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HUD's mission is to create strong, sustainable, inclusive communities and quality, affordable homes for all. To carry out this mission, the department administers community and housing programs that affect millions of households each year. These programs provide affordable rental housing opportunities and help homeless families and chronically homeless individuals and veterans. The department also administers mortgage insurance programs for single-family housing, multifamily housing, and health care facilities. IT plays a critical role in HUD's ability to perform its business functions, which involve the management of billions of dollars to carry out its mission. For example, the department's IT environment consists of multiple systems that, among other things, are intended to help coordinate interactions with lending institutions to insure mortgages, collect and manage state and local housing data, process applications for community development, and process vouchers for different rental assistance programs. Its systems also support the processing of applications for, and the management of, more than 50 grant programs administered by the department. However, according to HUD, its IT environment has not been sufficient to effectively support business functions because its systems are overlapping and duplicative, not integrated, necessitate manual workloads, and employ antiquated technologies that are costly to maintain. The department has reported that its environment consists of: over 200 information systems, many of which perform the same function and, thus, are overlapping and duplicative; stove-piped, nonintegrated systems that result in identical data existing in multiple systems; manual processing for business functions due to a lack of systems to support these processes; and antiquated technology (15 to 30 years old) and complex systems that are costly to maintain. To address challenges with its IT environment, HUD has developed a number of plans in recent years to guide its modernization efforts. These include plans that outline how it intends to spend IT funds, an information resource management strategic plan, and an enterprise architecture roadmap. These plans contain information related to the department's modernization efforts and actions aimed at improving its capacity to manage IT. Nevertheless, even with these plans and ongoing modernization efforts, the department reported in November 2016 that limited progress had been made in replacing legacy systems and manual processes with modern applications and enhanced capabilities. HUD's IT budget covers two categories of spending: (1) operations and maintenance of existing systems and (2) new investments for modernization (often referred to as development, modernization, and enhancement). Operations and maintenance funds refer to the expenses required for general upkeep of the department's existing systems. Funds for modernization support projects and activities that lead to new systems, or changes and modifications to existing systems that substantively improve capability or performance to better support HUD's mission and business functions. According to the Office of Management and Budget's (OMB) IT Dashboard, over the past 5 years, the department spent between approximately 70 and 95 percent of its total IT budget on operations and maintenance; it dedicated a smaller portion--ranging from approximately 5 to 30 percent--to modernization efforts. Figure 1 illustrates the percentage of HUD's IT spending during fiscal years 2012 through 2016, dedicated to operating and maintaining existing IT versus modernization efforts, as reported on the IT Dashboard. Consistent with prior years, a majority of HUD's fiscal year 2017 IT budget request is intended to support existing systems. Specifically, the department requested $286 million, of which approximately 87 percent ($250 million) is planned for operations and maintenance. According to the budget request, the department anticipates using operations and maintenance funds to support business administrative functions as well as its IT infrastructure, which includes servers, communications, equipment and support, desktops, mobile devices, and security. Of the fiscal year 2017 IT budget request, approximately 13 percent ($36 million) is intended to support modernization investments aimed at improving the department's IT environment. According to HUD's budget request, these funds are to support new investments intended to deliver modernized enterprise capabilities that better support the department's mission. Specifically, these investments are expected to, among other things, leverage enterprise-level technology, reduce the number of stand- alone systems, deliver cloud-based technologies, automate manual processes, and consolidate data. Of the $36 million requested for modernization, approximately 81 percent ($29 million) was identified to support four modernization efforts, which were in various phases of planning and development. Table 1 provides a description of these investments and the amounts of their associated fiscal year 2017 budget requests. Our prior work has shown that implementing repeatable, disciplined processes that adhere to federal law and best practices can help agencies effectively plan, manage, and oversee modernization efforts. Disciplined processes include establishing guidance that can be used for developing reliable cost estimates that project realistic life-cycle costs. Such estimates are critical to a modernization effort's success because they can be used to support key investment decisions that help to ensure finite resources are wisely spent. In addition, a reliable estimate is the foundation of a good budget and budget spending plan, which outlines how and at what rate an investment's funding will be spent over time. Put another way, reliable cost estimates are essential for successful IT investments and modernization efforts because they help ensure that Congress and the department itself can have reliable information on which to base funding and budgetary decisions. OMB calls for federal agencies to maintain current cost estimates that encompass the full life-cycle of an investment. Building on OMB's requirements and drawing on practices promulgated by federal cost estimating organizations and private industry, GAO's Cost Guide identifies cost estimating practices that, if followed correctly, have been found to be the basis for a reliable cost estimate. An estimate created using these practices exhibits four broad characteristics: it is comprehensive, well-documented, accurate, and credible. Moreover, each characteristic is associated with a specific set of best practices. Table 2 summarizes, by characteristic, the best practices for developing reliable cost estimates identified in the Cost Guide. Because specific and discrete best practices underlie each characteristic, an agency's performance in each of the characteristics can vary. For example, an organization's cost estimates could be found to be comprehensive and well-documented, but not accurate or credible. According to the Cost Guide, a cost estimate is considered reliable if each of the four characteristics is substantially or fully met; in contrast, if any of the characteristics are not met, minimally met, or partially met, the cost estimate cannot be considered reliable. The cost estimates that HUD developed for each of the four selected investments exhibited significant weaknesses in that they did not meet or substantially meet best practices for each characteristic. As such, the estimates were unreliable and did not provide a sound basis for informing the department's investment and budgetary decisions. Specifically, none of the estimates exhibited all of the characteristics of a reliable estimate, as they were not substantially or fully comprehensive, well-documented, accurate, and credible. Only one estimate--for the Customer Relationship Management investment--more than minimally met best practices associated with any of the four characteristics because it partially met the practices for a comprehensive and accurate estimate. The remaining three investments minimally met or did not meet the best practices associated with the four characteristics. For example, the Enterprise Data Warehouse estimate minimally met all four characteristics; the Enterprise Voucher Management System estimate did not meet the characteristic for being accurate, and minimally met the other three characteristics; and the Federal Housing Administration Automation and Modernization estimate did not met the characteristic for being credible, while minimally meeting the rest of the characteristics. Table 3 provides a summary of the extent to which the four investments' cost estimates were comprehensive, well-documented, accurate, and credible. Comprehensive. Of the cost estimates for the four selected investments, none were comprehensive. While one investment partially met associated best practices, the remaining three investments minimally met these practices. Specifically, although all of the estimates included costs for specific elements and phases of the investments, none of the estimates included both government and contractors costs of the investment over the life-cycle, from inception through design, development, deployment, and