implications for the reliability of the performance information. The Departmental Offices propose to use the dollar value of U.S. exports of goods and services to measure progress toward a goal to "facilitate legitimate trade, enhance access to foreign markets, and enforce trade agreements," but the plan does not acknowledge any limitations in the data from the Department of Commerce. Customs' plan does not discuss additional efforts that are needed to ensure the credibility of the data by which Customs' performance is to be judged. This is important in several of Customs' programs because one of its performance measures is the accuracy of key trade statistics, and we have noted Customs' inability to generate reliable trade data. Customs has also expressed concerns about its ability to generate reliable trade data. Its fiscal year 1997 trade compliance measurement report states that "Concerns remained for the improper classification of goods by importers potentially hindering enforcement activity and skewing trade statistics."Because some of Customs' measures depend on narrative assessments based on input from informant or intelligence operations (e.g., money-laundering systems disrupted and changes in drug-smuggling organizations' behavior), the plan could be improved by briefly describing efforts to ensure that the data are credible. Further, Customs' plan does not specifically mention weaknesses related to ensuring that sensitive data maintained in its automated systems are adequately protected from unauthorized access and modification and that its core financial systems capture all activities that occurred during the year and provide reliable information for management to use in controlling operations. These weaknesses could affect the reliability of Customs' performance data. The FMS plan does not adequately identify weaknesses in computer controls that could affect the reliability of data used to measure performance. For example, based on our ongoing work on the central banking function of FMS, which includes the payment and collection activities, we identified weaknesses in the general controls over some of FMS' computerized information systems that process receipts and disbursement information for the government. These controls did not provide adequate assurance that data files and computer programs were fully protected from unauthorized access and modification. When we commented on Treasury's strategic plan, we said that it could be improved by explicitly addressing the Department's capacity to measure progress toward achieving its goals. We also said that developing measures and collecting reliable data for some important areas of Treasury's performance, such as taxpayer burden, are very difficult to do. These issues are still concerns to us as Treasury's performance plan does not adequately discuss the strategies the Department plans to use to ensure that its measures of program performance are reliable and that they will improve accountability and support decisionmaking. These are challenges that Treasury faces as it strives to better meet the criteria set forth in the Results Act and related guidance. We realize that these challenges are difficult and that some measures and data, such as those pertaining to burden and compliance, will take more time than others to develop. However, in such instances, Treasury may need to devise and communicate the interim plans it will use to measure performance in these critical areas. We believe that Treasury's plan could be enhanced by explicitly discussing the Department's strategy to improve its performance measurement systems and data. Treasury's plan should also include annual performance goals for efforts to address its major management challenges. We believe that Treasury's plan could be improved by including performance goals to address the significant management challenges and high-risk areas the Department faces. We found that the Treasury plan does not have performance goals that adequately address the eight high-risk areas we previously identified that affect Treasury operations. For example, one governmentwide high-risk area for Treasury is ensuring that its computer systems will function properly after the century date change, yet only two bureaus--OCC and OTS--include specific performance goals related to the year 2000 computer date-change issue. The Departmental Offices' plan has a year 2000 goal for Treasury's systems in general and IRS' and FMS' plans did acknowledge that the computer date change is a management issue. Some of the other major management challenges that Treasury faces are briefly acknowledged in the bureaus' and offices' plans. Treasury's plan mentions the need to implement the Clinger-Cohen Act requirements. To fulfill these requirements, the Departmental Offices' plan has a Treasurywide goal that calls for establishing IT investment controls. The plan has one related "measure" for the goal, which is "establishing IT investment controls and ensuring Treasury and all bureaus have established investment review boards with defined, repeatable processes for project selection." However, the plan does not include any discussion of strategies for achieving this goal or how performance data will be used to demonstrate improvements to agency programs. Further, none of the bureaus' plans we reviewed in depth had related performance goals for establishing IT investment controls. This is a very important element of any investment strategy and the purpose for establishing it at the Department level. To ensure that all ongoing and new IT projects are considered by the investment review boards, each of Treasury's bureaus and offices should have performance goals that address IT investment controls in their respective plans. Treasury's plan also mentions the requirement in the Government Management Reform Act of 1994 (P.L. 103-356) that the Secretary of Treasury is to prepare audited consolidated financial statements (CFS) of the federal government beginning in the spring of 1998. FMS, which is responsible for preparing the audited cfs, revised the program activities in its fiscal year 1999 budget creating one on governmentwide accounting and reporting that covers the cfs requirement. For this activity, FMS' has one goal--to make the federal government a model for financial management--and four related measures such as the percent of agency reports for the cfs processed by FMS within the established range for accuracy. However, there is no discussion of how the 1999 proposed targets for the four performance measures relate to being a model for financial management. The Results Act seeks to improve the management of federal programs by shifting the focus of decisionmaking from staffing and activity levels to the results of federal programs. Annual performance plans, as required by the Act, should establish linkages between the long-term strategic goals outlined in agencies' strategic plans and their day-to-day program activities. Treasury's annual performance plan appropriately links its annual performance goals and measures to its strategic goals. Although, the plan provides useful information for congressional decisionmakers and other stakeholders, it did not fully present information that reflects the intended performance across the Department, describes how strategies relate to attainment of goals, and assures readers that performance results and data are credible. The plan we reviewed was Treasury's first one under the Results Act. Developing a plan that fully meets all the criteria of the Act and related guidance will be a challenge because developing measures and collecting reliable data for some important areas of Treasury's performance, such as taxpayer burden, are very difficult to do. Treasury's plan could be enhanced by explicitly discussing the Department's strategy to improve its performance measurement systems and data and by describing Treasury's interim plans to measure performance in critical areas. On May 28, 1998, we obtained oral comments from Treasury's Director of the Office of Strategic Planning and his staff on a draft of this report. They said that Treasury generally agreed with our analysis and provided comments to clarify its position. The officials said that Treasury's fiscal year 1999 performance plan--the first such plan required by the Results Act--is not its first plan. According to the officials, Treasury has published performance plans in the past and has publicly reported its performance results against the plans for fiscal years 1996 and 1997, ahead of the Act's requirements. Treasury agreed with our concerns about the validity of its performance data. Treasury pointed out that the validity of its performance data and its capacity to regularly and accurately report on performance are key challenges it needs to address. To this end, they said Treasury's Office of Inspector General is planning to identify critical information systems for inclusion in its annual evaluation work plans; Treasury's bureaus are continuing to identify and report where data are of questionable reliability; and the Department is developing a performance reporting system to routinely report the results of performance. In the draft of this report that Treasury reviewed, we said that a fuller description of strategies to achieve goals would be beneficial. Treasury said that to keep the plan focused and useful, a balance is needed on the amount of detailed information provided in the plan. Further, Treasury said that since its plan is incorporated in its budget request, congressional stakeholders can explore specific strategies of interest during hearings and follow-up questions. We agree that balance is needed in the amount of detailed information provided in the plan. At the meeting, we clarified that the plan did not always list strategies or adequately describe them. We revised our report to reflect this, and we also made other technical changes on the basis of Treasury's comments where appropriate. We will send copies of this report to the Chairman and Ranking Minority Members of interested congressional committees; the Director, Office of Management and Budget; and other interested parties. Copies will also be made available to others on request. This report was prepared under the direction of Charlie W. Daniel, Assistant Director. Please contact me or Mr. Daniel on (202) 512-9110 if you or your staff have any questions concerning this report. Tax Administration: IRS Faces Challenges in Measuring Customer Service (GAO/GGD-98-59, Feb. 23, 1998). Managing for Results: Agencies' Annual Performance Plans Can Help Address Strategic Planning Challenges (GAO/GGD-98-44, Jan. 30, 1998). The Results Act: Observations on the Department of the Treasury's July 1997 Draft Strategic Plan (GAO/GGD-97-162R, July 31, 1997). 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.	GAO reviewed the Department of the Treasury's fiscal year (FY) 1999 annual performance plan, focusing on: (1) the extent to which Treasury's performance plan provides a clear picture of intended performance across the agency; (2) how well Treasury's performance plan discusses the strategies and resources it will use to achieve its performance goals; and (3) the extent to which the Treasury's performance plan provides confidence that its performance information will be credible. GAO noted that: (1) Treasury's FY 1999 annual performance plan partially meets the criteria set forth in the Government Performance and Results Act and related guidance; (2) one of the strengths of the plan is that the annual performance goals and measures are linked to the strategic goals in the bureaus' and offices' strategic plans; (3) moreover, the plan generally provides a clear connection between its performance goals and the program activities in Treasury's budget request; (4) with a few exceptions, the plan covers each of Treasury's program activities as required by the Results Act; (5) the plan could be improved to better meet the criteria set forth in the Results Act and related guidance by presenting information on performance goals and measures in a manner that would better reflect intended or expected performance and achievements; (6) while GAO recognizes that some output measures are necessary, it also believes the plan could define Treasury's expected performance better if it had more outcome goals and measures; (7) also, the plan does not consistently include information across Treasury's bureaus and offices on how the Department plans to coordinate its activities that share a common purpose with activities in other agencies; (8) the plan, which includes the budget justification, describes the resources for carrying out the strategies to meet the criteria set forth in the Results Act and related guidance; (9) however, the information in the plan on how the strategies relate to achieving the goals did not always list strategies or adequately describe them; (10) additional details on how Treasury plans to verify and validate performance data, along with some discussion of how the effects of data limitations are to be handled, would better assure Congress and other stakeholders that the intended performance or results, if achieved, are credible; (11) GAO realizes that developing measures and collecting reliable data for some important areas of Treasury's performance are very difficult to do; (12) however, Treasury's plan could be enhanced by explicitly discussing the Department's strategy to improve its performance measurement systems and data and by describing Treasury's interim plans to measure performance in critical areas; (13) Treasury's plan would be more useful to Congress and other stakeholders if it included performance goals to address the significant management challenges and high-risk areas it faces; and (14) the plan briefly acknowledges some of the major management challenges and high-risk areas, but it does not have performance goals that adequately address all of them.	6,696	587
In response to GLBA, NAIC has expedited efforts under its Producer Licensing Reciprocity and Uniformity initiative to streamline and simplify the process for allowing producers licensed in one state to become licensed in other states. GLBA required that states enact certain reforms simplifying and bringing more efficiency to the insurance producer licensing process. Traditionally, agents licensed in one state generally had to meet the separate licensing requirements for each state where they wanted to sell insurance. Since licensing requirements differed substantially, this requirement imposed significant burdens on producers in terms of time, effort, and monetary costs. To comply with GLBA, a majority of the states must adopt either uniform licensing requirements or reciprocity by November 2002. With reciprocity, states must accept the decision of another state to approve a license and may not impose any additional licensing requirements. GLBA also gave NAIC responsibility for determining whether a state meets the uniformity or reciprocity provisions. If a majority of regulatory jurisdictions (29 states and territories) do not meet either the uniformity or reciprocity provisions by November 12, 2002, GLBA provides for the establishment of NARAB by the federal government, which would take over producer licensing functions from the states. NAIC developed and promoted the Producer Licensing Model Act (PLMA) to help states comply with GLBA's reciprocity provisions. To date, many states have passed laws based on PLMA attempting to comply with GLBA's reciprocity requirements. However, NAIC has not yet officially announced the number of "compliant states" based on its review of the states' laws and implementation plans. Meanwhile, some states with relatively large insurance markets have expressed concerns that will likely keep these states from implementing fully reciprocal producer licensing practices. These states appear reluctant to "lower" their standards on certain antifraud and consumer protection measures, particularly those related to conducting criminal background checks using fingerprint identification and bond requirements for producer applicants. NAIC continues to address these concerns, which were not fully resolved through PLMA, in its efforts to develop more uniform state producer licensing requirements. While preliminary indications suggest that NAIC is close to certifying enough states to meet the GLBA's legal requirement, other concerns remain that will likely prevent full reciprocity on producer licensing matters in all states. Factors that may prevent full reciprocity include some states' reluctance to waive certain antifraud and consumer protection measures and state implementation practices that may be considered nonreciprocal. Although a large number of states have passed some form of PLMA, some states did not remove or waive certain licensing requirements that may conflict with GLBA's reciprocity provisions. Our review of the checklists submitted to NAIC and discussions with industry representatives and regulators showed that a few states do not appear ready to waive certain existing antifraud and consumer protection requirements. Most commonly, these nonresident licensing requirements are related to criminal history checks (using fingerprint identification) and bond requirements for some producers. NAIC officials had anticipated that these requirements would be major areas of disagreement among states. We observed that some states were reluctant to eliminate their existing requirement to conduct a criminal history check on nonresident applicants using fingerprint identification. For example, California's insurance regulators said that while the state supports the goals of streamlining and creating more uniformity in state licensing procedures, California would not eliminate its nonresident fingerprinting requirement (and other key existing requirements) in order to satisfy the reciprocity provisions of GLBA. The regulators believed that eliminating this and several other existing requirements to achieve reciprocity with other states would weaken their current standards and consumer protection measures. In Florida, a recently enacted PLMA expresses the state's desire to meet the reciprocity and uniformity provisions of GLBA but also incorporates nonresident fingerprinting requirements under its consumer protection provisions. According to industry officials, some states continue to maintain fingerprinting requirements despite the passage of some form of PLMA legislation. Some state officials acknowledged that waiving nonresident producer licensing requirements to satisfy GLBA's reciprocity provisions could theoretically open a window of opportunity for undesirable individuals to enter the insurance industry. For instance, states where insurance regulators do not have the authority to conduct criminal background checks on producer applicants could provide such access. We have previously expressed concern that many insurance regulators lack the authority to conduct criminal background checks on industry applicants (in contrast to regulators in the banking, securities, and futures industries) and have supported actions to help establish such authority. Bond requirements for nonresident producers, intended to protect consumers and states from financial losses resulting from errors or misconduct, have also surfaced as a problematic issue in many states. According to industry observers, bond requirements have proven difficult to change or remove because they are established in state laws and regulations. NAIC commented that such requirements may not be appropriate for a producer seeking to conduct business on a multistate basis, because they do not take into account current commercial realities (e.g., a producer's annual volume of business is not taken into consideration in determining the amount of a bond). NAIC officials have also voiced concern about the cumulative impact of individual state bonding requirements in the context of facilitating multistate producer licensing. Another issue relates to the postlicensing requirements producers must satisfy after obtaining a license. Licensing requirements waived or removed to satisfy the reciprocity requirements of GLBA could resurface as postlicensing requirements, undermining the benefits of regulatory streamlining. In our review of the checklists submitted to NAIC, we found that many states said they have the authority to waive requirements relating to nonresident licensing. A handful of states also reported having postlicensing requirements that could limit or place conditions on nonresident producer activities. For instance, one state reported that it could waive evidence of company appointments as an application requirement but would ask for this evidence as a postlicensing requirement before the producer could conduct any insurance activity. Overall, we did not identify any significant use of additional postlicensing requirements, but such practices could inhibit the implementation of regulatory reciprocity among states. Although NAIC may be close to certifying enough states to avoid the creation of NARAB, other efforts to achieve greater uniformity must be successful before nationwide reciprocity is realized. Some states, often those with relatively large insurance markets, intend to maintain certain antifraud and consumer protection measures even though such requirements may be inconsistent with GLBA's reciprocity provisions. For instance, the California Department of Insurance did not support the adoption of NAIC's PLMA, designed to satisfy GLBA's reciprocity provision, because "the Model Act does not include several important enforcement tools that are contained in California law presently." Industry representatives have emphasized that the larger states need to reciprocate (accept the licensing decision of other states) before producers can fully benefit from improvements aimed at streamlining the licensing process to conduct business in multiple states. NAIC's Uniform Producer Licensing Initiatives Working Group is currently addressing a number of issues related to producer licensing to help states achieve more uniformity. The group's areas of work include those related to background checks, prelicensing education, continuing education, and definitions for limited lines of insurance. These efforts will also have to address the concerns of states that have been unwilling to "lower the bar" on their existing regulatory requirements. Achieving nationwide reciprocity in the area of producer licensing is tied to the success of these uniformity efforts. However, it remains uncertain whether or when more uniform producer licensing practices will be adopted that satisfy the concerns of those states with the largest insurance markets. Through NAIC's Speed to Market initiative, state insurance regulators are trying to streamline regulatory processes associated with insurance product approvals to make products available to consumers more quickly. A principal aspect of this initiative is to develop a more centralized product filing and approval process for certain types of insurance products that are sold on a multistate or nationwide basis. NAIC established the Coordinated Advertising, Rate, and Form Review Authority as a vehicle for providing insurers with a single point of filing and approval. However, insurers balked at the initial CARFRA trial, saying the process still incorporated too many individual state requirements beyond a common set of review criteria. In response, NAIC is now exploring the use of an interstate compact as a mechanism for overcoming the issue of having to satisfy the product review and approval criteria of each individual state. Another aspect of this initiative encompasses efforts to improve existing, conventional state-based systems. A notable outcome of these efforts is NAIC's System for Electronic Rate and Form Filing, or SERFF, which is designed to expedite the mechanics of submitting product rate and policy form filings to regulators. Other efforts to streamline product review and approval processes focus on reducing differences among the states' product filing requirements and identifying best practices. Many insurers, particularly those in the life and health insurance business, claim they have been at a competitive disadvantage in marketing and selling investment-oriented products because banks and securities firms-- their primary competitors in these product lines--can seek regulatory approval from a single regulator. In response, insurance regulators have tried to devise a one-stop filing and approval process for products that will be sold in multiple states. CARFRA is the mechanism that regulators devised to offer the industry a single source for product reviews and approvals. NAIC launched a pilot of the CARFRA product approval process in May 2001 with a single point of filing mechanism, national standards, and disclosure of any additional state requirements or deviations. The CARFRA pilot consisted of regulators from 10 states that agreed to review new product filings on three types of life and health insurance products: term life, individual annuities, and individual medical supplements. CARFRA's centralized product review and approval process was based on national standards along with consideration of individual state standards. NAIC's goals were to be able to process a product filing within 30 days of receipt to CARFRA if the product conformed to national standards and to process any "outlier" filings within 60 days--those product filings that conformed to the national standards but required further review against the variances for the states in which the products were to be sold. After CARFRA's decision, each state had the option of either accepting or rejecting the product. The CARFRA process also took advantage of technology enhancements utilizing SERFF. Since the launch date, only two filings have been received under the CARFRA process. According to NAIC, industry representatives said that CARFRA was not attractive because too many state deviations to the national standards existed. In general, the larger states participating in the CARFRA pilot program had the most deviations, often requiring the submission of additional forms and documentation beyond that necessary to satisfy the common review criteria. In addition, industry observers said that CARFRA was abandoned because participation in it was voluntary and it had no legitimate enforcement authority as a regulatory entity. After rethinking the CARFRA process, NAIC has considered several alternative methods of streamlining the product approval process. Instead of totally disregarding the CARFRA process, NAIC opted to restructure it as an interstate compact, building on the processes and national standards already developed. NAIC is currently finalizing a proposal for an interstate compact that would establish a commission known as the Interstate Insurance Commission for Annuities, Life Insurance, Disability Income, and Long-Term Care Products to set standards and streamline review and approval processes for such products. NAIC is currently soliciting input on a draft interstate compact and intends to finalize a version that state regulators can vote on at the fall national meeting in September 2002. The compact would require states to delegate product review and approval authority on certain products to the new commission. As well as reviewing and approving certain types of insurance products, this entity would also have the authority to set standards. The proposed interstate compact focuses on annuity, life insurance, disability income, and long-term care products. State insurance regulators have recognized that some life and annuity products are fundamentally distinguishable from other types of insurance products (e.g., property and casualty), since many products sold by life insurers have evolved to become investment products. Consequently, these investment-oriented products face direct competition from products offered by depository institutions and securities firms. According to NAIC, competitive pressures have provided the impetus to develop more streamlined product approval processes for certain insurance products. NAIC hopes the commission established through an interstate compact will help the states implement a more streamlined product review and approval process. The new commission would develop and implement national standards for certain life and annuity insurance products that would supersede the standards of member states that enact enabling legislation for the compact (compacting states). These participating states would then consider adherence to the national standards as having the force and effect of statutory law. Up to now, the states have not generally eliminated their individual deviations to a common set of review criteria. Compacting states must enact the compact into law, effectively ceding their authority to review and approve the specified insurance products to the commission. As proposed, the commission provides for the establishment of a 14-member management committee to manage the affairs of the commission. Six permanent committee members would represent the compacting states with the largest premium volume for annuities and life insurance products. Other compacting states would fill the remaining board member positions on a rotating basis. Geographic considerations would also be used in establishing the management committee. Additionally, the commission can establish product standards only after legislative enactment of the compact by 12 states, and can review products and render approvals or disapprovals on products only after legislative enactment of the compact by 26 states. The impetus for exploring the use of interstate compacts appears to be an increased sense of urgency to resolve current product approval issues and a realization among state officials that regulators have gone as far as they can to streamline product approval processes after the CARFRA trial setback. To overcome industry objections to state deviations beyond CARFRA's review criteria, state lawmakers would have had to change their states' product review and approval requirements to a common, uniform set of criteria. NAIC concluded that an interstate compact presented the best way to accomplish uniform product review and approval standards along with a single point of filing mechanism. The success of NAIC's Speed to Market initiative largely hinges on whether or not a significant number of state legislatures agree to cede their regulatory authority to a separate entity on certain insurance product standards and approvals. Proponents of interstate compacts believe such an approach could be successful if the compact entity develops fair rules, disclosure and due process requirements, sunshine rules (allowing regulators to revisit and decide whether to continue with an interstate compact approach after a specified date), and other informational filing requirements and processes. In contrast, other industry observers believe states have little motivation to change to a single point of filing process, in part because of considerable differences in approaches toward product approvals and consumer protection measures. It remains uncertain how many states will pass enabling legislation to establish interstate compacts for product approval functions or whether states with large insurance markets will embrace this approach. NAIC's Speed to Market initiative has also included efforts to improve existing conventional state-based product review and approval processes. Regardless of whether a more centralized process is used for certain types of life and health products, existing state-based review and approval processes will continue to be used for property and casualty products and many other life and health products for the foreseeable future. NAIC 's improvement efforts in this area, better known as Improvement to State- Based Systems, aim to enhance states' rate, form, and advertising review units by reforming and standardizing their approval processes. One of the most notable advances in improving state-based product review and approval processes has been SERFF, which offers a standard electronic form for new product filings with the states. SERFF enables regulators to receive, comment on, and approve or reject insurance industry rate and form filings electronically. SERFF is becoming increasingly popular, though it is not available for all types of products in each state. At its summer national meeting, NAIC reported that 50 states and the District of Columbia were licensed to accept product filings through SERFF and that 474 companies were licensed to use the system. Several industry representatives we spoke with acknowledged the merits of SERFF but explained that it still does not resolve more fundamental issues related to differences in product review and approval processes across states, many of which are based on statutory requirements. Additionally, to the extent that some states do not fully utilize SERFF for all lines of insurance, the cost benefit is diminished for insurers if they have to maintain a second paper product filing system as well. NAIC has also developed the Review Standards Checklist that gives insurers information on state rate and form filing requirements in a common format by product line. Other efforts under NAIC's Improvements to State-Based Systems focus on reviewing and eliminating "unnecessary" product filing requirements that have accumulated over time. In particular, NAIC and state regulators are trying to identify and reduce those regulations that no longer provide useful oversight value as well as "desk-drawer" rules that have evolved over time but that are not specified by statute, such as a requirement to use a certain type of form. NAIC has also developed a model law aimed at streamlining the product approval process for commercial property and casualty insurance. The Property and Casualty Commercial Rate and Policy Form Model Law, adopted by NAIC in March 2002, would ease some of the current state rate and form submission requirements if adopted by the states. The model recommends a "use and file" regulatory approach for commercial rates and a "file and use" approach for commercial policy forms. Under this model law, notices of commercial rate changes would be filed for informational purposes only and not subject to approval. Commercial policy forms would be filed 30 days prior to their use and would be subject to regulatory review and approval. One industry association pointed out that regulators from two states with large insurance markets said the model would not be adopted in their states. Trade representatives we spoke with could not speculate on the model law's prospects for passage at the state level, but indicated that its chances for approval faced challenges because commercial rates have risen substantially in the past year, exacerbated further by the September 11th attacks. NAIC's initiative to foster "national treatment of companies" has been revised since its inception and is now focused on making improvements to existing state processes related to insurer licensing. This initiative and others were highlighted in NAIC's Statement of Intent: The Future of Insurance Regulation, endorsed by NAIC in March 2000 in response to GLBA and changes in the financial services sector. Initially, efforts under the National Treatment of Companies initiative were directed at centralizing oversight for multistate insurers. Now renamed National Treatment and Coordination, the initiative is currently aimed at streamlining state-based review processes and application submissions for company licenses. Many of NAIC's efforts under this initiative have focused on implementing technology to support a common electronic application form, the Uniform Certificate of Authority Application, or UCAA. Like developments under the Speed to Market initiative, enhancements to the process of submitting forms have outpaced efforts to develop common review and approval criteria. Initially, the National Treatment of Companies initiative encompassed movement toward a single, unified process for supervising multistate insurers. Oversight functions such as licensing reviews, financial solvency monitoring, and market conduct oversight would have been conducted through a more centralized, streamlined process. However, as we previously reported in 2001, state regulators largely abandoned the goal of centralizing regulatory oversight for multistate insurers under this initiative and focused their efforts on improving existing company licensing processes. Some efforts to streamline other regulatory processes for large, multistate insurers have been shifted to other NAIC working groups. For instance, NAIC is undertaking an effort to better coordinate and execute financial analysis and examination activities among regulators that oversee affiliated insurers from multiple states under a holding company structure. From its inception, NAIC and state regulators tried to devise an operational concept for a "national treatment" program that would offer insurers a state-based system that could provide the same efficiencies in many areas of oversight as a federal charter for insurance companies. Many of the options considered were based on a centralized regulatory function that often allowed the insurers' state of domicile to perform regulatory activities on behalf of the other states. State regulators ultimately rejected a national treatment concept covering a broad array of regulatory oversight functions based on deference to insurers' domiciliary state. Furthermore, a planned test of a national treatment program in 2001 was cancelled. Activity on this initiative is now focused on streamlining existing state-based company licensing processes for the benefit of insurers that wish to conduct business in multiple states. Current efforts under NAIC's National Treatment and Coordination initiative are focused on developing more streamlined state-based application and review processes for insurer licensing. Much of NAIC's work on this initiative centers on the implementation of a common electronic application form, the UCAA. According to NAIC, this form is now available for use in all states. Closely tied to the development of the UCAA are efforts to develop a more common, uniform set of review criteria for insurer applications. The UCAA offers insurance companies a web-based, electronic application form to obtain a license in any state. Although the application would still be submitted to and reviewed by individual state insurance departments, the format would remain the same and could be submitted electronically. The UCAA provides formats for newly formed companies seeking a Certificate of Authority in their domicile state, for existing companies desiring to expand their business into other states, and for existing insurers that want to amend their existing Certificate of Authority. While the technology supporting a common application form has been developed, regulators have yet to agree on a common set of review criteria related to insurer licensing. In the absence of uniform criteria, insurers must separately submit supplemental applications beyond the UCAA information to individual states, often in paper form. Industry representatives maintain that these separate application requirements negate some of the benefits of using the UCAA form rather than conventional state application forms. NAIC and state regulators continue striving to develop more uniform review criteria for licensing insurers. In April 2002, NAIC provided documentation on 91 additional state-specific requirements beyond those in the UCAA application. Again, as was the case with the other initiatives, a principal issue in developing a common set of licensing review criteria has been the challenge of addressing each state's individual requirements. Through its Accelerated Licensure Evaluation and Review Techniques (ALERT) program, NAIC and state regulators are trying to reduce these additional state requirements (by 40 percent this year), particularly those not based on state statutes. While efforts to implement UCAA have been successful from a technical perspective, its common use in conjunction with a more standardized licensing review process has not yet materialized and remains uncertain. In this statement, we have discussed three of the initiatives outlined in NAIC's Statement of Intent for regulatory modernization--licensing nonresident producers (Producer Licensing Reciprocity and Uniformity), approving new products (Speed to Market), and coordinating the oversight of companies that operate in multiple states (National Treatment of Companies). While it appears that NAIC is close to certifying enough states to meet GLBA's reciprocity requirements before November 2002 to avoid the creation of NARAB, several states, including some of the largest, either will not have full reciprocity or will satisfy this requirement only by temporarily waiving--not eliminating--statutory requirements for nonresident producers. Similarly, the states' effort to streamline the product approval process--CARFRA--failed largely because, even in the 10 states that conducted the pilot, individual states would not give up state-specific requirements that they believed were important. Finally, as we pointed out in our earlier reports, the original objectives of National Treatment--providing regulatory treatment for "national companies" comparable to that under a single federal regulator--were quickly narrowed to focus on the implementation of the UCAA, a single application form that companies can submit to multiple states when applying for a license to sell insurance. Even in the case of the UCAA, which has been adopted by all states, individual states have retained additional state-specific requirements because they believe that the UCAA, by itself, lacked some important features, such as fingerprinting of company principals. While the specific details of state regulators' actions in each of these areas have varied, there have been similarities in the pattern of accomplishment. In each case, improvements, sometimes dramatic, have been made in efficiency by streamlining and applying technology, for example, standardizing forms and using technology to submit applications for licensing or product approval. There has been considerably less success in reaching agreement on the more substantive underlying issues. In each case, some states that consider themselves to be stricter or to have more consumer protections have been reluctant or have refused to lower their standards. If the objective of NAIC's agenda of regulatory reform and modernization is simply to have all states agree, then what has occurred thus far may be considered a failure. However, if the objective is more uniformity and reciprocity with an overall improvement in regulatory performance, then the holdout states may be the only defense against the weakening of both regulatory oversight and consumer protections. We do not suggest that every individual state deviation or objection is appropriate or desirable. However, if some states did not object to giving up fingerprinting, for example, as a means of conducting in-depth criminal and regulatory history background checks of agents or company owners and management, consumers would likely be more at risk and regulation would be less effective. In that case, neither uniformity nor reciprocity would represent regulatory progress. For its part, we believe NAIC has made a concerted effort in promoting more uniform regulatory processes and requirements. NAIC has also demonstrated successes in implementing technology to improve efficiencies in licensing and product approval processes. Now, continuing success on many regulatory streamlining efforts desired by industry depend on state legislatures' willingness to trust other regulatory entities, either other states or entities such as the commission created by the compact, with certain regulatory functions and decision-making authority. Many states, often with the largest insurance markets, are not likely to take such a step unless they are convinced that other states and regulatory entities operate under a set of standards comparable to their own.	The National Association of Insurance Commissioners (NAIC), through its Accreditation Program, has made considerable progress in achieving uniformity among state insurance regulators. In addition, competitive pressures from further consolidation in the financial services sector and enactment of the Gramm-Leach-Bliley Act has focused attention on regulator reforms in the insurance industry. NAIC's Producer Licensing Reciprocity and Uniformity initiative aims to streamline the licensing process for selling insurance in multiple states. State regulators are also trying to streamline regulatory processes to bring new insurance products to market more quickly. NAIC's Speed to Market initiative focuses both on developing a more centralized filing and approval process for life and health insurance products and on improving existing state-based approval processes for other types of products. Finally, NAIC's National Treatment of Companies initiative aims to facilitate the licensing process for conducting business on a multistate basis. However, NAIC and the states face significant challenges in implementing their initiatives.	5,784	218