operations and maintenance, to retirement of the investment. In addition, the Customer Relationship Management investment partially met the best practice related to defining the investment by, for example, explaining that the effort would result in a cloud-based solution that allowed the department to consolidate existing systems. However, none of the estimates fully met this practice, in part because investment documentation did not completely define system requirements, reflect current schedules, and demonstrate that efforts were technically reasonable. Further, work breakdown structures that had been developed were not sufficiently detailed for any of the investments to ensure that cost elements were neither omitted nor double counted, and allowed for traceability between the investment's costs and schedule by deliverable, such as hardware or software components. Moreover, although various assumptions were factored into the cost estimate for the Customer Relationship Management investment, the basis for the assumptions was not documented and, as a result, their reasonableness could not be determined. For the remaining three investments, where information was limited and judgments had to be made, the estimates did not contain cost-influencing ground rules and assumptions. Well-documented. The four investments did not develop well- documented cost estimates because none were supported by detailed documentation that described how the estimate was derived and how the expected funding would be spent. This characteristic's best practices were minimally met by all of the investments. In discussing the estimating methodologies used to develop the estimates, HUD officials reported using analogy, expert opinion, parametric, and other methods; however, the department did not document the specific methodologies used for any of the investments. Specifically, HUD did not adequately document for each estimate the sources of data used, any assessments of data accuracy and reliability, and other circumstances affecting the data, such as the details related to calculations performed. The estimating information for the investments also was not captured in a way that the data used could be easily replicated and updated. Further, the documentation did not sufficiently discuss the technical baseline--which is intended to serve as the basis for developing an estimate by providing a common definition of the investment--or how the data were normalized. In addition, while HUD officials reported briefing management on each of the investments and on the high-level estimate for the Enterprise Voucher Management System, the department did not brief management on the ground rules and assumptions underlying the estimate. A cost estimate is not considered valid until management has approved it, yet the department did not provide documentation that any of the four cost estimates had been reviewed and accepted by management. Accurate. Overall, the four estimates were not accurate because only one estimate partially addressed the best practices associated with this characteristic, two estimates minimally addressed the best practices, and one estimate did not meet any of the associated practices. As such, we could not determine whether the cost estimates provided results that were unbiased and were not overly conservative or optimistic. More specifically, the estimate for the Customer Relationship Management investment partially addressed the best practices in that its calculations did not contain errors and actual costs from existing programs or historical data were used to develop the estimate. However, analyses had not been performed for any of the investments to ensure that the cost estimates were based on an assessment of most likely costs. In addition, none of the investments' estimates had been properly adjusted for inflation to ensure that cost data were expressed in consistent terms, which is important because doing so can help to prevent cost overruns. For example, officials for the Federal Housing Administration Automation and Modernization investment stated that the cost data had not been adjusted for inflation or normalized to constant year dollars to remove the effects of inflation. Further, the estimating techniques used to determine costs were not documented, which prevented an assessment of the accuracy of any calculations performed. Finally, while HUD officials responsible for the investments stated that the estimates were grounded in historical data, such as actual costs from comparable investments, they did not provide evidence to support this assertion for all four investments. Credible. Three of the investments minimally met the best practices associated with developing a credible cost estimate and one investment did not meet the practices. Specifically, the estimates did not fully discuss limitations of the analyses because of uncertainty or biases surrounding the data or assumptions. For example, none of the investments conducted a sensitivity analysis, which is intended to reveal how the cost estimate is affected by a change in a single assumption and allows for the cost estimator to understand which variable most affects the cost estimate. In addition, risk and uncertainty analyses were not conducted in a manner that conformed to the practices in the Cost Guide. For example, while HUD officials responsible for Enterprise Data Warehouse and Customer Relationship Management investments stated that risks were evaluated, evidence supporting these assertions was not provided. In addition, risk documentation was provided for the Federal Housing Administration Automation and Modernization investment, but the analysis was limited to a portion of the investment and, therefore, did not provide a comprehensive view of the level of risk and the degree of uncertainty associated with the estimate. Moreover, department officials stated that cross checks were conducted for three of the investments' estimates to determine whether applying other methods produced similar results; however, evidence was not provided to demonstrate how this was done. Lastly, an independent cost estimate developed by a group outside of the acquiring organization was not conducted to validate the reasonableness of the cost estimates developed for the four investments. (Additional details on our assessments of the four investments' cost estimates can be found in appendix I.) The significant weaknesses in the cost estimates can largely be attributed to the department's lack of established guidance for developing reliable cost estimates, which is contrary to our prior work related to disciplined processes. HUD officials responsible for the selected investments' estimates stated that department guidance had not yet been established and that IT investments were not required to develop estimates that exhibit the four characteristics of a reliable estimate. As a result, according to these officials, cost estimating practices are inconsistently implemented across the department and are decentralized because of the reliance on the efforts and experience of various subject matter experts and contractors. With regard to improving its cost estimating practices, in January 2014, the department began efforts to develop cost estimating guidance by conducting an internal review of approaches used for developing estimates. Following this review, the department drafted guidance in June 2015 that was intended to conform to best practices in the Cost Guide. In August 2016, officials from the Offices of Strategic Planning and Management, the Chief Financial Officer, and the Chief Information Officer stated that HUD was in the process of further developing the guidance to reflect cost estimating best practices. However, as of December 2016, the guidance had not yet been established. According to the officials, finalizing the guidance has been a challenge due to competing priorities within the department, such as addressing weaknesses in its governance structure and management processes. Additionally, these officials stated that the department's focus has been on establishing an infrastructure that is expected to enable implementation of better cost estimating practices. Moving forward, the officials stated that they expect to continue efforts to finalize and establish the guidance in the future, although time frames for doing so had not been determined. Until HUD establishes guidance that calls for the implementation of best practices identified in the Cost Guide, the department is less likely to develop reliable cost estimates for its IT investments that can serve as the basis for informed investment decision making. In going forward without addressing the weaknesses identified in this report, the department risks being unable to effectively estimate funding needs for IT investments and using unreliable data to make budgetary decisions. While it is critical that HUD's IT investments develop cost estimates that provide Congress and the department reliable information on which to make decisions, the cost estimates for the four selected investments had significant weaknesses. Specifically, none of the cost estimates for these investments were reliable because they did not fully or substantially implement best practices that result in exhibiting characteristics of being comprehensive, well-documented, accurate, and credible. Many of