The nation's long-term fiscal outlook is daunting under any realistic policy scenarios and assumptions. For over 14 years, GAO has periodically prepared various long-term budget simulations that seek to illustrate the likely fiscal consequences of our coming demographic challenges and rising health care costs. Indeed, the health care area is especially important because the long-term fiscal challenge is largely a health care challenge. While Social Security is important because of its size, health care spending is both large and projected to grow much more rapidly. Our most recent simulation results illustrate the importance of health care in the long-term fiscal outlook as well as the imperative to take action soon. These simulations show that over the long term we face large and growing structural deficits due primarily to known demographic trends and rising health care costs. These trends are compounded by the presence of near-term deficits arising from new discretionary and mandatory spending as well as lower federal revenues as a percentage of the economy. Continuing on this imprudent and unsustainable fiscal path will gradually erode, if not suddenly damage, our economy, our standard of living, and ultimately our national security. Our current path will also increasingly constrain our ability to address emerging and unexpected budgetary needs and increase the burdens that will be faced by our children, grandchildren, and future generations of Americans. Figures 1 and 2 present our long-term simulations under two different sets of assumptions. For both simulations, Social Security and Medicare spending is based on the 2006 Trustees' intermediate projections, and we assume that benefits continue to be paid in full after the trust funds are exhausted, although current law does not provide for such. Medicaid spending is based on the Congressional Budget Office's (CBO) December 2005 long-term projections under its midrange assumptions. In figure 1, we start with CBO's 10-year baseline, constructed according to the statutory requirements for that baseline. Consistent with these specific yet unrealistic requirements, discretionary spending is assumed to grow with inflation for the first 10 years and tax cuts scheduled to expire are assumed to expire. After 2016, discretionary spending and revenue are held constant as a share of gross domestic product (GDP) at the 2016 level. Under this fiscally restrained scenario, spending for Social Security and health care programs would grow to consume over three-quarters of federal revenues by 2040. In figure 2, two assumptions are changed: (1) discretionary spending is assumed to grow with the economy after 2006 rather than merely with inflation, and (2) all expiring tax provisions are extended. In this less restrained but possibly more realistic scenario, federal revenues will cover little more than interest on the large and growing federal debt by 2040. While many alternative scenarios could be developed incorporating different combinations of possible policy choices and economic assumptions, these two scenarios can be viewed as possible "bookends" to a range of possible outcomes. Budget flexibility--the ability to respond to unforeseen events--is key to being able to successfully deal with the nation's and the world's uncertainties. By their very nature, mandatory spending programs-- entitlement programs like Medicare and Social Security--limit budget flexibility. They are governed by eligibility rules and benefit formulas, which means that funds are spent as required to provide benefits to those who are eligible and wish to participate. As figure 3 shows, mandatory spending has grown as a share of the total federal budget. For example, mandatory spending on programs (i.e., mandatory spending excluding interest) has grown from 27 percent in 1965--the year Medicare was created--to 42 percent in 1985 to 53 percent last year. (Total spending not subject to annual appropriations--mandatory spending and net interest-- has grown from 34 percent in 1965 to 61 percent last year.) Under both the CBO baseline estimates and the President's Budget, this spending would grow even further. Figure 3 illustrates that while it is important to control discretionary spending, the real challenge is mandatory spending. Accordingly, substantive reform of the major health programs and Social Security is critical to recapturing our future fiscal flexibility. The aging population and rising health care costs will have significant implications not only for the budget but also our economy and competitive posture. Figure 4 shows the total future draw on the economy represented by Social Security, Medicare, and Medicaid. Under the 2006 Trustees' intermediate estimates and CBO's 2005 midrange and long-term Medicaid estimates, spending for these entitlement programs combined will grow to over 15 percent of GDP in 2030 from today's 8.9 percent. It is clear that taken together, Social Security, Medicare, and Medicaid represent an unsustainable burden on the federal budget and future generations. Ultimately, the nation will have to decide what level of federal benefits and spending it wants and how it will pay for these benefits. While Social Security, Medicare, and Medicaid are the major drivers of the long-term spending outlook in the aggregate, they are not the only promises the federal government has made for the future. The federal government undertakes a wide range of responsibilities, programs, and activities that may either obligate the government to future spending or create an expectation for such spending. Specific fiscal exposures vary widely as to source, likelihood of occurrence, magnitude, and strength of the government's legal obligations. If we think of fiscal exposures as extending from explicit liabilities (like military and civilian pensions) to specific contingencies (like pension, flood, and other federal insurance programs) to the commitments implicit in current policy and/or public expectations (like the gap between the present value of future promised and funded Social Security and Medicare benefits), the federal government's fiscal exposures totaled more than $46 trillion at the end of 2005, up from about $20 trillion in 2000. This translates into a burden of about $156,000 per American, or approximately $375,000 per full-time worker--more than double what it was in 2000. These amounts are growing every second of every minute of every day due to continuing deficits, known demographic trends and compounding interest costs. Many are beginning to realize that difficult choices must be made, and soon. A crucial first step in acting to improve our long-term fiscal outlook will be to face facts and identify the many significant commitments already facing the federal government. If citizens and government officials come to better understand our nation's various fiscal exposures and their implications for the future, they are more likely to insist on prudent policy choices today and sensible levels of fiscal risk in the future. How do we get started? Today you are focusing on budget process improvements. That's a good start. While the process itself cannot solve the problem, it is important. It can help policymakers make tough but necessary choices today rather than defer them until tomorrow. Restoration of meaningful budget controls--budgetary caps and a pay-as- you-go (PAYGO) rule on both the tax and spending side of the ledger--is a start toward requiring that necessary trade-offs be made rather than delayed. Although the restoration of caps and a PAYGO rule are important, they are not enough. Among the characteristics a budget process needs for that to happen are increased transparency and better incentives, signals, triggers and default mechanisms to address the fiscal exposures/commitments the federal government has already made and better transparency for and controls over the long-term fiscal exposures/commitments that the federal government is considering. Let me elaborate. There is broad consensus among observers and analysts who focus on the budget that the controls contained in the expired Budget Enforcement Act constrained spending for much of the 1990s. In fact, annual discretionary budget authority actually declined in real terms during the mid-1990s. I endorse the restoration of realistic discretionary caps and PAYGO discipline applied to both mandatory spending and revenue legislation. But the caps can only work if they are realistic; while caps may be seen as tighter than some would like, they are not likely to bind if they are seen as totally unreasonable given current conditions. While PAYGO discipline constrained the creation or legislative expansion of mandatory spending and tax cuts, it accepted the existing provisions of law as given. Looking ahead, the budget process will need to go beyond limiting expansions. Cost increases in existing mandatory programs cannot be ignored and the base of existing spending and tax programs must be reviewed and re- engineered to address our long-range fiscal gap. Specifically, as I have said before, I would like to see a process that forces examination of "the base" of the federal government--for major entitlements, for other mandatory spending, and for so-called "discretionary" spending (those activities funded through the appropriations process). Reexamining "the base" is something that should be done periodically regardless of fiscal condition--all of us have a stewardship obligation over taxpayer funds. As I have said before, we have programs still in existence today that were designed 20 or more years ago--and the world has changed. I would suggest that as constraints on discretionary spending continue to tighten, the need to reexamine existing programs and activities becomes greater. One of the questions this Congress is grappling with-- earmarks--can be seen in this context. Whatever the agreed-upon level for discretionary spending, the allocation within that total will be important. How should that allocation be determined? What sort of rules will you want to impose on both the allocation across major areas (defense, education, etc.) and within those areas? By definition, earmarks specify how some funds will be used. How will the process manage them? After all, not all earmarks are bad but many are highly questionable. It is not surprising that in times of tight resources, the tension between earmarks and flexibility will likely rise. Although mandatory spending is not amenable to caps, such spending need not--and should not--be permitted to be on autopilot and grow to an unlimited extent. Since the spending for any given entitlement or other mandatory program is a function of the interaction between eligibility rules and the benefit formula--either or both of which may incorporate exogenous factors such as economic downturns--the way to change the path of spending for any of these programs is to change their rules or formulas. We recently issued a report on "triggers"--some measure that when reached or exceeded, would prompt a response connected to that program. By identifying significant increases in the spending path of a mandatory program relatively early and acting to constrain it, Congress may avert much larger and potentially disruptive financial challenges and program changes in the future. A trigger is a measure and a signal mechanism--like an alarm clock. It could trigger a "soft" response--one that calls attention to the growth rate of the level of spending and prompts special consideration when the threshold or target is breached. The Medicare program already contains a "soft" response trigger: the President is required to submit a proposal for action to Congress if the Medicare Trustees determine in 2 consecutive years that the general revenue share of Medicare spending is projected to exceed 45 percent during a 7-fiscal-year period. The most recent Trustees' report to Congress for the first time found that the general revenue share of financing is projected to exceed that threshold in 2012. Thus, if next year's report again concludes that it will exceed the threshold during the 7- fiscal-year period, the trigger will have been tripped and the President will be required to submit his proposal for action. Soft responses can help in alerting decision makers of potential problems, but they do not ensure that action to decrease spending or increase revenue is taken. In contrast, a trigger could lead to "hard" responses under which a predetermined, program-specific action would take place, such as changes in eligibility criteria and benefit formulas, automatic revenue increases, or automatic spending cuts. With hard responses, spending is automatically constrained, revenue is automatically increased, or both, unless Congress takes action to override--the default is the constraining action. For example, this year the President's Budget proposes to change the Medicare trigger from solely "soft" to providing a "hard" (automatic) response if Congress fails to enact the President's proposal. Any discussion to create triggered responses and their design must recognize that unlike controls on discretionary spending, there is some tension between the idea of triggers and the nature of entitlement and other mandatory spending programs. These programs--as with tax provisions such as tax expenditures--were designed to provide benefits based on eligibility formulas or actions as opposed to an annual decision regarding spending. This tension makes it more challenging to constrain costs and to design both triggers and appropriate responses. At the same time, with less than 40 percent of the budget under the control of the annual appropriations process, considering ways to increase transparency, oversight, and control of mandatory programs must be part of addressing the nation's long-term fiscal challenges. Besides triggers, transparency of existing commitments would be improved by requiring the Office of Management and Budget (OMB) to report annually on fiscal exposures--the more than $46 trillion figure I mentioned earlier--including a concise list, description, and cost estimates, where possible. OMB should also ensure that agencies focus on improving cost estimates for fiscal exposures. This should complement and support continued and improved reporting of long-range projections and analysis of the budget as a whole to assess fiscal sustainability and flexibility. Others have embraced this idea for better reporting of fiscal exposures. Senator Voinovich has proposed that the President report each January on the fiscal exposures of the federal government and their implications for the long-term financial health and Senator Lieberman introduced legislation to require better information on liabilities and commitments. This year Representatives Cooper, Chocola, and Kirk have sponsored legislation also aimed at improving the attention paid to our growing federal commitments. And, in his last few budgets the President has proposed that reports be required for any proposals that would worsen the unfunded obligations of major entitlement programs. These proposals provide a good starting point for discussion. Reporting is a critical first step--but, as I noted above, it must cover not only new proposals but also existing commitments, and it should be accompanied by some incentives and controls. We need both better information on existing commitments and promises and information on the long-term costs of any new significant proposed spending increases or tax cut. Ten-year budget projections have been available to decision makers for many years. We must build on that regime but also incorporate longer-term estimates of net present value (NPV) costs for major spending and tax commitments comprising longer-term exposures for the federal budget beyond the 10- year window. Current budget reporting does not always fully capture or require explicit consideration of some fiscal exposures. For example, when Medicare Part D was being debated, much of the debate focused on the 10-year cost estimate--not on the long-term commitment that was obviously much greater. While the budget was not designed to and does not provide complete information on long-term cost implications stemming from some of the government's commitments when they are made, progress can and should be made on this front. For example, we should require NPV estimates for major proposals--whether on the tax side or the spending side--whose costs escalate outside the 10-year window. And these estimates should be disclosed and debated before the proposal is voted on. Regarding tax provisions, it is important to recognize that tax policies and programs financing the federal budget can be reviewed not only with an eye toward the overall level of revenue provided to fund federal operations and commitments, but also the mix of taxes and the extent to which the tax code is used to promote overall economic growth and broad-based societal objectives. In practice, some tax expenditures are very similar to mandatory spending programs even though they are not subject to the appropriations process or selected budget control mechanisms. Tax expenditures represent a significant commitment and are not typically subject to review or reexamination. This should not be allowed to continue nor should they continue to be largely in the dark and on autopilot. Finally, the growing use of emergency supplemental appropriations raises concerns that an increasing portion of federal spending is exempt from the discipline and trade-offs of the regular budget process. Some have expressed concern that these "emergency" supplementals are not always used just to meet the needs of unforeseen emergencies but also include funding for activities that could be covered in regular appropriation acts. According to a recent Congressional Research Service report, after the expiration of discretionary limits and PAYGO requirements at the end of fiscal year 2002, supplemental appropriations net of rescissions increased the budget deficit by almost 25 percent per year. On average, the use of supplemental appropriations for all purposes has grown almost 60 percent each year, increasing from about $17 billion in fiscal year 2000 to about $160 billion in fiscal year 2005. Constraining emergency appropriations to those which are necessary (not merely useful or beneficial), sudden, urgent, unforeseen, and not permanent has been proposed in the past. The issue of what constitutes an emergency needs to be resolved and discipline exerted so that all appropriations for activities that are not true emergencies are considered during regular budget deliberations. We cannot grow our way out of our long-term fiscal challenge. We have to make tough choices and the sooner the better. A multi-pronged approach is necessary: (1) revise existing budget processes and financial reporting requirements, (2) restructure existing entitlement programs, (3) reexamine the base of discretionary and other spending, and (4) review and revise tax policy and enforcement programs. Everything must be on the table. Fundamentally, we need to undertake a top-to-bottom review of government activities to ensure their relevance and fit for the 21st century and their relative priority. Our report entitled 21st Century Challenges: Reexamining the Base of the Federal Government presents illustrative questions for policymakers to consider as they carry out their responsibilities. These questions look across major areas of the budget and federal operations, including discretionary and mandatory spending and tax policies and programs. We hope that this report, among other things, will be used by various congressional committees as they consider which areas of government need particular attention and reconsideration. The understanding and support of the American people will be critical in providing a foundation for action. The fiscal risks I have discussed, however, are a long-term problem whose full impact will not likely be felt for some time. At the same time, they are very real and time is currently working against us. The difficult but necessary choices we face will be facilitated if the public has the facts and comes to support serious and sustained action to address the nation's fiscal challenges. That is why if an Entitlement and Tax Reform Commission is created to develop proposals to tackle our long-term fiscal imbalance, its charter may have to include educating the public as to the nature of the problem and the realistic solutions. While public education may be part of a Commission's charge, we cannot wait for it to begin. As you may know, the Concord Coalition is leading a public education effort on this issue and I have been a regular participant. Although along with Concord the core group is the Heritage Foundation, the Brookings Institution, and the Committee for Economic Development, others are also actively supporting and participating in the effort--the state treasurers, auditors and comptrollers, the American Institute of Certified Public Accountants, AARP, and the National Academy of Public Administration. I am pleased to take part in this national education and outreach effort to help the public understand the nature and magnitude of the long-term financial challenge facing this nation. This is important because while process reform can structure choices and help, broad understanding of the problem is also essential. After all, from a practical standpoint, the public needs to understand the nature and extent of our fiscal challenge before their elected representatives are likely to act. Thank you, Mr. Chairman. This concludes my prepared remarks. I would be happy to answer any questions you may have. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. For further information on this testimony, please contact Susan J. Irving at (202) 512- 9142 or [email protected]. Individuals making key contributions to this testimony include Christine Bonham, Assistant Director; Carlos Diz, Assistant General Counsel; and Melissa Wolf, Senior Analyst. 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 nation's long-term fiscal outlook is daunting. While the budget process has not caused the problems we face, the absence of meaningful budget controls and other mechanisms has served to compound our fiscal challenge. Conversely, a process that illuminates the looming fiscal pressures and provides appropriate incentives can at least help decision makers focus on the right questions. Meaningful budget controls and other mechanisms can also help to assure that difficult but necessary choices are made. The budget process needs to provide incentives and signals to address commitments the government has already made and better transparency for and controls on the long-term fiscal exposures being considered. Improvements would include the restoration of realistic discretionary caps; application of pay-as-you-go (PAYGO) discipline to both mandatory spending and revenue legislation; the use of "triggers" for some mandatory programs; and better reporting of fiscal exposures. Over the long term we face a large and growing structural deficit due primarily to known demographic trends and rising health care costs. Continuing on this imprudent and unsustainable fiscal path will gradually erode, if not suddenly damage, our economy, our standard of living, and ultimately our national security. Our current path will also increasingly constrain our ability to address emerging and unexpected budgetary needs and increase the burdens that will be faced by our children, grandchildren, and future generations. The budget process itself cannot solve this problem, but it can help policymakers make tough but necessary choices. If citizens and government officials come to better understand various fiscal exposures and their implications for the future, they are more likely to insist on prudent policy choices today and sensible levels of fiscal risk in the future. We cannot grow our way out of our long-term fiscal challenge. We must make tough choices and the sooner the better. A multi-pronged approach is needed: (1) revise existing budget processes and financial reporting requirements, (2) restructure existing entitlement programs, (3) reexamine the base of discretionary and other spending, and (4) review and revise tax policy and enforcement programs--including tax expenditures. Everything must be on the table and a credible and effective Entitlement and Tax Reform Commission may be necessary. Fundamentally we need a top-to-bottom review of government activities to ensure their relevance and fit for the 21st century and their relative priority.	4,475	491
Reclamation has carried out its mission to manage, develop, and protect water and related resources in 17 western states since 1902. The agency has led or provided assistance in constructing most of the large dams and water diversion structures in the West for the purpose of developing water supplies for irrigation, as well as for other purposes, including hydroelectric power generation, municipal and industrial water supplies, recreation, flood control, and fish and wildlife enhancement. Reclamation is organized into five regions, with technical and policy support provided by its central office in Denver. Each regional office oversees the water projects located within its regional boundaries (see fig. 1). The federal statutes authorizing individual water projects and the statutes generally applicable to all water projects--known collectively as reclamation law--govern Reclamation's water projects. Reclamation law determines how the costs of constructing water projects are allocated and how repayment responsibilities are assigned among the projects' users. Cost allocation is the process of assigning an equitable share of the total cost to each use in a multipurpose project. Under reclamation law, Reclamation allocates a share of the project's total construction costs to each of the authorized project purposes based on the proportion of benefits each purpose receives from the project, and the costs allocated to each purpose are deemed to be reimbursable or nonreimbursable. Reimbursable costs are those that are to be repaid by certain water users, including irrigation districts, power, and municipal and industrial water suppliers. Nonreimbursable costs are those that are not repaid by water users and are instead generally borne by the federal government because certain project purposes are viewed by Congress as being national in scope, such as costs allocated to flood control and navigation, fish and wildlife enhancement, and recreation. At the time each water project is authorized and designed, Reclamation estimates the total construction costs and allocates these costs among the project uses. Once project construction is completed, and the actual construction costs are determined, Reclamation performs a final construction cost allocation. The cost allocation serves as a basis for the repayment terms in water users' contracts. The amount of reimbursable costs that water users are responsible for repaying is based on the type of project purpose (see fig. 2). Power and municipal and industrial users are responsible for repaying their allocated share of the construction costs, plus the interest that accrues on those costs during construction and the repayment period. For irrigation districts, however, reclamation law does not require the districts to pay interest on the construction costs allocated to irrigation, resulting in federally subsidized financing for irrigation districts responsible for repayment. In addition, irrigation districts may receive the following two types of financial assistance in repaying their allocated construction costs: Irrigation assistance. The amount of construction costs allocated to irrigation that the Secretary of the Interior determines to be above the irrigation districts' ability to pay for a given project is repaid from other revenue sources, where available. These other revenues are primarily earned from the sale of power generated by the project (or other related projects), or from the sale of municipal and industrial water, among other revenue sources. Ability-to-pay determinations are based on Reclamation's financial analysis of a given geographic area, and determinations generally occur before construction begins on a project. Credits. Credits can relieve part or all of irrigation districts' repayment obligations. Types of credits include congressionally authorized repayment reductions, or "charge-offs," and construction expenses determined to be nonreimbursable. Charge-offs are credits that are often enacted through legislation in response to special circumstances, such as a determination that the land is unproductive, or the settlement of Indian water rights claims. To establish an agreement between the federal government and irrigation districts on the delivery of water from a project and to collect payments, Reclamation generally enters into one of the following two types of contracts with irrigation districts: Repayment contracts: Section 9(d) of the Reclamation Project Act of 1939 authorizes permanent contracts for water delivery with repayment of construction costs allocated to irrigation to be paid in fixed dollar amounts in annual or other regular increments, over a period of up to 40 years, by the irrigation district to Reclamation. Water service contracts: Section 9(e) of the Reclamation Project Act of 1939 authorizes contracts to furnish water for irrigation purposes for up to 40-year periods. Reclamation generally enters into water service contracts with irrigation districts when construction of the water project has not been completed, final construction costs are uncertain, or the irrigation district does not want a permanent contract, among other reasons. By law, Reclamation must charge rates for water delivered under water service contracts that are at least sufficient to cover an appropriate share of fixed charges the Secretary of the Interior deems proper, taking into consideration the construction costs allocated to irrigation, as well as an appropriate share of annual operation and maintenance costs. A water service contract can contain a provision providing for its renewal--through negotiations between Reclamation and the irrigation district--once the contract's term ends, or the contract may contain a provision allowing for its conversion to a repayment contract. Depending on the size of the water project, which varies substantially across projects, Reclamation may have contracts with a number of irrigation districts within that project's service area. Irrigation districts then enter into separate agreements with landholders to provide project water.geographic area, Reclamation may have only one or two contracts with irrigation districts for that water project, which provides water to a small number of landholders. On the other hand, for water projects covering a larger area, Reclamation may have contracts with multiple irrigation districts servicing hundreds of landholders within a project. Reclamation collects data on water project construction costs and the status of repayment by irrigation districts, but it has not publicly reported this information since the 1980s. Reclamation's regional offices collect repayment data annually for each water project with an outstanding construction cost repayment obligation and then compile them in Statements of Project Construction Cost and Repayment (repayment statements). These repayment statements indicate that $1.6 billion of the $6.4 billion in costs allocated to irrigation was outstanding, as of the end of fiscal year 2012. It is Reclamation policy to make the repayment statements available to the public upon request, but it could better promote to the public that it prepares repayment statements annually and that these statements are available. Reclamation's data on water project construction cost repayments indicate that, of the $6.4 billion in costs allocated to irrigation as of the end of fiscal year 2012, $1.6 billion remains outstanding. Every fiscal year, Reclamation's five regional offices collect repayment data and compile them in repayment statements for each water project that has These repayment construction costs with repayments outstanding.statements include data on the total construction costs for the water project; the construction costs allocated to each project purpose, including irrigation; repayment information for costs allocated to each project purpose, including the amount irrigation districts have repaid as of the end of the fiscal year; and any financial assistance granted to irrigation districts. Reclamation prepared repayment statements for 43 of these 54 projects in fiscal year 2012, which indicate that the total construction cost for these projects was more than $963.3 million, of which at least $350.5 million was allocated to irrigation. Reclamation did not prepare repayment statements for the other 11 projects or otherwise have construction cost and repayment information readily available. Per Reclamation policy, it is optional to prepare repayment statements for water projects where all water users, including irrigation districts, have repaid their construction cost allocations. that the total construction cost for these projects was more than $19.7 billion, of which $6.4 billion was allocated to irrigation (see fig. 3). According to Reclamation's repayment statements, as of the end of fiscal year 2012, of the $6.4 billion in construction costs allocated to irrigation, the outstanding repayment obligations totaled $1.6 billion--or 25 percent--after accounting for nearly $4.8 billion in repayments made by irrigation districts, other repayments received, and financial assistance to irrigation (see table 1). Outstanding repayment obligations ranged across Reclamation's regions, from approximately $91.7 million in the Upper Colorado region to more than $1.0 billion in the Mid-Pacific region (accounting for 64 percent of the total outstanding construction costs allocated to irrigation). Reclamation's repayment statements as of the end of fiscal year 2012 further show that, of the $1.6 billion outstanding repayment obligation for irrigation, irrigation districts are expected to repay approximately $1.1 billion through repayment or water service contracts. Of the remaining $490.4 million, approximately $287.4 million is expected to be recovered through other revenue sources, such as the sale of surplus project water for irrigation, and roughly $203.0 million is being repaid, pursuant to federal law, a settlement agreement, and stipulated judgment, by a municipal corporation that operates and maintains the Central Arizona Project. Irrigation districts have repaid nearly $1.4 billion of their allocated costs primarily through repayment or water service contracts as of the end of fiscal year 2012 and, according to Reclamation officials, irrigation districts are generally current in their repayments.Reclamation officials, across the 76 water projects with outstanding repayment obligations, Reclamation holds 72 repayment contracts for irrigation and 304 water service contracts for irrigation. We found that, across Reclamation's regions, the number of water projects with outstanding repayment obligations as of the end of fiscal year 2012 and the types of contracts vary, as described in table 2. Reclamation has not publicly reported the information it collects on water project construction costs and repayment since the 1980s, and we found that Reclamation does not make it readily known to the public that it prepares repayment statements annually or that they are available.Reclamation officials said that the purpose of the repayment statements is generally for internal management use, such as when the agency is preparing for contract negotiations, or to provide information to certain power users on the amounts of irrigation assistance power may be responsible for paying. Reclamation officials told us they had considered publishing the repayment statements on the agency's website in the mid- 2000s as part of an internal management review, but they decided not to do so. Instead, in 2007, Reclamation developed an internal policy document on the preparation of repayment statements that states that such statements will be provided to any interested party upon request. This policy document is posted on the section of the agency's website that contains program and administrative policies that apply to Reclamation's management of its water projects. Information on the availability of the repayment statements is not otherwise posted online or made public. We interviewed staff from legislative branch agencies and several other individuals knowledgeable about Reclamation water projects who indicated that public availability to the information contained in the repayment statements would be helpful. Some individuals we interviewed were not aware that Reclamation prepares repayment statements annually, or that the agency would make them available upon request. Several individuals we interviewed indicated that making the repayment statements directly accessible on the agency's website would be helpful and, in some cases, better inform their work. For example, a staff member from the Congressional Research Service said that to be able to respond to congressional committee requests in a timely manner, it would be helpful to have repayment information on the agency's website, similar to information posted online by Reclamation's Mid-Pacific regional office on its water rates (which are based in part on construction cost allocation and repayment information) for the Central Valley Project. In addition, some individuals noted that, as Reclamation considers modifying or expanding existing water storage capacity or delivery, Congress and others may want to assess information on how costs were allocated and how funding and repayment arrangements were established in the past to inform potential future funding arrangements. For instance, an environmental consultant told us that having repayment information readily accessible for water projects developed in the past would help inform decisions on future funding arrangements and other policy considerations for federal, state, and other parties considering the expansion of a water project in the Pacific Northwest. A senior Reclamation official we interviewed agreed that increasing public awareness that cost allocation and repayment information is available upon request could better position the public to obtain information that could help inform their decision making on related water project issues. In addition, the official stated that there may be additional opportunities to make the public aware of its policy beyond posting the information on the policy section of its website. According to the Office of Management and Budget's open government directive, the federal government should publish information online about what the government is doing to promote transparency, accountability, and informed participation by the public, and federal agencies should proactively use modern technology to disseminate useful information. By further disseminating information to the public that cost allocation and repayment data are available through the repayment statements, Reclamation would promote transparency and potentially increase informed participation by the public. The authority for irrigation districts, or for landholders within those districts, to repay their allocated construction costs early is limited to a small number of districts across Reclamation's water projects. Based on our analysis, early repayment affects the financial return to the federal government, and it accelerates the elimination of certain restrictions and requirements for landholders that are in place until their repayment obligations are fulfilled, among other things. Reclamation and irrigation district officials told us that early repayment may not appeal to many districts or landholders, but some districts or landholders may be incentivized to seek and exercise the authority to repay early, depending on their particular circumstances. The authority for irrigation districts, or for landholders within those districts, to repay their allocated water project construction costs early-- that is, repay outstanding repayment obligations, either through lump-sum or accelerated payments, in advance of the date specified in the districts' contracts--is limited. Unless expressly authorized in their contracts or by statute, irrigation districts and landholders are not authorized to repay their construction cost obligations early. According to Reclamation data, of the estimated 585 irrigation districts that had repayment or water service contracts with Reclamation, as of December 2013, 87 districts-- or about 15 percent--had authority for the district, or for landholders within the district, to repay their construction cost obligations early. Of those 87 irrigation districts, 69 districts exercised their authority and repaid early, or had some landholders who repaid early, as of December 2013, with early repayments totaling more than $238.9 million, according to Reclamation data. Contractual authority for early repayment is limited because only a small number of contracts that predate the Reclamation Reform Act of 1982-- which prohibited new contracts after October 12, 1982, from authorizing early repayment--contain terms expressly authorizing early repayment.Reclamation data indicate that of the 87 irrigation districts with early repayment authority, 55 districts had contracts that authorized landholders to repay their outstanding construction cost obligations early; these districts are located largely in the Pacific Northwest region. Some or all landholders within 39 of those 55 irrigation districts exercised this contractual authority and made early repayments totaling approximately $18.7 million as of December 2013,app. IV). according to Reclamation data (see In addition, we identified seven statutes enacted since 2000 that authorize some irrigation districts--or, in some cases, landholders within those districts--to repay their construction cost obligations early. Specifically, we identified 32 irrigation districts that sought and received statutory authority for early repayment by the district or landholders.analysis of Reclamation data shows that, of those 32 irrigation districts with statutory authority, 30 districts repaid early or had some landholders within the district who repaid early, with their early repayments totaling $220.2 million, as of December 2013 (see app. IV). Twenty-two irrigation districts that receive water from the Central Valley Project and received statutory authority in 2009 comprised most of those early repayments, totaling nearly $200.1 million. Early repayment affects the financial return to the federal government and accelerates the elimination of certain restrictions and requirements for landholders that are in place until their repayment obligations are fulfilled. While only a limited number of irrigation districts and landholders have early repayment authority, there has been consideration in Congress of expanding early repayment authority more broadly, such as to all irrigation districts. Reclamation documents and officials we interviewed indicated that the agency has and would likely continue to support additional authorization for early repayment, so long as the financial return to the federal government was not negatively affected, but that the unique aspects of most water projects support authorizing early repayment on a case-by-case basis. Reclamation officials and irrigation district officials told us that early repayment may not appeal to many districts or landholders, given that their repayments are otherwise due in fixed, interest-free amounts spread over many years. In addition, some noted, the districts or landholders may not be in a financial position to repay their outstanding repayment obligations on a lump-sum or accelerated basis. On the other hand, as described above, of the 87 irrigation districts that had early repayment authority, most of the districts, or at least some of the landholders within those districts, exercised such authority and repaid their obligations early. Based on our analysis, we found that early repayment more quickly eliminates certain restrictions and requirements for a landholder, which may provide an incentive for the landholder or the district to seek and exercise early repayment authority, depending on their circumstances. Specifically, we found that early repayment has various implications for the federal government, irrigation districts, and landholders, as follows. Early repayment affects the financial return to the federal government, largely depending on whether a discount may be authorized, such as calculating the present value of the outstanding repayment obligation to determine the amount to be repaid early, and the size of that discount. If no discounts are authorized, any repayments that occur earlier than the due date specified in the contract would be worth more to the government because irrigation districts' repayments do not bear interest. By receiving lump-sum or accelerated payments early for the outstanding repayment obligations, the government avoids the loss in value that would otherwise occur with repayments made over time. For example, if in 2014 an irrigation district were to make a lump-sum payment of $100,000 that would otherwise be due in annual installments through 2030 (e.g., about $5,882 per year for 17 years), the government would receive that money sooner. Looked at another way, if the irrigation district were to continue making annual repayments over time, rather than repay early, the value to the government of $100,000 paid in full after annual installments ending in 2030 would be approximately $74,220 in 2014 dollars. Reclamation officials told us that in most instances where irrigation districts or landholders exercised their authority to repay early, the early repayment amounts reflected their outstanding repayment obligations, and the agency did not apply any discounts. If early repayment authority provides a discount toward the outstanding repayment obligation, however, the value of the return to the government is reduced compared with repayment of the full outstanding amount. In recent years, a few statutes have granted certain irrigation districts a discount. For example, legislation enacted in 2009 required certain Central Valley Project irrigation districts to repay their outstanding repayment obligations early, at a discount of half the 20-year Treasury rate. This discount was intended to offset the irrigation districts' borrowing costs in obtaining loans to facilitate their early repayments, according to an attorney who represented the districts. In this example, the discount may have incentivized the irrigation districts to repay early, but it also reduced the financial return to the federal government compared with early repayment without a discount. Specifically, Reclamation data indicate that, if no discount had been applied, the early return to the government would have been $236.7 million, rather than the $200.1 million that was repaid based on the discount.such a discount had not been provided, fewer irrigation districts may have exercised their early repayment authority, and a larger discount would have resulted in a smaller return to the government. On the other hand, if Based on past early repayments, some irrigation districts and landholders may be motivated to repay early without a discount, but Reclamation officials told us that they believe some kind of discount would be needed to incentivize many irrigation districts to consider early repayment, were it to be authorized. Under certain scenarios, authorizing a discount could result in early repayment ultimately being worth much less to the federal government compared with repayment of the full outstanding amount. For example, in 2012, the Congressional Budget Office analyzed proposed legislation that would have expanded early repayment authority to all irrigation districts in the Central Valley Project. according to that analysis, the proposed legislation would have permitted early repayments at levels approximating the present value, by applying the 20-year Treasury rate, of the irrigation districts' outstanding repayment obligations. The Congressional Budget Office estimated that if this legislation were enacted and early repayment authority were exercised by the majority of those irrigation districts, it would result in a net loss of $176 million to the government over the long-term. Congressional Budget Office, "Cost Estimate: H.R. 1837 Sacramento-San Joaquin Valley Water Reliability Act" (Washington, D.C.: Feb. 27, 2012). ownership limits and are charged full-cost water rates on land irrigated in excess of the amount subject to the pricing limitations. Full-cost water rates include interest charges on the landholders' remaining allocated portion of construction costs and can be substantially higher than the subsidized rates charged for acres under the statutory pricing limitations. For instance, officials in one irrigation district told us their full-cost water rates were roughly double and, in another district, about 30 times higher than the subsidized rates. Once irrigation districts or landholders have repaid their construction cost obligations in full-- whether early, or as scheduled by the terms of their contract--the landholders are no longer subject to these acreage and pricing limitations. As a result, landholders may be able to receive project water, to the extent it is available, on additional land or at a subsidized rate once they have fulfilled their repayment obligations. Reclamation officials told us that any foregone income in future years from full-cost water rates would reduce the return to the federal government associated with early repayment. According to Reclamation officials, the agency collected approximately $146.8 million from January 1988 through December 2013 in full-cost water rates from landholders who were irrigating land in excess of the amount subject to the statutory pricing limitations. Thus, if early repayment authority were exercised by those landholders, then the loss of full-cost water rate revenue in future years would at least partially offset the return to the government from early repayments. In addition, Reclamation officials and others we interviewed stated that early repayment would allow for the possibility of larger entities receiving project water at subsidized rates on larger landholdings sooner than intended under reclamation law--one of Reclamation's early goals in developing water projects throughout the western United States was to promote farming opportunities for small, family-owned operations. Other irrigation district officials told us, however, that even though their districts had landholders with excess acres who may be interested in early repayment, the elimination of acreage and pricing limitations would not likely serve as an incentive for the districts as a whole to repay early. For example, one official stated that her district would have to finance a loan to make early repayments on a lump-sum or accelerated basis, which did not make sense compared with making annual, interest-free repayments under the terms of the contract. Early repayment also eliminates annual reporting requirements for landholders earlier than if repayment was made by the due date specified in the contract. Until their construction cost obligations are repaid, landholders are subject to annual reporting requirements to ensure landholders' compliance with acreage and pricing limitations. According to irrigation district officials and landholders we interviewed, completing these reports can be difficult and time-consuming for landholders and for districts, which must complete a form for Reclamation summarizing the reports submitted by landholders. For example, one landholder in Oregon said that it repaid its construction cost obligation early, after receiving statutory authority to do so in 2005, in part to eliminate the need to submit the annual reports. On the other hand, some irrigation district officials told us that while the reporting requirements were burdensome, eliminating the reporting requirements would not be a sufficient reason for the district to repay early, if granted the authority, without other incentives. Early repayment potentially provides irrigation districts with a greater assurance of receiving available project water on a permanent basis. The right to water is generally determined by state law--which varies by state and can be complex--so repayment and water service contracts do not provide a right to water under state law. Under federal reclamation law, however, these contracts give irrigation districts assurance of a specified amount of water from the project's available water supply, which becomes permanent upon completion of repayment of the construction costs Securing a permanent right to project water in allocated to the districts.a geographic area where water supply is uncertain was a key motivation in the Central Valley Project irrigation districts' desire to convert their contracts and repay their construction costs early, according to an attorney who represented those districts in pursuing and receiving such authority in 2009. In addition, for irrigation districts that receive and exercise authority to convert their water service contracts to repayment contracts and repay early, the need for Reclamation and the districts to renegotiate water service contracts when they expire is eliminated, according to agency officials. Reclamation officials and the attorney representing the Central Valley Project irrigation districts told us that renegotiating the terms of water service contracts can be time-consuming and unpredictable for landholders and their agricultural businesses and, therefore, repayment contracts may be preferable over water service contracts. On the other hand, the agency's flexibility for responding to water shortages, drought, and climate change-related issues could be limited as a result of fixing the amount of water an irrigation district receives under a repayment contract in perpetuity, according to a statement made by Reclamation's Commissioner in 2011. With population, agricultural production, and development in the West projected to continue to increase, Reclamation may be called upon to modify or expand existing capacity for water storage or delivery. In considering potential new work and affiliated funding arrangements, Congress, as well as water users and the public, may benefit from evaluating information on past water projects. In particular, Congress and others may want to assess information on how costs were allocated and how funding and repayment arrangements were established among various water users in the past. Reclamation compiles such information in the repayment statements it prepares annually for each water project with outstanding repayment obligations. However, Reclamation does not make it readily known to the public that this information is available upon request. By further disseminating information to the public that construction cost and repayment data are available, Reclamation may increase interested parties' opportunities to obtain cost and repayment information, and Reclamation would promote transparency and potentially increase informed participation by the public. This, in turn, could further enable Congress, water users, and the public to assess past funding arrangements and enhance their ability to make informed decisions for funding potential new work, such as to expand water storage capacity. Consistent with Reclamation's policy to make construction cost repayment statements available to the public upon request, and to promote transparency and increase informed participation by Congress, water users, and the public, the Secretary of the Interior should direct Reclamation to better promote to the public that annual statements of project construction cost and repayment are available. We provided a draft of this report to the Department of the Interior for review and comment. On August 13, 2014, the department's audit liaison indicated in an e-mail that the department concurred with the recommendation and did not have any other comments. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the appropriate congressional committees, the Secretary of the Interior, 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 members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. This appendix provides information on the scope of our work and the methodology used for the following objectives: examine (1) the extent to which Reclamation collects and reports information on water project construction costs and the status of repayment by irrigation districts and (2) the extent to which irrigation districts can repay their allocated water project construction costs early and the implications of early repayment. In conducting our work, we reviewed the Reclamation Act of 1902, the Reclamation Project Act of 1939, the Reclamation Reform Act of 1982, and other relevant laws. We reviewed Reclamation policies and directives and other Reclamation documents on water project construction cost allocation, repayment, and early repayment of construction costs. We also reviewed our July 1996 report on the status of construction cost allocations and repayments. In addition, we conducted interviews with knowledgeable Reclamation officials at the agency's central office in Denver, Colorado, and all five regional offices (Great Plains, Lower Colorado, Mid-Pacific, Pacific Northwest, and Upper Colorado) about issues related to the status of repayment and early repayment. For our interviews with officials from each of the regional offices, we developed a set list of open-ended questions to obtain information and documentation on information they maintain on water project construction cost allocation and repayment information and the use and availability to the public of this information, as well as the opportunities for and potential implications of early repayment, among other things. To determine the extent to which Reclamation collects and reports information on water project construction costs and the status of repayment by irrigation districts, we analyzed Reclamation's Statements of Project Construction Cost and Repayment (repayment statements) for fiscal year 2012, the most current data available at the time of our review. Reclamation provided repayment statements for 76 projects with outstanding repayment obligations with irrigation districts, and provided repayment statements for 43 of 54 projects with irrigation that no longer had outstanding obligations with irrigation districts (Reclamation policy calls for repayment statements to be prepared annually for all water projects with construction cost repayments outstanding. This policy does not apply to water projects where all water users, including irrigation districts, have repaid their construction cost allocations, and per Reclamation policy, preparing repayment statements for these projects is optional). The data contained in repayment statements are generally tied The repayment statements are prepared to audited accounting records.annually by the regional offices for each water project that has construction costs allocated to one or more water users with an outstanding repayment obligation. The repayment statements contain information on total costs for the water project, including construction costs incurred as of the end of the fiscal year; estimated future construction costs, and other costs that Reclamation includes in its repayment analysis for construction costs, such as capitalized operation and maintenance costs; the allocation of construction costs among project purposes, including irrigation; and the status of repayment for costs allocated to each project purpose, including repayment realized, anticipated future repayment, and any financial assistance granted to irrigation districts, such as credits, which relieve water users from a portion of their allocated repayment obligations. To analyze and interpret the data contained in the repayment statements, we relied, in part, on the relevant financial standards section on repayment statements in the Reclamation Manual, which provides guidance on the content and format for repayment statements. When the data in a repayment statement included estimated future construction costs, we subtracted these estimated costs from the projects' total costs because such costs have not yet been and, in some cases, may never be, incurred. To assess the reliability of Reclamation repayment data, we took steps such as reviewing the guidance for developing repayment statements in the Reclamation Manual; interviewing Reclamation officials from all five regional offices who were involved in preparing the repayment statements, as well as officials from Reclamation's central finance office in Denver; identifying the sources of data included in the repayment statements and the agency's review process; and following up with Reclamation officials to obtain clarifying information in instances where we identified discrepancies in the data. On the basis of these steps, we found the repayment statements to be sufficiently reliable for the purposes of this report. We reviewed information from each of the five regional offices on the number of repayment and water service contracts in their respective regions where irrigation districts were making repayments on their allocated construction cost obligations, as of July 2014, for the Lower Colorado, Mid-Pacific, Pacific Northwest and Upper Colorado regions and, as of November 2013, for the Great Plains region. To assess the reliability of the data provided by the regions concerning the number of contracts of each type, we asked Reclamation officials a standard set of questions concerning the reliability of the data and reviewed corresponding documentation, and we found the data sufficiently reliable for the purposes of our report. We also reviewed Reclamation's policies and practices on making cost allocation and repayment information-- specifically, its repayment statements--available to the public, as well as the Office of Management and Budget's open government directive and associated documentation related to ensuring the transparency of government information to the public. To examine the extent to which irrigation districts can repay their allocated water project construction costs early, and the implications of early repayment, we reviewed applicable laws, policies, and other relevant documents. We also collected data from Reclamation's regional offices on irrigation districts that have contractual or statutory authority to repay early, districts that have exercised such authority, and the dates and amounts of early repayments through December 2013. To assess the reliability of the data provided by Reclamation concerning early repayment, we asked Reclamation officials a standard set of questions concerning the reliability of the data and reviewed corresponding documentation, and we found the data sufficiently reliable for the purposes of our report. In addition, we conducted legal research to identify statutes that provide irrigation districts with the authority to repay their construction cost obligations early. To help identify the implications of early repayment, we reviewed the Reclamation Reform Act of 1982 and other laws and regulations that establish acreage and pricing limitations and reporting requirements for landholders until their repayment obligations are fulfilled. We also reviewed testimonies and a statement for the record by Reclamation on draft legislation that would have authorized early repayment for additional irrigation districts, and we reviewed Congressional Budget Office cost estimates of various bills since 2005 that proposed expanding early repayment authority to certain irrigation districts. For both objectives, we conducted interviews with officials from a nonprobability sample of eight irrigation districts and two landholders from five water projects located in California, Nebraska, Oregon, and Wyoming to collect information on the repayment of construction costs and related issues. We selected these irrigation districts and landholders using criteria such as the type of contracts the districts held with Reclamation (repayment or water service contracts), their status of repayment, and whether or not the districts had early repayment authority. We also interviewed a nonprobability sample of nine individuals knowledgeable about Reclamation water projects on the status of repayments, early repayment authority, or both. Using the "snowball sampling" technique, we identified these individuals by asking for referrals to others knowledgeable about Reclamation water projects and their repayment from others whom we had previously interviewed. Specifically, we interviewed staff from the Congressional Research Service and Congressional Budget Office, attorneys who have represented irrigation districts pursuing enactment of legislation authorizing early repayment, an attorney who has represented environmental organizations in litigation concerning Reclamation water projects, an environmental consultant, former congressional staff, and officials from the Family Farm Alliance and Taxpayers for Common Sense. We conducted this performance audit from June 2013 to September 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 following two tables provide information on construction cost allocations by project purpose (table 3) and repayment status of construction costs allocated to irrigation (table 4) for 54 Bureau of Reclamation water projects for which irrigation districts have fulfilled their repayment obligations, as of the end of fiscal year 2012. The following two tables provide information on construction cost allocations by project purpose (table 5) and repayment status of construction costs allocated to irrigation (table 6) for 76 Bureau of Reclamation water projects with ongoing repayments by irrigation districts, as of the end of fiscal year 2012. The following two tables provide information on irrigation districts with contractual authority for landholders to repay their outstanding construction cost obligations early, and early repayments made (table 7) and irrigation districts with statutory authority for the districts or landholders to repay their outstanding construction cost obligations early, and early repayments made (table 8), as of December 2013. In addition to the individual named above, Alyssa M. Hundrup (Assistant Director), Josey Ballenger, Marya Link, and Jeanette Soares made key contributions to this report. Stephen Brown, Cindy Gilbert, Paul Kinney, and Alison O'Neill also provided assistance.	Since 1902, Reclamation has financed and built water projects to provide water for irrigation and various other uses in 17 western states. The costs to construct the water projects including irrigation as a project purpose--a combined total of more than $20 billion--were primarily financed by the federal government, but irrigation districts and other water users that receive project water are obligated to repay the government for their allocated share of construction costs. Reclamation typically enters into multiyear contracts with irrigation districts that establish water delivery and repayment of their share of construction costs over time. GAO was asked to provide information on the status of irrigation repayments. This report examines (1) the extent to which Reclamation collects and reports information on construction costs and the status of repayment and (2) the extent to which irrigation districts can repay early and the implications of early repayment. GAO reviewed laws and policies; fiscal year 2012 construction cost repayment and early repayment data; and interviewed Reclamation officials and nonprobability samples of eight irrigation districts and nine individuals knowledgeable about water projects. The Department of the Interior's Bureau of Reclamation collects information on water project construction costs and the status of repayment by irrigation districts--entities that have entered into contracts with the agency to receive project water for irrigation purposes--but has not publicly reported repayment information since the 1980s. Reclamation's data on water project construction cost repayments indicate that, of the $6.4 billion in costs allocated to irrigation as of the end of fiscal year 2012, $1.6 billion remains outstanding. The remaining $4.8 billion has been repaid by irrigation districts or through other revenue sources or will be provided in financial assistance to the districts. Reclamation's policy is to make the statements it prepares annually on repayment available to the public upon request, but the agency does not make it readily known to the public that it prepares these statements or that they are available. GAO interviewed individuals knowledgeable of Reclamation water projects who indicated that this information would be useful for their work, such as in considering funding arrangements for the expansion of water projects; some individuals were not aware that Reclamation prepares repayment statements annually, or that the agency would make them available upon request. By more widely disseminating information to the public that construction cost and repayment data are available, Reclamation may increase interested parties' opportunities to obtain cost and repayment information. This, in turn, could further enable Congress, water users, and the public to assess past funding arrangements and enhance their ability to make informed decisions for funding potential new work, such as to expand water storage capacity. The authority for irrigation districts--or for landholders who own or lease land for agricultural purposes within those districts--to repay their allocated share of construction costs early is limited to a small number of districts, and its use has various financial and other implications. Early repayment authority allows irrigation districts or landholders to repay their total outstanding repayment obligations in advance of the date specified in the districts' contracts. As of December 2013, 87 irrigation districts--representing about 15 percent of all districts with contracts--had authority for the district or its landholders to repay early. Of those authorized, 69 irrigation districts either repaid early, or had some landholders who repaid early, with those payments totaling more than $238.9 million. GAO found that early repayment's effect on the financial return to the federal government largely depends on whether a discount may be authorized, such as calculating the present value of the outstanding repayment obligation to determine the amount to be repaid early, and the size of that discount. If no discounts are authorized, any early repayments that occur would be worth more to the government because the repayments do not bear interest. In addition, early repayment accelerates the elimination of certain restrictions and requirements for landholders that are in place until their repayment obligation is fulfilled. For example, once landholders have fully repaid their construction cost obligations, they are no longer subject to acreage limits on the amount of land they can own or lease for agricultural purposes and irrigate with project water and may be able to receive project water on additional land. GAO recommends that Reclamation better promote to the public that information on water projects' construction costs and repayment status is available. The Department of the Interior concurred with the recommendation.	8,073	914
IT can enrich people's lives and improve organizational performance. For example, during the last two decades, the Internet has matured from being a means for academics and scientists to communicate with each other to being a national resource where citizens can interact with their government in many ways, including receiving services and supplying and obtaining information. While investments in IT have the potential to improve lives and organizations, some federally funded IT projects can--and have-- become risky, costly, unproductive mistakes. As part of a comprehensive effort to increase the operational efficiency of federal technology assets and deliver greater value to the American taxpayer, federal agencies are shifting to the deployment of cloud services. Cloud computing takes advantage of several broad evolutionary trends in IT, including the use of virtualization. According to NIST, cloud computing is a means "for enabling convenient, on-demand network access to a shared pool of configurable computing resources that can be rapidly provisioned and released with minimal management effort or service provider interaction." NIST also states that an application should possess five essential characteristics to be considered cloud computing: on-demand self service, broad network access, resource pooling, rapid elasticity, and measured service.applications are network-based and scalable on demand. Essentially, cloud computing According to OMB, cloud computing brings a wide range of benefits: Economical: cloud computing is a pay-as-you-go approach to IT, in which a low initial investment is required to begin, and additional investment is needed only as system use increases. Flexible: IT departments that anticipate fluctuations in user demand no longer need to scramble for additional hardware and software. With cloud computing, they can add or subtract capacity quickly and easily. Fast: cloud computing eliminates long procurement and certification processes, while providing a near-limitless selection of services. According to NIST, cloud computing offers three service models: Infrastructure as a service--the service provider delivers and manages the basic computing infrastructure of servers, software, storage, and network equipment upon which a platform (i.e., operating system and programming tools and services) to develop and execute applications can be developed by the consumer. Platform as a service--the service provider delivers and manages the underlying infrastructure (i.e., servers, software, storage, and network equipment), as well as the platform (i.e., operating system, and programming tools and services) upon which the consumer can create applications using programming tools supported by the service provider or other sources. Software as a service--the service provider delivers one or more applications and the computational resources and underlying infrastructure to run them for use on demand as a turnkey service. As can be seen in figure 1 below, each service model offers unique functionality, with consumer control of the environment decreasing from infrastructure to platform to software. NIST has also defined four deployment models for providing cloud services: private, community, public, and hybrid. In a private cloud, the service is set up specifically for one organization, although there may be multiple customers within that organization and the cloud may exist on or off the customer's premises. In a community cloud, the service is set up for organizations with similar requirements. The cloud may be managed by the organizations or a third party and may exist on or off the organization's premises. A public cloud is available to the general public and is owned and operated by the service provider. A hybrid cloud is a composite of two or more of the above deployment models (private, community, or public) that are bound together by standardized or proprietary technology that enables data and application portability. According to federal guidance, these deployment models determine the number of consumers (tenancy), and the nature of other consumers' data that may be present in a cloud environment. A public cloud should not allow a consumer to know or control other consumers of a cloud service provider's environment. However, a private cloud can allow for ultimate control in selecting who has access to a cloud environment. Community clouds and hybrid clouds allow for a mixed degree of control and knowledge of other consumers. Additionally, the cost for cloud services typically increases as control over other consumers and knowledge of these consumers increase. According to OMB, the federal government needs to shift from building custom systems to adopting cloud technologies and shared solutions, which will improve the government's operational efficiencies and result in substantial cost savings. To achieve these benefits, OMB required agencies to immediately shift to a "Cloud First" policy and increase their use of available cloud and shared services whenever a secure, reliable, and cost-effective cloud solution exists. In order to accelerate the adoption of cloud computing solutions across the government, OMB made cloud computing an integral part of its 25 Point Implementation Plan to Reform Federal Information Technology Management. The plan specified six major goals: align the acquisition process with the technology cycle, align the budget process with the technology cycle, and apply "light technology" and shared solutions.strengthen program management, streamline governance and improve accountability, increase engagement with industry, To achieve these goals, the plan outlines 25 action items, such as completing plans to consolidate 800 data centers by 2015 and developing a governmentwide strategy to hasten the adoption of cloud computing. To accelerate the shift to cloud computing, OMB required agencies to identify, plan, and fully migrate three services to a cloud solution by June 2012. In February 2011, OMB issued the Federal Cloud Computing Strategy, as called for in its 25-Point Plan. The strategy provides definitions of cloud computing; benefits of cloud computing, such as accelerating data center consolidations; a decision framework for migrating services to a cloud environment; case studies to support agencies' migration to cloud computing; and roles and responsibilities for federal agencies. For example, the strategy states that NIST's role is to lead and collaborate with federal, state, and local government agency CIOs, private sector experts, and international bodies to identify and prioritize cloud computing standards and guidance. Further, the strategy notes that an estimated $20 billion of the federal government's $80 billion in annual IT spending is a potential target for migration to cloud computing solutions. In a December 2011 memo, OMB established the Federal Risk and Authorization Management Program (FedRAMP), a governmentwide program to provide joint authorizations and continuous security monitoring services for all federal agencies. Among other things, the memo required the General Services Administration's (GSA) FedRAMP program management office to publish a concept of operations, which was completed in February 2012. The concept of operations states that FedRAMP is to: ensure that cloud-based services have adequate information security; eliminate the duplication of effort and reduce risk management costs; enable rapid and cost-effective procurement of information systems/service for federal agencies. Further, the FedRAMP program is to assess and grant cloud service providers provisional authorization to provide cloud services governmentwide. Agencies can leverage the provisional authorization to minimize certification and accreditation processes. FedRAMP reached initial operational capabilities in June 2012 and is to be fully operational in fiscal year 2014. Consistent with OMB's Cloud Computing Strategy, NIST has issued several key publications related to standards and security. For example: NIST Special Publication (SP) 500-291, NIST Cloud Computing Standards Roadmap identifies current standards, standards gaps, and standardization priorities. For example, it describes the status of cloud computing standards for interoperability, portability, and security. NIST SP 500-292, NIST Cloud Computing Reference Architecture presents the NIST Cloud Computing Reference Architecture and Taxonomy to communicate the components and offerings of cloud computing. The architecture is presented in two parts: (1) a complete overview of roles; and (2) the necessary components for managing and providing cloud services, such as service deployment, service orchestration, cloud service management, security and privacy. NIST SP 800-144, Guidelines on Security and Privacy in Public Cloud Computing provides an overview of public cloud computing and the security and privacy considerations involved. Specifically, the document describes the threats, technology risks, and safeguards surrounding public cloud environments, and their treatment. NIST SP 800-145, The NIST Definition of Cloud Computing defines cloud computing in terms of essential characteristics, service models, and deployment models. NIST is also working on the Cloud Computing Technology Roadmap (SP 500-293), which is to describe cloud computing security challenges and high-priority gaps for which new or revised standards, guidance, and technology need to be developed.plans to publish the roadmap by the end of 2012. According to NIST officials, NIST In February 2012, the CIO Council and the Chief Acquisition Officers Council issued guidance for acquiring IT in a cloud environment. The guidance identifies 10 key areas unique to federal agencies' procurement of cloud services that require improved collaboration and alignment during the contracting process. The 10 areas are: Selecting a cloud service--choosing the appropriate cloud service and deployment model. Cloud service provider and end-user agreements--terms of service, and service provider and end-user agreements need to be fully integrated into cloud contacts. Service-level agreements--agreements need to define performance with clear terms and definitions, demonstrate how performance is being measured, and identify what enforcement mechanisms are in place to ensure the conditions are met. Roles and responsibilities--cloud service provider, agency, and integrator roles and responsibilities should be clearly defined. Standards--NIST's cloud reference architecture should be used for cloud procurements. Security--requirements for the service provider to maintain the security and integrity of the agency data must be clearly defined. Privacy--privacy risks and responsibilities need to be addressed in the contract between federal agencies and service providers. E-discovery--service providers need to be aware of the need to locate, preserve, collect, process, review, and produce electronically stored information in the event of civil litigation or investigation. Freedom of Information Act (FOIA)--all relevant data must be available for appropriate handling under the act. E-records--agencies need to ensure that service providers understand the federal agencies obligations under the Federal Records Act. More recently in May 2012, OMB issued its shared services strategy, as According to OMB, this strategy is to help called for in its 25-Point Plan.federal agencies (1) improve return on investment across the agency's IT portfolio, (2) close productivity gaps by implementing integrated governance processes and innovative IT service solutions, and (3) increase communications with stakeholders to ensure transparency, accountability, and collaboration in the full life cycle of IT shared services. To facilitate these improvements, the strategy provides definitions, concepts, and critical success factors to be considered when implementing IT shared services; an implementation strategy; and a federal governance structure to support federal agencies' shared services development and implementation efforts. In May 2010, we reported on the efforts of multiple agencies to ensure the We noted that while OMB, security of governmentwide cloud computing.GSA, and NIST had initiated efforts to ensure secure cloud computing, significant work remained to be completed. For example, OMB had not yet finished a cloud computing strategy; GSA had begun a procurement for expanding cloud computing services, but had not yet developed specific plans for establishing a shared information security assessment and authorization process; and NIST had not yet issued cloud-specific security guidance. We made several recommendations to address these issues. Specifically, we recommended that OMB establish milestones to complete a strategy for federal cloud computing and ensure it addressed information security challenges. These include having a process to assess vendor compliance with government information security requirements and the division of information security responsibilities between the customer and vendor. OMB subsequently published a strategy in February 2011 that addressed the importance of information security when using cloud computing, but did not fully address several key challenges confronting agencies, such as the appropriate use of attestation standards for control assessments of cloud computing service providers, and the division of information security-related responsibilities between customer and provider. We also recommended that GSA consider security in its procurement for cloud services, including consideration of a shared assessment and authorization process. GSA has since developed its FedRAMP program, an assessment and authorization process for systems shared among federal agencies. Finally, we recommended that NIST issue guidance specific to cloud computing security. As noted previously, NIST has since issued multiple publications that address such guidance. More recently, in October 2011, we testified that 22 of 24 major federal agencies reported that they were either concerned or very concerned about the potential information security risks associated with cloud computing. These risks include being dependent on the security practices and assurances of vendors and the sharing of computing resources. We stated that these risks may vary based on the cloud deployment model. Private clouds, whereby the service is set up specifically for one organization, may have a lower threat exposure than public clouds, whereby the service is available to any paying customer. Evaluating this risk requires an examination of the specific security controls in place for the cloud's implementation. We also reported that the Federal CIO Council had established a cloud computing Executive Steering Committee to promote the use of cloud computing in the federal government, with technical and administrative support provided by GSA's cloud computing program management office, but had not finalized key processes or guidance. The subgroup had worked with its members to define interagency security requirements for cloud systems and services and related information security controls. Additionally, in April 2012, we reported that more needed to be done to implement OMB's 25-Point Plan and measure its results. Among other things, we reported that of the 10 key action items that we reviewed, 3 had been completed and 7 had been partially completed by December 2011. In particular, OMB and agencies' cloud-related efforts only partially addressed requirements. Specifically, agencies' plans were missing key elements, such as a discussion of needed resources, migration schedules, or plans for retiring legacy systems. As a result, we recommended, among other things, that the Secretaries of Homeland Security, Veterans Affairs, and the Attorney General direct their respective CIOs to complete elements missing from the agencies' plans for migrating services to a cloud computing environment. In comments on a draft of this report, each of the agencies generally agreed with our recommendations. OMB requires federal agencies to immediately shift to a "Cloud First" policy by implementing cloud-based solutions whenever a secure, reliable, and cost-effective cloud option exists. To accelerate the shift, OMB required agencies, by February 2011, to identify three IT services to be migrated to a cloud solution and develop a plan for each of the three services, migrate one of the services to a cloud-based solution by December 2011, and migrate the remaining services by June 2012. According to OMB's 25-Point Plan, migrating these services was intended to build capabilities and momentum in the federal agencies, and to act as a catalyst for agencies to migrate additional services to cloud-based solutions in order to improve the government's operational efficiency and to reduce operating costs. Each of the seven agencies we reviewed has made progress implementing OMB's "Cloud First" policy. Each agency has incorporated cloud computing requirements into its policies and processes. For example, the Department of State (State) incorporated into its plan a review of its IT investment portfolio to identify candidates for cloud solutions. Similarly, the Department of Agriculture (USDA) identified cloud computing as a high-priority initiative and adopted the "Cloud First" policy of migrating existing, or offering new, IT services to a cloud-based environment. The agency is also developing and deploying an infrastructure to offer cloud-based services to other government departments and agencies. Each agency identified at least three services by February 2011 to implement in a cloud environment and reported that the agency had implemented at least one cloud service by December 2011. Agencies selected the services based on a mix of criteria, including (1) services that had already been implemented in a cloud environment or were in the process, (2) risk to mission functionality, and (3) maturity of the cloud solutions. In selecting the services, most agencies chose existing services, while others developed and implemented new services. Specifically, of the 21 services selected, 13 were migrations of existing functionality and 8 were new services. The most commonly identified services were e-mail, website hosting, and collaboration services. Further, five agencies reported implementing more than one cloud service by December 2011, with four agencies reporting to have implemented cloud-based services prior to December 2010, which was when OMB issued its 25-Point Plan. In addition, two of the seven agencies do not plan to meet OMB's deadline to implement three cloud solutions by June 2012. Specifically, USDA plans to complete its Document Management and Correspondence Tracking system in September 2012 and the Small Business Administration (SBA) plans to complete one of its services in August 2012 and another in December 2012. While DHS does not plan to implement four of its services until after June 2012, officials reported that it implemented four services by December 2011 and two services by June 2012. See figure 2 for the cloud-based services by agency and service type; and reported planned and implementation dates. While each agency submitted plans to OMB for its selected services, all but 1 of the 20 plans submitted to OMB were missing one or more key required elements. In its 25-Point Plan, OMB required agencies to prepare a plan for implementing each cloud-based service and retiring the associated legacy system. According to OMB, each plan is to contain, among other things, estimated costs of the service, major milestones, and performance goals. However, only 1 plan fully met the key elements as required. For example, of the 20 plans, 7 did not include estimated costs, 5 did not include major milestones, and 11 did not include performance goals. Further, none of the 14 projects migrating existing services included plans to retire the associated legacy systems. See table 1 for our assessment of key elements of the agencies' plans. While agencies did not include all of these elements in the plans provided to OMB, three agencies later reported that they had estimated costs for five of the seven services. According to agency officials, information was missing because it was not available at the time the plans were submitted to OMB or it was deemed not to be relevant. While developing milestones for services already implemented would appear to add little value, it remains important that agencies develop cost estimates, performance goals, and plans to retire associated legacy systems. Doing so would enable agencies to measure performance and determine whether the cloud-based solution is cost effective, and ensure that savings generated from retiring systems are realized. Additionally, each of the agencies identified opportunities for future cloud implementations. For example, GSA officials stated that GSA is considering migrating its storage and help desk services to the cloud, while State officials stated that the agency is considering moving its development environment to a cloud solution. Further, USDA is currently offering a portfolio of cloud services to other agencies through its National Information Technology Center, which, according to USDA officials, is working to provide competitive and scalable services to federal agencies. As agencies implement these and other cloud-based solutions, identifying key information--cost estimates, milestones, performance goals, and legacy system retirement plans--will also be essential in determining whether their activities constitute a positive return on investment, and therefore, whether the benefits of their activities will be fully realized. In transitioning to cloud-based solutions, officials in the agencies we reviewed stated that they encountered challenges that may impede their ability to realize the full benefits of cloud-based solutions: Meeting federal security requirements: Cloud vendors may not be familiar with security requirements that are unique to government agencies, such as continuous monitoring and maintaining an inventory of systems. For example, State officials described their ability to monitor their systems in real time, which they said cloud service providers were unable to match. Treasury officials also explained that the Federal Information Security Management Act's requirement of maintaining a physical inventory is challenging in a cloud environment because the agency does not have insight into the provider's infrastructure and assets. Obtaining guidance: Existing federal guidance for using cloud services may be insufficient or incomplete. Agencies cited a number of areas where additional guidance is needed such as purchasing commodity IT and assessing Federal Information Security Management Act security levels.Plan required agencies to move to cloud-based solutions before guidance on how to implement it was available. As a result, some HHS operating divisions were reluctant to move to a cloud environment. In addition, Treasury officials noted confusion over NIST definitions of the cloud deployment models, but noted that recent NIST guidance has been more stable. For example, an HHS official noted that the 25-Point Acquiring knowledge and expertise: Agencies may not have the necessary tools or resources, such as expertise among staff, to implement cloud solutions. DHS officials explained that delivering cloud services without direct knowledge of the technologies has been difficult. Similarly, an HHS official stated that teaching their staff an entirely new set of processes and tools--such as monitoring performance in a cloud environment--has been a challenge. Certifying and accrediting vendors: Agencies may not have a mechanism for certifying that vendors meet standards for security, in part because the Federal Risk and Authorization Management Program (FedRAMP) had not yet reached initial operational capabilities. For example, GSA officials stated that the process to certify Google to meet government standards for their migration to cloud-based e-mail was a challenge. They explained that, contrary to traditional computing solutions, agencies must certify an entire cloud vendor's infrastructure. In Google's case, it took GSA more than a year to certify more than 200 Google employees and the entire organization's infrastructure (including hundreds of thousands of servers) before GSA could use Google's service. Ensuring data portability and interoperability: To preserve their ability to change vendors in the future, agencies may attempt to avoid platforms or technologies that "lock" customers into a particular product. For example, a Treasury official explained that it is challenging to separate from a vendor, in part due to a lack of visibility into the vendor's infrastructure and data. Overcoming cultural barriers: Agency culture may act as an obstacle to implementing cloud solutions. For example, a State official explained that public leaks of sensitive information have put the agency on a more risk-averse footing, which makes it more reluctant to migrate to a cloud solution. Procuring services on a consumption (on-demand) basis: Because of the on-demand, scalable nature of cloud services, it can be difficult to define specific quantities and costs. These uncertainties make contracting and budgeting difficult due to the fluctuating costs associated with scalable and incremental cloud service procurements. For example, HHS officials explained that it is difficult to budget for a service that could consume several months of budget in a few days of heavy use. Recently issued federal guidance and initiatives recognize many of these challenges. For example, OMB's Federal Cloud Computing Strategy recognizes the challenge of data portability and interoperability and notes that agencies should consider the availability of technical standards for cloud interfaces that reduce the risk of vendor lock-in. Similarly, several NIST publications--such as their Guidelines on Security and Privacy in Public Cloud Computing and Cloud Computing Reference Architecture-- address portability, interoperability, and security standards, and NIST plans to issue additional guidance on cloud computing security, among other things. In addition, the FedRAMP program is to create processes for security authorizations and allow agencies to leverage security authorizations on a governmentwide basis in an effort to streamline the certification and accreditation processes. Selected agencies have made progress implementing OMB's "Cloud First" policy. In particular, agencies have incorporated cloud solutions into their IT and investment management policies and processes, and implemented one or more services in a cloud environment by December 2011. Two agencies do not plan to meet OMB's requirement to fully implement three services to a cloud environment by June 2012, but plan to do so by year end. Further, agencies' plans for implementing these services were often missing key information, such as performance goals or legacy system retirement plans. Without complete information, agencies are not in a position to know whether the implementation of the selected services was cost-effective and whether the cost savings generated from retiring legacy systems were realized. Going forward, as agencies implement additional cloud-based solutions, it is important that, at a minimum, they develop estimated costs, milestones, performance goals, and plans for retiring relevant legacy systems. Until agencies' cloud implementations are sufficiently planned and relevant systems are retired, the benefits of federal efforts to implement cloud solutions--improved operational efficiencies and reduced costs associated with retiring legacy systems-- may be delayed or not fully realized. Additionally, agencies are facing a series of challenges as they implement cloud solutions. Recent guidance and initiatives may help to mitigate the impact of these challenges. Further, these initiatives may help agencies assess their readiness to implement cloud-based solutions and guide their implementation. To help ensure the success of agencies' implementation of cloud-based solutions, we are recommending that the Secretaries of Agriculture, Health and Human Services, Homeland Security, State, and the Treasury; and the Administrators of the General Services Administration and Small Business Administration direct their respective CIOs to take the following two actions: establish estimated costs, performance goals, and plans to retire associated legacy systems for each cloud-based service discussed in this report, as applicable; and develop, at a minimum, estimated costs, milestones, performance goals, and plans for retiring legacy systems, as applicable, for planned additional cloud-based services. We received comments on a draft of this report from all seven departments and agencies in our review, as well as from OMB and NIST. The Departments of Agriculture, Homeland Security, and Treasury, and the GSA agreed with our recommendations; the Department of State agreed with our second recommendation and disagreed with our first recommendation; and HHS and SBA did not agree or disagree with our recommendations. Each agency's comments are discussed in more detail below. In written comments, USDA's Acting CIO stated that the department concurred with the content of the report and had no comments. USDA's written comments are provided in appendix III. In written comments, the Director of DHS's GAO-OIG Liaison Office concurred with our recommendations and described ongoing and planned actions to address them. DHS's written comments are provided in appendix IV. The department also provided technical comments, which we have incorporated in the report as appropriate. In comments provided via e-mail, Treasury's Deputy Assistant Secretary for Information Systems stated that the department agreed with the report and had no comments. In written comments, GSA's Acting Administrator agreed with our findings and recommendations, and stated that GSA will take action as appropriate. GSA's written comments are provided in appendix V. In written comments, State's Chief Financial Officer concurred with our recommendation to develop cost estimates, milestones, performance goals, and plans for retiring legacy systems for its planned cloud-based services. The department stated that it has established an annual requirement for all programs and initiatives to conduct an alternative analysis for retiring legacy systems and using cloud-based services, if feasible. The analysis includes the development of estimated costs, milestones, performance goals, and legacy system retirement plans. The department disagreed with our recommendation to establish cost estimates, performance goals, and plans to retire associated legacy systems for each of the department's cloud-based services discussed in this report, noting that these services did not have associated legacy systems to be retired. In a clarifying conversation, the Division Chief, Bureau of Information Resource Management, explained that one of the two migrated services ran on a virtual machine that hosts many other programs, and the other service transitioned from internally-managed software to a cloud-based service, neither of which required the retirement of an existing system. We acknowledge that a retirement plan may not be applicable for these two services; however, our recommendation is not focused solely on the need for legacy retirement plans, but also identifies the need to establish cost estimates and performance goals for each cloud-based service discussed in this report. As stated in this report, State did not establish performance goals for its electronic library service. Performance goals help to set priorities