the weaknesses found in the investments can be attributed to the lack of established cost-estimating guidance, which the department has not yet finalized because it has focused on addressing management weaknesses and taking action to establish an infrastructure to support improved cost estimation practices. Until HUD finalizes and ensures the implementation of guidance to improve its cost estimating practices, the department is at risk of continuing to make investment decisions based on unreliable information. To increase the likelihood that its IT investments develop reliable cost estimates, we recommend that the Secretary of HUD finalize, and ensure the implementation of, guidance that incorporates the best practices called for in the GAO Cost Estimating and Assessment Guide. We received written comments on a draft of this report from HUD, which are reprinted in appendix II. In its comments, the department agreed with our recommendation and indicated that it plans to take action in response. HUD also provided technical comments, which we incorporated as appropriate. Among these comments, the department took issue with our conclusion that cost estimation had not been a priority and stated that HUD had been focused on establishing an infrastructure so that it could improve its cost estimating practices. We revised our conclusion to reflect the department's actions in this regard. We are sending copies of this report to the appropriate congressional committees, the Secretary of Housing and Urban Development, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-6304 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. The following tables summarize our assessments, for each selected IT investment, regarding the extent to which each met the characteristics of a reliable cost estimate--comprehensive, well documented, accurate, and credible. Specifically, our assessments identified whether the investments estimates met, substantially met, partially met, minimally met, or did not meet each of the four characteristics and provides key examples of the rationale. The Customer Relationship Management investment's cost estimate partially met best practices for developing a comprehensive and accurate estimate and minimally met best practices for developing a well- documented and credible estimate. The Enterprise Data Warehouse investment's cost estimate minimally met best practices for developing a comprehensive, well-documented, accurate, and credible estimate. The Enterprise Voucher Management System investment's cost estimate minimally reflected best practices for developing a comprehensive, well- documented, and credible estimate and did not reflect best practices for developing an accurate cost estimate. The Federal Housing Administration Automation and Modernization investment's cost estimate minimally met best practices for developing a comprehensive, well documented, and accurate estimate and did not meet best practices for developing a credible cost estimate. In addition to the contact named above, Teresa M. Yost (Assistant Director), Donald Baca (Analyst-in-Charge), Brian Bothwell, Kami Brown, Rebecca Eyler, Amanda Gill, and Karen Richey made key contributions to this report.
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HUD relies extensively on IT to deliver services and manage programs in support of its mission. For fiscal year 2017, HUD requested $36 million for IT investments intended to deliver modernized enterprise-level capabilities that better support the department's mission. Critical to the success of such efforts is the department's ability to develop reliable cost estimates that project life-cycle costs and provide the basis for, among other things, informed decision making and realistic budget formulation. The joint explanatory statement that accompanied the Consolidated and Further Continuing Appropriations Act, 2015, included a provision for GAO to evaluate HUD's cost estimating practices. This review determined the extent to which HUD implemented cost estimating best practices for selected IT investments. GAO selected four IT modernization investments with the largest portion of requested funding for fiscal year 2017, interviewed relevant agency officials, and analyzed and compared each investment's cost estimate to best practices in the Cost Guide . This guide states that, when most or all of the practices are "fully" or "substantially" met, an estimate is considered reliable. The cost estimates that the Department of Housing and Urban Development (HUD) developed for the four selected information technology (IT) investments were unreliable and, thus, lacked a sound basis for informing the department's investment and budgetary decisions. GAO's Cost Estimating and Assessment Guide ( Cost Guide ) defines best practices that are associated with four characteristics of a reliable estimate--comprehensive, well documented, accurate, and credible. However, none of the cost estimates for the selected investments exhibited all of these characteristics. Only one estimate--for the Customer Relationship Management investment--more than minimally met best practices associated with any of the four characteristics because it partially met the practices for a comprehensive and accurate estimate. The remaining three investments minimally or did not meet the best practices associated with the four characteristics. For example, the Enterprise Data Warehouse estimate minimally met all four characteristics; the Enterprise Voucher Management System estimate did not meet the characteristic for being accurate and minimally met the other three characteristics; and the Federal Housing Administration Automation and Modernization estimate did not meet the characteristic for being credible, while minimally meeting the remaining characteristics (see table). The significant weaknesses in the cost estimates for the selected investments can largely be attributed to the department's lack of guidance for developing reliable cost estimates. HUD officials responsible for the selected investments stated that the department had not required the development of estimates that exhibit the four characteristics of a reliable estimate. As a result, according to these officials, cost estimating practices have been decentralized and inconsistent across the department. While HUD drafted guidance in June 2015 that was intended to conform to the best practices in GAO's Cost Guide , the department has not yet finalized the guidance because it has focused on establishing the infrastructure needed to support improved cost estimation practices. Until HUD finalizes and ensures the implementation of guidance to improve its cost estimating practices, the department is at risk of continuing to make investment decisions based on unreliable information. To improve cost estimating practices, GAO recommends that HUD finalize and implement guidance that incorporates best practices called for in the Cost Guide . HUD concurred with this recommendation.
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Since EPA was created in 1970, the agency has been responsible for enforcing the nation's environmental laws. This responsibility has traditionally involved monitoring compliance by those in the regulated community (such as factories or small businesses that release pollutants into the environment or use hazardous chemicals), ensuring that violations are properly identified and reported, and ensuring that timely and appropriate enforcement actions are taken against violators when necessary. Most major federal environmental statutes, including the Clean Water Act, permit EPA to allow states under certain circumstances to implement key programs and to enforce their requirements. EPA establishes by regulation the requirements for state enforcement authority, such as the authority to seek injunctive relief and civil and criminal penalties. EPA also outlines by policy and guidance its views as to the elements of an acceptable state enforcement program, such as necessary legislative authorities and the type and timing of the action for various violations, and tracks how well states comply. Environmental statutes generally provide authority for EPA to take appropriate enforcement action against violators in states that have been delegated authority for these programs when states fail to initiate enforcement action. The statutes also provide that EPA may withdraw approval of a state's program if the program is not administered or enforced adequately. EPA administers its environmental enforcement responsibilities through its headquarters Office of Enforcement and Compliance Assurance (OECA). While OECA provides overall direction on enforcement policies, and sometimes takes direct enforcement action, it carries out much of its enforcement responsibilities through its 10 regional offices. These offices are responsible for taking direct enforcement action and for overseeing the enforcement programs of state agencies in those instances in which the state has been delegated such enforcement authority. EPA has established principles for its enforcement and compliance program. State guidance, providing the framework for state/EPA enforcement agreements, has been in place since 1986. According to EPA, this state guidance, together with statute-specific guidance, is the blueprint for both EPA and state enforcement and compliance programs and serves as the basis for both authorizing and reviewing state programs. OECA expects the regions to take a systematic approach to administering and overseeing the enforcement programs among delegated and nondelegated programs and, in doing so, to follow the policies and guidance issued for this purpose. While federal and state enforcement officials agree that core enforcement requirements should be generally implemented consistently, according to EPA some variation is to be expected--and, in some cases, encouraged. For example, EPA expects some variation in how regions target resources to the most significant compliance issues in different regions and states, the level of enforcement activity--which should vary with the severity of the problem, and the level of regional oversight of state enforcement programs--with the greater oversight provided for weaker programs. As we noted in our 2000 report on the consistency of EPA's regions in enforcing environmental requirements, some variation in environmental enforcement is necessary to take into account local conditions and local concerns. At the same time, EPA enforcement officials readily acknowledged that core enforcement requirements must be consistently implemented, and to ensure fairness and equitable treatment, similar violations should be met with similar enforcement responses, regardless of geographic location. However, when we reviewed EPA's enforcement efforts we found that variations among EPA's regional offices had led to inconsistencies in the actions they take to enforce environmental requirements. For example, we found that inspection coverage by EPA and state enforcement staff varied for facilities discharging pollutants within each region, the number and type of enforcement actions taken by EPA's regions also varied, the size of the penalties assessed and the criteria used in determining penalties assessed varied by region, and the regions' overall strategies in overseeing the states within their jurisdiction varied, which may have resulted in more in-depth reviews in some regional programs than in others. EPA headquarters officials responsible for the water program explained that such variation was fairly commonplace and has posed problems. The director of OECA's water enforcement division, for example, said that in reacting to similar violations, enforcement responses in certain regions were weaker than in others, and that such inconsistencies had increased. We identified a number of factors that contributed to variations in EPA's enforcement that included the following: differences in the philosophical approaches among enforcement staff about how to best achieve compliance with environmental requirements, differences in state laws and enforcement authorities, and in the manner in which regions respond to these differences, variations in resources available to both state and regional enforcement the flexibility afforded by EPA policies and guidance that allow states a degree of latitude in their enforcement programs, and incomplete and inadequate enforcement data which, among other things, hamper EPA's ability to accurately characterize the extent of variations. We also noted in our 2000 report that EPA headquarters enforcement officials were developing performance information that would allow for comparisons among both regions and states in their conduct of key enforcement responsibilities. Such assessments were expected to highlight any major program variations and would be communicated through the issuance of periodic status reports. A number of EPA regional offices were also developing and applying new audit protocols in their state reviews and encouraging more effective communication between and among regional and state enforcement staff. But we also concluded that a number of factors would continue to challenge EPA's ability to ensure reasonably consistent enforcement across its regions. Among the most important of these factors was the absence of reliable data on how both states and regions are performing their enforcement responsibilities. In 2007, we again examined EPA's efforts to improve oversight of state enforcement activities. At that time, we reported that EPA had improved its oversight of state enforcement programs by implementing the State Review Framework (SRF). We noted that EPA's implementation of the SRF gave it the potential to provide for the first time a consistent approach for overseeing authorized states' compliance and enforcement programs. Nonetheless, we also reported that the SRF had identified several significant weaknesses in how states enforce their environmental laws in accordance with federal requirements. For example, reviews conducted under the framework found that the states were not properly documenting inspection findings or how they calculate or assess penalties, as provided by EPA's enforcement policy and guidance, that the states were not adequately entering significant violations noted in their inspection reports into EPA databases, and that the states lacked adequate or appropriate penalty authority or policies. While we recognized the value in EPA's identification and documentation of these findings, we also reported that EPA had not developed a plan for how it would uniformly address them in a timely manner, nor had the agency identified the root causes of the weaknesses, although some EPA and state officials attributed the weaknesses to causes such as increased workloads concomitant with budgetary reductions. We concluded that, until EPA addressed enforcement weaknesses and their causes, it faced limitations in determining whether the states are performing timely and appropriate enforcement, and whether they are applying penalties to environmental violators in a fair and consistent manner within and among the states. In 2000 and in 2007, GAO made several recommendations to EPA to address the concerns that we identified with the agency's enforcement programs. For example, in 2000, we recommended that EPA develop a comprehensive strategy to adequately address problems with the quality of the agency's enforcement data and issue guidance to the regions describing the required elements of audit protocols to be used in overseeing state enforcement programs. In 2007, we recommended that to enhance EPA's oversight of regional and state enforcement activities consistent with federal requirements that the agency should (1) identify lessons learned and develop an action plan to address significant issues, (2) address resource issues such as state staffing levels and resource requirements, (3) publish the results of the SRF reviews so that the public and others will know how well state enforcement programs are working, and (4) conduct a performance assessment of regional enforcement programs similar to the SRF. EPA generally agreed with most of the recommendations we made in 2007, but did not specifically comment on the recommendations we made in 2000. Although EPA has taken steps to address the recommendations in our 2000 report, it has not yet implemented the recommendations in our 2007 report. In 2005, we reported that the scope of EPA's responsibilities under the Clean Water Act had increased significantly since 1972, along with the workload associated with implementing and enforcing the act's requirements. For example, EPA's implementation of the 1987 amendments which expanded the scope of the act by regulating storm water runoff resulted in (1) increasing the number of regulated industrial and municipal facilities by an estimated 186,000 facilities and (2) adding hundreds of thousands of construction projects to states' and regions' workloads for the storm water program. At the same time, EPA had authorized states to take on more responsibilities, shifting the agency's workload from direct implementation to oversight. In 2007, we reported that while overall funding for carrying out enforcement activities to regions and authorized states had increased from fiscal years 1997 through 2006, these increases had not kept pace with inflation and the growth in enforcement responsibilities. Over the 10-year period we reviewed, EPA's enforcement funding to the regions increased from $288 million in fiscal year 1997 to $322 million in fiscal year 2006, but declined in real terms by 8 percent. Both EPA and state officials told us they found it difficult to respond to new requirements while carrying out their previous responsibilities. In 2007, officials in OECA and EPA's Office of the Chief Financial Officer told us that in recent years OECA headquarters absorbed decreases in OECA's total enforcement funding to prevent further reductions to the regions. We determined that enforcement funding for OECA headquarters increased from $197 million in fiscal year 2002 to $200 million in fiscal year 2006--a 9 percent decline in real terms. During the same time, regional enforcement funding increased from $279 million to $322 million--a 4 percent increase in real terms. EPA also reduced the size of the regional enforcement workforce by about 5 percent over the 10 year period between fiscal years 1997 and 2006. During this 10-year period, the regional workforce was reduced from 2,568 full-time equivalent (FTE) staff in fiscal year 1997 to 2,434 FTEs in fiscal year 2006. In comparison, the OECA headquarters workforce declined 1 percent, and the EPA total