and drive progress toward key outcomes, thus enabling agencies to measure performance and determine whether the acquired cloud-based service is performing as intended and achieving the desired outcome. Therefore, we believe that the recommendation is applicable and relevant to the department. State's written comments are provided in appendix VI. In comments provided via e-mail, HHS's Office of the Assistant Secretary for Legislation stated that the department did not have any general or technical comments on the report. In comments provided via e-mail, SBA's Office of Congressional and Legislative Affairs stated that the agency had no comments on the draft report and that SBA would work to implement the recommendations. OMB and NIST provided technical comments, which we have incorporated as appropriate. We are sending copies of this report to interested congressional committees; the Secretaries of Agriculture, Commerce, Health and Human Services, Homeland Security, State, and the Treasury; the Administrators of the General Services Administration and Small Business Administration; the Director of the Office of Management and Budget; 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 have any questions about this report, please contact me at (202) 512-9286 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix VII. Our objectives were to (1) assess the progress selected agencies have made in implementing the federal "Cloud First" policy and (2) identify challenges selected agencies are facing as they implement the policy. To address our first objective, we first categorized agencies by the size of their information technology (IT) budget: large (more than $3 billion), medium ($1-3 billion), and small (less than $1 billion), as reported in the Office of Management and Budget's (OMB) fiscal year 2011 Exhibit 53. We then selected agencies from each budget category to include (1) a mix of services (e.g., e-mail, collaboration, and website hosting) that agencies had proposed moving to the cloud and (2) agencies that were cited by OMB as having successfully implemented a cloud solution. Seven agencies were selected: the Departments of Agriculture (USDA), Health and Human Services (HHS), Homeland Security (DHS), State, and the Treasury; and the General Services Administration (GSA) and the Small Business Administration (SBA). We analyzed documentation from the selected agencies, including project plans and progress reports, which described the actions agencies have taken to migrate services to a cloud solution. We also compared agencies' migration plans to OMB's associated guidance to determine any variances. We interviewed officials responsible for implementing the cloud solutions to determine how the services were selected and migrated. Finally, we interviewed officials from the National Institute of Standards and Technology (NIST) and OMB to understand cloud computing standards, requirements, and guidance for federal agencies. To address our second objective, we interviewed officials from each of the selected agencies and asked them to describe challenges associated with their implementation of cloud solutions. Because of the open-ended nature of our discussions with agency officials, we conducted a content analysis of the information we received in order to identify and categorize common challenges. To do so, two team analysts independently reviewed and drafted a series of challenge statements based upon each agency's records. They then worked together to resolve any discrepancies, choosing to report on challenges that were identified by two or more agencies. These common challenges were presented in the report. Finally, we compared the challenges to OMB's Federal Cloud Computing Strategy and the Chief Information Officers Council's and Chief Acquisition Officers Council's cloud computing guidance to determine the extent to which they were addressed. We conducted this performance audit from October 2011 through July 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. This appendix provides information on the services the selected federal agencies chose to migrate to cloud solutions. Specifically, this appendix includes a brief description of the three cloud services, as well as the service model, deployment model, and Federal Information Security Management Act of 2002 (FISMA) security level. Data Center Services: DHS is implementing a private cloud within two of its data centers to enhance sharing sensitive information across the department. The private cloud encompasses multiple services (DHS committed to OMB to move eight data center services to a cloud environment) to improve collaboration and information sharing within the department. Employment Verification: This is a free service that workers can use to confirm employment eligibility in the United States. This service is to provide a mechanism by which DHS can validate identity, and control secure access to employment information. Website Hosting: This service is intended to host DHS public-facing websites and offer an enterprise content delivery capability with 100 percent availability and provide a web content management capability to manage the content across all of the public-facing websites that reside within the public cloud offering. Correspondence Tracking: This service is to allow the Federal Acquisition Service to track communication with Congress from when correspondence is received to the final processing of a response. GSA's E-mail and Collaboration Solution: This cloud solution is to replace GSA's legacy e-mail system, and is to provide faster upgrades and improved customer service to approximately 17,000 users. In addition, this service is a critical component of GSA's mobile technology strategy. IT Power Management Services: This new functionality manages the power settings for more than 17,000 GSA workstations and the Office of the Chief Information Officer's infrastructure servers. GSA estimates that it will reduce the carbon footprint by over 4.8 million carbon pounds a year by turning off computers every evening. Medwatch+: This service is to provide a web portal for reporting public safety information, as well as information by drug and biological product. This effort is comprised of three private cloud services: Safety Reporting, Device Adverse Reporting, and Drugs and Biologics Adverse Reporting. The first two services are already in cloud environments and the third is being migrated. Grants Solutions: This suite of services is available to federal agencies and grantee/applicant organizations. These services cover 14 grant award processes for federal agencies and grantee/applicant organizations through GrantSolutions.gov. Audit Resolution Tracking Management System: This "proof-of- concept" was designed to replace the Administration for Children and Families' legacy Audit Resolution system. This service linked audit reports with the appropriate grantees and was expected to reduce hosting costs. Collaboration Services (Management and Technical Assistance Line of Business): This service is intended to encourage small business owners and small business lenders to take advantage of SBA programs, services, and loan options. Human Resources (Performance Management): This new service is to provide tools for training and performance management while reducing annual infrastructure costs. LAN/WAN, Offsite Vaulting: This is to provide online backup and recovery capabilities; and electronic vaulting for records retention. Electronic Library: This is to provide domestic and overseas agency staff with direct access to information in over 50 databases. The cloud solution is to add additional functionality including online, self-service resource check-in, check-out, and other library requests; regionalized and issue-driven electronic information portals; and an integrated electronic catalog with other online libraries. Program Management: This service is to provide program managers of the Nonproliferation and Disarmament Fund access to agency data from any location. Website Hosting: This is to provide access to keyword-searchable and downloadable government documents, unclassified publications, and databases regarding the history of State, diplomacy, and foreign relations. Business Process Management: This is to automate the Bureau of Engraving and Printing's processes for manufacturing, financial management, acquisition, and supply chains. Document Management and Freedom of Information Act Case Management: This service is to provide the agency capabilities such as electronic capture, store, search/analyze, share, and document management. Website Hosting: This service is to provide a flexible, scalable architecture for the department's main website and four additional websites. Collaboration Services (USDA Connect): This service is to increase interagency interaction, productivity, and efficiency by providing tools such as Profiles, Wikis, Blogs, Communities, Activities, Files, and Bookmarks for over 107,000 USDA users. Document Management and Correspondence Tracking: This is to eliminate redundancy and increased efficiency by consolidating over 20 systems to a single cloud-based customer relationship management environment to organize customer information and track correspondence throughout the agency. E-mail: This is to provide e-mail service for over 120,000 inboxes and enhanced agencywide collaboration through e-mail, instant messaging, web conferencing, and a global address list. In addition to the individual named above, the following staff also made key contributions to the report: Deborah Davis (assistant director), Shannin O'Neill (assistant director), Nancy Glover, Sandra Kerr, Emily Longcore, Andrew Stavisky, and Kevin Walsh.	As part of a comprehensive effort to increase the operational efficiency of federal technology assets, federal agencies are shifting how they deploy IT services. OMB issued a "Cloud First" policy in December 2010 that requires federal agencies to implement cloud-based solutions whenever a secure, reliable, and cost-effective cloud option exists; and to migrate three technology services to a cloud solution by June 2012. Cloud computing provides on-demand access to a shared pool of computing resources; can be provisioned on a scalable basis; and reportedly has the potential to deliver services faster, more efficiently, and at a lower cost than custom-developed systems. GAO was asked to (1) assess the progress selected agencies have made in implementing this policy and (2) identify challenges they are facing in implementing the policy. To do so, GAO (1) selected seven agencies, analyzed agency documentation, and interviewed agency and OMB officials; and (2) identified, assessed, and categorized common challenges. The selected federal agencies have made progress implementing the Office of Management and Budget's (OMB) "Cloud First" policy. Consistent with this policy, each of the seven agencies incorporated cloud computing requirements into their policies and processes. For example, one agency had incorporated a review of its information technology (IT) investment portfolio to identify candidates for a cloud solution into its IT plan. Further, each of the seven agencies met the OMB deadlines to identify three cloud implementations by February 2011 and to implement at least one service by December 2011. However, two agencies do not plan to meet OMB's deadline to implement three services by June 2012, but plan to do so by calendar year end, ranging from August to December. Each of the seven agencies has also identified opportunities for future cloud implementations, such as moving storage and help desk services to a cloud environment. While each of the seven agencies submitted plans to OMB for implementing the cloud solutions, all but one plan were missing key required elements. For example, 7 of the 20 plans did not include estimated costs and none of the plans for services that were to migrate existing functionality to a cloud-based service included plans for retiring or repurposing the associated legacy systems. According to agency officials, this was largely because the information was not available at the time the plans were developed. Until agencies' cloud implementations are sufficiently planned and relevant systems are retired, the benefits of federal efforts to implement cloud solutions--improved operational efficiencies and reduced costs--may be delayed or not fully realized. GAO identified seven common challenges associated with the implementation of OMB's "Cloud First" policy. Common Challenges to Cloud Computing 1. Meeting Federal Security Requirements 2. Obtaining guidance 3. Acquiring knowledge and expertise 4. Certifying and accrediting vendors 5. Ensuring data portability and interoperability 6. Overcoming cultural barriers 7. Procuring services on a consumption (on-demand) basis Recently issued federal guidance and initiatives recognize many of these challenges, such as the National Institute of Standards and Technology standards and guidance, and the General Services Administration's program to assist federal agencies certify and accredit potential cloud service providers. GAO is making recommendations to seven agencies to develop key planning information, such as estimated costs and legacy IT systems' retirement plans for existing and planned services. The agencies generally agreed with GAO's recommendations. State disagreed with one recommendation, noting that legacy retirement plans were not applicable to its existing cloud services. GAO maintains that the recommendation is applicable for reasons discussed in this report.	8,026	748
Leading organizations engage in broad, integrated succession planning and management efforts that focus on strengthening both current and future organizational capacity. As part of this approach, these organizations identify, develop, and select successors who are the right people, with the right skills, at the right time for leadership and other key positions. We identified specific succession planning and management practices that agencies in Australia, Canada, New Zealand, and the United Kingdom are implementing that reflect this broader focus on building organizational capacity. Collectively, these agencies' succession planning and management initiatives demonstrated the following six practices. 1. Receive Active Support of Top Leadership. Effective succession planning and management initiatives have the support and commitment of their organizations' top leadership. In other governments and agencies, to demonstrate its support of succession planning and management, top leadership actively participates in the initiatives. For example, each year the Secretary of the Cabinet, Ontario Public Service's (OPS) top civil servant, convenes and actively participates in a 2-day succession planning and management retreat with the heads of every government ministry. At this retreat, they discuss the anticipated leadership needs across the government as well as the individual status of about 200 high-potential executives who may be able to meet those needs over the next year or two. Top leadership also demonstrates its support of succession planning and management when it regularly uses these programs to develop, place, and promote individuals. The Royal Canadian Mounted Police's (RCMP) senior executive committee regularly uses the agency's succession planning and management programs when making decisions to develop, place, and promote its top 500-600 employees, both officers and civilians. The RCMP's executive committee, consisting of the agency's chief executive, the chief human capital officer, and six other top officials, meets quarterly to discuss the organization's succession needs and to make the specific decisions concerning individual staff necessary to address those needs. Lastly, top leaders demonstrate support by ensuring that their agency's succession planning and management initiatives receive sufficient funding and staff resources necessary to operate effectively and are maintained over time. Such commitment is critical since these initiatives can be expensive because of the emphasis they place on participant development. For example, a senior human capital manager told us that the Chief Executive of the Family Court of Australia (FCA) pledged to earmark funds when he established a multiyear succession planning and management program in 2002 despite predictions of possible budget cuts facing FCA. Similarly, at Statistics Canada--the Canadian federal government's central statistics agency--the Chief Statistician of Canada has set aside a percentage, in this case over 3 percent, of the total agency budget to training and development, thus making resources available for the operation of the agency's four leadership and management development programs. According to a human capital official, this strong support has enabled the level of funding to remain fairly consistent over the past 10 years. 2. Link to Strategic Planning. Leading organizations use succession planning and management as a strategic planning tool that focuses on current and future needs and develops pools of high-potential staff in order to meet the organization's mission over the long term. Succession planning and management initiatives focus on long-term goals, are closely integrated with their strategic plans, and provide a broader perspective. For example, Statistics Canada considers the human capital required to achieve its strategic goals and objectives. During the 2001 strategic planning process, the agency's planning committees received projections showing that a majority of the senior executives then in place would retire by 2010, and the number of qualified assistant directors in the executive development pool was insufficient to replace them. In response, the agency increased the size of the pool and introduced a development program of training, rotation, and mentoring to expedite the development of those already in the pool. For RCMP, succession planning and management is an integral part of the agency's multiyear human capital plan and directly supports its strategic needs. It also provides the RCMP Commissioner and his executive committee with an organizationwide picture of current and developing leadership capacity across the organization's many functional and geographic lines. To achieve this, RCMP constructed a "succession room"--a dedicated room with a graphic representation of current and potential job positions for the organization's top 500-600 employees covering its walls--where the Commissioner and his top executives meet at least four times a year to discuss succession planning and management for the entire organization. 3. Identify Talent from Multiple Organizational Levels, Early in Careers, or with Critical Skills. Effective succession planning and management initiatives identify high-performing employees from multiple levels in the organization and still early in their careers. RCMP has three separate development programs that identify and develop high-potential employees at several organizational levels. For example, beginning at entry level, the Full Potential Program reaches as far down as the front-line constable and identifies and develops individuals, both civilians and officers, who demonstrate the potential to take on a future management role. For more experienced staff, RCMP's Officer Candidate Development Program identifies and prepares individuals for increased leadership and managerial responsibilities and to successfully compete for admission to the officer candidate pool. Finally, RCMP's Senior Executive Development Process helps to identify successors for the organization's senior executive corps by selecting and developing promising officers for potential promotion to the senior executive levels. The United Kingdom's Fast Stream program targets high-potential individuals early in their civil service careers as well as recent college graduates. The program places participants in a series of jobs designed to provide experiences, each of which is linked to strengthening specific competencies required for admission to the Senior Civil Service. According to a senior program official, program participants are typically promoted quickly, attaining midlevel management in an average of 3.5 years, and the Senior Civil Service in about 7 years after that. In addition, leading organizations use succession planning and management to identify and develop knowledge and skills that are critical in the workplace. For example, Transport Canada estimated that 69 percent of its safety and security regulatory employees, including inspectors, are eligible for retirement by 2008. Faced with the urgent need to capture and pass on the inspectors' expertise, judgment, and insights before they retire, the agency embarked on a major knowledge management initiative in 1999 as part of its succession planning and management activities. To assist this knowledge transfer effort, Transport Canada encouraged these inspectors to use human capital flexibilities including preretirement transitional leave, which allows employees to substantially reduce their workweek without reducing pension and benefits payments. The Treasury Board of Canada Secretariat, a federal central management agency, found that besides providing easy access to highly specialized knowledge, this initiative ensures a smooth transition of knowledge from incumbents to successors. 4. Emphasize Developmental Assignments in Addition to Formal Training. Leading succession planning and management initiatives emphasize developmental or "stretch" assignments for high-potential employees in addition to more formal training components. These developmental assignments place staff in new roles or unfamiliar job environments in order to strengthen skills and competencies and broaden their experience. For example, in Canada's Accelerated Executive Development Program (AEXDP), developmental assignments form the cornerstone of efforts to prepare senior executives for top leadership roles in the public service. These assignments help enhance executive competencies by having participants perform work in areas that are unfamiliar or challenging to them in any of a large number of agencies throughout the Canadian Public Service. For example, a participant with a background in policy could develop his or her managerial competencies through an assignment to manage a direct service delivery program in a different agency. One challenge sometimes encountered with developmental assignments in general is that executives and managers resist letting their high-potential staff leave their current positions to move to another organization. Agencies in other countries have developed several approaches to respond to this challenge. For example, once individuals are accepted into Canada's AEXDP, they are employees of, and paid by, the Public Service Commission, a central agency. Officials affiliated with AEXDP told us that not having to pay participants' salaries makes executives more willing to allow talented staff to leave for developmental assignments and fosters a governmentwide, rather than an agency-specific, culture among the AEXDP participants. 5. Address Specific Human Capital Challenges, Such as Diversity, Leadership Capacity, and Retention. Leading organizations stay alert to human capital challenges and respond accordingly. Government agencies around the world, including in the United States, are facing challenges in the demographic makeup and diversity of their senior executives. Achieve a More Diverse Workforce. Leading organizations recognize that diversity can be an organizational strength that contributes to achieving results. For example, the United Kingdom's Cabinet Office created Pathways, a 2-year program that identifies and develops senior managers from ethnic minorities who have the potential to reach the Senior Civil Service within 3 to 5 years. This program is intended to achieve a governmentwide goal to double (from 1.6 percent to 3.2 percent) the representation of ethnic minorities in the Senior Civil Service by 2005. Pathways provides executive coaching, skills training, and the chance for participants to demonstrate their potential and talent through a variety of developmental activities such as projects and short-term work placements. Maintain Leadership Capacity. Both at home and abroad, a large percentage of senior executives will be eligible to retire over the next several years. Canada is using AEXDP to address impending retirements of assistant deputy ministers--one of the most senior executive-level positions in its civil service. As of February 2003, for example, 76 percent of this group are over 50, and approximately 75 percent are eligible to retire between now and 2008. A recent independent evaluation of AEXDP by an outside consulting firm found the program to be successful and concluded that AEXDP participants are promoted in greater numbers than, and at a significantly accelerated rate over, their nonprogram counterparts. Increase Retention of High-Potential Staff. Canada's Office of the Auditor General (OAG) uses succession planning and management to provide an incentive for high-potential employees to stay with the organization and thus preserve future leadership capacity. Specifically, OAG identified increased retention rates of talented employees as one of the goals of the succession planning and management program it established in 2000. Over the program's first 18 months, annualized turnover in OAG's high-potential pool was 6.3 percent compared to 10.5 percent officewide. This official told us that the retention of members of this high-potential pool was key to OAG's efforts to develop future leaders. 6. Facilitate Broader Transformation Efforts. Effective succession planning and management initiatives provide a potentially powerful tool for fostering broader governmentwide or agencywide transformation by selecting and developing leaders and managers who support and champion change. For example, in 1999, the United Kingdom launched a wide- ranging reform program known as Modernising Government, which focused on improving the quality, coordination, and accessibility of the services government offered to its citizens. Beginning in 2000, the United Kingdom's Cabinet Office started on a process that continues today of restructuring the content of its leadership and management development programs to reflect this new emphasis on service delivery. For example, the Top Management Programme supports senior executives in developing behavior and skills for effective and responsive service delivery, and provides the opportunity to discuss and receive expert guidance in topics, tools, and issues associated with the delivery and reform agenda. These programs typically focus on specific areas that have traditionally not been emphasized for executives, such as partnerships with the private sector and risk assessment and management. Preparing future leaders who could help the organization successfully adapt to recent changes in how it delivers services is one of the objectives of the FCA's Leadership, Excellence, Achievement, Progression program. Specifically, over the last few years FCA has placed an increased emphasis on the needs of external stakeholders. This new emphasis is reflected in the leadership capabilities FCA uses when selecting and developing program participants. The program provides participants with a combination of developmental assignments and formal training opportunities that place an emphasis on areas such as project and people management, leadership, and effective change management.	Leading public organizations here and abroad recognize that a more strategic approach to human capital management is essential for change initiatives that are intended to transform their cultures. To that end, organizations are looking for ways to identify and develop the leaders, managers, and workforce necessary to face the array of challenges that will confront government in the 21st century. The Subcommittee on Civil Service and Agency Organization, House Committee on Government Reform, requested GAO to identify how agencies in four countries--Australia, Canada, New Zealand, and the United Kingdom--are adopting a more strategic approach to managing the succession of senior executives and other public sector employees with critical skills. As part of a reexamination of what the federal government should do, how it should do it, and in some cases, who should be doing it, it is important for federal agencies to focus not just on the present but also on future trends and challenges. Succession planning and management can help an organization become what it needs to be, rather than simply to recreate the existing organization. Leading organizations go beyond a succession planning approach that focuses on simply replacing individuals and engage in broad, integrated succession planning and management efforts that focus on strengthening both current and future organizational capacity. As part of this broad approach, these organizations identify, develop, and select successors who are the right people, with the right skills, at the right time for leadership and other key positions. Governmental agencies around the world anticipate the need for leaders and other key employees with the necessary competencies to successfully meet the complex challenges of the 21st century. To this end, the experiences of agencies in Australia, Canada, New Zealand, and the United Kingdom can provide insights to federal agencies, many of which have yet to adopt succession planning and management initiatives that adequately prepare them for the future.	2,570	376
The base of the federal corporate income tax includes net income from business operations (receipts, minus the costs of purchased goods, labor, interest, and other expenses). It also includes net income that corporations earn in the form of interest, dividends, rent, royalties, and realized capital gains. The statutory rate of tax on net corporate income ranges from 15 to 35 percent, depending on the amount of income earned. The United States taxes the worldwide income of domestic corporations, regardless of where the income is earned, with a foreign tax credit for certain taxes paid to other countries. The timing of the tax liability depends on several factors. For example, income earned not by the domestic corporation, but by a foreign subsidiary is generally not taxed until a distribution--such as a dividend--is made to the U.S. corporation. At about $242 billion, corporate income taxes are far smaller than the $845 billion in social insurance taxes and $1.1 trillion in individual income taxes that the Office of Management and Budget (OMB) estimates were paid in fiscal year 2012 to fund the federal government. Figure 1 shows the relative distribution of federal taxes. Figures 1 and 2 show the trend in corporate income tax revenues since 1950. According to tax experts, corporate income tax revenues fell from the 1960s to the early 1980s for several reasons. For example, corporate income became a smaller share of gross domestic product (GDP) during these years, partly due to the fact that corporate debt, and therefore deductible interest payments, increased relative to corporate equity, reducing the tax base. In addition, tax expenditures, such as more generous depreciation rules also grew over that period.1980s, the corporate income tax has accounted for about 6 to 15 percent Since the early of federal revenue. Consequently, although not the largest, it remains an important source of federal revenue. Relative to GDP, the corporate income tax has ranged from a little over 1 percent to just under 2.7 percent during those same years, as shown in figure 2. The Congressional Budget Office (CBO) recently projected that despite the recent uptick, corporate income tax revenue for the next 10 years as a percentage of GDP is expected to stay within this same range. Businesses operating as publicly traded corporations in the United States are required to report the income they earn and the expenses (including taxes) they incur each year according to two separate standards. First, they must produce financial statements in accordance with generally accepted accounting principles (GAAP), based on standards established by the Financial Accounting Standards Board. Income and expense items reported in these statements are commonly known as book items. Second, in general, domestic corporations, including publicly traded corporations, must file corporate income tax returns on which they report income, expenses, and tax liabilities according to rules set out in the Internal Revenue Code (IRC) and associated Department of Treasury regulations. The measurement of business net income is inherently difficult and some components of both tax and book net income are estimates subject to some imprecision. (Net income equals total income minus expenses.) One important source of imprecision is the difficulty of measuring costs associated with the use of capital assets. Both book and tax depreciation rules allocate capital costs over the expected useful lives of different types of assets. The actual useful life of specific assets may differ from the expected lives used for purposes of either book or tax depreciation. reported on their federal tax return for that year. In financial statements, income tax expense includes the estimated future tax effects attributable to temporary differences between book and tax income. Prior to 2004, corporations were required to reconcile their book net income with tax net income reporting on Schedule M-1 of their income tax returns by comparing the book and tax return amounts of a limited number of income and expense items. Concern over the growing difference observed between pretax book net income and tax net income and the lack of detail available from the Schedule M-1 on the sources of these differences led to the development of the more extensive reporting on book-tax differences that is now required on Schedule M-3. One important concern with Schedule M-1 arose from the fact that GAAP governing which components of large multinational corporate groups need to be included in financial statements differ from tax rules that specify which of those components need to be included in consolidated tax returns. Consequently, the financial statement data that taxpayers reported on their M-1s could relate to a much different business entity from the one covered by the tax return. A Schedule M-3 filer is now required to report the worldwide income of the entity represented in its financial statements and then follow a well-defined series of steps-- subtracting out income and losses of foreign and U.S. entities that are included in the financial statements but not in consolidated tax returns; adding in the income and losses of entities that are included in consolidated tax returns but not in financial statements; and making other adjustments to arrive at the book income of tax-includible entities. The Schedule M-3 also requires filers to report many more specific income and expense items according to both financial statement and tax rules than the M-1 required. The items causing the largest book-tax differences are identified later in this report. (See app. II for a copy of the Schedule M-3.) Effective tax rates on corporate income can be defined in a variety of ways, each of which provides insights into a different issue. These rates fall into two broad categories--average rates and marginal rates. An average corporate effective tax rate, which is the focus of this report, is generally computed as the ratio of taxes paid or tax liabilities accrued in a given year over the net income the corporation earned that year; it is a good summary of the corporation's overall tax burden on income earned during that particular period. "Burden" in this context refers to what the corporation remits to the Treasury, also called statutory burden. However, statutory burden may differ from economic burden, which measures the loss of after-tax income due to a tax. The economic burden of some or all of the taxes on a corporation may be shifted to the firm's customers or workers, as well as to other firms and other workers. Any remaining burden is borne by the corporation's shareholders or other owners of capital. A marginal effective tax rate focuses on the tax burden associated with a specific investment (usually over the full life of that investment) and is a better measure of the effects that taxes have on incentives to invest. Effective rates differ from statutory tax rates in that they attempt to measure taxes paid as a proportion of economic income, while statutory rates indicate the amount of tax liability (before any credits) relative to taxable income, which is defined by tax law and reflects tax benefits and subsidies built into the law. The statutory tax rate of 35 percent applying to most large U.S. corporations is sometimes referred to as the "headline rate," because it is the rate most familiar to the public. Until recently, data constraints have inhibited comparisons of effective tax rate estimates based on the alternative reporting systems. Access to tax return data is tightly restricted by law; consequently, most researchers who have estimated average effective tax rates for U.S. corporations have used either firm-level or aggregated data compiled from corporate financial statements for their measures of both tax liability and income. Even those with access to tax data could not easily determine how effective tax rates based on financial statements would differ from those based on actual tax returns because, as noted above, the scope of the business entity represented in a corporation's financial statement can be quite different from that covered by its consolidated federal tax return. Researchers with access to data from Schedule M-3 and other parts of corporate income tax returns will now be able to directly compare effective tax rates based on the different data sources for a consistent population of large corporate income taxpayers, as we do in the following section. The two essential components of a methodology for estimating an average effective tax rate are the measure of tax liabilities to be used as the numerator of the rate and the measure of income to be used as the denominator. A common measure of tax liability used in estimates based on financial statement data has been the current tax expense--either federal only or worldwide (which comprises federal, foreign, and U.S. state and local income taxes); however, some studies have used the total tax expense, and others have used cash taxes paid during the year. Corporations that filed Schedules M-3 for tax year 2010 reported a total of $185 billion in current U.S. federal income tax expense and $225 billion in total federal income tax expense, compared to the total of $187 billion in actual tax paid after credits that they reported owing IRS for that year.data from IRS do not include a measure of cash taxes paid. The typical measure of income for effective tax rate estimates based on financial statements has been some variant of pretax net book income. Figure 3 shows the value of this book income measure for corporations that filed Schedules M-3 for tax year 2010 and shows the separate values for profitable and unprofitable filers. Profitable filers had aggregate pretax net book income of $1.4 trillion while unprofitable filers had losses totaling $315 billion, resulting in total net book income of $1.1 trillion for the full population. As these numbers suggest, average effective tax rates can vary significantly depending on the population of corporations covered by the estimate. The inclusion of unprofitable firms, which pay little if any actual tax, can result in relatively high estimates because the losses of unprofitable corporations greatly reduce the denominator of the effective rate. Such estimates do not accurately represent the tax rate on the profitable corporations that actually pay the tax. Some prior studies have excluded unprofitable corporations; others have not. Figure 3 also shows the value of two income measures defined by tax rules for the same population of taxpayers. The first measure, income (loss) before net operating loss deductions and special deductions, is the tax return measure to which Schedule M-3 filers are required to reconcile their net book income (we refer to this measure as net tax income). It represents total income minus all deductions, except for losses carried over from other tax years and the special deductions relating to intercorporate dividends. The positive values of this measure for profitable filers, negative values for unprofitable filers, and net value for all filers are all of a lower magnitude relative to book net income.measure shown in figure 3 is taxable income, which equals net tax income minus losses carried over from other years and special deductions. Taxable income is higher than tax net income for the full population of Schedule M-3 filers, even after the additional deductions, because it is defined to be no less than zero. Therefore there are no current-year losses to offset positive income amounts. For the profitable subpopulation taxable income is lower than net tax income. For tax year 2010, profitable Schedule M-3 filers actually paid U.S. federal income taxes amounting to 12.6 percent of the worldwide income that they reported in their financial statements (for those entities included in their tax returns). This tax rate is slightly lower than the 13.1 percent rate based on the current federal tax expenses that they reported in those financial statements; it is significantly lower than the 21 percent effective rate based on actual taxes and taxable income, which itself is well below the top statutory rate of 35 percent.tax rate cannot be explained by income taxes paid to other countries. Even when foreign, state, and local corporate income taxes are included in the numerator, for tax year 2010, profitable Schedule M-3 filers actually paid income taxes amounting to 16.9 percent of their reported worldwide income. All of the effective tax rates based on book income for profitable filers are lower than the equivalent measures computed for all Schedule M-3 filers, shown on the right side of figure 4, because the inclusion of losses reduces the aggregate income for all Schedule M-3 filers. This difference was particularly large for tax year 2009 because the aggregate losses of unprofitable filers were considerably larger in that year than in 2010. Aggregate book losses were even larger for tax year 2008; however, because these losses more than offset the income of profitable corporations, resulting in an overall net loss, we could not compute meaningful average effective tax rates based on book income for all corporations for that year. With access to only aggregated data, we were not able to provide any information on the distribution of effective rates across individual filers; however, past work we have done suggest that there could be significant variation in effective rates across taxpayers.effective tax rates for different types of corporations, such as U.S. controlled corporations and foreign controlled corporations. Past empirical studies comparing average effective tax rates across countries have focused on worldwide taxes (which add foreign and state and local income taxes to federal income taxes in the numerator). Our estimates for these worldwide rates ranged between 2 to 6 percent higher than the U.S. federal rates we present above, but the relationships between the different measures (total, current, and actual) within each year remained similar. (See fig. 5.) It is difficult to make close comparisons between our results and estimates from prior studies based on financial statement data because most of the latter estimates are averaged over multiple years for which we have no data. (See fig. 9 in app. I.) Our estimated rates for the full population of filers for tax year 2010 are generally lower than the estimates presented in earlier studies while our estimated rates for other years are generally higher. As noted above, it can be difficult to compare financial statements with tax returns because entities included under each type of reporting can differ. IRS developed Schedule M-3 Part I to help delineate book-tax differences related to consolidation and to standardize the definition of the financial, or book, income of the tax consolidated group. As shown in figure 6, for tax year 2010 Schedule M-3 filers reported that they earned a total of $1.3 trillion from U.S. and foreign entities that were included in their consolidated financial statement but not in their consolidated tax returns (which, therefore, had to be subtracted out on the Schedule M-3). They also reported $420 billion in losses from such entities. (These losses also had to be subtracted out, meaning that net income increased by $420 billion.) In contrast, they reported less than $10 billion in either income or losses from entities that are included in their tax returns but not in their financial statements. These corporations also reported $762 billion in positive adjustments and $20 billion in negative adjustments relating to transactions between excluded and included entities. The corporations must also report several other types of adjustments, such as for any difference between the time period covered by their financial statements and the period covered by their tax years, that they make in order to arrive at a final amount that represents the net book income or loss of all of their entities that are included in their tax returns. For tax year 2010, this population of Schedule M-3 filers reported a total of $1.1 trillion in net book income for entities included in their tax returns and a total of $300 billion in losses for such entities. Schedule M-3 Parts II and III report book-tax differences related to income and expenses, respectively, for the tax consolidated group only. The largest category of differences for both income and expense items was "other." IRS officials told us that their reviews of the detailed documentation that filers are required to submit along with their Schedules M-3 indicate three broad subtypes of reporting in these other categories: 1. Some common income and expense categories have no line of their own on the M-3, so they have to be reported as other. This was the case for research and development expenses prior to 2010; those expenses now have their own line. 2. Taxpayers report miscellaneous items in these categories but do not provide details on what they include. 3. Taxpayers record items in these categories that clearly should have been reported on more specific lines of the M-3. The officials suggested some taxpayers do this because they do not take the time or trouble to fill out the form properly; others may be trying to hide details from the IRS. As a consequence, there is over-reporting in the two "other" categories and under-reporting in some of the more specific categories. Figures 7 and 8 identify the 10 largest categories of book-tax differences for both income and expense items in tax year 2010. Book-tax differences caused by the inclusion of an income or expense item by one accounting system but not the other are known as permanent differences. One of the largest permanent book-tax income differences reported in tax year 2010 arose from the section 78 gross-up, as shown in figure 7. Section 78 of the IRC requires U.S. corporations electing to claim the foreign tax credit to gross-up (i.e., increase) their dividend income by the amount of creditable foreign income taxes associated with Given that corporations are not required to the dividends they received. make this type of adjustment for book income purposes, the amount of any gross-up is a permanent positive difference between tax income and book income. 26 U.S.C. SS 78. Section 902 of the IRC permits a U.S. corporation that owns at least 10 percent of the voting stock of a foreign corporation to take an indirect credit for foreign income taxes associated with dividends that it receives from that foreign corporation. 