workforce increased 1 percent during the same period. However, the change in FTEs was not uniform across the 10 regions over the period. For example, two regions--Region 9 (San Francisco) and Region 10 (Seattle)--experienced increases in their workforce: Region 9 increased 5 percent, from 229 to 242 FTEs, and Region 10 increased 6 percent, from 161 to 170 FTEs. In contrast, two regions--Region 1 (Boston) and Region 2 (New York) experienced the largest declines: Region 1 experienced a 15 percent decline, from 195 to 166 FTEs, and Region 2 had a 13 percent decline, from 291 to 254 FTEs. Although we recognized that resources had not kept pace with EPA's responsibilities under the Clean Water Act, we also found that EPA's process for budgeting and allocating resources did not fully consider the agency's current workload, either for specific statutory requirements, such as those included in the Clean Water Act, or for the broader goals and objectives in the agency's strategic plan. Instead, EPA made incremental adjustments and relied primarily on historical precedent when making resource allocations. In 2005, we concluded that changes at the margin may not be sufficient because both the nature and distribution of the Clean Water Act workload had changed, the scope of activities regulated under the act had increased, and EPA had taken on new responsibilities while shifting others to the state. While we reported in 2005 that EPA had taken some actions to improve resource planning, we also found that it faced a number of challenges that hindered comprehensive reform in this area. Specifically, we identified several efforts that EPA had initiated to improve the agency's ability to strategically plan its workforce and other resources. While some of these efforts were not directly related to workforce planning, we found that they had the potential to give the agency some of the information it needed to support a systematic, data-driven method for budgeting and allocating resources. In addition, we identified two initiatives within the Office of Water that we believed had the potential to provide relevant and useful information for a data-driven approach to budgeting and allocating resources. First, beginning in December 1998, EPA and the states collaborated on a state resource analysis for water quality management to develop an estimate of the resources that states needed to fully implement the Clean Water Act. The primary focus of the project was identifying the gap between states' needs and available resources. To develop the estimates of the gap, EPA and the states created a detailed model of activities associated with implementing the Clean Water Act, the average time it took to complete such activities, and the costs of performing them. The National Academy of Public Administration subsequently reviewed the model and determined that the underlying methodology was sound, and recommended that EPA and the states refine the model to support data-driven grant allocation decisions. However, as we reported, the agency did not implement the recommendation, citing resource constraints and reluctance on the part of some states. Second, in 2003, the Office of Water implemented an initiative called the Permitting for Environmental Results Strategy to respond to circumstances that were making it increasingly difficult for EPA and the states to meet their responsibilities under the Clean Water Act. According to EPA, in addition to the scope and complexity of the act expanding over time, the states were also facing an increasing number of lawsuits and petitions to withdraw their authorization to administer some Clean Water Act programs. As part of its effort to identify and resolve performance problems in individual states, EPA and the states were developing profiles containing detailed data on the responsibilities, resources, and workload demands of each state and region. We concluded that this information would be useful to any comprehensive and systematic resource planning method adopted by the agency. Nonetheless, we also identified a number of larger challenges that EPA would face as it tried to adopt a more systematic process for budgeting and resource allocation. Specifically, we found that EPA would be challenged in obtaining complete and reliable data on key workload indicators, which we concluded would be the most significant obstacle to developing a systematic, data-driven approach to resource allocation. Without comprehensive and reliable data on workload, EPA cannot accurately identify where agency resources, such as staff with particular skills, are most needed. EPA officials told us that some of the key workload factors related to controlling point and nonpoint source pollution include the number of point source dischargers, the number of wet weather dischargers, and the quantity and quality of water in particular areas. However, we reported that for some of this information, the relevant databases may not have the comprehensive, accurate, and reliable information that is needed by the agency. Even with better workload data, we found in 2005 that EPA would also find it difficult to implement a systematic, data-driven approach to resource allocation without staff support for such a process. Support might not be easily forthcoming because, according to EPA officials in several offices and regions, staff were reluctant to accept a data-driven approach after their experience in using workload models during the 1980s. At that time, each major program office used a model to allocate resources to the agency's regional offices. When the models were initially developed, agency officials believed they were useful because EPA's programs were rapidly expanding as the Congress passed new environmental laws. Over time, however, the expansion of EPA's responsibilities leveled off, and its impact on the relative workload of regions was not as significant. The change in the rate of the workload expansion, combined with increasingly constrained federal resources during the late 1980s, meant that the workload models were only being used to allocate changes at the margins. The agency stopped using the models in the early 1990s because, according to officials, staff spent an unreasonable amount of time negotiating relatively minor changes in regional resources. To address the concerns that we identified with EPA's resource allocation and planning processes for the enforcement programs, in 2005, we made several recommendations to the agency. Specifically, we recommended that EPA identify relevant workload indicators that drive resource needs, ensure that relevant data are complete and reliable, and use the results to inform budgeting and resource allocation decisions. In responding to our recommendations, EPA voiced concerns that a bottom-up workload assessment contrasts with its approach, which links budgeting and resource allocation to performance goals and results. However, we reiterated our belief that assessing workload and how it drives resources was fully compatible with EPA's approach. In 2008, when we again reported on EPA's resource allocation process, we found that the process was essentially the same as we reported in 2005 and that the agency had not made progress on implementing our recommendations. In 2007, we reported that, despite the interdependence between EPA and the states in carrying out enforcement responsibilities, effective working relationships have historically been difficult to establish and maintain, based on reports by GAO, EPA's Office of Inspector General, the National Academy of Public Administration, and others. We identified the following three key issues that have affected EPA and state relationships in the past: EPA's funding allocations to the states did not fully reflect the differences among the states' enforcement workload and their relative ability to enforce state environmental programs consistent with federal requirements. In this regard, EPA lacked information on the capacity of both the states and EPA's regions to effectively carry out their enforcement programs, because the agency had done little to assess the overall enforcement workload of the states and regions and the number and skills of people needed to implement enforcement tasks, duties, and responsibilities. Furthermore, the states' capacity continued to evolve as they assumed a greater role in the day-to- day management of enforcement activities, workload changes occurred as a result of new environmental legislation, new technologies were introduced, and state populations shifted. Problems in EPA's enforcement planning and priority setting processes resulted in misunderstandings between OECA, regional offices, and the states regarding their respective enforcement roles, responsibilities, and priorities. States raised concerns that EPA sometimes "micromanaged" state programs without explaining its reasons for doing so and often did not adequately consult the states before making decisions affecting them. OECA had not established a consistent national strategy for overseeing states' enforcement of EPA programs. Consequently, the regional offices were not consistent in how they oversaw the states. Some regional offices conducted more in-depth state reviews than others, and states in these regions raised concerns that their regulated facilities were being held to differing standards of compliance than facilities in states located in other regions. Our 2007 report acknowledged that EPA had made substantial progress in improving priority setting and enforcement planning with states through its system for setting national enforcement priorities and the National Environmental Performance Partnership System (NEPPS), which was designed to give states demonstrating strong environmental performance greater flexibility and autonomy in planning and operating their environmental programs. We concluded that the NEPPS had fostered a more cooperative relationship with the states and that EPA and the states had also made some progress in using NEPPS for joint planning and resource allocation. State participation in the partnership had grown from 6 pilot states in fiscal year 1996 to 41 states in fiscal year 2006. In 2008, we reported that EPA relies on a variety of measures to assess and report on the effectiveness of its civil and criminal enforcement programs. For example, EPA relies on assessed penalties that result from enforcement efforts among its long-standing measurable accomplishments. The agency uses its discretion to estimate the appropriate penalty amount based on individual case circumstances. EPA has developed penalty policies as guidance for determining appropriate penalties in civil administrative cases and referring civil judicial cases. The policies are based on environmental statutes and have an important goal of deterring potential polluters from violating environmental laws and regulations. The purpose of EPA's penalties is to eliminate the economic benefit a violator gained from noncompliance and to reflect the gravity of the alleged harm to the environment or public health. In addition to penalties, EPA has also established what it considers two major performance measures for its civil enforcement program. These are (1) the value of injunctive relief--the monetary value of future investments necessary for an alleged violator to come into compliance, and (2) pollution reduction--the pounds of pollution to be reduced, treated, or eliminated as a result of an enforcement action. EPA relies on these measures, among others, in pursuing its national enforcement priorities and overall strategy of fewer, but higher impact, cases. However, unless these measures are meaningful, the Congress and the public will not be able to determine the effectiveness of the enforcement program. When we reviewed EPA's assessed penalties data we determined that from fiscal years 1998 to 2007 total inflation-adjusted penalties declined when excluding major default judgments. When adjusted for inflation, total assessed penalties were approximately $240.6 million in fiscal year 1998 and $137.7 million in 2007. Moreover, we identified three shortcomings in how EPA calculates and reports penalty information to the Congress and the public that may result in an inaccurate assessment of the program. Specifically, we reported that EPA was Overstating the impact of its enforcement programs by reporting penalties assessed against violators rather than actual penalties received by the U.S. Treasury. Reducing the precision of trend analyses by reporting nominal rather than inflation-adjusted penalties, thereby understating past accomplishments. Understating the influence of its enforcement programs by excluding the portion of penalties awarded to states in federal cases. In contrast to penalties, we found that both the value of estimated injunctive relief and the amount of pollution reduction reported by EPA generally increased. The estimated value of injunctive relief increased from $4.4 billion in fiscal year 1999 to $10.9 billion in fiscal year 2007, in 2008 dollars. In addition, estimated pollution reduction commitments amounted to 714 million pounds in fiscal year 2000 and increased to 890 million pounds in fiscal year 2007. However, we identified several shortcomings in how EPA calculates and reports this information as well. We found that generally EPA's reports did not clearly disclose the following: Annual amounts of injunctive relief and pollution reduction have not yet been achieved. They are based on estimates of relief and reductions to be realized when violators come into compliance. Estimates of the value of injunctive relief are based on case-by-case analyses by EPA's technical experts, and in some cases the estimates include information provided by the alleged violator. Pollution reduction estimates are understated because the agency calculates pollution reduction for only 1 year at the anticipated time of full compliance, though reductions may occur for many years into the future. In addition, we identified a number of factors that affected EPA's process for achieving annual results in terms of penalties, estimated value of injunctive relief, and amounts of pollution reduction. Some of these factors that could affect the outcomes included: The Department of Justice (DOJ), not EPA, is primarily responsible for prosecuting and settling civil judicial and criminal enforcement cases. Executive Order 12988 directs DOJ, whenever feasible, to seek settlements before pursuing civil judicial actions against alleged violators. Unclear legal standards, as illustrated by the 2006 Supreme Court decision, Rapanos v. United States have hindered EPA's enforcement efforts. This case generally made it more difficult for EPA to take enforcement actions because the legal standards for determining what is a "water of the United States" were not clear. In our 2008 report, we recommended that EPA take a number of actions to improve the accuracy and transparency of the information that it reports to the Congress and the public regarding penalties assessed, value of injunctive relief, and estimates of pollution reduction. EPA generally agreed with most of our recommendations and stated that it would consider making these changes in the future. In conclusion, our work over the past 9 years has shown that the Clean Water Act has significantly increased EPA's and the states' enforcement responsibilities, available resources have not kept pace with these increased needs, and actions are needed to further strengthen the enforcement program. To address these concerns, we have made several recommendations to EPA, however, EPA's implementation of our recommendations has been uneven and several of the issues that we have identified over the last decade remain unaddressed today. The agency still needs comprehensive, accurate, and reliable data that would allow it to better target limited resources to those regions and potential pollution problems of the greatest concern. The agency still needs better processes to plan and allocate resources to ensure that the greatest risks are being addressed. Finally, the agency needs accurate and transparent measures to report on whether the Clean Water Act is being consistently implemented across the country in all regions and that like violations are being addressed in the same manner. Mr. Chairman, this concludes our prepared statement, we would be happy to respond to any questions that you or other committee Members might have. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. For further information about this testimony, please contact Anu Mittal at (202) 512- 3841 or [email protected]. Key contributors to this testimony were Steve Elstein, Diane Raynes, Ed Kratzer, Sherry McDonald, Antoinette Capaccio, and Alison O'Neill. 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.
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Congress enacted the Clean Water Act to help reduce water pollution and improve the health of the nation's waterways. The Environmental Protection Agency (EPA) administers its enforcement responsibilities under the act through its Office of Enforcement and Compliance Assurance (OECA), as well as its 10 regional offices and the states. Over the last 9 years, GAO has undertaken a number of reviews of EPA's environmental enforcement activities, including for the Clean Water Act. For this testimony statement, GAO was asked to summarize the results of five prior reports on the effectiveness of EPA's enforcement program. Specifically, this statement includes information on the (1) factors that cause variations in enforcement activities and lead to inconsistencies across regions, (2) impact that inadequate resources and work force planning has had on enforcement, (3) efforts EPA has taken to improve priority planning, and (4) accuracy and transparency of measures of program effectiveness. GAO's prior recommendations have included the need for EPA to collect more complete and reliable data, develop improved guidance, and better performance measures. Although EPA has generally agreed with these recommendations, its implementation has been uneven. GAO is not making new recommendations in this statement. In 2000, GAO found variations among EPA's regional offices in the actions they take to enforce environmental requirements. For example, the regions varied in the inspection coverage of facilities discharging pollutants, the number and type of enforcement actions taken, and the size of the penalties assessed and the criteria used in determining penalties. GAO also found that variations in the regions' strategies for overseeing state programs may have resulted in more in-depth reviews in some regional programs than in others. Several