26 U.S.C. SS 902. particular category. Similarly, the negative differences represent the sums across all filers with net negative differences. The magnitudes of some book-tax differences varied significantly between 2006 and 2010.For example, the excess of tax depreciation over book depreciation increased from about $69 billion in 2006 to over $145 billion in 2010. As another example, the excess of tax income over book income relating to the section 78 gross-up increased from about $36 billion in 2006 to over $77 billion in 2010. As the details presented in figures 7 and 8 indicate, the direction of the book-tax differences in all of the income and expense categories varies across corporations. The book amount is greater for some corporations, while the tax amount is greater for others. As a consequence, the aggregate net difference in many categories (shown in tables 1 and 2 in app. III) are significantly smaller than the absolute value of the differences. Moreover, the net difference is positive for some categories and negative for others. The offsetting of negative and positive differences across categories and across corporations within categories means that the relatively small difference between aggregate net book income ($833 billion) and aggregate net tax income ($737 billion) for the population of Schedule M-3 filers for tax year 2010 may hide considerable differences between book and tax income and between effective tax rates based on book income and those based on tax income for individual corporations. Given the aggregate nature of our data, we were not able to examine the range of potential differences across corporations. We provided a draft of this report to IRS on April 25, 2013, for review and comment. After reviewing the draft report, IRS 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 the Treasury, the Commissioner of Internal Revenue, and other interested parties. In addition, the report also 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) 512-9110 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. Results from past studies, presented in Figure 9, use financial statement data to estimate average effective tax rates for U.S. corporations, employed pretax worldwide book income as the denominator of their effective rate, and covered at least one tax year since 2001. As indicated in the figure, these studies used a variety of measures of worldwide taxes for their numerator. Five of the estimates were based on data that excluded all corporations with negative book income. Most of the studies reported their results as averages across multiple years. Other recent studies used aggregate measures of tax receipts received by the U.S. Treasury and profits before taxes from the Bureau of Economic Analysis's (BEA) National Income and Product Account (NIPA) data to estimate average corporate effective tax rates. The BEA profits measure is created using an aggregate income amount using tax data adjusted by two components: inventory valuation adjustment and capital consumption adjustment. Due to the aggregate nature of the profits before taxes, the denominator includes corporations with positive and negative profits before taxes. Another recent study by Citizens for Tax Justice and the Institute on Taxation and Economic Policy used financial statement data but focused on the effective rate of the federal income tax on U.S. domestic income, rather than worldwide taxes on worldwide income. They estimated a three-year (2008 to 2010) average effective tax rate of 18.5 percent for a sample of 280 of the largest U.S. corporations. Appendix II: Copy of IRS Form 1120, Schedule M-3 (Tax Year 2010) Appendix IV: Descriptions of Income and Expense Items with the Largest Book-Tax Differences Description Differences in this category and the one below relating to Form 4797 arise from differences in book and tax reporting of gains or losses arising from the sale or other disposition of business assets. One such difference arises when accumulated tax depreciation for an asset is higher than accumulated book depreciation, which would make the gain upon sale higher for tax purposes than book purposes. Certain qualified interest income, such as that from municipal bonds, is exempt for tax purposes but must be reported as income in financial statements. Also some items may be treated as interest income for tax purposes but as some other form of income for financial accounting purposes. Cost of goods sold comprises numerous items, some of which have their own lines on the M-3, like depreciation and stock options expense, and other which do not. Among the differences reported on this line are those relating to differences in inventory accounting. This line includes any difference between the amount of foreign dividends that corporations report on their tax returns and the amounts they report in their financial statements, unless those dividends have already been taxed by the United States. This line relates to differences between the book and tax treatment of any interest owned by the filer or a member of the U.S. consolidated tax group that is treated as an investment in a partnership for U.S. income tax purposes (other than an interest in a disregarded entity). This line relates to differences between the treatment of income and losses from equity investments under financial statement rules and tax accounting rules . See description relating to income statement disposition of assets. Section 902 of the Internal Revenue Code (IRC) permits a U.S. corporation that owns at least 10 percent of the voting stock of a foreign corporation to take an indirect credit for foreign income taxes associated with dividends that it receives from that foreign corporation. Section 78 of the IRC requires U.S. corporations electing to claim the foreign tax credit to gross up (i.e., increase) their dividend income by the amount of creditable foreign income taxes associated with the dividends they received. This line covers differences in the book and tax reporting of capital gains, other than those arising from partnerships and other pass-through entities. One reason for differences on this line is that certain amounts that are treated as tax deductions for tax purposes are treated as some other form of expense for financial accounting purposes, or vice versa. For tax purposes a firm depreciates its assets using the modified accelerated cost recovery system method, which allows the write-off of an asset at a much faster rate than straight-line depreciation, the most commonly used method for financial accounting purposes. This category covers differences in book and tax amortization rules for items other than those relating to goodwill or acquisition, reorganization and start-up costs. Under Generally Accepted Accounting Principles, firms are required to estimate the proportion of sales that will ultimately become uncollectible and expense this amount in the same period as the recognition of the sale in revenue. In contrast, for tax purposes firms must wait until a specific receivable is known to be uncollectible before it can be deducted. Description Prior to 2002, goodwill was amortized over a maximum of 40 years for book purposes; after 2001 financial accounting changed to the impairment method, whereby goodwill is only written down if it is judged by management and auditors to be impaired. For tax purposes, goodwill was not deductible prior to 1994; since 1994 goodwill must be amortized over 15 years. These differences between book and tax treatments can be either temporary or permanent. This line covers all expenses attributable to any pension plans, profit-sharing plans, or any other retirement plans. A stock option expense generally is recorded in a financial statement as the estimated fair value of the option over the period of time that the stock option vests. The exercise of the stock option does not affect the corporation's net book income. In contrast, the IRC recognizes two types of stock options--qualified and nonqualified stock options. Firms cannot take deductions for qualified stock options (unless the stock is held for less than 2 years), although recipients get special beneficial tax treatment. For nonqualified stock options, the firm granting the option can deduct the fair market value when the recipient has an unrestricted right to the property and the fair market value can be reasonably ascertained. This line shows the difference between the amounts of foreign income taxes that corporations report as expenses in their financial statements and the amounts that they claim as deductions for tax purposes. U.S. corporations typically claim foreign tax credits, rather than deductions, for most of the foreign income taxes they pay. Consequently, the book tax expenses typically far exceed the tax deductions. Examples of the types of compensation that taxpayers are required to report on this line are payments attributable to employee stock purchase plans, phantom stock options, phantom stock units, stock warrants, stock appreciation rights, and restricted stock, regardless of whether such payments are made to employees or non-employees, or as payment for property or compensation for services. In addition to the contact named above, James Wozny (Assistant Director), Elizabeth Fan, Robert MacKay, Donna Miller, Karen O'Conor, Max Sawicky, and Andrew J. Stephens made key contributions to this report.	Proponents of lowering the U.S. corporate income tax rate commonly point to evidence that the U.S. statutory corporate tax rate of 35 percent, as well as its average effective tax rate, which equals the amount of income tax corporations pay divided by their pretax income, are high relative to other countries. However, GAO's 2008 report on corporate tax liabilities ( GAO-08-957 ) found that nearly 55 percent of all large U.S.-controlled corporations reported no federal tax liability in at least one year between 1998 and 2005. Given the difficult budget choices Congress faces and its need to know corporations' share of the overall tax burden, GAO was asked to assess the extent to which corporations are paying U.S. corporate income tax. In this report, among other things, GAO (1) defines average corporate ETR and describes the common methods and data used to estimate this rate and (2) estimates average ETRs based on financial statement reporting and tax reporting. To conduct this work, GAO reviewed economic and accounting literature, analyzed income and expense data that large corporations report on the Schedules M-3 that they file with Internal Revenue Service (IRS), and interviewed IRS officials. Effective tax rates (ETR) differ from statutory tax rates in that they attempt to measure taxes paid as a proportion of economic income, while statutory rates indicate the amount of tax liability (before any credits) relative to taxable income, which is defined by tax law and reflects tax benefits and subsidies built into the law. Lacking access to detailed data from tax returns, most researchers have estimated ETRs based on data from financial statements. A common measure of tax liability used in past estimates has been the current tax expense--either federal only or worldwide (which comprises federal, foreign, and U.S. state and local income taxes). The most common measure of income for these estimates has been some variant of pretax net book income. GAO was able to compare book tax expenses to tax liabilities actually reported on corporate income tax returns. For tax year 2010 (the most recent information available), profitable U.S. corporations that filed a Schedule M-3 paid U.S. federal income taxes amounting to about 13 percent of the pretax worldwide income that they reported in their financial statements (for those entities included in their tax returns). When foreign and state and local income taxes are included, the ETR for profitable filers increases to around 17 percent. The inclusion of unprofitable firms, which pay little if any tax, also raises the ETRs because the losses of unprofitable corporations greatly reduce the denominator of the measures. Even with the inclusion of unprofitable filers, which increased the average worldwide ETR to 22.7 percent, all of the ETRs were well below the top statutory tax rate of 35 percent. GAO could only estimate average ETRs with the data available and could not determine the variation in rates across corporations. The limited available data from Schedules M-3, along with prior GAO work relating to corporate taxpayers, suggest that ETRs are likely to vary considerably across corporations. GAO does not make recommendations in this report. GAO provided a draft of this report to IRS for review and comment. IRS provided technical comments which were incorporated as appropriate.	5,731	693
While the IGs are designed to focus primarily on exposing fraud, waste, and abuse in individual federal agency programs, GAO's broad audit authority allows us to support Congress through strategic analyses of issues that cut across multiple federal agencies and sources of funding. Although the IGs report to the heads of their respective departments and make periodic reports to Congress, GAO reports directly to Congress on a continuous basis. GAO consults regularly with its oversight committees and relevant committees of jurisdiction regarding key issues of national importance, such as U.S. fiscal solvency, emergency preparedness, DOD transformation, global competitiveness, and emerging health care and other challenges for the 21st century. The Congress established the GAO in 1921 to investigate all matters relating to the receipt, disbursement, and application of public funds. Since then, Congress has expanded GAO's statutory authorities and frequently calls upon it to examine federal programs and their performance, conduct financial and management audits, perform policy analysis, provide legal opinions, adjudicate bid protests, and conduct investigations. In 2006, the GAO issued more than 1,000 audit products and produced a $105 return for each dollar invested in the agency. GAO has developed substantial expertise on security and reconstruction issues, as well as having long-term relationships with State, Defense, and USAID. Our work spans several decades and includes evaluations of U.S. military and diplomatic programs and activities, including those during and following contingency operations in Vietnam, the Persian Gulf (Operations Desert Shield and Storm), Bosnia, and Afghanistan. We also have many years of expertise in evaluating U.S. efforts to help stabilize regions or countries; we have, for example, monitored U.S. assistance programs in Asia, Central America, and Africa. The depth and breadth of our work and the expertise we have built has helped facilitate our ability to quickly gather facts and provide insights to the Congress as events unfold, such as the conflict in Iraq. Our current work draws on our past work and regular site visits to Iraq and the surrounding region, such as Jordan and Kuwait. Furthermore, we plan to establish a presence in Iraq beginning in March 2007 to provide additional oversight of issues deemed important to Congress. Our plans, however, are subject to adequate fiscal 2007 funding of GAO by the Congress. Our work in Iraq spans the three prongs of the U.S. national strategy in Iraq--security, political, and economic. The broad, cross-cutting nature of our work helps minimize the possibility of overlap and duplication by individual IGs. We and other accountability organizations take steps to coordinate our oversight with others to avoid duplication and leverage our resources. In that regard, the ability of the Special Inspector General for Iraq Reconstruction (SIGIR) to provide in-country oversight of specific projects and reconstruction challenges has enabled us to focus our work on more strategic and cross-cutting national, sector, and interagency issues. The expansion of SIGIR's authority underscores the need for close coordination. We coordinate our work in Iraq through various forums, including the Iraq Inspectors General Council (IIGC) and regular discussions with the IG community. Established by what is now SIGIR, IIGC provides a forum for discussion and collaboration among the IG and staff at the many agencies involved in Iraq reconstruction activities. Our work is coordinated through regular one-on-one meetings with SIGIR, DOD, State, and USAID. We also coordinate our work with other accountability organizations, such as the Federal Bureau of Investigation's (FBI) public corruption unit. Let me highlight some of the key findings and recommendations we have made as a result of our continuing work in Iraq. In November 2005, the National Security Council issued the National Strategy for Victory in Iraq (NSVI) to clarify the President's strategy for achieving U.S. political, security, and economic goals in Iraq. The U.S. goals included establishing a peaceful, stable, and secure Iraq. Our July 2006 report assessed the extent to which the NSVI and its supporting documents addressed the six characteristics of an effective national strategy. While we reported that the NSVI was an improvement over previous U.S. planning efforts for stabilizing and rebuilding Iraq, we concluded that the strategy fell short in at least three key areas. First, it only partially identified the agencies responsible for implementing key aspects of the strategy. Second, it did not fully address how the United States will integrate its goals with those of the Iraqis and the international community, and it did not detail Iraq's anticipated contribution to its future needs. Third, it only partially identified the current and future costs of U.S. involvement in Iraq, including maintaining U.S. military operations, building Iraqi government capacity, and rebuilding critical infrastructure. We recommended that the NSC improve the current strategy by articulating clear roles and responsibilities, specifying future contributions, and identifying current costs and future resources. In addition, our report urged the United States, Iraq, and the international community to (1) enhance support capabilities of the Iraqi security forces, (2) improve the capabilities of the national and provincial governments, and (3) develop a comprehensive anti-corruption strategy. In our view, congressional review of the President's 2007 plan for Iraq should consider whether it addresses the key elements of a sound national strategy identified in our July 2006 report. In October 2005, we issued a classified report on the military's campaign plan for Iraq. In that report, we discussed the military's counterinsurgency plan for Iraq and the conditions and phases in the plan. The report contained a recommendation to link economic, governance, and security indicators to conditions for stabilizing Iraq. Congress acted on our recommendation in the 2006 National Defense Authorization Act and required DOD to report on progress toward meeting the conditions referred to in GAO's report. We have supplemented this work with a series of classified briefings to the Congress on changes to the campaign plan and U.S. efforts to train and equip Iraqi security forces and protect weapons caches throughout Iraq. We will continue to provide Congress these classified briefings. Since 2001, Congress has appropriated about $495 billion to U.S. agencies for military and diplomatic efforts in support of the global war on terrorism; the majority of this amount has gone to stabilize and rebuild Iraq. Efforts in Iraq involve various activities such as combating insurgents, conducting civil affairs, building capacity, reconstructing infrastructure, and training Iraqi military forces. To date, the United States has reported substantial costs for Iraq and can expect to incur significant costs in the foreseeable future, requiring decision-makers to consider difficult trade-offs as the nation faces an increasing number of long-range fiscal challenges. Funding for these efforts has been provided through annual appropriations, as well as supplemental appropriations that are outside the annual budget process. In our view, moving more funding into baseline budgets, particularly for DOD, would enable decision-makers to better weigh priorities and assess trade-offs. As of September 30, 2006, DOD had reported costs of about $257.5 billion for military operations in Iraq. In addition, as of October 2006, about $29 billion had been obligated for Iraqi reconstruction and stabilization efforts. However, problems with the processes for recording and reporting GWOT costs raise concerns that these data may not accurately reflect the true dollar value of war-related costs. U.S. military and diplomatic commitments in Iraq will continue for the foreseeable future and are likely to involve hundreds of billions of additional dollars. The magnitude of future costs will depend on several direct and indirect variables and, in some cases, decisions that have not been made. DOD's future costs will likely be affected by the pace and duration of operations, the types of facilities needed to support troops overseas, redeployment plans, and the amount of military equipment to be repaired or replaced. Although reducing the number of troops would appear to lower costs, we have seen from previous operations in the Balkans and Kosovo that costs could rise--if, for example, increased numbers of contractors replace military personnel. With activities likely to continue into the foreseeable future, decision-makers will have to carefully weigh priorities and make difficult decisions when budgeting for future costs. Over the years, we have made a series of recommendations to the Secretary of Defense intended to improve the transparency and reliability of DOD's GWOT obligation data, including recommendations that DOD (1) revise the cost-reporting guidance so that large amounts of reported obligations are not shown in "miscellaneous" categories, and (2) take steps to ensure that reported GWOT obligations are reliable. We also have recommended that DOD build more funding into the baseline budget once an operation reaches a known level of effort and costs are more predictable. In response, the department has implemented many of our previous recommendations. Overall security conditions in Iraq continued to deteriorate in 2006 and have grown more complex despite recent progress in transferring security responsibilities to Iraqi security forces and the Iraqi government. The number of trained and equipped Iraqi security forces has increased from about 174,000 in July 2005 to about 323,000 in December 2006, at the same time as more Iraqi army units have taken the lead for counterinsurgency operations in specific geographic areas. Despite this progress, attacks on coalition forces, Iraqi security forces, and civilians have all increased, reaching record highs in October 2006. Because of the poor security in Iraq, the United States could not draw down U.S. force levels in Iraq as planned in 2004 and 2006, and U.S. forces have continued to conduct combat operations in urban areas, especially Baghdad. Transferring security responsibilities to the Iraqi security forces and provincial governments is a critical part of the U.S. government's strategy in Iraq and key to allowing a drawdown of U.S. forces. Since 2003, the United States has provided about $15.4 billion to train, equip, and sustain Iraqi security forces and law enforcement. However, it is unclear whether U.S. expenditures and efforts are having their intended effect in developing capable forces and whether additional resources are needed. A key measure of the capabilities of Iraqi forces is the Transition Readiness Assessment (TRA) reports prepared by coalition advisors embedded in Iraqi units. These reports serve as the basis for the Multinational Force- Iraq (MNF-I) determination of when a unit is capable of leading counterinsurgency operations and can assume security responsibilities for a specific area. The TRA reports provide the coalition commander's professional judgment on an Iraqi unit's capabilities and are based on ratings in personnel, command and control, equipment, sustainment and logistics, training, and leadership. To conduct future work on this issue, GAO has made multiple requests for full access to the unit-level TRA reports over the last year. However, DOD has not yet complied with our requests. This serves to seriously and inappropriately limit congressional oversight over the progress achieved toward a critical U.S. objective. Since 2003, the United States has provided about $15.4 billion for Iraqi security forces and law enforcement. According to Multinational Security Transition Command-Iraq (MNSTC-I) records, MNF-I has issued about 480,000 weapons, 30,000 vehicles, and 1.65 million pieces of gear (uniforms, body armor, helmets, and footwear), among other items, to the Iraqi security forces as of October 2006. Congress funded the train-and-equip program for Iraq outside traditional security assistance programs, which, according to DOD officials, provided DOD with a large degree of flexibility in managing the program. Since the funding did not go through traditional security assistance programs, the accountability requirements normally applicable to these programs did not necessarily apply, according to DOD officials. It is currently unclear what accountability measures, if any, DOD has chosen to apply to the train-and- equip program for Iraq, as DOD officials have expressed differing opinions on this matter. As part of our ongoing work, we have asked DOD to clarify what accountability measures it has chosen to apply to the program. While it is unclear which regulations DOD has chosen to apply, beginning in early 2004, MNF-I established requirements to control and account for equipment provided to the Iraqi security forces by issuing orders that outlined procedures for its subordinate commands. These included obtaining signed records for equipment received by Iraqi units or individuals and recording weapons serial numbers. Although MNF-I took initial steps to establish property accountability procedures, limitations such as the initial lack of a fully operational equipment distribution network, staffing weaknesses, and the operational demands of equipping the Iraqi forces during war hindered its ability to fully execute critical tasks outlined in the property accountability orders. Since late 2005, MNSTC-I has taken additional steps to improve its property accountability procedures, including establishing property books for equipment issued to Iraqi Ministry of Defense and Ministry of Interior forces. According to MNSTC-I officials, MNSTC-I also recovered existing documentation for equipment previously issued to Iraqi forces. However, according to our preliminary analysis, DOD and MNF-I may not be able to account for Iraqi security forces' receipt of about 90,000 rifles and about 80,000 pistols that were reported as issued before early October 2005. Thus, DOD and MNF-I may be unable to ensure that Iraqi military forces and police received all of the equipment that the coalition procured or obtained for them. In our ongoing review, we will continue to assess MNF-I records for Iraqi equipment distributed to Iraqi forces. We plan on issuing a final report on these and related intelligence matters by March 2007. Our work focuses on the accountability requirements for the transportation and distribution of U.S.-funded equipment and did not review any requirements relevant to the procurement of this equipment. The U.S. government faces significant challenges in improving the capabilities of Iraq's central and provincial governments so that they can provide security and deliver services to the Iraqi people. According to State, the Iraqi capacity for self-governance was decimated after nearly 30 years of autocratic rule. In addition, Iraq lacked competent existing Iraqi governmental organizations. Since 2003, the United States has provided the Iraqis with a variety of training and technical assistance to improve their capacity to govern. As of December 2006, we identified more than 50 capacity development efforts led by at least six U.S. agencies. However, it is unclear how these efforts are addressing core needs and Iraqi priorities in the absence of an integrated U.S. plan. Iraq also faces difficulties in spending budgeted funds for capital goods and projects in the security, oil, and electricity sectors. When the Iraqi government assumed control over its finances in 2004, it became responsible for determining how more than $25 billion annually in government revenues would be collected and spent to rebuild the country and operate the government. However, unclear budgeting and procurement rules have affected Iraq's efforts to spend capital budgets effectively and efficiently. Since most of the U.S. reconstruction funds provided between fiscal years 2003 and 2006 have been obligated, unexpended Iraqi funds represent an important source of additional financing. Iraq had more than $6 billion in unspent capital project funds as of August 2006. For example, Iraq's Oil Ministry spent only $4 million of $3.6 billion in budgeted funds to repair Iraq's dilapidated oil infrastructure. The inability to spend this money raises serious questions for the government, which has to demonstrate to citizens who are skeptical that it can improve basic services and make a difference in their daily lives. The U.S. government has launched a series of initiatives in conjunction with other donors to address this issue and improve ministry budget execution. Since September 11, 2001, U.S. military forces have experienced a high pace of operations to support homeland security missions, Operation Enduring Freedom in Afghanistan, and various combat and counterinsurgency operations in Iraq. These operations have required many units and personnel to deploy for multiple tours of duty and, in some cases, to remain for extended tours. DOD faces significant challenges in maintaining readiness for overseas and homeland missions and sustaining rotational deployments of duty, especially if the duration and intensity of current operations continue at the present pace. Ongoing military operations in Iraq are inflicting heavy wear and tear on military equipment. Some equipment items used by U.S. forces are more than 20 years old, and harsh combat and environmental conditions over time have further exacerbated equipment condition problems. The Army and the Marine Corps have initiated programs to reset (repair or replace) equipment and are likely to incur large expenditures in the future. We are currently assessing these programs, including the extent to which the military services are tracking reset costs and the extent to which their reset plans maintain unit equipment readiness while meeting ongoing operational requirements. U.S. ground forces in Iraq have come under frequent and deadly attacks from insurgents using weapons such as improvised explosive devices (IED), mortars, and rocket launchers. IEDs, in particular, have emerged as the number one threat against U.S. forces. Because of the overwhelming size and number of conventional munitions storage sites in Iraq, combined with prewar planning assumptions that proved to be invalid, there were an insufficient number of U.S. and coalition troops on the ground to prevent the widespread looting of those sites. The human, strategic, and financial costs of the failure to provide sufficient troops on the ground have been high, since IEDs made from looted explosives have caused about half of all U.S. combat fatalities and casualties in Iraq and have killed hundreds of Iraqis. In addition, unsecured conventional munitions sites have helped sustain insurgent groups and threatened the achievement of the Operation Iraqi Freedom's (OIF) strategic goal of creating a stable Iraqi nation. DOD's actions to date have primarily focused on countering IEDs and not on the security of conventional munitions storage sites as a strategic planning and priority-setting consideration for future operations. Although good first steps, these actions do not address what we believe is a critical OIF lesson learned: If not secured during initial combat operations, an adversary's conventional munitions storage sites can represent an asymmetric threat to U.S. forces that remain in country. In December 2006, we recommended that the Chairman of the Joint Staff conduct a theaterwide survey and risk assessment regarding unsecured conventional munitions in Iraq and incorporate conventional munitions storage site security as a strategic planning factor into all levels of planning policy and guidance. DOD partially concurred with our recommendations. Efforts to protect U.S. ground forces with increased body and truck armor have been characterized by shortages and delays, which have reduced operational capabilities and forced combat commanders to accept additional risk in completing their missions. We are currently reviewing force protection measures, including body armor, for current operations, as well as the organization and management of the Joint IED Defeat to counter the IED threat. In prior reports, we recommended that the process for identifying and funding urgent wartime requirements be improved and that funding decisions be based on risk and an assessment of the highest priority requirements. More recently, we have recommended actions to ensure that the services make informed and coordinated decisions about materiel solutions developed and procured to address common urgent wartime requirements. DOD generally agreed with these recommendations. DOD has relied extensively on contractors to undertake major reconstruction projects and provide logistical support to its troops in Iraq. Despite making significant investments through reconstruction and logistics support contracts, this investment has not always resulted in the desired outcomes. Many reconstruction projects have fallen short of expectations, and DOD has yet to resolve long-standing challenges in its management and oversight of contractors in deployed locations. These challenges often reflect shortcomings in DOD's capacity to manage contractor efforts, including having sufficiently focused leadership, guidance, a match between requirements and resources, sound acquisition approaches, and an adequate number of trained contracting and oversight personnel. The challenges encountered in Iraq are emblematic of the systemic issues that DOD faces. In fact, GAO designated DOD's contract management activities as a high-risk area more than a decade ago and have reported on DOD's long-standing problems with its management and oversight of support contractors since 1997. For example, because information on the number of contractor employees and the services they provide is not aggregated within DOD or its components, DOD cannot develop a complete picture of the extent to which it relies on contractors to support its operations. DOD recently established an office to address contractor support issues, but the office's specific roles and responsibilities are still being defined. In assessing acquisition outcomes government-wide over many years, we have applied a framework of sound acquisition practices that recognizes that a prerequisite to having good outcomes is to match well-defined requirements and available resources. Shifts in priorities and funding invariably have a cascading effect on individual contracts. Further, to produce desired outcomes with available funding and within required time frames, DOD and its contractors need to clearly understand DOD's objectives and needs and how they translate into the contract's terms and conditions; they need to know the goods or services required, the level of performance or quality desired, the schedule, and the cost. When such requirements were not clear, DOD often entered into contract arrangements that posed additional risks. Managing risks when requirements are in flux requires effective oversight, but DOD lacked the capacity to provide sufficient numbers of contracting, logistics, and other personnel, thereby hindering oversight efforts. With a considerable amount of DOD's planned construction work remaining and the need for continued logistical support for deployed forces, it is essential to improve DOD's capacity to manage its contractors if the department is to increase its return on its investment. GAO's value to the Congress and the American people rests on its ability to demonstrate professional, independent, objective, relevant, and reliable work. To achieve this outcome, we set high standards for ourselves in the conduct of our work. Our core values of accountability, integrity, and reliability describe the nature of our work and, most importantly, the character of our people. In all matters, GAO takes a professional, objective, and nonpartisan approach to its work. GAO's quality assurance framework is designed to ensure adherence to these principles. The framework is designed around people, processes, and technology and applies to all GAO work conducted under generally accepted government auditing standards. GAO has a multidisciplinary staff of approximately 3,200 accountants, health experts, engineers, lawyers, national security specialists, environmental specialists, economists, historians, social scientists, actuaries, and statisticians. GAO leverages this knowledge by staffing engagements with teams proficient in a number of areas. For example, engagement teams comprise a mix of staff supported by experts in technical disciplines, such as data collection and survey methods, statistics, econometric modeling, information technology, and the law. To add additional value and mitigate risk, GAO has a forensic audits and special investigations team to expose government fraud, waste, and abuse. A key process in our quality assurance framework is providing responsible officials of audited agencies with the opportunity to review and comment on our draft reports. This policy is one of the most effective ways to ensure that a report is fair, complete, and constructive. In April 2005, an international peer review team gave our quality assurance system a clean opinion--only the second time a national audit institution has received such a rating from a multinational team. Thus, the Congress and the American people can have confidence that GAO's work is independent, objective, and reliable. The team, under the auspices of the Global Working Group of national audit institutions, examined all aspects of GAO's quality assurance framework. The team found several global "better practices" at GAO that go beyond what is required by government auditing standards. These practices included its strategic planning process, which ensures that GAO focus on the most significant issues facing the country, serious management challenges, and the programs most at risk. The team identified other noteworthy practices: GAO's audit risk assessment process, which determines the level of product review and executive involvement throughout the audit engagement. GAO's agency protocols, which provide clearly defined and transparent policies and practices on how GAO will interact with audited agencies. GAO's use of experts and specialists to provide multidisciplinary audit teams with advice and assistance on methodological and technical issues--vastly expanding GAO's capacity to apply innovative approaches to the analysis of complex situations. As an organization in constant pursuit of improvement, we benefited from the peer reviewers' recognition of our quality control procedures as global "better practices" as well as their suggestions on how to strengthen guidance and streamline procedures. Our work highlights the critical challenges that the United States and its allies face in the ongoing struggle to help the Iraqis stabilize, secure, and rebuild their country. Forthright answers to the oversight questions we posed in our report of January 9, 2007, are needed from the U.S. agencies responsible for executing the President's strategy. Congress and the American people need complete and transparent information on the progress made toward achieving U.S. security, economic, and diplomatic goals in Iraq to reasonably judge our past efforts and determine future directions. For future work, GAO will continue to provide this committee and Congress with independent analysis and evaluations and coordinate our efforts with the accountability community to ensure appropriate oversight of federal programs and spending. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or other members may have at this time. For questions regarding this testimony, please call Joseph A. Christoff at (202) 512-8979. Other key contributors to this statement were Nanette Barton, Donna Byers, David Bruno, Dan Cain, Lynn Cothern, Tim DiNapoli, Mike Ferren, Rich Geiger, Tom Gosling, Whitney Havens, Lisa Helmer, Patrick Hickey, Henry L. Hinton Jr., John Hutton, Steve Lord, Judy McCloskey, Tet Miyabara, Mary Moutsos, Ken Patton, Sharon Pickup, Jason Pogacnik, Jim Reynolds, Donna Rogers, and William Solis. 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.	GAO provided a strategic overview of GAO's work related to securing, stabilizing, and rebuilding Iraq. In our statement today, as requested, GAO highlighted (1) GAO's scope, authority, and coordination; (2) some of the insights stemming from our work in Iraq; and (3) the rigorous quality assurance framework that GAO uses to ensure relevant, reliable, and consistent results in all of our work. This testimony is based upon extensive work spanning several years. Since 2003, we have issued 67 Iraq-related reports and testimonies. For example, GAO sent a report to the Congress last week on a range of key issues for congressional oversight of efforts to secure, stabilize, and rebuild Iraq. Although many of our sources are classified, we strive to report information to the Congress in a public format to promote greater transparency and accountability of U.S. government policies, programs, and activities. As provided for in our congressional protocols, most of our work in Iraq has been performed under my authority to conduct evaluations on my own initiative since it is a matter of broad interest to the entire Congress and numerous committees in both chambers. Our work also helped inform the deliberations of the Iraq Study Group; the Comptroller General personally briefed this group on the results of our Iraq work in June 2006. GAO also provided significant additional information to the Iraq Study Group for its use. GAO and the Inspectors General (IG) of individual departments and agencies have different roles and responsibilities. GAO's broad audit authority allows us to support Congress through strategic analyses of issues that cut across multiple federal agencies and sources of funding. Our work spans the security, political, and economic prongs of the U.S. national strategy in Iraq. The broad, cross-cutting nature of this work helps minimize the possibility of overlap and duplication by any individual Inspector General. Based on our work, we have made some unique contributions to Congress. Our past and ongoing work has focused on the U.S. strategy and costs of operating in Iraq, training and equipping the Iraqi security forces, governance issues, the readiness of U.S. military forces, and acquisition outcomes. Some highlights from our work follow. Our analysis of the National Strategy for Victory in Iraq recommended that the National Security Council improve the strategy by articulating clearer roles and responsibilities, specifying future contributions, and identifying current costs and future resources. In our examination of the cost of U.S. military operations abroad, we recommended that the Secretary of Defense improve the transparency and reliability of Department of Defense's (DOD) Global War on Terror (GWOT) obligation data. We also recommended that DOD build more funding into the baseline budget once an operation reaches a known level of effort and costs are more predictable. In assessing the capabilities of Iraqi security forces, we found that overall security conditions in Iraq have deteriorated despite increases in the numbers of trained and equipped security forces. A complete assessment of Iraqi security forces' capabilities is dependent on DOD providing GAO with the readiness levels of each Iraqi unit. We found that DOD faces significant challenges in maintaining U.S. military readiness for overseas and homeland missions and in sustaining rotational deployments of duty, especially if the duration and intensity of current operations continue at the present pace. In assessing the impact of ongoing military operations in Iraq on military equipment, we found that the Army and the Marine Corps have initiated programs to reset (repair or replace) equipment and are likely to incur large expenditures in the future. In reviewing efforts to secure munitions sites and provide force protection, we recommended that DOD conduct a theaterwide survey and risk assessment of unsecured conventional munitions in Iraq and incorporate storage site security into strategic planning efforts. In assessing acquisition outcomes, we found that DOD often entered into contract arrangements with unclear requirements, which posed additional risks to the government. DOD also lacked the capacity to provide sufficient numbers of contracting, logistics, and other personnel, thereby hindering oversight efforts. In April 2005, an international peer review team gave our quality assurance system a clean opinion--only the second time a national audit institution has received such a rating from a multinational team. Thus, the Congress and the American people can have confidence that GAO's work is independent, objective, and reliable.	5,723	926
The FCS concept is designed to be part of the Army's Future Force, which is intended to transform the Army into a more rapidly deployable and responsive force--one that differs substantially from the large division- centric structure of the past. The Army is reorganizing its current forces into modular brigade combat teams, each of which is expected to be highly survivable and the most lethal brigade-sized unit the Army has ever fielded. The Army expects FCS-equipped brigade combat teams to provide significant warfighting capabilities to DOD's overall joint military operations. Fundamentally, the FCS concept is to replace mass with superior information--that is, to see and hit the enemy first rather than to rely on heavy armor to withstand a hit. This solution attempts to address a mismatch that has posed a dilemma to the Army for decades: the Army's heavy forces had the necessary firepower needed to win but required extensive support and too much time to deploy while its light forces could deploy rapidly but lacked firepower. If the Future Force becomes a reality, then the Army would be better organized, staffed, equipped, and trained for prompt and sustained land combat, qualities intended to ensure that the Army would dominate over evolving, sophisticated threats. The Future Force is to be offensively oriented and will employ revolutionary concepts of operations, enabled by new technology. The Army envisions a new way of fighting that depends on networking the force, which involves linking people, platforms, weapons, and sensors seamlessly together in a system- of-systems. In 2006, Congress mandated that the Secretary of Defense conduct a milestone review for the FCS program, following the preliminary design review scheduled for early 2009. Congress stated that the review should include an assessment of (1) whether the requirements are valid and can be best met with the FCS program, (2) whether the FCS program can be developed and produced within existing resources, and (3) whether the program should continue as currently structured, be restructured, or be terminated. The Congress required the Secretary of Defense to review specific aspects of the program, including the maturity of critical technologies, program risks, demonstrations of the FCS concept and software, and a new cost estimate and affordability assessment and to submit a report of the findings and conclusions of the review to Congress. Congressional defense committees have asked GAO on numerous occasions to report and testify on FCS activities. This statement is based on work which was conducted between March 2006 and March 2007 and in accordance with generally accepted government auditing standards. In our March 2007 report, we found that despite the investment of $8 billion already made in the FCS program, it still has significantly less knowledge--and less assurance of success--than required by best practices or DOD policy. By early 2009, enough knowledge should be available about the key elements of the FCS business case to make a well- informed decision on whether and how to proceed with the program. If significant doubts remain regarding the program's executability, DOD will have to consider alternatives to proceeding with the program as planned. Central to the go/no-go decision will be demonstrable soundness of the FCS business case in the areas of requirements, technology, acquisition strategy, and finances. Our specific findings in the areas of requirements, technologies, acquisition strategy, and finances are summarized below. The Army has made considerable progress in defining system-of-systems level requirements and allocating those requirements to the individual FCS systems. This progress has necessitated significant trade-offs to reconcile requirements and technical feasibility. A key example of this has been the decision to allow a significant increase in manned ground vehicle weight to meet survivability requirements that in turn has forced trade-offs in transportability requirements. The feasibility of FCS requirements still depends on key assumptions about immature technologies, costs, and other performance characteristics like the reliability of the network and other systems. As current assumptions in these areas are replaced with demonstrated performance, more trade-offs are likely. At this point, the Army has identified about 70 high-level risks to be resolved to assure the technical feasibility of requirements. A challenge for the Army in making these trades--which are practical necessities--is determining the cumulative effect of an individual decision on overall requirements. For example, a decision to discontinue a munition technology could result in less lethality, possibly less survivability if our vehicles have to shoot more than once to defeat an enemy, and less responsiveness due to the weight added by carrying more ammunition and fuel. As it proceeds to the preliminary design review and the subsequent go/no- go milestone, the Army faces considerable challenges in completing the definition of technically achievable and affordable system-level requirements, an essential element of a sound business case. The Army will have to complete definition of all system-level requirements and the network as well as the preliminary designs for all systems and subsystems. By the time of the review, it should be able to demonstrate that the FCS will satisfy key performance parameters and the Army's user community with a program that is as good as or better than what is available with current forces. To do this, the Army will have to mitigate FCS technical risks to significantly lower levels and make demonstrable progress toward meeting key FCS goals including weight reduction, reliability improvement, and average unit production cost reduction. The Army has made progress in the areas of critical technologies, complementary programs, and software development, but it will take several more years to reach the level of maturity needed in 2003. Program officials report that the number of critical technologies they consider as mature has doubled in the past year. While this is good progress by any measure, FCS technologies are far less mature at this point in the program than they should be, and they still have a long way to go to reach full maturity. The Army only sees the need to reach a technology readiness level that requires demonstration of capabilities in a relevant environment by 2011. This does not assure that these capabilities will actually perform as needed in a realistic environment, as required by best practices for a sound business case. We also note that last year, technology maturity levels had been the result of an independent assessment, while the current levels have been determined by the FCS program office. The Army has made some difficult decisions to improve the acquisition strategies for some key complementary programs, such as Joint Tactical Radio System and Warfighter Information Network-Tactical, but they still face significant technological and funding hurdles. Finally, the Army and the LSI are attempting to utilize many software-development best practices and have delivered the initial increments of software on schedule. On the other hand, most of the software development effort lies ahead, and the amount of software code to be written--already an unprecedented undertaking-- continues to grow as the demands of the FCS design becomes better understood. The Army and the LSI have recognized several high-risk aspects of that effort and mitigation efforts are underway. As it approaches the preliminary design review and the subsequent go/no- go milestone review, the Army should have made additional progress in developing technologies and software as well as aligning the development of complementary programs with the FCS. The Army faces many challenges, such as demonstrating that critical technologies are mature and having this maturity independently validated. The Army will need to mitigate the recognized technical risks and integrate the technologies with other systems. It will also need to address cost, schedule, and performance risks related to software and mitigate those risks to acceptable levels. Finally, the Army must settle on the set of complementary programs that are essential for FCS success, ensure adequate funding for these systems, and align their schedules with the FCS schedule. The FCS acquisition strategy and testing schedule has become more complex as plans have been made to spin out capabilities to current Army forces. The strategy acquires knowledge later than called for by best practices and DOD policy, although the elongated schedule of about 10 years provides a more realistic assessment of when capabilities can be delivered. Knowledge deficits for requirements and technologies have created enormous challenges for devising an acquisition strategy that can demonstrate the maturity of design and production processes. Even if setting requirements and maturing technologies proceed without incident, FCS design and production maturity are not likely to be demonstrated until after the production decision is made. The critical design review will be held much later on FCS than other programs, and the Army will not be building production-representative prototypes to test before production. The first major test of the network and FCS together with a majority of prototypes will not take place until 2012. Much of the testing up to the 2013 production decision will involve simulations, technology demonstrations, experiments, and single-system testing. Only after that point, however, will substantial testing of the complete brigade combat team and the FCS concept of operations occur. However, production is the most expensive phase in which to resolve design or other problems found during testing. Spin-outs, which are intended to accelerate delivery of FCS capabilities to the current force, also complicate the acquisition strategy by absorbing considerable testing resources. As the Army proceeds to the preliminary design review in 2009, it faces a number of key challenges in the remaining portions of the acquisition strategy. It must complete requirements definition and technology maturity. The spin-out capabilities must be demonstrated before committing to production. System integration must be completed and the Army should be preparing to have released at least 90 percent of the engineering drawings by the time of the critical design review, a best practice. Finally, the program schedule must allocate sufficient time, as needed, to test, fix and retest throughout the FCS test program. Each FCS system, the information network, and the FCS concept should be thoroughly tested and demonstrated before committing to low rate initial production in 2013. In 2006, we reported that FCS program acquisition costs had increased to $160.7 billion--76 percent--since the Army's original estimate of $91.4 billion (figures adjusted for inflation). While the Army's current estimate of $163.7 billion is essentially the same, an independent estimate from the Office of the Secretary of Defense puts the acquisition cost of FCS between $203 billion and $234 billion. The comparatively low level of technology and design knowledge at this point in the program portends future cost increases. Our work on a broad base of DOD weapon system programs shows that most developmental cost increases occur after the critical design review, which will be in 2011 for the FCS. Yet, by that point in time, the Army will have spent about 80 percent of the FCS's development funds. Further, the Army has not yet fully estimated the cost of essential complementary programs and the procurement of spin-out items to the current force. The Army is cognizant of these resource tensions and has adopted measures in an attempt to control FCS costs. However, some of these measures do involve reducing program scope in the form of lower requirements and capabilities, which will have to be reassessed against the user's demands. Symptomatic of the continuing resource tension, the Army recently announced that it was restructuring several aspects of the FCS program, including reducing the scope of the program and its planned annual production rates to lower annual funding demands. I do want to point out the significance of the financial commitments the Army will make in the next few years. The fiscal year 2008 request includes $99.6 million in FCS procurement funds. Those funds are to procure long lead items for production of (1) non-line-of-sight cannon and other manned ground vehicles, and (2) the initial set of FCS spin-out kits. The fiscal year 2008 request will also fund plant facilitization to support FCS production beginning in fiscal year 2009. Procurement funds rise quickly thereafter, growing from $328.6 million to $1.27 billion to $6.8 billion in fiscal years 2009, 2011, and 2013, respectively. By the time of the preliminary design review and the congressionally mandated go/no-go milestone in 2009, the Army should have more of the knowledge needed to build a better cost estimate for the FCS program. The Army should also have more clarity about the level of funding that may be available to it within the long-term budget projections to fully develop and procure the FCS program of record. Also, by that time, the Army will need to have developed an official Army cost position that reconciles the gap between the Army's estimates and the independent cost estimate. In the cost estimate, the Army should clearly establish if it includes the complete set and quantities of FCS equipment needed to meet established requirements. Based on this estimate, the Army must ensure that adequate funding exists in its current budget and future years to fully fund the FCS program of record including the development of the complementary systems deemed necessary for the FCS as well as to procure the FCS capabilities planned to be spun out to the current forces. In our March 2007 report, we noted that it was important that specific criteria--as quantifiable as possible and consistent with best practices-- be established now to evaluate the sufficiency of program knowledge. We recommended specific criteria that should be included in the Secretary of Defense's evaluation of the FCS program as part of the go/no-go decision following the preliminary design review in 2009. DOD agreed with this recommendation and noted that the decision will be informed by a number of critical assessments and analyses, but was unspecific as to criteria. We agree that while it is necessary that good information--such as that included in DOD's response--be presented at the decision, it is also necessary that quantitative criteria that reflect best practices be used to evaluate the information. We also noted that in view of the great technical challenges facing the program, the possibility that FCS may not deliver the right capability must be acknowledged and anticipated. We therefore recommended that the Secretary of Defense analyze alternative courses of action DOD can take to provide the Army with sufficient capabilities, should the FCS be judged as unlikely to deliver needed capabilities in reasonable time frames and within expected funding levels. DOD agreed with this recommendation as well, citing it would rely on ongoing analyses of alternatives. We believe that it is important to keep in mind that it is not necessary to find a rival solution to FCS, but rather the next best solution should the program be judged unable to deliver needed capabilities. The Army recently made a number of key changes to FCS to keep program costs within available funding levels. Core program development and production costs were reduced by deleting or deferring four of the original systems, but these savings were offset by adding funding for spin-outs and ammunition, which had previously not been funded. The program's cost estimate reflecting the adjustment is now $161.2 billion, a slight decrease from $163.7 billion that we previously reported. Highlights include: Four systems deleted or deferred: the Class II and III unmanned aerial vehicles, the intelligent munitions system, and the armed robotic vehicle. The munitions system will continue outside of FCS, while the robotic vehicle will continue in the science and technology environment. Quantity changes: Class I unmanned aerial vehicle quantities will be cut in half. Quantities of non-line-of-sight launch systems and precision attack missiles were also reduced. The Army will buy eight additional Class IV unmanned aerial vehicles for each brigade combat team. Production rate reduction: Annual FCS production will be reduced from 1.5 to 1 brigade combat team. This change will extend FCS production by about 5 years to 2030. Consolidation of spin-outs: Spin-outs will be reduced from four to three and the content of the spin-outs have changed. The Army has now funded procurement of the spin-outs that had previously been unfunded. Schedule extension: Initial FCS production has been delayed 5 months to February 2013 and initial and full operational capabilities dates have been delayed 6 months to June 2015 and June 2017, respectively. According to Army officials, the Army's initial assessment found little difference between 14 and 18 systems on the capabilities of the FCS brigade combat team. When the program was approved in 2003, it also had 14 systems. In 2004, when it was restructured, 4 systems were added back in, bringing the total to 18, plus the network. It is not clear how the overall performance of the system can be insensitive to the changes in the composition of the FCS systems. Similarly, we do not yet have an understanding on why FCS production costs have not increased because of the lower production rates and consequent additional years of production. Generally, slowing down the production rate increases costs as the fixed costs of production facilities must be incurred for more years. To achieve the Army's goals for the FCS program, in 2003 the Army decided to employ a lead systems integrator (LSI) to assist in defining, developing, and integrating FCS. In the past few years, DOD and other agencies have applied the LSI concept in a variety of ways. In the case of the FCS program, the LSI shares program management responsibilities with the Army, including defining the FCS solution (refining requirements), selecting and managing subcontractors, and managing testing. Evaluating the use of the LSI on FCS involves consideration of several intertwined factors, which collectively make the LSI arrangement in the FCS context unique. Some, like the best efforts nature of a cost reimbursable research and development contract, are not unique to the LSI or to FCS. Other factors differ not so much in nature, but in degree from other programs. For example, FCS is not the first system-of-systems program DOD has proposed, but it is arguably the most complex. FCS is not the first program to proceed with immature technologies, but it has more immature technologies than other programs. FCS is not the first program to employ an LSI, but the extent of the partner-like relationship between the Army and the LSI breaks new ground. The Army's decision to employ a lead systems integrator for the FCS program was framed by two factors: (1) the ambitious goals of the FCS program and (2) the Army's capacity to manage it. As envisioned in 2003 when the program started, FCS presented a daunting technical and management challenge: the concurrent development of multiple weapon systems whose capabilities would be dependent on an information network also to be developed. All of this was to take place in about 5 1/2 years--much faster than a single weapon system typically takes. Army leaders believed the Army did not have the workforce or flexibility to manage development of FCS on its own within desired timelines. The Army saw its limitations in meeting this challenge as (1) cultural: difficulty in crossing traditional organizational lines; (2) capability: shortage of skills in key areas, such as managing the development of a large information network; and (3) capacity: insufficient resources to staff, manage, and synchronize several separate programs. In addition to the complexity and workforce implications of FCS, the Army saw an opportunity with an LSI to create more incentives for a contractor to give its best effort in development and to create more competition at lower supplier levels. Thus, they employed a contractor--a lead systems integrator-with significant program management responsibilities to help it define and develop FCS and reach across traditional Army mission areas. In May 2003, the Army hired the Boeing Corporation to serve as the LSI for the FCS system development and demonstration phase. Boeing subcontracted with Science Applications International Corporation, another defense contractor, to assist in performing the LSI functions. The relationship between the Army and the LSI is complicated. On the one hand, the LSI plays the traditional role of developing a product for its customer, the Army, and on the other hand the LSI acts like a partner to the Army in ensuring the design, development, and prototype implementation of the FCS network and family of systems. In forging a partner-like relationship with the LSI, the Army sought to gain managerial advantages such as maintaining flexibility to deal with shifting priorities. A partner-like relationship also poses long-term risks for the government. Depending on the closeness of the working relationship, the government's ability to provide oversight can be reduced compared with an arms-length relationship; more specifically, the government can become increasingly vested in the results of shared decisions and runs the risk of being less able to provide oversight compared with an arms-length relationship, especially when the government is disadvantaged in terms of workforce and skills. In the case of FCS, these risks are present. The Army is more involved in the selection of subcontractors than we have seen on other programs, involvement that can, over time, make the Army somewhat responsible for the LSI's subcontracting network. On the other hand, the LSI is more involved with influencing the requirements, defining the solution, and testing that solution than we have seen on other programs. This is not to say that the level of involvement or collaboration between the Army and the LSI is inherently improper, but that it may have unintended consequences over the long term. OSD is in a position to provide this oversight, but thus far has largely accepted the program and its changes as defined by the Army, even when they are at wide variance from the best practices embodied in OSD's own acquisition policies. In 2003, OSD approved the FCS for system development and demonstration prematurely despite the program's combination of immature technologies and short schedule and then declined to follow through on plans to make a better informed decision 18 months later. OSD has allowed the Army to use its cost estimates rather than OSD's own independent--and significantly higher--cost estimates and has agreed with the Army's determination that the bulk of cost increases since 2003 are the result of scope changes and thus do not trigger congressional reporting requirements. In the fiscal year 2007 National Defense Authorization Act, Congress mandated that DOD hold a formal go/no-go decision meeting on the FCS in 2009. DOD has since proposed a serious approach to making that decision, a step that is encouraging from an oversight perspective. The Army has structured the FCS contract consistent with its desire to incentivize development efforts and make it financially rewarding for the LSI to make such efforts. In that regard, the FCS contract pays well. According to an independent estimate from the Office of the Secretary of Defense, the fee payable to the LSI is relatively high based on the value of work it actually performs, and its average employee assigned to the program costs more than a federal executive. The business arrangement between the Army and LSI has been converted from an other transaction agreement to a Federal Acquisition Regulation-based contract. Yet, there remain substantive risks on whether the contract can result in a successful program outcome. As with many cost-reimbursable research and development contracts, the contractor is responsible for putting forth its best effort to ensure a successful FCS. However, if that system fails to meet expectations or requirements despite that effort, the LSI is not responsible. The Army provides incentive payments through nine program events called out in the current contract, for which the LSI must demonstrate progress in setting up and implementing various program processes. By the time the FCS critical design review is completed in 2011, the Army will have paid out over 80 percent of the costs of the LSI contract and the LSI will have had the opportunity to earn more than 80 percent of its total fee. While the Army rationally notes that it is important to use fees to encourage good performance early, the experiences of previous weapon systems shows that most cost growth occurs after the critical design review. Key demonstrations of the actual capabilities of FCS systems will take place after this point. The Army shares responsibility with the LSI for making key decisions and to some extent the Army's performance affects the performance of the LSI. For example, some of the technologies critical to the FCS are being developed by the Army, not the LSI. If the technologies do not perform as planned, the LSI may not be responsible for the consequent trade-offs in performance. Furthermore, the Army is responsible for all program changes and therefore can adjust its expectations of the LSI according to those changes and the LSI may still earn its full fee. Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions you or members of the subcommittee may have. For future questions about this statement, please contact me at (202) 512-4841 or [email protected]. Individuals making key contributions to this statement include William R. Graveline, William C. Allbritton, Noah B. Bleicher, Lily J. Chin, Brendan S. Culley, Marcus C. Ferguson, Michael D. O'Neill, Kenneth E. Patton, Thomas P. Twambly, Adam Vodraska, and Carrie R. Wilson. 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 Army's Future Combat System (FCS) is a program characterized by bold goals and innovative concepts--transformational capabilities, system-of-systems approach, new technologies, a first-of-a-kind information network, and a total investment cost of more than $200 billion. As such, the FCS program is considered high risk and in need of special oversight and review. Today's testimony is based on work conducted over the past year in response to (1) the National Defense Authorization Act for Fiscal Year 2006, which requires GAO to report annually on the FCS acquisition; and (2) the John Warner National Defense Authorization Act for Fiscal Year 2007, which requires GAO to report on the role of the lead systems integrator in the Army's FCS program. Accordingly, this statement discusses (1) the business case for FCS to be successful and (2) the business arrangements for the FCS program. The Army has far less knowledge about FCS and its potential for success than is needed to fulfill the basic elements of a business case. Those elements are not new to the Army, nor to the Department of Defense (DOD), which addresses such criteria in its weapon system acquisition policy. The Army has made improvements to the program, such as lengthening time frames for demonstrating capabilities and for providing capabilities to current forces. While the Army has also made progress, what it still lacks in knowledge raises doubts about the soundness of the FCS business case. The Army has yet to fully define FCS requirements; FCS technologies that should have been matured in 2003, when the program started, are still immature; key testing to demonstrate FCS performance will not be completed and maturity of design and product will not be demonstrated until after production starts in 2013; and an independent cost estimate from the Office of the Secretary of Defense is between $203 billion and $234 billion, a far higher figure than the Army's cost estimate. To achieve its goals for the FCS program, the Army decided to employ a lead systems integrator (LSI) to assist in defining, developing, and integrating the FCS. This decision reflected the fact that not only were FCS goals ambitious, but also that the Army had limited capacity to manage the undertaking. Boeing Corporation is the LSI. Its relationship with the Army on FCS breaks new ground for collaboration between the government and a contractor. The close working relationship has advantages and disadvantages. An advantage is that such a relationship allows flexibility in responding to shifting priorities. A disadvantage is an increase in risks to the Army's ability to provide oversight over the long term. The contract itself is structured in such a way as to enable the LSI to be paid over 80 percent of its costs and fees by completion of the critical design review in 2011--a point after which programs typically experience most of their cost growth. This is consistent with the Army's desire to provide incentives for the development effort. On the other hand, this contract, as with many cost-reimbursable research and development contracts, makes the contractor responsible for providing its best efforts, but does not assure a successful FCS. The foregoing underscores the important role of the Office of the Secretary of Defense in providing oversight on the FCS program. To date, the Office of the Secretary of Defense has largely accepted the Army's approach to FCS, even though it runs counter to DOD's policy for weapon system acquisition. GAO believes the Office of the Secretary of Defense needs to hold the FCS program accountable to high standards at the congressionally directed decision in 2009 on whether to proceed with FCS. Financial commitments to production will grow rapidly after that point. The Office of the Secretary of Defense should also be mindful of the department-wide implications of the future use of LSIs as well as the system-of-systems approach to developing weapon acquisitions.	5,431	823
The electricity industry, as shown in figure 1, is composed of four distinct functions: generation, transmission, distribution, and system operations. Once electricity is generated--whether by burning fossil fuels; through nuclear fission; or by harnessing wind, solar, geothermal, or hydro energy--it is generally sent through high-voltage, high-capacity transmission lines to local electricity distributors. Once there, electricity is transformed into a lower voltage and sent through local distribution lines for consumption by industrial plants, businesses, and residential consumers. Because electric energy is generated and consumed almost instantaneously, the operation of an electric power system requires that a system operator constantly balance the generation and consumption of power. Utilities and others own and operate electricity assets, which may include generation plants, transmission lines, distribution lines, and substations-- structures often seen in residential and commercial areas that contain technical equipment such as switches and transformers to ensure smooth, safe flow of current and regulate voltage. Utilities may be owned by investors, municipalities, and individuals (as in cooperative utilities). System operators--sometimes affiliated with a particular utility or sometimes independent and responsible for multiple utility areas-- manage the electricity flows. These system operators manage and control the generation, transmission, and distribution of electric power using control systems--IT- and network-based systems that monitor and control sensitive processes and physical functions, including opening and closing circuit breakers. As we have previously reported, the effective functioning of the electricity industry is highly dependent on these control systems. Nevertheless, for many years, aspects of the electricity network lacked (1) technologies-- such as sensors--to allow system operators to monitor how much electricity was flowing on distribution lines, (2) communications networks to further integrate parts of the electricity grid with control centers, and (3) computerized control devices to automate system management and recovery. As the electricity industry has matured and technology has advanced, utilities have begun taking steps to update the electricity grid--the transmission and distribution systems--by integrating new technologies and additional IT systems and networks. Though utilities have regularly taken such steps in the past, industry and government stakeholders have begun to articulate a broader, more integrated vision for transforming the electricity grid into one that is more reliable and efficient; facilitates alternative forms of generation, including renewable energy; and gives consumers real-time information about fluctuating energy costs. This vision--the smart grid--would increase the use of IT systems and networks and two-way communication to automate actions that system operators formerly had to make manually. Electricity grid modernization is an ongoing process, and initiatives have commonly involved installing advanced metering infrastructure (smart meters) on homes and commercial buildings that enable two-way communication between the utility and customer. Other initiatives include adding "smart" components to provide the system operator with more detailed data on the conditions of the transmission and distribution systems and better tools to observe the overall condition of the grid (referred to as "wide-area situational awareness"). These include advanced, smart switches on the distribution system to reroute electricity around a troubled line and high-resolution, time-synchronized monitors--called phasor measurement units--on the transmission system. The use of smart grid systems may have a number of benefits, including improved reliability with fewer and shorter outages, downward pressure on electricity rates resulting from the ability to shift peak demand, an improved ability to more efficiently use alternative sources of energy, and an improved ability to detect and respond to potential attacks on the grid. Both the federal government and state governments have authority for overseeing the electricity industry. For example, the Federal Energy Regulatory Commission (FERC) regulates rates for wholesale electricity sales and transmission of electricity in interstate commerce. This includes approving whether to allow utilities to recover the costs of investments they make to the transmission system, such as some smart grid investments. Meanwhile, local distribution and retail sales of electricity are generally subject to regulation by state public utility commissions. State and federal authorities also play key roles in overseeing the reliability of the electric grid. State regulators generally have authority to oversee the reliability of the local distribution system. The North American Electric Reliability Corporation (NERC) is the federally designated U.S. Electric Reliability Organization, and is overseen by FERC. NERC has responsibility for conducting reliability assessments and developing and enforcing mandatory standards to ensure the reliability of the bulk power system--i.e., facilities and control systems necessary for operating the transmission network and certain generation facilities needed for reliability. NERC develops reliability standards collaboratively through a deliberative process involving utilities and others in the industry, which are then sent to FERC for approval. These standards include critical infrastructure protection standards for protecting electric utility-critical and cyber-critical assets. FERC has responsibility for reviewing and approving the reliability standards or directing NERC to modify them. In addition, the Energy Independence and Security Act of 2007 established federal policy to support the modernization of the electricity grid and required actions by a number of federal agencies, including the National Institute of Standards and Technology (NIST), FERC, and the Department of Energy. With regard to cybersecurity, the act required NIST and FERC to take the following actions: NIST was to coordinate development of a framework that includes protocols and model standards for information management to achieve interoperability of smart grid devices and systems. As part of its efforts to accomplish this, NIST identified cybersecurity standards for these systems and the need to develop guidelines for organizations such as electric companies on how to securely implement smart grid systems. In January 2011, we reported that NIST had identified 11 standards involving cybersecurity that support smart grid interoperability and had issued the first version of a cybersecurity guideline. In February 2012, NIST issued the 2.0 version of the framework that, according to NIST documents, added 22 standards, specifications, and guidelines to the 75 standards NIST recommended as being applicable to the smart grid in the 1.0 version from January 2010. In September 2014, NIST issued the first revision of the cybersecurity guidelines. FERC was to adopt standards resulting from NIST's efforts that it deemed necessary to ensure smart grid functionality and interoperability. However, according to FERC officials, the statute did not provide specific additional authority to allow FERC to require utilities or manufacturers of smart grid technologies to follow these standards. As a result, any standards identified and developed through the NIST-led process are voluntary unless regulators use other authorities to indirectly compel utilities and manufacturers to follow them. Like threats affecting other critical infrastructures, threats to the electricity industry and its transmission and distribution systems are evolving and growing and can come from a wide array of sources. Risks to cyber- based assets can originate from unintentional or intentional threats. Unintentional threats can be caused by, among other things, natural disasters, defective computer or network equipment, software coding errors, and careless or poorly trained employees. Intentional threats include both targeted and untargeted attacks from a variety of sources, including criminal groups, hackers, disgruntled insiders, foreign nations engaged in espionage and information warfare, and terrorists. These adversaries vary in terms of their capabilities, willingness to act, and motives, which can include seeking monetary gain or pursuing a political, economic, or military advantage. For example, adversaries possessing sophisticated levels of expertise and significant resources to pursue their objectives--sometimes referred to as "advanced persistent threats"--pose increasing risks. They make use of various techniques-- or exploits--that may adversely affect federal information, computers, software, networks, and operations, such as a denial of service, which prevents or impairs the authorized use of networks, systems, or applications. The potential impact of these threats is amplified by the connections between industrial control systems, supervisory control and data acquisition (or SCADA) systems, information systems, the Internet, and other infrastructures, which create opportunities for attackers to disrupt critical services, including electrical power. The increased reliance on IT systems and networks also exposes the electric grid to potential and known cybersecurity vulnerabilities. These include an increased number of entry points and paths that can be exploited; the introduction of new, unknown vulnerabilities resulting from an increased use of new system and network technologies; wider access to systems and networks due to increased connectivity; an increased amount of customer information being collected and transmitted, which creates a tempting target for potential attackers. We and others have also reported that smart grid and related systems have known cyber vulnerabilities. For example, cybersecurity experts have demonstrated that certain smart meters can be successfully attacked, possibly resulting in disruption to the electricity grid. In addition, we have reported that control systems used in industrial settings such as electricity generation have vulnerabilities that could result in serious damages and disruption if exploited. Further, in 2007, the Department of Homeland Security, in cooperation with the Department of Energy, ran a test that demonstrated that a vulnerability commonly referred to as "Aurora" had the potential to allow unauthorized users to remotely control, misuse, and cause damage to a small commercial electric generator. Moreover, in 2008, the Central Intelligence Agency reported that malicious activities against IT systems and networks have caused disruption of electric power capabilities in multiple regions overseas, including a case that resulted in a multicity power outage. In January 2014, the Director of National Intelligence testified that industrial control systems and SCADA systems used in electrical power distribution and other industries provided an enticing target to malicious actors and that, although newer architectures provide flexibility, functionality, and resilience, large segments remain vulnerable to attack, which might cause significant economic or human impact. Further, in 2015 the Director testified that studies asserted that foreign cyber actors were developing means to access industrial control systems remotely, including those that manage critical infrastructures such as electric power grids. As government, private sector, and personal activities continue to move to networked operations, the threat will continue to grow. Cyber incidents continue to affect the electric industry. For example, the Department of Homeland Security's Industrial Control Systems Cyber Emergency Response Team noted that the number of reported cyber incidents affecting control systems of companies in the electricity subsector increased from 3 in 2009 to 25 in 2011. The response team reported that the energy sector, which includes the electricity subsector, led all others in fiscal year 2014 with 79 reported incidents. Reported incidents affecting the electricity subsector have had a variety of impacts, including hacks into smart meters to steal power, failure in control systems devices requiring power plants to be shut down, and malicious software disabling safety monitoring systems. As we have previously reported, multiple entities have taken steps to help secure the electricity grid, including NERC, NIST, FERC, and the Departments of Homeland Security and Energy. For example, NERC developed critical infrastructure standards for protecting electric utility- critical and cyber-critical assets. These standards established requirements for key cybersecurity-related controls: the identification of critical cyber assets, security management, personnel and training, electronic "security perimeters," physical security of critical cyber assets, systems security management, incident reporting and response planning, and recovery plans for critical cyber assets. In December 2011 we reported that NERC's cybersecurity standards, along with supplementary guidance, were substantially similar to NIST guidance applicable at the time to federal agencies. NERC had also published security guidelines for companies to consider for protecting electric infrastructure systems, although these guidelines were voluntary and typically not checked for compliance. For example, some of this guidance was intended to assist entities in identifying and developing a list of critical cyber assets. As of October 2015, NERC listed about 30 critical infrastructure protection standards for cybersecurity, some of which were subject to enforcement, some which were subject to future enforcement, and some which were pending regulatory filing or approval. NERC also had enforced compliance with mandatory cybersecurity standards through its Compliance Monitoring and Enforcement Program, including assessing monetary penalties for violations. NIST, in accordance with its responsibilities under the Energy Independence and Security Act of 2007, has identified cybersecurity standards for smart grid systems. Specifically, in August 2010 NIST had identified 11 such standards and issued the first version of a cybersecurity guideline. As we reported in January 2011, NIST's guidelines largely addressed key cybersecurity elements, with the exception of the risk of attacks using both cyber and physical means--an element essential to securing smart grid systems. We recommended that NIST finalize its plan and schedule for incorporating the missing elements into its guidelines. In 2014, NIST issued updated guidelines, which address the relationship of smart grid cybersecurity to cyber-physical attacks and cybersecurity testing and certification. In addition, the updated guidelines describe the relationship of smart grid cybersecurity to NIST's cybersecurity framework that was issued in February 2014. This framework, which was developed in accordance with Executive Order 13636, is to enable organizations--regardless of size, degree of cybersecurity risk, or cybersecurity sophistication--to apply the principles and best practices of risk management to improving the cybersecurity and resilience of critical infrastructure. FERC had also taken several actions, including reviewing and approving NERC's critical infrastructure protection standards in 2008. It had also directed NERC to make changes to the standards to improve cybersecurity protections. However, in 2012 the FERC Chairman stated that many of the outstanding directives had not been incorporated into the standards. We also noted in our January 2011 report that FERC had begun reviewing smart grid standards identified by NIST, but declined to adopt them due to insufficient consensus. The Department of Homeland Security, in its capacity as the lead federal agency for cyber-critical infrastructure protection, had issued recommended practices to reduce risks to industrial control systems in critical infrastructure sectors, including the electricity subsector. The department has also provided on-site support to respond to and analyze security incidents and shared actionable intelligence, vulnerability information, and threat analysis with companies in the electricity subsector. In addition, the department, in accordance with Executive Order 13636, established a program to promote the adoption of the NIST cybersecurity framework. As the lead agency responsible for critical infrastructure protection efforts in the energy sector, the Department of Energy, as we reported in December 2011, was involved in efforts to assist the electricity subsector in the development, assessment, and sharing of cybersecurity standards, according to department officials. In addition, the department has created sector-specific guidance to assist the sector in implementing the NIST cybersecurity framework. The guidance includes sections that explain framework concepts for its application, identify example resources that may support framework use, provide a general approach to framework implementation, and identify an example of a tool-specific approach to implementing the framework. In our January 2011 report we identified a number of key challenges that industry and government stakeholders faced in securing the systems and networks supporting the electricity grid. Monitoring implementation of cybersecurity standards. Best practices for information security call for monitoring the extent to which security controls have been implemented. In our report, we noted that FERC had not developed an approach coordinated with other regulators to monitor, at a high level, the extent to which industry follows the voluntary smart grid standards it adopts. We recommended that FERC, in coordination with state regulators and groups that represent utilities subject to less FERC and state regulation, periodically evaluate the extent to which utilities and manufacturers are following voluntary interoperability and cybersecurity standards and develop strategies for addressing any gaps in compliance with standards that are identified as a result of this evaluation. However, FERC has not implemented this recommendation. While FERC reported that it has taken steps to collaborate with stakeholders, it has not taken steps to determine the extent to which the voluntary standards have been integrated into products or whether they are effective. Monitoring such efforts would help FERC and other regulators know if their approach to standards setting is effective or if changes are needed. Clarifying regulatory responsibilities. Experts we spoke with during the course of our review in 2011 expressed concern that there was a lack of clarity about the division of responsibility between federal and state regulators, particularly regarding cybersecurity. While jurisdictional responsibility has historically been determined by whether a technology is located on the transmission or distribution system, experts raised concerns that smart grid technology may blur these lines because, for example, devices deployed on parts of the grid traditionally subject to state jurisdiction could, in the aggregate, affect the reliability of the transmission system, which falls under federal jurisdiction. Experts also noted concern about the ability of regulatory bodies to respond quickly to evolving cybersecurity threats. Clarifying these responsibilities could help improve the effectiveness of efforts to protect smart grid technology from cyber threats. Taking a comprehensive approach to cybersecurity. To secure their systems and information, entities should adopt an integrated, organization-wide program for managing information security risk. Such an approach helps ensure that risk management decisions are aligned strategically with the organization's mission and security controls are effectively implemented. However, as we reported in 2011, experts told us that the existing federal and state regulatory environment had created a culture within the utility industry of focusing on compliance with regulatory requirements instead of one focused on achieving comprehensive and effective cybersecurity. By taking such a comprehensive approach, utilities could better mitigate cybersecurity risk. Ensuring that smart grid systems have built-in security features. Information systems should be securely configured, including having the ability to record events that take place on networks to allow for detecting and analyzing potential attacks. Nonetheless, experts told us that certain currently available smart meters had not been designed with a strong security architecture and lacked important security features, such as event logging. By ensuring that smart grid systems are securely designed, utilities could enhance their ability to detect and analyze attacks, reducing the risk that attacks will succeed and helping to prevent them from recurring. Effectively sharing cybersecurity information. Information sharing is a key element in the model established by federal policy for protecting critical infrastructure. However, the electric industry lacked an effective mechanism to disclose information about cybersecurity vulnerabilities, incidents, threats, lessons learned, and best practices. For example, experts we spoke with stated that while the industry had an information-sharing center, it did not fully address these information needs. Establishing quality processes for information sharing will help provide utilities with the information needed to adequately protect cyber assets against attackers. Establishing metrics for evaluating cybersecurity. Metrics are important for comparing the effectiveness of competing cybersecurity solutions and determining what mix of solutions will make the most secure system. The electric industry, however, was challenged by a lack of cybersecurity metrics, making it difficult to determine the extent to which investments in cybersecurity improve the security of smart grid systems. Developing such metrics could provide utilities with key information for making informed and cost-effective decisions on cybersecurity investments. In our January 2011 report, we recommended that FERC, working with NERC as appropriate, assess whether any cybersecurity challenges identified in our report should be addressed in commission cybersecurity efforts. Since that time, FERC took the following actions. First, in 2011, it began evaluating whether cybersecurity challenges, including those identified in our report, should be addressed under the agency's existing cyber security authority and efforts. As a part of this effort, the commission directed NERC to revise the electricity industry's critical infrastructure protection (CIP) standards with the aim of addressing, among other things, cybersecurity challenges identified in our report. In November 2013, NERC issued updated CIP standards to address these and other cybersecurity challenges. Second, the commission held a technical conference in 2011 in which it solicited feedback from industry stakeholders to help inform the agency's cybersecurity efforts. Third, in September 2012, the commission established an Office of Energy Infrastructure Security, which is to, among other things, help mitigate cybersecurity threats to electricity industry facilities, and to improve cybersecurity information sharing. In summary, as they become increasingly reliant on computerized technologies, the electricity industry's systems and networks are susceptible to an evolving array of cyber-based threats. Key entities, including NERC and FERC, are critical to approving and disseminating cybersecurity guidance and standards, while NIST, DHS, and the Department of Energy have additional roles to play in providing guidance and providing other forms of support for protecting the sector against cyber threats. Moreover, without monitoring the implementation of voluntary cybersecurity standards in the industry, FERC does not know the extent to which such standards have been adopted or whether they are effective. Given the increasing use of information and communications technology in the electricity subsector and the evolving nature of cyber threats, continued attention can help mitigate the risk these threats pose to the electricity grid. Chairman Weber, Chairwoman Comstock, Ranking Members Grayson and Lipinski, and Members of the Subcommittees, this concludes my prepared statement. I would be happy to answer any questions you may have at this time. If you or your staffs have any questions about this statement, please contact Gregory C. Wilshusen at (202) 512-6244 or [email protected]. Other staff who contributed to this statement include Franklin J. Rusco, Director; Michael W. Gilmore; Bradley W. Becker; Kenneth A. Johnson; Jon R. Ludwigson; Lee McCracken; Jonathan Wall; and Jeffrey W. Woodward. 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 electric power industry--including transmission and distribution systems--increasingly uses information and communications technology systems to automate actions with the aim of improving the electric grid's reliability and efficiency. However, these "smart grid" technologies may be vulnerable to cyber-based attacks and other threats that could disrupt the nation's electricity infrastructure. Several federal entities have responsibilities for overseeing and helping to secure the electricity grid. Because of the proliferation of cyber threats, since 2003 GAO has designated protecting the systems supporting U.S. critical infrastructure (which includes the electricity grid) as a high-risk area. GAO was asked to provide a statement on opportunities to improve cybersecurity for the electricity grid. In preparing this statement, GAO relied on previous work on efforts to address cybersecurity of the electric sector. GAO reported in 2011 that several entities--the North American Electric Reliability Corporation (NERC), the National Institute of Standards and Technology (NIST), the Federal Energy Regulatory Commission (FERC), the Department of Homeland Security (DHS), and the Department of Energy (DOE)--had taken steps to help secure the electric grid. These included developing cybersecurity standards and other guidance to reduce risks. While these were important efforts, GAO at that time also identified a number of challenges to securing the electricity grid against cyber threats: Monitoring implementation of cybersecurity standards : GAO found that FERC had not developed an approach, coordinated with other regulatory entities, to monitor the extent to which the electricity industry was following voluntary smart grid standards, including cybersecurity standards. Clarifying regulatory responsibilities: The nature of smart grid technology can blur traditional lines between the portions of the grid that are subject to federal or state regulation. In addition, regulators may be challenged in responding quickly to evolving cybersecurity threats. Taking a comprehensive approach to cybersecurity: Entities in the electricity industry (e.g., utilities) often focused on complying with regulations rather than taking a holistic and effective approach to cybersecurity. Ensuring that smart grid systems have built-in security features: Smart grid devices (e.g., meters) did not always have key security features such as the ability to record activity on systems or networks, which is important for detecting and analyzing attacks. Effectively sharing cybersecurity information: The electricity industry did not have a forum for effectively sharing information on cybersecurity vulnerabilities, incidents, threats, and best practices. Establishing cybersecurity metrics: The electricity industry lacked sufficient metrics for determining the extent to which investments in cybersecurity improved the security of smart grid systems. Since 2011, additional efforts have been taken to improve cybersecurity in the sector. For example, in 2013, NERC issued updated standards to address these and other cybersecurity challenges. NIST also updated its smart grid cybersecurity standards in 2014. It has also developed a cybersecurity framework for critical infrastructure, and DHS and DOE have efforts under way to promote its adoption. In addition, FERC assessed whether these and other challenges should be addressed in its ongoing cybersecurity efforts. However, FERC did not coordinate with other regulators to identify strategies for monitoring compliance with voluntary cybersecurity standards in the industry, as GAO had recommended. As a result, FERC does not know the extent to which such standards have been adopted or whether they are effective. Given the increasing use of information and communications technology in the electricity subsector and the evolving nature of cyber threats, continued attention can help mitigate the risk these threats pose to the electricity grid. In its 2011 report, GAO recommended that (1) NIST improve its cybersecurity standards, (2) FERC assess whether challenges identified by GAO should be addressed in ongoing cybersecurity efforts, and (3) FERC coordinate with other regulators to identify strategies for monitoring compliance with voluntary standards. The agencies agreed with the recommendations, but FERC has not taken steps to monitor compliance with voluntary standards.	4,627	807