factors contributed to these variations including differences in the philosophical approaches among enforcement staff about how best to achieve compliance with environmental requirements, differences in state laws and enforcement authorities and how the regions respond to these differences, variations in resources available to state and regional offices, the flexibility afforded by EPA policies and guidance that allow latitude in state enforcement programs, and incomplete and inadequate enforcement data that hampered EPA's ability to accurately characterize the extent of variations. In 2007, GAO reported improvements in EPA's oversight of state enforcement activities with the implementation of a state review framework. However, while this framework helped identify several weaknesses in state programs, the agency had not developed a plan for how it would uniformly address these weaknesses or identify the root causes of these weaknesses. In 2005, GAO reported that the scope of EPA's responsibilities under the Clean Water Act along with workload associated with implementing and enforcing the act's requirements had increased significantly. At the same time, EPA had authorized states to take on more responsibilities, shifting the agency's workload from direct implementation to oversight. In 2007, GAO reported that while overall funding for enforcement activities had increased from $288 million in fiscal year 1997 to $322 million in fiscal year 2006, resources had not kept pace with inflation or the increased responsibilities. Both EPA and state officials told GAO that they found it difficult to respond to new requirements while carrying out previous responsibilities and regional offices had reduced enforcement staff by about 5 percent. In 2005, GAO also reported that EPA's process for budgeting and allocating resources did not fully consider the agency's workload, either for specific statutory requirements such as those included in the Clean Water Act or the broader goals and objectives in the agency's strategic plan. Any efforts made by the agency to develop a more systematic process would be hampered by the lack of comprehensive and accurate workload data. In 2007, GAO reported that EPA had made substantial progress in improving priority setting and enforcement planning with states through its system for setting national enforcement priorities and this had fostered a more cooperative relationship with the states. Finally, in 2008, GAO reported that EPA could improve the accuracy and transparency of some of the measures that it uses to assess and report on the effectiveness of its civil and criminal enforcement programs. GAO identified shortcomings in how EPA calculates and reports these data that may prevent the agency from providing Congress and the public with a fair assessment of the programs.
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As table 1 shows, at the end of fiscal year 2013, USPS had about $100 billion in unfunded liabilities for pension, retiree health, and workers' compensation benefits as well as outstanding debt. These unfunded liabilities have increased by 62 percent since fiscal year 2007. Since fiscal year 2007, USPS has experienced significant financial challenges. USPS's gap between expenses and revenues has grown significantly. In fiscal year 2009, we returned USPS to our high-risk list due, in part, to a projected loss of $7 billion--and an actual loss of over Also, USPS did not make retiree health $8.5 billion--in fiscal year 2010.benefit prefunding payments totaling $16.7 billion due during fiscal years 2011 through 2013. In addition, USPS's outstanding debt to the U.S. Treasury increased from $2.1 billion at fiscal year-end 2006 to its current statutory borrowing limit of $15 billion.and unfunded liabilities have become a large and growing burden-- increasing from 83 percent of USPS's revenues in fiscal year 2007 to 148 percent of revenues in fiscal year 2013. As shown in figure 1, USPS's debt USPS's dire financial condition makes paying for these liabilities highly challenging. In the short term, USPS lacks liquidity to fund needed capital investments and cannot increase its liquidity through borrowing since USPS has hit its $15 billion statutory debt limit. At the end of fiscal year 2013, USPS held unrestricted cash of $2.3 billion, which it states represents approximately 9 days of average daily expenses. This level of liquidity could be insufficient to support operations in the event of another significant downturn in mail volume. In the long term, USPS will be challenged to pay for its unfunded liabilities on a smaller base of First- Class Mail, its most profitable product. First-Class Mail volume has declined 37 percent since it peaked in fiscal year 2001. In addition, USPS's five-year business plan projects this volume will continue declining by about 5 to 6 percent annually. The extent to which USPS has funded its benefit liabilities varies as a result of different statutory funding requirements specific to each benefit program as well as USPS's financial means to make funding payments. For example, prefunding of USPS's pension benefits has been required over decades, and as a result, USPS's pension liability is over 90 percent funded. Prefunding USPS's retiree health benefits began in 2007, and at a fairly aggressive pace, and the liability is about half funded at present. In contrast, under the Federal Employees Compensation Act (FECA), USPS funds its workers' compensation benefits on a pay-as-you-go basis, pursuant to statutory requirements, so the entire FECA liability is unfunded. Also, as discussed further below, the ongoing prefunding requirements--i.e., the rules for calculating the amount that USPS must pay each year--differ among the pension, retiree health, and workers' compensation programs. For each of the four post-employment benefit programs--Civil Service Retirement System (CSRS), Federal Employees Retirement System (FERS), retiree health, and workers' compensation--table 2 illustrates, as of the end of fiscal year 2013, USPS's liability, the value of the assets that have been set aside, the funded percentage, and the unfunded liability. The funded percentages are 91 percent for CSRS, 101 percent (i.e., a slight surplus) for FERS, 49 percent for retiree health, and 0 percent for workers' compensation. The unfunded liabilities, in order of decreasing size, are $48 billion for retiree health, $19 billion for pensions, and $17 billion for workers' compensation. These total to about $85 billion, which, together with USPS's debt to the Treasury of $15 billion, adds to the $100 billion of total debt and unfunded liabilities cited earlier. USPS's benefit liabilities are actuarial estimates of the present value of a portion of the future benefits projected to be paid under each program based on formulas in current law. Specifically, for both the pension and retiree health programs, the liability includes two pieces: (1) the present value of all projected future benefits for current retirees and their beneficiaries, plus (2) the present value of a portion of the projected future benefits for current employees and their beneficiaries, based on employees' service to date (with each additional year of service adding to the liability, such that approximately the full liability is accrued when employees reach retirement).employee groups and other stakeholders, these liabilities do not include any amounts for future USPS employees not yet hired or born. The workers' compensation liability represents the present value of all projected future benefits for former employees who have sustained an injury and are eligible for benefits; it does not include a provision for projected future injuries to current employees. Contrary to statements made by some These liability measurements depend on a combination of economic and demographic assumptions regarding such factors as future investment returns, interest rates, inflation, salary increases, medical costs, and longevity. These liability measurements inherently contain significant degrees of uncertainty, and can change from year to year, both because of actual experience differing from the assumptions and because of changes to the assumptions themselves, which can occur in response to emerging experience and changing conditions. As an example of the sensitivity of these liabilities to changes in assumptions, USPS has estimated that its $48 billion unfunded liability for retiree health benefits could have ranged from $35 billion to $64 billion, solely by varying the inflation rate by 1 percent in either direction. USPS's pension and retiree health liabilities are estimated using demographic and pay-increase assumptions developed for the federal workforce as a whole, rather than assumptions developed for the USPS workforce in particular. Some have suggested that USPS's benefit liabilities may be overstated in that the use of USPS-specific assumptions would result in a lower liability measurement.we support using the most accurate numbers possible. We suggested that if USPS-specific assumptions are used, the assumptions should In 2013, we testified that continue to be recommended by an independent body (such as OPM's Board of Actuaries). USPS's ongoing prefunding contributions are governed by separate rules applying to the funding of its CSRS, FERS, retiree health benefit, and