Federal agencies record their budget spending authority in fund accounts called Fund Balance with Treasury (FBWT), and increase or decrease these accounts as they collect or disburse funds. In the federal government, an agency's FBWT account is the closest thing an agency has to a corporate bank account. The difference is that instead of a cash balance, FBWT represents unexpended spending authority in appropriations. In enacting appropriations, Congress authorizes agencies to spend from the various FBWT accounts to meet their missions. These fund accounts serve as a control mechanism to help ensure that agencies' disbursements do not exceed the appropriated amounts. Reconciling FBWT activity is an important internal control in ensuring that all receipt and disbursement transactions have been recorded in the accounting records of government agencies. Reconciling agency FBWT activity records with Treasury activity records is important to establish the completeness of transactions reported and can be used to determine unexpended fund balances. Reconciliation is a necessary step in achieving funds control. A reconciliation consists of comparing two or more sets of records, researching and resolving any differences, and recording adjustments if necessary. Reconciliations are to be performed routinely so that any problems are detected and corrected promptly and differences are not allowed to age, thereby becoming increasingly difficult to research. DFAS, a component of DOD, has responsibility for providing finance and accounting services to all other DOD components, including the Air Force, Army, Navy, and Marine Corps. DFAS' headquarters unit and five DFAS centers are responsible for accounting, disbursing, collecting, and financial reporting for DOD components. DFAS Denver, with support from its field locations, is specifically responsible for Air Force accounting functions. Air Force and other components' personnel are responsible for funds control and purchasing the goods and services necessary to meet their missions. The Office of the Under Secretary of Defense (Comptroller) issues the DOD Financial Management Regulation containing DOD's policies and procedures in the area of financial management. The DFAS centers and their field locations process cash, interagency, and intra-DOD transactions based on requests from military service personnel. Cash transactions primarily consist of paper checks issued, electronic funds transfers, and deposits. Interagency and intra-DOD transactions are primarily transfers of funds between federal entities and do not involve cash; however, they affect the FBWT accounts the same way cash transactions do. DFAS increases or decreases DOD's individual FBWT account balances during the year as funds are collected or disbursed. DFAS is responsible for maintaining transaction-level details and a record of the unexpended balance for each of DOD's appropriation accounts. Treasury also maintains accounting information on the Air Force's and other federal agencies' FBWT activity to prepare governmentwide financial reports. In an effort to ensure the integrity of these reports, Treasury directs agencies to reconcile their reported FBWT activity on a regular and recurring basis. Many disbursements from Air Force General Funds are made and reported to Treasury by other DOD services and federal agencies in accordance with pre-arranged agreements. These other DOD components and agencies process disbursements from Air Force General Funds for obligations that were established by Air Force personnel responsible for buying goods and services and then transmit information on their disbursements for Air Force to Treasury and separately to DFAS Denver. Federal agencies and the other DOD components disburse the funds first, and DFAS Denver field locations receive the detailed accounting transaction data from them later. This process is different from both normal bookkeeping operations in the private sector and keeping one's personal checkbook. This DOD system is similar to having more than one person writing checks on the same bank account, which would create uncertainty in knowing the balance in the account. Increasing the difficulty in knowing the balance is DOD's long-standing problem of not having integrated accounting systems, which routinely causes accounting data to be processed at different times. The following example illustrates the interagency disbursement system. Assume the Air Force authorizes the State Department to disburse Air Force funds. The State Department pays a bill for the Air Force and sends the information to Treasury. Treasury then subtracts the funds from the Air Force's FBWT. Treasury reports the disbursement to DFAS Denver. However, DFAS Denver cannot record the related expense transaction or subtract the already disbursed funds from the FBWT account balance on its books until it receives sufficient details from the State Department. These details can come after the month-end Treasury report. When DFAS Denver receives the transaction data from the State Department, DFAS Denver sends the information to the Air Force field activity that authorized the disbursement. The Air Force field activity matches the disbursement to the original obligation and records the transaction. Each month, DFAS Denver compares the activity recorded in the Air Force FBWT account to the activity reported in the account by Treasury. Because multiple federal agencies and other DOD components can affect the Air Force's fund balance accounts at Treasury, DFAS Denver's recorded transaction activity routinely differs from Treasury's, creating reconciling items at any point in time. These multiple participants in the disbursing and collecting process make the reconciliation process more complex than reconciling one's personal checkbook. The reconciliation process consists of two parts. First, Treasury compares agency-reported receipts and disbursements to amounts reported by the Federal Reserve or commercial banking system. Treasury then provides agencies the details of any identified discrepancies in monthly comparison reports. Each agency is responsible for researching the differences between its and Treasury's records. Once differences are resolved, agencies record any necessary adjustments to their FBWT accounts and report these adjustments to Treasury. To correct bank errors, agencies contact the bank or Treasury for assistance. Figure 1 summarizes this first part of the FBWT reconciliation process. For the second part of the reconciliation process, DFAS Denver compares the disbursement and collection transaction activity for each appropriation account in its records for the Air Force General Funds to another monthly report from Treasury that shows the activity reported by all agencies for each fund account. Since, as previously explained, Treasury receives some of the disbursement and collection activity directly from other entities before DFAS Denver, timing differences often occur. DFAS Denver then identifies and reconciles any timing differences or errors. Timing differences are resolved through the normal course of DFAS Denver's staff recording transactions in Air Force records. To correct errors, including those made by other agencies in reporting Air Force fund account transactions to Treasury, DFAS Denver's staff records adjustments to Air Force records and reports them to Treasury and the other agencies as appropriate. Figure 2 summarizes the second part of the FBWT reconciliation process. The reconciliation process at DFAS Denver and the other DOD components is complicated by the long-standing problem of a lack of integrated systems within and among the components. DFAS Denver currently depends on file extracts from multiple systems for its reconciliations. DFAS Denver's staff analyzes the numerous extracts and determines the causes of the differences in the multiple systems. To be effective, this reconciliation process must be comprehensive to overcome and compensate for the lack of integration among its systems. Our objectives were to determine (1) the progress DFAS Denver has made in improving its processes for reconciling the transaction activity in the Air Force General Funds and (2) whether any of DFAS Denver's reconciliation concepts or policies could be used in reconciling the Fund Balance with Treasury activity of the other DOD components. Our review focused on the General Funds reconciliations and did not include Air Force Working Capital Funds reconciliations. To determine the extent of progress DFAS Denver has made in improving the reconciliation of the transaction activity in the Air Force General Funds, we met with DFAS Denver officials and observed DFAS Denver procedures for monitoring the field reconciliation efforts. We obtained reports of outstanding differences for the Air Force General Funds from DFAS Denver and Treasury. We determined whether existing DFAS Denver policies, procedures, and practices reflected the need for improvements outlined in prior year audit reports issued by GAO, DOD's Inspector General, and the Air Force Audit Agency. To determine whether the DFAS Denver reconciliation concepts, policies, and practices could be used across DOD, we met with DFAS headquarters, Denver, Cleveland, and Indianapolis officials to identify the similarities and differences among DFAS centers and the FBWT reconciliation initiatives in place at each center. To determine the progress other centers had reported in reconciling their FBWT accounts, we obtained reports of outstanding differences from DFAS headquarters and Treasury. The scope of our review at DFAS Denver focused solely on evaluating the processes used to reconcile the Air Force General Funds activity and did not include detailed testing of its reconciliations or of data provided by Treasury or the Air Force Audit Agency. Also, we did not determine whether DFAS Denver's policies and processes are uniformly in place throughout all of its field locations. We did not audit the Air Force's FBWT reconciliation and thus provide no conclusions as to whether the processes discussed in this report are being effectively performed. We performed our work from August 2000 through April 2001 in accordance with generally accepted government auditing standards. Written comments on a draft of this report were received from the Director of Accounting, DFAS, and have been reprinted in appendix I. DFAS Denver has developed a two-part process for reconciling its FBWT receipt and disbursement activity that reconciles differences in (1) cash transactions identified by Treasury and (2) Air Force transaction records compared to transaction activity reported to Treasury. Over the past few years, by increasing management attention on the reconciliation process, DFAS Denver has made improvements in both parts of the process and has reported a corresponding reduction in its unreconciled differences. However, its reconciliation processes are not yet fully refined. In prior years, auditors identified and reported weaknesses in DFAS Denver's ability to effectively reconcile the cash activity part of its FBWT reconciliation. For example, in reporting on the results of its audit of the Air Force's fiscal year 1997 financial statements, the Air Force Audit Agency noted that DFAS Denver field personnel did not promptly research and correct deposit and disbursement differences identified by Treasury.In addition, the Air Force Audit Agency identified internal control weaknesses for fiscal year 1998 related to the (1) monitoring and reconciliation of check totals, (2) timely reporting of checks, and (3) prompt resolution of check amount discrepancies. In recent years, DFAS Denver has increased the management attention given to resolving cash differences identified by Treasury, which is part one of the FBWT reconciliation process. At the heart of its efforts are several initiatives to improve its processes for identifying, researching, and resolving the differences. For example, DFAS Denver has implemented new procedures for reconciling deposit and electronic funds transfer transactions. Each month, DFAS Denver produces exception reports containing specific transactions that have been reported to Treasury (1) by the Federal Reserve but not by DFAS field personnel, (2) by DFAS field personnel but not the Federal Reserve, and (3) in different months, for different amounts, or otherwise reported differently by DFAS field personnel and the Federal Reserve. DFAS Denver provides these lists each month to field accounting personnel to aid them in resolving differences. DFAS Denver personnel monitor the timeliness of field resolution of these differences and contact field personnel regarding aged unresolved amounts. In addition to improving its reconciliation processes for deposits and electronic funds transfers, DFAS Denver also has improved its methods of monitoring differences related to paper checks. DFAS Denver receives a Treasury notification of individual paper check errors throughout the month as Treasury identifies discrepancies between the check amount reported by DFAS Denver and the amount paid by the bank. In addition, Treasury also reports these check discrepancies in a summary comparison report sent to DFAS Denver after month-end. DFAS Denver has added a procedure to monitor and correct the individual check errors prior to receiving the monthly summary comparison reports from Treasury. Other initiatives DFAS Denver has undertaken include adding a new section to the mandatory training class for new disbursing officers describing procedures for clearing differences reported by Treasury; adding a section to the DFAS Web page providing detailed instructions for DFAS Denver and field accounting personnel for resolving cash transaction differences; increasing the use of electronic funds transfers rather than paper checks (issuing electronic funds transfers is a more automated process than issuing paper checks, and, since the transaction occurs immediately, timing differences are virtually eliminated); and issuing memorandums requiring field personnel to increase the priority given to resolving FBWT differences identified by Treasury. These proactive initiatives have been a major factor in DFAS Denver's reported reduction in cash transaction discrepancies. For example, according to Treasury reports as of September 30, 2000, the current net unresolved cash differences from 2 months to 1 year totaled less than $400,000 compared to $26 million as of September 30, 1998. DFAS Denver's experience also provides evidence that not performing routine reconciliation can result in differences getting so old that they become difficult to reconcile. Treasury records as of September 30, 2000, show $56 million still outstanding in net unreconciled cash differences that occurred over 5 years ago before the new reconciliation procedures were in place. DFAS Denver has found it difficult to locate supporting documentation to determine the causes of these old differences. The records also show that DFAS Denver has only $260,000 net unreconciled differences that are from 1 to 5 years old. Every month, timing differences occur between when Treasury and Air Force receive and record transactions. These differences are caused by the lack of integrated accounting systems and routine business processing. Consequently, DFAS Denver must routinely reconcile its transaction records to those at Treasury. Prior to fiscal year 1998, DFAS Denver was not reconciling these monthly differences in the two sets of records. Over the past 3 years, DFAS Denver developed the second part of the overall reconciliation process to reconcile the difference between its records and those at Treasury as shown in figure 3. DFAS Denver's goal for this process is to identify the transactions that make up the difference, categorize them to facilitate reconciliation, and track them until they are reconciled. The first step is to determine the difference between Treasury and Air Force records each month. DFAS Denver does this by comparing the total Air Force disbursement and receipt transactions in Treasury's records to the comparable transactions in Air Force accounting records and calculating the difference. This is the amount that has to be reconciled, which was $1.6 billion at September 30, 2000. Step two is a monthly data analysis process to identify the specific transactions making up the difference calculated in step one. DFAS Denver refers to the calculated difference in the two sets of records as the undistributed difference. The term "undistributed" applies to those transactions that have not yet been reconciled--recorded or corrected in the accounting records. To identify the transactions, DFAS Denver uses data retrieval and analysis tools to extract the transactions in DFAS Denver's Merged Accounting and Fund Reporting system. The function of this system is to track transactions from the time DFAS Denver receives them from either Treasury or the originators of the transactions until Air Force personnel reconcile them. Once DFAS Denver identifies the transactions that make up the unreconciled difference, it sorts them by appropriation into various categories to help speed and simplify the reconciliation process. Sorting the transactions into categories with common elements facilitates tracking the transactions until the field-level accounting staff fully reconciles them by either recording them in Air Force accounting records, making corrections to the records, or submitting adjustments or corrections to the originators of the transactions. DFAS Denver has developed 11 categories that reflect the nature of transactions. For example, the categories into which the unreconciled transactions are sorted include the following. Army-Navy Current Month. The Army and the Navy, which make payments on behalf of the Air Force, cite Air Force appropriations when they submit the payment information to Treasury. Since Air Force field locations often have not yet received the detailed accounting transactions for these payments, these transactions are placed in this category awaiting reconciliation. Rejects. This category is used when Air Force field locations cannot verify payments made by someone else on their behalf. This can happen when they determine that they have not been provided sufficient supporting documentation to post the transaction or the payment belongs to another accounting station. The field locations "reject" the individual payment back to DFAS Denver for transmission either back to the originator of the payment or to another field location. Interfund. DOD components sometimes use the interfund system to sell materials to each other. If the seller and buyer do not record the transactions in the same month, which often occurs, it automatically appears as a reconciling difference between DFAS Denver's records and Treasury's records and would be placed in this category for reconciliation purposes. Reducing the total undistributed amount is important because fewer transactions will have to be tracked until reconciled. However, the use of nonintegrated systems and routine business processes does not permit the simultaneous processing of transactions and affects when transactions are recorded. Therefore, eliminating the undistributed amount entirely is not possible because timing differences will continue to cause a difference between DFAS Denver's and Treasury's records that will need to be identified and reconciled. DFAS Denver's analysis cannot yet identify all the transactions that make up the total undistributed difference. The amount that is not identified is referred to as the "variance." Eliminating the variance is important because the variance constitutes the amount of receipt and disbursement activity for which DFAS Denver cannot identify transactions. Without first identifying the transactions, DFAS Denver cannot reconcile the activity. As figure 4 shows, DFAS Denver has reported progress in reducing both the variance and the total undistributed amount. As of September 30, 2000, the reported variance for all appropriations totaled $35 million, or about 2 percent, of the $1.6 billion in total difference in Treasury's and DFAS Denver's records. As of September 30, 1998, the reported variance was $386 million, or almost 10 percent, of the $3.7 billion in total difference. At the time of our review, DFAS Denver had additional efforts under way to refine its methodology for identifying transactions for the remaining variance. DFAS Denver officials told us that by April 2001 they had identified causes and potential explanations for all but $2 million of the $35 million variance as of September 30, 2000. However, they will not be able to prevent the variance from continuing until they have learned how to consistently identify the types of transactions that were causing the variance. DFAS Denver's analysis of undistributed transactions is crucial to part two of the overall reconciliation process, and the progress DFAS Denver has made in reducing the reported variance is commendable. However, the undistributed analysis is incomplete because two types of transactions are not subject to the analysis. As discussed in the following section, adding these transactions to the analysis is one of the needed refinements to the reconciliation process. Step three is the tracking process. DFAS Denver tracks all undistributed transactions until its field-level accounting staff fully reconciles them by either recording them in Air Force accounting records or making corrections to Air Force or Treasury records. In this step, DFAS Denver transmits lists of undistributed transactions in aging categories to the field- level accounting stations each month and requires them to return the lists annotated with a proposed resolution for each transaction. To complete the loop, DFAS Denver personnel are to monitor that the annotated resolution does, in fact, take place by examining subsequent accounting cycles for evidence of the action. DFAS Denver measures the success of its tracking efforts against performance metrics for reconciling transactions established by DFAS headquarters. These time frame performance metrics range from 60 to 180 days, depending on the type of transaction. DFAS Denver data indicate that about 85 percent of the total undistributed transactions are reconciled within 60 days, so DFAS Denver's primary focus is on the other 15 percent, although it tracks all undistributed transactions until they are reconciled. DFAS Denver has reported progress in reducing the volume of transactions that fall outside the established time frame performance metrics for reconciling identified transactions. As figure 5 shows, according to DFAS Denver reports, it reduced the portion of the undistributed transactions shown in figure 4 that were not reconciled within the performance time frame metrics from $234 million at the end of fiscal year 1998 to $37 million at the end of 2000. Although DFAS Denver has made progress in developing its reconciliation process to fully reconcile the differences between Treasury's and its own FBWT records for the Air Force General Funds, it has not yet achieved that goal. First, DFAS Denver has not documented the overall reconciliation process with explanations of the individual steps, their objectives, and their associated comparisons and reconciliations. Such a description could provide both a road map for the entire process and a means for ensuring that the FBWT activity reconciliation is complete and thorough. In addition to potentially omitting important activities without a complete description of the process, a loss of one or more of the few key people who understand the entire process, especially part two, would jeopardize DFAS Denver's ability to maintain its reconciliation progress and to continue needed refinements. Second, in addition to the need to document the overall reconciliation process, we identified three refinements to part two of the process that are necessary. Identification of Transactions for Remaining Variance. As discussed above, DFAS Denver has not yet determined the causes of the remaining difference between its and Treasury's receipt and disbursement activity or the transactions that make it up. Because all transactions have not been identified and because the variance fluctuates somewhat from month to month, further analysis is necessary. Until DFAS Denver can identify all of the transactions that make up the variance, it will not be able to fully reconcile the difference. Undistributed Analysis Incomplete. DFAS Denver has not included two types of unreconciled transactions in its analysis of the undistributed transactions because they are not in the Merged Accounting and Fund Reporting system. The first type consists of the transactions that field-level personnel have accepted, processed, and entered into the Air Force accounting records but not yet matched to obligations. Field-level accounting staffs recorded these transactions even though DFAS does not consider transactions ready to be recorded in Air Force's official accounting records until they have been matched with their obligations. The second type consists of the transactions recorded temporarily in Treasury suspense accounts. DFAS Denver and Treasury use these suspense accounts to record receipt or disbursement transactions pending identification of the fund holders. DFAS Denver includes these transactions in the undistributed analysis at fiscal year-end but not routinely every month. Until both types of transactions are routinely identified by appropriate data extracts and included in the monthly analysis of undistributed transactions, DFAS Denver will not have assurance that it has identified the complete universe of transactions that must be reconciled. During our review, DFAS Denver agreed to begin including both types of transactions in the monthly undistributed analysis. Lack of Documentation for Specific Desk Procedures. DFAS Denver has not fully documented, with how-to desk procedures, some of the steps and activities within the second part of the reconciliation process. For example, the various categories of transactions displayed in the Undistributed Report and the Merged Accounting and Fund Reporting system files from which they are extracted are defined and documented, but the techniques and specific procedures for performing the analysis and developing the report are not. DFAS Denver began a project to document these techniques and procedures during our review. Recreating these management tools without documentation would be difficult for someone who was not familiar with the process. How-to procedures can ensure that the process can be replicated over time. Furthermore, in some instances, only one or two key individuals developed these and other procedures and know how to perform them. Without complete documentation, the loss of a few key people could put DFAS Denver at risk of losing its momentum in reconciling its FBWT activity. The FBWT reconciliation concepts, policies, and procedures developed at DFAS Denver could be used by other DFAS centers, which have not made as much progress in reconciling their FBWT activity, according to DFAS reports and officials. The other centers have not been as successful as DFAS Denver has in identifying transactions that constitute the undistributed difference between their DOD components' accounting records and Treasury's. For example, even though their overall General Funds operating expenditures are comparable to Air Force's, the Army and Navy variances--the amounts for which they cannot determine specific transactions--are substantially larger. As stated previously, DFAS Denver reported a $35 million variance as of September 30, 2000, for the Air Force. In comparison, DFAS Cleveland reported a $5.8 billion variance for the Navy, and DFAS Indianapolis reported $664 million for the Army. DOD's legacy accounting systems complicate the FBWT reconciliation process. These systems are not integrated, which causes timing differences in processing receipts and transactions since all DOD components pay bills for each other. In addition, the systems were not designed to facilitate the reconciliation process. Although DOD has had plans under way for years to create integrated systems, it is likely many years away from implementing fully integrated financial management systems. Nevertheless, the DFAS centers must reconcile their FBWT activity. Each DFAS center processes billions of dollars of transactions each month that must be accounted for and reconciled. Consequently, the centers must create auditable FBWT activity reconciliation processes. To facilitate its efforts, DFAS Denver has designed interim workaround measures, such as its data extracts, to identify undistributed transactions to create useful reconciliation data. DFAS Denver's efforts have demonstrated that current DOD systems can be adapted for routine financial reconciliations if used creatively and with perseverance. Transferring DFAS Denver's experiences to the other centers is reasonable even though each center relies on different legacy systems, which cause them to operate differently to accomplish the same tasks. Since each center's systems are different, it is the concepts and general approach to developing processes and practices developed at DFAS Denver that can be adapted and utilized, rather than the specific steps in the processes. An example is DFAS Denver's concept of identifying, categorizing, and tracking undistributed transactions as illustrated in figure 3. After comparing their records to Treasury's, the other DFAS centers could first identify the individual transactions that make up the difference between their records and Treasury's. After identifying the individual transactions, they could categorize them by type to facilitate reconciliation. Finally, they could track and monitor the transactions until they are reconciled at the field level. DFAS Denver has demonstrated that increased management attention can, indeed, result in positive change. Reconciliation of FBWT--a key step in DOD's ability to establish adequate funds control and financial accountability--will only be achieved if the other centers follow DFAS Denver's lead and provide the needed attention to this area. Increased attention, improved monitoring, and adaptation of the concepts used by DFAS Denver will help all of the DOD components to reconcile their FBWT transaction activity. In addition, a comprehensive reconciliation process can facilitate achieving a successful audit of only that year's FBWT transaction activity. However, one year's successful audit of the reconciliation of FBWT activity will not result in an auditable FBWT financial statement balance because the issue of verifying and auditing the beginning balances will remain. The balances in each FBWT account roll forward from year to year until the account is closed, which can be 5 years or more, depending on the type of appropriation. For example, the DOD-wide financial statement reported a FBWT balance of $178 billion as of September 30, 2000. Some portion of this can be attributed to the beginning balance of $175 billion in FBWT brought forward on October 1, 1999. Although one year's audit of current activity will not resolve this issue, a series of successful audits can. After a number of years, if current activity is routinely reconciled and audited, the balances from prior years when reconciliations were not routinely being performed will ultimately be immaterial. One other issue that affects the reliability of the amount of DOD funds available for expenditure in each appropriated fund is DOD's practice of making large amounts of adjustments to closed accounts. For example, as we discussed in our May 2001 testimony on DOD financial management,DOD reported $2.7 billion of adjustments to closed appropriation accounts in fiscal year 2000. Although closed accounts are not included in FBWT balances, we reported that DOD made frequent adjustments to move transactions from current accounts and charge them to closed accounts. Until all of DOD's transactions are accurately recorded, the reliability of FBWT amounts will remain questionable. DFAS Denver has made progress in developing an auditable process capable of fully reconciling its FBWT activity, but it has more to do to finish the job. For example, DFAS Denver has not yet identified all of the transactions that make up the difference between its and Treasury's receipt and disbursement activity. Finally, a significant amount of the progress has been highly dependent upon the work of a few key people, but their efforts have not been captured in detailed documented procedures. Consequently, if these people were lost, DFAS Denver would risk being unable to institutionalize these processes and losing the momentum it has gained. The reconciliation process is convoluted in that it involves extracting and comparing data from several DOD systems, which are not fully integrated. However, other DOD components do not have to wait for future system enhancements to institute good financial management practices. DFAS Denver's experience demonstrates that an effective combination of people, policies, procedures, and controls can serve as a short-term solution to the larger and longer term problem of overhauling inadequate systems. The concepts used at DFAS Denver can be adapted by other DFAS centers. However, each center will have to develop its own procedures, data extracts, comparisons, and reconciliations based on the systems it uses. To further improve the reconciliation of the activity in Air Force Fund Balance with Treasury General Fund accounts and to ensure that the process is comprehensive and institutionalized with continuity of effort, we recommend that the Director, DFAS, direct the Director, DFAS Denver, to further refine the reconciliation process to identify and include all transactions that make up the differences between Air Force and Treasury records and resolve these differences within established time frames; and document the entire Fund Balance with Treasury General Funds activity reconciliation process, including specific procedures for the various reconciliations within the overall process. To improve and expedite the reconciliation processes at other DOD components, we recommend that the Director, DFAS, require the other DFAS centers to adapt DFAS Denver's reconciliation concepts and practices to their own environments. To ensure that each center's adaptations are consistent and in accordance with DFAS policies, we further recommend that the Director, DFAS, provide leadership and assistance in transferring knowledge from DFAS Denver to the other centers. In written comments on a draft of this report, DOD concurred with our recommendations. DOD's response described the actions that DFAS has underway to address each recommendation and provided estimated completion dates. We are sending copies of this report to the Under Secretary of Defense (Comptroller and Chief Financial Officer); the Commissioner of the Financial Management Service, Department of the Treasury; and the directors of the four other DFAS Centers: DFAS Cleveland, DFAS Columbus, DFAS Indianapolis, and DFAS Kansas City. Copies will be made available to others upon request. Please contact Linda Garrison at (404) 679-1902 or by e-mail at [email protected] if you or your staffs have any questions about this report. GAO staff making key contributions to this report were Ray Bush, Francine DelVecchio, David Shoemaker, and Carolyn Voltz. Financial Audit: Issues Regarding Reconciliations of Fund Balances With Treasury Accounts (GAO/AIMD-99-271, September 17, 1999). Financial Audit: Issues Regarding Reconciliations of Fund Balances With Treasury Accounts (GAO/AIMD-99-3, October 14, 1998). Financial Audit: Reconciliation of Fund Balances With Treasury (GAO/AIMD-97-104R, June 24, 1997). Performance Measures for Disbursing Stations (Report No. D-2001-024, December 22, 2000). Disclosure of Differences in Deposits, Interagency Transfers, and Checks Issued in the FY 1999 DOD Agency-Wide Financial Statements (Report No. D-2000-123, May 18, 2000). Accounting for Selected Assets and Liabilities - Fund Balance With Treasury, Fiscal Year 1999 (99053001, August 28, 2000). Accounting for Selected Assets and Liabilities - Fund Balance With Treasury, Fiscal Year 1998 (98053001, January 6, 2000). Accounting for Selected Assets and Liabilities, Fiscal Year 1997 Air Force Consolidated Financial Statements (97053001, September 3, 1998). 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 Department of Defense (DOD) has had longstanding problems in reconciling the transaction activity in its Fund Balance with Treasury accounts. These reconciliation problems hamper DOD's ability to prepare auditable financial statements and have prompted GAO to place DOD financial management on its list of government activities at high risk for waste, fraud, abuse, and mismanagement. In August 1998, DOD developed a strategic plan to improve the reconciliation process for the activity in its Fund Balance with Treasury accounts. DOD reported that the Defense Finance and Accounting Service's (DFAS) Denver Center, which provides support for the Air Force, has made the most progress in implementing this plan and that its process for reconciling the activity in the Air Force General Funds is more comprehensive than that of the other DOD components. This report reviews the Denver center's reconciliation processes to determine (1) the progress the Denver center has made in reconciling the transaction activity in the Air Force General Funds and (2) whether the Denver center's reconciliation concepts, policies, and practices could be used in reconciling the Fund Balance with Treasury activity of other DOD components. GAO found that (1) the Denver center has made progress in developing a comprehensive reconciliation process for the Air Force General Funds' transaction activity in the Fund Balance with Treasury accounts, primarily by increasing management attention. GAO also found that the concepts and policies developed by the Denver center to identify and resolve transaction differences could improve the reconciliation processes of the other DFAS centers that have not made as much progress.	7,647	316
The Army faces enormous equipping challenges while conducting operations in Iraq and Afghanistan, and restructuring to a modular force. The Army has four key initiatives underway that impact efforts to equip the force: the establishment of modular units, expansion of the force, equipment reset, and reconstitution of prepositioned equipment. The Army's modular restructuring initiative, which began in 2004, is considered the most extensive reorganization of its force since World War II. This transformation was initiated, in part, to support current operations in Iraq and Afghanistan by increasing the number of combat brigades available for deployment overseas. The foundation of modular restructuring is the creation of new, standardized, modular units that change the Army's legacy division-based force structure to smaller more numerous brigade formations embedded with significant support elements. A key goal of the modularity initiative is for modular brigades to have at least the same combat capability as a brigade under the division- based force. The new modular brigades are expected to be as capable as the Army's existing brigades partly because they will have different equipment including key enablers such as advanced communications and surveillance equipment. Moreover, in contrast to the Army's previous division-based force, modular National Guard and Army Reserve units will have the same design, organizational structure, and equipment as their active component counterparts. In addition, the Secretary of Defense announced in January 2007 an initiative to expand the Army by adding more than 74,200 soldiers and thereby creating six active brigade combat teams and additional modular support units. This planned expansion is intended to allow the Army to revitalize and balance the force, reduce deployment periods, increase time soldiers spend at home station in between deployments, increase capability, and strengthen the systems that support the forces. The Army relies on equipment reset and prepositioned equipment to improve equipment availability. Reset is the repair, replacement, and modernization of equipment that has been damaged or lost as a result of combat operations. The Army prepositioned equipment program is an important part of DOD's overall strategic mobility framework. The Army prepositions equipment at diverse strategic locations around the world in order to field combat-ready forces in days rather than the weeks it would take if equipment had to be moved from the United States to the location of the conflict. The total cost to restructure and rebuild the Army is uncertain but this effort will likely require many billions of dollars and take at least several more years to complete. Our analysis of Army cost estimates and cost data indicate that it is likely to cost at least $190 billion dollars to equip modular units, expand the force, reset equipment, and replace prepositioned equipment from fiscal years 2004 through 2013. However, these estimates have limitations and could change. For example, the Army is likely to continue to have shortfalls of some key equipment beyond then and believes it will require additional funding to equip modular units through fiscal year 2017. Although the Army has not identified a total aggregate cost for its key equipping initiatives, it has previously reported some cost estimates and cost data for equipping modular units, expanding the Army, resetting equipment, and restoring pre-positioned stocks. However, these estimates have some limitations because they are based on incomplete information, have not been updated, or may change as a result of the evolving nature and unknown duration of ongoing operations in Iraq and Afghanistan. As a result, the full costs of these equipping efforts are unclear but will be substantial. Based on our analysis of various sources of Army cost data, it appears that the cost of these initiatives will exceed $190 billion dollars between fiscal years 2004-2013 (see table 1). These figures do not include data on Army longer term transformation efforts such as the Army's Future Combat System. The John Warner National Defense Authorization Act for Fiscal Year 2007 required the Army to report annually on its progress toward fulfilling requirements for equipment reset, equipping of units transforming to modularity, and reconstitution of equipment in prepositioned stocks. In its February 2008 report, the Army stated that there is no longer a distinguishable difference between equipment purchased for modular restructuring and other modernized fielding. The report does not address future costs in detail, nor does it provide significant detail about progress achieved to date with funds that have already been appropriated. As a result, it is becoming increasingly difficult to track overall progress and costs. The following sections further describe the cost and status of the Army's key initiatives including modular restructuring, expanding the force, resetting equipment, and restoring pre-positioned stocks. These initiatives will drive much of the costs of equipping the Army for the next several years. The Army has made progress establishing modular units but this initiative will likely cost billions more than the Army originally estimated because the Army's estimate was based on some assumptions that no longer appear valid and was developed before some modular unit designs had been finalized. As a result, the Army now believes it will require additional funding through fiscal year 2017 to equip its modular units. However, it has not revised its 2005 cost estimate to reflect this. Moreover, because it will take time to procure equipment once funds are appropriated, units may not receive all scheduled equipment until 2019. In early 2005, the Army estimated that converting the Army to a modular design would cost approximately $52.5 billion from fiscal years 2005-2011, which was incorporated in a funding plan approved by the Office of the Secretary of Defense. The funding plan included costs for equipment, sustainment and training, and construction/facilities. As shown in table 2, most of these funds--$43.6 billion--were designated for equipment purchases. The Army made the decision to create modular units knowing that it would take several years after units were established to equip and staff them at authorized levels. At the end of fiscal year 2007, the Army had converted about two-thirds of its force to modular units. By the end of fiscal year 2008, the Army projects it will have converted 277 of 327 modular units (about 85 percent). The Army currently projects that the unit restructuring will be completed by fiscal year 2013. However, our ongoing work shows that the Army will continue to have significant shortfalls of key equipment that are critical to achieving the planned benefits of the modular force after the Army receives planned funding for fiscal years 2005-2011. For example, the Army projects that it will still need hundreds of thousands of modern equipment items including intelligence equipment, advanced radios, and trucks. In place of more modern equipment, many Army units will continue to have some older equipment that does not necessarily provide the same capability as the more modern counterparts. The Army has stated that it plans to request funds through 2017 to help fill modular unit equipment shortfalls. However, it has not revised its initial $43.6 billion estimate, even though it was based upon several assumptions that no longer appear valid. Specifically, we have reported that the Army believes it will need additional funding to equip modular units because its 2005-2011 funding plan: was developed before some modular unit designs had been finalized, assumed that Army National Guard and reserve units would retain some older models of equipment, and assumed that significant quantities of equipment would be returned from Iraq in good enough condition to help equip modular units. Additional explanation of each of these factors follows. At the time the Army's cost estimate was developed, the Army's modular designs were incomplete, so budget analysts were uncertain about the exact number of personnel and how many and what type of equipment items would be needed for modular units. For example, on the basis of lessons learned, the Army has reconfigured some of the modular unit designs and has added additional capabilities for force protection and route clearance to counter specific threats faced by deployed units. Further, because the number and composition of National Guard units had not been developed, budget analysts made certain assumptions about how much funding would be required by National Guard units to convert to the new modular designs. When the Army began to implement its modular restructuring initiative, it planned for the National Guard to establish 34 Brigade Combat Teams plus an additional number of support brigades. The 2006 Quadrennial Defense Review, however, recommended that the Army establish only 28 Brigade Combat Teams and convert the remaining units to support brigades. In addition, the Army's original plan for equipping modular units also did not fully consider the equipping implications associated with the Army National Guard's changing role in supporting military operations. Since 2001, the Army National Guard's role has changed from a strategic reserve force to an operational force that is used to support a wide range of military operations at home and abroad. Prior to 2001, Army National Guard units were generally equipped with older equipment and at lower levels than comparable active duty units because it was assumed that they would have considerable warning and training time before deploying overseas. However, senior Army officials have determined that the National Guard's modular units should be structured like those in the active component and receive similar equipment since the Guard has become an operational force that deploys along with active units. As a result, senior Army officials have stated the Army plans to request additional funds for Army National Guard equipment. In addition, the Army National Guard also has significant domestic missions, and equipment needs for those missions are uncertain. In January 2007 we issued a report on actions needed to address National Guard domestic equipment requirements and readiness. We found that DOD has not worked with the Department of Homeland Security to define National Guard requirements for responding to the 15 catastrophic scenarios developed by the Homeland Security Council. As a result, the equipment requirements and the funding needed to provide equipment for such missions are unknown. Last, when developing its cost estimate for equipping modular units, the Army assumed that significant quantities of equipment would come back from Iraq and be available after some reset and repair work to be distributed to new modular units. Given the heavy use of equipment in Iraq and Afghanistan, this assumption may no longer be valid. The increased demands for equipment used in Iraq operations have had a dramatic effect on equipment availability. This demand reduces expected service life, creates significant repair expenses, and creates uncertainty as to whether it is economically feasible to repair and reset these vehicles. Further, more vehicles currently being operated in theater may be replaced altogether by newer vehicles offering better protection. DOD's plan to expand the size of the Army by over 74,000 personnel will also add to the Army's equipment needs. This planned expansion includes building six additional active modular infantry brigade combat teams and some additional modular support units. In January 2007, the Army estimated that this expansion would cost approximately $70.2 billion including personnel, equipment, facilities, and other costs. The equipment portion of this estimate was $17.9 billion. However, in January 2008, we reported that the Army's overall estimate was not transparent or comprehensive. We also found that certain aspects of the estimate, such as health care costs, may be understated and that some factors that could potentially affect the Army's funding plan are still evolving. With regard to equipment costs, we could not determine how the Army calculated its procurement estimate because Army budget documents do not identify key assumptions or the steps used to develop the estimate. According to best practices, high-quality cost estimates use repeatable methods that will result in estimates that are comprehensive and can also be easily and clearly traced, replicated, and updated. Given the magnitude of the Army's funding plan and potential changes to the plan, we recommended that the Secretary of Defense direct the Secretary of the Army to provide Congress with a revised funding plan for expanding the force and adhere to a high quality cost estimating methodology. In February 2008, the Army revised its overall cost estimate for expanding the force to $72.5 billion. According to Army documents, the Army now assumes that $18.5 billion will be needed to procure equipment for combat brigades and support units being created under the Army's expansion efforts. Finally, in October 2007, the Army also announced a plan to accelerate the expansion implementation timelines for the active Army and Army National Guard from fiscal year 2013 to fiscal year 2010 which will likely further exacerbate equipment shortfalls. The Army has not yet developed a revised funding plan for implementing this acceleration but plans to do so as part of its effort to prepare its fiscal years 2010-2015 budget plan later this year. As a result, it is not clear how the decision to accelerate the expansion effort will affect equipment costs. To improve near-term readiness of nondeployed units, the Army has received substantial funds in recent years to rebuild the force by resetting damaged, and worn equipment and reconstituting its prepositioned equipment sets. However, the Army has not identified the overall requirements for these efforts, and the total cost of these initiatives is uncertain. In addition to procuring new equipment, the Army is working to rebuild the force by resetting its existing equipment to support the ongoing conflicts as well as to equip nondeployed units. Originally, the Army estimated that equipment reset would cost $12 billion to $13 billion per year. Reset costs have grown significantly from about $3.3 billion in fiscal year 2004 to more than $17 billion in fiscal year 2007. Our analysis of Army data shows that the Army is likely to require at least $118.5 billion dollars from fiscal years 2004-2013 (see table 1). The Army has reported that future reset costs will depend on the amount of forces committed, the activity level of those forces, and the amount of destroyed, damaged or excessively worn equipment. As a result, these costs are uncertain. The Army has stated that it will require reset funding for the duration of operations and estimates that it will request reset funding for an additional 2-3 years after operations cease. As operations continue in Iraq and Afghanistan and the Army's equipment reset requirements increase, the potential for reset costs to significantly increase in future DOD supplemental budget requests also increases. We have also reported that Congress may not have the visibility it needs to exercise effective oversight and to determine if the amount of funding appropriated for equipment reset has been most appropriately used for the purposes intended because the Army was not required to report the obligation and expenditure of funds appropriated for reset in the procurement accounts at a level of detail similar to the level of detail reported in the operation and maintenance accounts. Given the substantial amount of equipment deployed overseas, the uncertain length of operations in Iraq and Afghanistan, and the lack of transparency and accountability, it is unclear how much funding the Army will need to reset its equipment. While Army officials recently told us that they have begun to report procurement obligations and expenditures at a level of detail similar to the level of detail reported for operation and maintenance accounts, officials in the Office of the Secretary of Defense believe that all of the Army's equipping initiatives, including reset, are part of a larger Army equipping effort and they do not believe that the department needs to track these initiatives separately. We continue to believe that tracking the cost of reset is key to identifying the total cost of the Army equipment plan. In December 2006, the Army decided to remove equipment from its prepositioned sets stored on ships in order to accelerate the creation of two additional brigade combat teams to provide support for ongoing operations. This equipment supplemented equipment prepositioned in Southwest Asia, equipment which has been depleted and reconstituted several times over the course of these operations. It is still unclear when these critical reserve stocks will be reconstituted or how much this will cost; however, the Army has estimated it will require at least $10.6 billion to complete this reconstitution effort through 2013 (see table 1). Army officials stated that prepositioned equipment sets worldwide would be reconstituted in synchronization with the Army's overall equipping priorities, when properly funded, and in accordance with the Army's prepositioning strategy, known as the Army Prepositioned Strategy 2015. We recommended in our September 2005 and February 2007 reports that DOD develop a coordinated, department-wide plan and joint doctrine for the department's prepositioning programs. Synchronizing a DOD-wide strategy with the Army's prepositioning strategy would ensure that future investments made for the Army's prepositioning program would properly align with the anticipated DOD-wide strategy. Without a DOD-wide strategy, DOD risks inconsistencies between the Army's and the other services' prepositioning strategies, which may result in duplication of efforts and resources. In addition, we could not determine the extent to which the reconstitution of the Army's prepositioned stocks is reflected in DOD funding requests nor identify the cost estimates for restoring these prepositioned equipment sets. For example, Army officials could not provide a breakdown of the $3.3 billion cost estimate in the fiscal year 2007 supplemental budget request to reconstitute the prepositioned stocks removed from ships. Army officials stated that the estimated cost to fully implement the prepositioning strategy would total somewhere between $10.6 billion and $12.8 billion between fiscal years 2008 and 2013. However, DOD's funding requests for reconstitution are difficult to evaluate because they may also include funding for other equipment-related funding requests, such as Army modularity, equipment modernization, equipment reset, or requests to fill equipment shortages. Army officials stated that separating prepositioning requirements from other requirements in their funding requests is complicated, and they do not plan to separately track funds set aside for the reconstitution of their prepositioned equipment sets. A common theme in our work has been the need for DOD and the Army to take a more strategic approach to decision making that promotes transparency and ensures that programs and investments are based on sound plans with measurable, realistic goals and time frames, prioritized resource needs, and performance measures to gauge progress. Our prior work has found that a lack of clear linkages between overall Army equipment requirements and funding needs is an impediment to effective oversight of the Army's equipping plans. Further, transparency of the funds requested for Army equipment is hindered because Army funding needs are scattered across multiple funding requests. Finally, we have suggested a number of actions to enhance transparency and reduce the risks associated with Army equipping initiatives. However, many of these recommendations have not been adopted and, as a result, the Army faces uncertainties going forward. The Army has not clearly linked its overall equipment requirements with funding requests. Our work has shown that major transformation initiatives have a greater chance of success when their funding plans are transparent, analytically based, executable, and link to the initiative's implementation plans. A lack of linkage between overall Army equipment requirements and funding plans impedes oversight by DOD and congressional decision-makers because it does not provide a means to measure the Army's progress toward meeting long-term Army equipment goals or to inform decisions that must be made today. Our work on modular restructuring has shown that the Army has substantially revised its timeline for fully equipping units from an original date of 2011 to 2019 but has not provided evidence of its overall equipment requirements or specific plans, milestones, or resources required to fully equip the modular force. Meanwhile, the Army is working to expand its force beyond its original modular restructuring goals, which will lead to billions of additional dollars in requirements to equip new modular units. The Army also does not know if its existing prepositioned equipment requirements reflect actual needs because DOD has not formulated a DOD-wide prepositioning strategy to guide the Army's prepositioning strategy. Army officials stated that its worldwide prepositioned equipment sets would be reconstituted in synchronization with the Army's overall equipping priorities and in accordance with its Army Prepositioned Strategy 2015. However, the Army had not established those priorities as of December 2007. Additionally, the Army Prepositioned Strategy 2015 is not correlated with a DOD-wide prepositioning strategy, because, according to DOD officials, a DOD-wide prepositioning strategy does not exist. DOD officials explained that the services are responsible for equipping strategies and that the Joint Staff conducts assessments of the services' prepositioning programs to determine their relationship within the DOD-wide strategic context. We continue to believe, however, that a DOD-wide strategy is needed in addition to an Army strategy. Finally, the Army's reset implementation strategy is based on resetting equipment that it expects will be returning in a given fiscal year, and not on targeting shortages of equipment for units preparing for deployment to Iraq and Afghanistan. According to the Army's Army Force Generation model implementation strategy and reset implementation guidance, the primary goal of reset is to prepare units for deployment and to improve next-to-deploy units' equipment-on-hand levels. Until the Army's reset implementation strategy targets shortages of equipment needed to equip units preparing for deployment, the Army will be unable to minimize operational risk by ensuring that the needs of deploying units can be met. Oversight of the Army's key equipment initiatives has been complicated by multiple funding requests. DOD requested operation and maintenance funds for Army prepositioned equipment in both the fiscal year 2008 annual budget request (about $156 million) and the fiscal year 2008 request related to the Global War on Terror (about $300 million). Army officials stated that there could be some overlap between funds requested for reconstitution of prepositioned equipment in the annual budget request and the reset of prepositioned equipment in the supplemental request. Without integrating the full costs for Army equipment needs in a single budget, decision makers may have difficulty seeing the complete picture of the Army's funding needs and the potential for trade-offs among competing defense priorities. We have recommended a number of actions intended to improve management controls and enhance transparency of funding requests associated with modular restructuring, force expansion, equipment reset, and prepositioning of equipment stock. However, many of these recommendations have not been adopted because the Army has not developed concrete plans to address the recommendations and in some cases, disagreed with our recommendations. As a result, senior DOD leaders and Congress may not have sufficient information to assess progress and fully evaluate the Army's funding requests. Our prior reports on the Army's modular restructuring initiative recommended that the Army improve the transparency of its equipment requirements and funding plans as well as its plan to assess the modular unit designs. In recent years, we recommended the Army develop a comprehensive strategy and funding plan that details the Army's equipping strategy, compares equipment plans with modular unit designs, identifies total funding needs, and includes a mechanism for measuring progress in staffing and equipping its modular units. We have also recommended that the Army develop a comprehensive assessment plan that includes steps to evaluate modular units in full-spectrum combat. In January 2008, we recommended that DOD provide Congress with additional information on the Army's expansion initiative, including an updated funding plan and that the Army maintain a transparent audit trail including documentation of the steps used to develop its expansion funding plan. We have also made recommendations intended to address short and long- term operational risks associated with Army equipment reset and prepositioning strategies. Regarding the Army's equipment reset plans, we recommended in September 2007 that the Army ensure that its priorities address equipment shortages in the near term to minimize operational risk and ensure that the needs of units preparing for deployment can be met. Finally, with regard to prepositioned equipment, we recommended the establishment of a DOD-wide prepositioning strategy to ensure that future Army prepositioning investments are aligned with DOD's prepositioning goals. We continue to believe that our recommendations have merit, though many of these recommendations have not been adopted and, as a result, the Army faces uncertainties going forward. Restoring equipment readiness across the Army will require billions of dollars in maintenance and procurement funding but the full cost--and how long it will take--are still unclear. The uncertainty about the magnitude and duration of our military commitments further complicates and deepens the equipping challenges facing the Army. Moreover, growing fiscal problems facing the nation may lead to growing pressure on defense budgets. Such uncertainty about the future underscores the need for sound management approaches like setting goals, establishing clear measures to track progress, and identifying full costs. Until these steps are taken, decision makers will lack key information needed to gauge interim progress and make informed choices aimed at balancing the need to restore near-term readiness while positioning the Army for the future. Mr. Chairman and Members of the Committee, this concludes my statement. I would be pleased to respond to any question you or other Members of the Committee or Subcommittee may have. For questions regarding this testimony, please call Janet A. St. Laurent at (202) 512-4402 or [email protected]. Key contributors to this testimony were John Pendleton, Director; Wendy Jaffe, Assistant Director; Kelly Baumgartner; Grace Coleman; Barbara Gannon; David Hubbell; Kevin O'Neill; Steve Rabinowitz; Terry Richardson; Donna Rogers; Kathryn Smith; Karen Thornton; and Suzanne Wren. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. The Nation's Long-Term Fiscal Outlook: January 2008 Update. GAO-08- 591R. Washington, D.C.: March 21, 2008. Military Readiness: Impact of Current Operations and Actions Needed to Rebuild Readiness of U.S. Ground Forces. GAO-08-497T. Washington, D.C.: February 14, 2008. Defense Logistics: Army Has Not Fully Planned or Budgeted for the Reconstitution of Its Afloat Prepositioned Stocks. GAO-08-257R. Washington, D.C.: February 8, 2008. Force Structure: Need for Greater Transparency for the Army's Grow the Force Initiative Funding Plan. GAO-08-354R. Washington, D.C.: January 18, 2008. Force Structure: Better Management Controls Are Needed to Oversee the Army's Modular Force and Expansion Initiatives and Improve Accountability for Results. GAO-08-145. Washington, D.C.: December 14, 2007. Defense Logistics: Army and Marine Corps Cannot Be Assured That Equipment Reset Strategies Will Sustain Equipment Availability While Meeting Ongoing Operational Requirements. GAO-07-814. Washington, D.C.: September 19, 2007. Military Training: Actions Needed to More Fully Develop the Army's Strategy for Training Modular Brigades and Address Implementation Challenges. GAO-07-936. Washington, D.C.: August 6, 2007. Defense Logistics: Improved Oversight and Increased Coordination Needed to Ensure Viability of the Army's Prepositioning Strategy. GAO- 07-144. Washington, D.C.: February 15, 2007. Defense Logistics: Preliminary Observations on the Army's Implementation of Its Equipment Reset Strategies. GAO-07-439T. Washington, D.C.: January 31, 2007. Reserve Forces: Actions Needed to Identify National Guard Domestic Equipment Requirements and Readiness. GAO-07-60. Washington, D.C.: January 26, 2007. Force Structure: Army Needs to Provide DOD and Congress More Visibility Regarding Modular Force Capabilities and Implementation Plans. GAO-06-745. Washington, D.C.: September 6, 2006. Force Structure: Capabilities and Cost of Army Modular Force Remain Uncertain. GAO-06-548T. Washington, D.C.: April 4, 2006. Defense Logistics: Preliminary Observations on Equipment Reset Challenges and Issues for the Army and Marine Corps. GAO-06-604T. Washington, D.C.: March 30, 2006. Reserve Forces: Plans Needed to Improve Army National Guard Equipment Readiness and Better Integrate Guard into Army Force Transformation Initiatives. GAO-06-111. Washington, D.C.: October, 4 2005. Force Structure: Actions Needed to Improve Estimates and Oversight of Costs for Transforming Army to a Modular Force. GAO-05-926. Washington, D.C.: September 29, 2005. Defense Logistics: Better Management and Oversight of Prepositioning Programs Needed to Reduce Risk and Improve Future Programs. GAO- 05-427. Washington, D.C.: September 6, 2005. Defense Management: Processes to Estimate and Track Equipment Reconstitution Costs Can Be Improved. GAO-05-293. Washington, D.C.: May 5, 2005. Force Structure: Preliminary Observations on Army Plans to Implement and Fund Modular Forces. GAO-05-443T. Washington, D.C.: March 16, 2005. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.	The high pace of overseas operations is taking a heavy toll on Army equipment. Harsh combat and environmental conditions over sustained periods of time have exacerbated equipment repair, replacement, and recapitalization problems. The Army has also taken steps to restructure its forces before implementing its longer term transformation to the Future Combat System. To support ongoing operations and prepare for the future, the Army has embarked on four key initiatives: (1) restructuring from a division-based force to a modular brigade-based force, (2) expanding the Army by adding about 74,000 people and creating new units, (3) repairing, replacing, and recapitalizing new equipment through its reset program, and (4) replacing equipment borrowed from its pre-positioned equipment sets around the world. Since 2004, Congress has provided billions of dollars to support the Army's equipping needs. GAO has issued many reports on the Army's efforts to equip modular units, expand the Army, reset equipment, and manage and replace prepositioned equipment. This statement, which draws largely on these reports, will address (1) the equipment-related cost of these initiatives, and (2) the management challenges facing the Army and the actions needed to improve its implementation of these initiatives. GAO is issuing a separate statement today on the Future Combat System (GAO-08- 638T). Restructuring and rebuilding the Army will require billions of dollars for equipment and take years to complete; however, the total cost is uncertain. Based on GAO's analysis of Army cost estimates and cost data, it appears that the Army's plans to equip modular units, expand the force, reset equipment, and replace prepositioned equipment are likely to cost at least $190 billion dollars through fiscal year 2013. However, these estimates have some limitations and could change. Further, the Army has stated it plans to request additional funds to address equipment shortfalls in modular units through fiscal year 2017. Several factors are contributing to the uncertainties about future costs. First, the Army's $43.6 funding plan for equipping modular units was based on preliminary modular unit designs and did not fully consider the needs of National Guard units. Second, the Army expects to need $18.5 billion for equipment to expand the force but has not clearly documented this estimate. Third, costs to reset equipment may total at least $118 billion from fiscal years 2004-2013 but may change because they are dependent on how much equipment is lost, damaged, or worn beyond repair during continuing operations in Iraq and Afghanistan and how long these operations continue. Fourth, the Army believes it will need at least $10.6 billion to replace pre-positioned equipment that was taken out of storage to support ongoing operations, but this amount is an estimate and DOD's overall strategy for prepositioned equipment has not yet been issued Given the magnitude of these initiatives and potential for costs to change, DOD will need to carefully monitor the projected costs of these initiatives so that it can consider tradeoffs and allocate funding to balance the Army's equipping needs for the next decade and longer term transformation goals. A common theme in GAO's work has been the need for DOD and the Army to take a more strategic approach to decision making that promotes transparency and ensures that programs and investments are based on sound plans with measurable, realistic goals and time frames, prioritized resource needs, and performance measures to gauge progress. GAO's work on modular restructuring has shown a lack of linkage between the Army's funding requests and equipment requirements. This lack of linkage impedes oversight by DOD and Congress because it does not provide a means to measure the Army's progress in meeting modular force equipment requirements or inform budget decisions. Oversight of Army initiatives has also been complicated by multiple funding requests that makes it difficult for decision makers to understand the Army's full funding needs. GAO has recommended a number of actions to improve management controls and enhance transparency of the Army's plans for equipping modular units, expanding the force, resetting equipment, and replacing prepositioned equipment. However, many of these recommendations have not been fully implemented or adopted. For example, until the Army provides a comprehensive plan for its modular restructuring and expansion initiatives, which identifying progress and total costs, decision makers may not have sufficient information to assess progress and allocate defense resources among competing priorities.	6,121	900
USPS's financial condition and outlook continue to deteriorate with a worsening outlook for mail volume and revenue. USPS currently projects a mail volume decline of 13.7 percent for fiscal year 2009, triple the 4.5 percent decline in fiscal year 2008 and the largest percentage decline since the Great Depression. As a result, USPS is projecting the following for fiscal year 2009: a net loss of about $7 billion, even if it achieves record cost savings of about $6 billion; an increase in outstanding debt by the annual statutory limit of $3 billion; and, despite this borrowing, an unprecedented $1 billion cash shortfall. USPS has reported that it does not expect to generate sufficient cash from operations to fully make its mandated payment of $5.4 billion for future retiree health benefits that is due by September 30, 2009. Further, USPS recently reported to Congress that--due to the need to maintain sufficient cash to cover costs--it will not fully make this payment, even if it receives $2 billion in relief from fiscal year 2009 retiree health benefits payments that would be provided by H.R. 22, which has been reported out of the House Committee on Oversight and Government Reform. USPS also expects continued financial problems in fiscal year 2010, with a similar deficit even if it achieves larger cost savings, and an even larger cash shortfall. Under this scenario, USPS would increase its outstanding debt by an additional $3 billion, which would bring its total debt to $13.2 billion at the end of fiscal year 2010--only $1.8 billion less than its $15 billion statutory limit. USPS's projected cost cutting of about $6 billion for this fiscal year is much larger than its previous annual cost-cutting targets that have ranged from nearly $900 million to $2 billion since 2001. However, USPS projects cash shortfalls because cost cutting and rate increases will not fully offset the impact of mail volume declines and other factors that increase costs-- notably semiannual cost-of-living allowances (COLA) for employees covered by union contracts. Compensation and benefits constitute close to 80 percent of its costs--a percentage that has remained similar over the years despite major advances in technology and automating postal operations. Also, USPS continues to pay a higher share of employee health benefit premiums than other federal agencies. Further, it has high overhead (institutional) costs that are hard to change in the short term, such as providing universal service that includes 6-day delivery and maintaining a network of 37,000 post offices and retail facilities, as well as a delivery network of more than 149 million addresses. Two days ago, we 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. We reported that USPS urgently needs to restructure to address its current and long-term financial viability. USPS's cost structure has not been cut fast enough to offset accelerated decline in mail volume and revenue. In this regard, USPS has high personnel costs, including those to provide 6-day delivery and retail services. To achieve financial viability, USPS must align its costs with revenues, generate sufficient earnings to finance capital investment, and manage its debt. We noted that mail use has been changing over the past decade as businesses and consumers have moved to electronic communication and payment alternatives. Further innovations in, and use of, e-commerce and broadband are expected. The percentage of households paying bills by mail is declining while the percentage of electronic payments is increasing (see fig. 1). Mail volume peaked in 2006, and its decline has accelerated with the economic recession, particularly among major mail users in the advertising, financial, and housing sectors. Mail volume has typically returned after recessions, but USPS's 5-year forecast suggests that much of the lost volume will not return. For these reasons, we concluded that action is needed in multiple areas, including possible action and support by Congress, as no single change will be sufficient to address USPS's challenges. The short-term challenge for USPS is to cut costs quickly enough to offset the unprecedented volume and revenue declines, so that it can cover its operating expenses. The long-term challenge is to restructure USPS operations, networks, and workforce to reflect changes in mail volume, use of the mail, and revenue. Accordingly, we have called for USPS to develop and implement a broad restructuring plan--with input from the Postal Regulatory Commission (PRC) and other stakeholders, and approval by Congress and the administration--that includes key milestones and time frames for actions, addresses key issues, and identifies what steps Congress and other stakeholders may need to take. We stated that USPS's restructuring plan should address how it plans to realign postal services, such as delivery frequency, delivery standards, and access to retail services, with changes in the use of mail by consumers and businesses; better align costs and revenues, including compensation and benefit costs; optimize its operations, networks, and workforce; increase mail volumes and revenues; and retain earnings, so that it can finance needed capital investments and repay its growing debt. USPS needs to optimize its retail, mail processing, and delivery networks to eliminate growing excess capacity and maintenance backlogs, reduce costs, and improve efficiency. We recently reported that USPS needs to rightsize its retail and mail processing networks and reduce the size of its workforce. USPS has a window of opportunity to further reduce the cost and size of its workforce through attrition and the large number of upcoming retirements to minimize the need for layoffs. As the Postmaster General testified this March, about 160,000 USPS employees are eligible for regular retirement this fiscal year, and this number will grow within the next 4 years to nearly 300,000. USPS has begun efforts to realign and consolidate some of its mail processing, retail, and delivery operations, but much more restructuring is urgently needed. We recognize that USPS would face formidable resistance to restructuring with many facility closures and consolidations because of concerns that these actions would impact service, employees, and local communities. USPS senior management will need to provide leadership and work with stakeholders to overcome resistance for its actions to be successfully implemented. USPS must use an open and transparent process that is fairly and consistently applied; engage with its unions, management associations, the mailing industry, and political leaders; and demonstrate results of actions. In turn, these stakeholders and Congress need to recognize that major changes are urgently needed for USPS to be financially viable. To its credit, USPS recently began a national initiative to consolidate some of its 3,200 postal retail stations and branches in urban and suburban areas. It has nearly completed an initial review to identify which facilities will be studied for consolidation, and expects the studies to take about 4 months, with final decisions made starting this October. USPS has processes for notifying its unions and management associations, soliciting community input, and notifying affected employees as it winnows the list of stations and branches it is considering for consolidation (see fig. 2). On July 2, 2009, USPS requested that PRC provide an advisory opinion on USPS's retail consolidation initiative, which has led to a public process that will provide stakeholders with opportunities for input. In its request, USPS stated it would identify opportunities to consolidate retail operations and improve efficiency, but only after concluding that such changes will continue to provide ready access to essential postal services. USPS noted that the branches and stations considered for consolidation are often in close proximity to each other. USPS stated that it could not estimate the savings because it had not made decisions on how many or which facilities would be closed. Going forward, issues may include whether stations and branches will be considered subject to statutory requirements for maintaining and closing post offices, and the similar question of whether any branches and stations are covered by the long- standing appropriations provision that restricts post office closures. USPS is required, among other things, to provide adequate, prompt, reliable, and efficient services to all communities, including a maximum degree of effective and regular services in rural areas, communities, and small towns where post offices are not self-sustaining. USPS is specifically prohibited from closing small post offices solely for operating at a deficit. Consistent with reasonable economies, USPS is authorized to establish and maintain facilities as are necessary to provide ready access to essential services to customers throughout the nation. Before closing a post office, USPS must, among other things, provide customers with at least 60 days of notice before the proposed closure date, and any person served by the post office may appeal its closure to the PRC. However, USPS plans state that customers will have 20 days to comment on a proposed closure of a station or branch and that no appeals will be permitted. USPS explained that stations and branches are different from post offices. A recent Congressional Research Service report discussed this matter and other issues related to the closure of these retail facilities. To put USPS's retail consolidation initiative into context, we recently testified before this subcommittee that USPS can streamline its network of 37,000 post offices, branches, and stations--a network that has remained largely static despite expanding use of retail alternatives and shifts in population. We have previously reported that the number of postal retail facilities has varied widely among comparable counties in urban areas, and a number of facilities we visited appeared to merit consideration for closure based on leading federal practices for rightsizing facility networks. Our report also noted that USPS has a maintenance backlog for its retail facilities, and USPS officials stated that USPS has historically underfunded its maintenance needs. USPS has limited its capital expenditures to help conserve cash, which may affect its maintenance backlog. Fewer retail facilities would reduce maintenance needs. USPS has begun efforts to consolidate some mail processing operations, but much more needs to be done to restructure this network, particularly since USPS has closed only 1 of its approximately 400 major mail processing facilities. In the Postal Accountability and Enhancement Act of 2006, Congress encouraged USPS to expeditiously move forward in its streamlining efforts, recognizing that the 400 processing facilities are more than USPS needs and streamlining this network can help eliminate excess costs. USPS has substantial excess capacity in its processing network that is growing with declining mail volume. According to USPS, it has 50 percent excess capacity for processing First-Class Mail. USPS is using the Area Mail Processing process to propose consolidating some mail processing operations (see app. I and http://www.usps.com/all/amp.htm). USPS is also consolidating processing and transportation operations from Bulk Mail Centers and Surface Transfer Centers into what it refers to as Network Distribution Centers, which USPS officials expect to be completed this November (see http://www.usps.com/all/ndc.htm). In the past decade, USPS has closed some smaller facilities, such as 68 Airport Mail Centers and 50 Remote Encoding Centers. In 2005, we recommended that USPS enhance transparency and strengthen accountability of its realignment efforts to assure stakeholders that such efforts would be implemented fairly and achieve the desired results. We since testified that USPS took steps to address these recommendations and should be positioned for action. USPS has ongoing efforts to increase the efficiency of mail delivery, which is USPS's largest cost segment and includes more than 350,000 carriers that account for approximately 45 percent of salary and benefit expenses. Two key efforts are (1) realignment of city delivery routes and (2) installing new Flats Sequencing Systems to automate the sorting of flat- sized mail--such as catalogs and magazines--into delivery order, so that time-consuming and costly manual sorting by carriers is no longer needed. First, USPS is realigning city carrier routes to remove excess capacity and improve efficiency, which is expected to generate nearly $1 billion in annual savings. USPS also expects this effort to result in reduced facility space needs, increased employee satisfaction, and more consistent delivery service. Route realignment has been made possible by collaboration between USPS and the National Association of Letter Carriers. The parties agreed on the original realignment process, which resulted in eliminating 2,500 routes. A modified process, which will cover all city delivery routes, has resulted in the elimination of an additional 1,800 routes through June 2009 (see fig. 3), and additional routes may be eliminated. Thus, route realignment should result in further savings next fiscal year. USPS has established policies and procedures to notify customers if they will be affected by route realignment and taken actions to keep affected stakeholders informed. For example, USPS has made updated route information available on the Internet, which the mailing industry needs to prepare and organize the mail so USPS can efficiently handle it. Second, USPS has begun to install 100 automated sorting machines for its $1.5 billion Flats Sequencing System to sort flat-sized mail into delivery order, which is scheduled to be completed in October 2010. USPS expects this to improve delivery accuracy, consistency, and timeliness. USPS has worked with the mailing industry to facilitate implementation, since the industry plays a major role in preparing, transporting, and addressing flat- sized mail for efficient USPS handling. Mailer representatives have praised USPS communications and coordination with them--a process that is continuing to address implementation issues. USPS and the two carrier unions (the National Association of Letter Carriers and the National Rural Letter Carriers' Association) reached agreement on revised work rules and procedures to realign routes and capture work hour savings. Because of mail volume declines, to maximize program savings, USPS is reconsidering where to deploy the machines and the number of delivery routes covered by the program. On routes covered by the machines, city carriers, on average, will be manually sorting nearly 500 fewer flat-sized mail pieces each day. Finally, USPS has proposed moving to 5-day delivery to help address its financial problems. USPS is studying how 5-day delivery could be implemented, potential savings, and impacts on its employees. The study, which USPS expects to complete this fall, will incorporate input from postal unions and management associations, the mailing industry, and consumer and market research. Cutting delivery frequency would affect universal postal service and could further accelerate the decline in mail volume and revenues. Considering the potential impact on cost, volume, revenues, employees, and customers, it will be important for USPS to make its study publicly available so that Congress and stakeholders can better understand USPS's proposal and consider the trade-offs involved. As USPS has recognized, implementing 5-day delivery would require congressional action because a long-standing appropriations provision mandates 6-day delivery. PRC officials have stated that USPS would be required to seek an advisory opinion from PRC on such a change, which would lead to a public hearing with stakeholder input. According to USPS officials, USPS would need about 6 months to prepare for and implement 5-day delivery, including moving employees to other locations, reprogramming payroll systems, and realigning operations. 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. 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, Josh Bartzen, Paul Hobart, Kenneth E. John, David Hooper, Hannah Laufe, Emily Larson, Josh Ormond, Susan Ragland, Amy Rosewarne, Travis Thomson, and Crystal Wesco. Area Mail Processing (AMP) study initiated 34. Western Nassau, NY, to Mid-Island, NY 35. Wilkes Barre, PA, to Scranton, PA, and Lehigh Valley, PA nnonced on Jne 6, 2009, tht it hd hlted the Indstry, Cliforni, stdy because it determined there were no significnt opportnities to improve efficiency or service t tht time. nnonced on My 5, 2009, tht it hd hlted the Plttsbrgh, New York, stdy because of nresolved service isses. 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 has worsened this year, with the recession and changing mail use causing declines in mail volume and revenues despite postal rate increases. GAO testified in May to this subcommittee that USPS expects these declines to lead to a record net loss and an unprecedented cash shortfall even if ambitious cost cutting is achieved. GAO reported that maintaining USPS's financial viability as the provider of affordable, high-quality universal postal service will require actions in a number of areas, such as (1) rightsizing its retail and mail processing networks by consolidating operations and closing unnecessary facilities and (2) reducing the cost and size of its workforce, which generates about 80 percent of its costs. Today GAO is releasing its report on USPS efforts to improve the efficiency of delivery. Delivery accounts for nearly half of USPS salary and benefit costs. This testimony (1) updates USPS's financial condition and outlook and explains GAO's decision to place USPS's financial condition on the High-Risk List and (2) discusses the need for USPS to restructure its mail processing, retail, and delivery networks and its efforts to improve their efficiency. It is based on GAO's past and ongoing work and updated USPS information. USPS's financial condition and outlook continue to deteriorate with a worsening outlook for mail volume and revenue. USPS now projects mail volume to decline by about 28 billion pieces to about 175 billion pieces in fiscal year 2009, a decline of 13.7 percent. As a result, USPS projects (1) a net loss of about $7 billion even with record savings of about $6 billion; (2) an increase in outstanding debt by the annual $3 billion limit; and, (3) despite this borrowing, an unprecedented $1 billion cash shortfall. Thus, USPS recently reported to Congress that, due to the need to maintain sufficient cash to cover costs, it will not fully make its mandated payment of $5.4 billion for future retiree health benefits due by September 30, 2009, even if it receives $2 billion in relief under pending House legislation. GAO added USPS's financial condition to the High-Risk List this week. GAO reported USPS urgently needs to restructure to address its current and long-term financial viability. Accordingly, GAO calls for USPS to develop and implement a broad restructuring plan--with input from the Postal Regulatory Commission and other stakeholders, and approval by Congress and the administration--that includes key milestones and time frames for actions, addresses key issues, and identifies what steps Congress and other stakeholders may need to take. USPS needs to optimize its retail, mail processing, and delivery networks to eliminate growing excess capacity and maintenance backlogs, reduce costs, and improve efficiency. USPS has a window of opportunity to reduce the cost and size of its workforce through attrition and the large number of upcoming retirements to minimize the need for layoffs. Although USPS has begun efforts to realign and consolidate some mail processing, retail, and delivery operations, much more is urgently needed. GAO recognizes that USPS would face formidable resistance to restructuring with many facility closures and consolidations because of concerns that these actions would affect service, employees, and communities. USPS management will need to provide leadership and work with stakeholders to overcome resistance for its actions to be successfully implemented. USPS must use an open, transparent, fair, and consistent process; engage with its unions, management associations, the mailing industry, and political leaders; and demonstrate results. In turn, these stakeholders and Congress need to recognize that major restructuring is urgently needed for USPS to be financially viable. To its credit, USPS recently began a national initiative to consolidate some of its 3,200 postal retail stations and branches in urban and suburban areas. USPS has begun efforts to consolidate some mail processing operations but has closed only 1 of 400 major mail processing facilities. USPS is realigning city carrier routes to remove excess capacity and improve efficiency, which is expected to save nearly $1 billion annually; has begun to install automated equipment to reduce costly manual sorting of flat-sized mail; and is studying how it could shift to 5-day delivery and the potential savings.	3,588	910

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