workers' compensation liabilities. These separate rules include variations in amortization periods, recognition of any surpluses, use of actuarially determined versus fixed payments, and actuarial assumptions. The Postal Accountability and Enhancement Act (PAEA) eliminated USPS's agency contributions for CSRS, as the USPS had a CSRS surplus at that time. The surplus of $17 billion was transferred to the new Postal Service Health Benefits Fund (PSHRBF) to begin prefunding USPS's retiree health liability. Under current law, USPS is not required to make any prefunding contributions for CSRS prior to fiscal year 2017. If USPS were to have an unfunded CSRS liability in 2017 (for example, if the current unfunded CSRS liability of $20 billion persists), USPS would have to begin making prefunding payments to eliminate the unfunded liability by September 30, 2043, i.e., over a 27-year amortization period from fiscal years 2017 to 2043. If USPS were to have a CSRS surplus as of the close of any of the fiscal years ending in 2015, 2025, 2035, and 2039, the CSRS surplus would be transferred to the PSHRBF. For FERS, USPS is annually required to contribute its share of the "normal cost" plus an amortization payment toward any existing unfunded liability. The normal cost is the annual expected growth in the liability attributable to an additional year of employees' service. The amortization payment toward any unfunded liability is determined using a 30-year amortization period. Since USPS has had a FERS surplus for a number of years, it has not had to make any amortization payments, only its normal cost payments. Current law does not provide any provision for utilization of any FERS surplus, as discussed further in the next section. USPS made FERS normal cost payments of $3.5 billion in fiscal year 2013. Unlike its pension liability, prior to 2007 USPS had been funding its retiree health liability on a pay-as-you-go basis--an approach in which USPS paid its share of premiums for existing retirees, with no prefunding for any future premiums expected to be paid on behalf of current retirees and employees. We have drawn attention to USPS's retiree health benefit liability over the past decade. In May 2003, the Comptroller General testified that USPS's accounting treatment--which reflected the pay-as- you-go nature of its funding--did not reflect the economic reality of its legal liability to pay for its retiree health benefits, and that current ratepayers were not paying for the full costs of the services they were receiving. Consequently, the pension benefits being earned by USPS employees--which were being prefunded--were being recovered through current postal rates, but the retiree health benefits of those same employees were not being recognized in rates until after they retired. The Comptroller General testified that without a change, a sharp escalation in postal rates in future years would be necessary to fund the cost of retiree health benefits on a pay-as-you-go basis. In 2006, PAEA established requirements for USPS to begin prefunding its retiree health benefits. USPS stated in its 2007 Annual Report that such prefunding was a "farsighted and responsible action that placed the Postal Service in the vanguard of both the public and private sectors in providing future security for its employees, and augured well for our long- term financial stability," but also acknowledged that the required payments would be a considerable financial challenge in the near term. PAEA required USPS to make "fixed" prefunding payments to the PSRHBF, ranging from $5.4 billion to $5.8 billion per year, due each fiscal year from 2007 through 2016. three required annual payments. We have referred to these 10 years of required payments as "fixed" because the amounts are specified in statute rather than calculated based on an actuarial measurement of the liability. In addition to these prefunding requirements, USPS is also required to continue paying its share of health benefit premiums for current retirees and their beneficiaries, payments USPS has been making. USPS paid $2.9 billion for its share of retiree health benefit premiums in fiscal year 2013. USPS's $5.4 billion retiree health benefit prefunding payment due at the end of fiscal year 2009 was reduced to $1.4 billion. Pub. L. No. 111-68, SS 164 (Oct. 1, 2009). We reported on USPS's retiree health prefunding requirements in GAO-13-112. period of just 10 years, as has sometimes been stated. However, we have reported that the required payments are significantly "frontloaded," in that the total payments required in the first 10 years (fiscal years 2007- 2016) were significantly in excess of estimates of what actuarially determined amounts would be. The Federal Employees' Compensation Act (FECA) is the workers' compensation program for federal employees, including USPS. FECA is managed by the Department of Labor (DOL) and provides benefits paid out of the Employees' Compensation Fund to federal employees who sustained injuries or illnesses while performing federal duties. USPS funds its workers' compensation under a pay-as-you go system by annually reimbursing DOL for all workers' compensation benefits paid to or on behalf of postal employees in the previous year. USPS reimbursed DOL $1.4 billion for fiscal year 2013. Without congressional action to address USPS's benefit funding issues and better align its costs and revenues, USPS faces continuing low liquidity levels, insufficient revenues to make annual prefunding payments, and increasing benefit liabilities. Deferring funding could increase costs for future ratepayers and increase the possibility that USPS may not be able to pay for these costs. USPS stated that in the short term, should circumstances leave the agency with insufficient cash, it would be required to implement contingency plans to ensure that mail delivery continues. These measures could require that USPS prioritize payments to employees and suppliers ahead of some payments to the federal government. For example, as discussed previously, near the end of fiscal year 2011, in order to maintain its liquidity USPS temporarily halted its regular FERS contribution. However, USPS has since made up those missed FERS payments. According to USPS, current projections indicate that it will be unable to make the required $5.7 billion retiree health benefit prefunding payment due in September 2014. USPS has stated that its cash position will worsen in October 2014 when it is required to make an estimated payment of $1.4 billion to DOL for its annual workers' compensation reimbursement. USPS's statements about its liquidity raise the issue of whether USPS will need additional financial help to remain operational while it restructures and, more fundamentally, whether it can remain financially self-sustainable in the long term. We have previously reported that Congress and USPS need to reach agreement on a comprehensive package of actions to improve USPS's financial viability. In previous reports, we have discussed a range of strategies and options, to both reduce costs and enhance revenues, that Congress could consider to better align USPS costs with revenues and address constraints and legal restrictions that limit USPS's ability to reduce costs and improve efficiency. We have also reported that it is important for USPS to align its expenses and revenues to avoid even greater financial losses, repay its outstanding debt, and increase capital for investments needed to sustain its national network. In addition, we have reported that Congress needs to modify USPS's retiree health prefunding payment in a fiscally responsible manner, and that USPS should prefund any unfunded retiree health liability to the maximum extent that its finances permit. Implementing strategies and options to better align costs with revenues would better enable USPS to be in a financial position to fund and pay for its debt and unfunded benefit liabilities. With any unfunded liability comes the risk of being unable to pay for it in the future. This risk can be heightened when future revenues are declining or highly uncertain, as is the case for USPS. We have reported on several rationales for prefunding pension and retiree health benefits.Some of the same reasoning could be applied to workers' compensation benefits as well. The benefits of prefunding include the following: Achieving an equitable allocation of cost over time by paying for retirement benefits during employees' working years, when such benefits are earned. For USPS, this is about equity between current and future postal ratepayers. This is in line with helping USPS align costs with revenues. An additional consideration here is the "legacy" unfunded liability that was not paid by ratepayers in prior years. Protecting the future viability of the enterprise by not saddling it with bills later after employees have retired. Providing greater benefit security to employees, retirees, and their beneficiaries. Prefunded benefits are more secure against the future risks of benefit cuts or inability to pay. Providing security to any third party that might become responsible in the event of the enterprise's inability to pay for some or all of the unfunded liability. Prefunding decisions also involve trade-offs between USPS's current financial condition and its long-term prospects. While reducing unfunded liabilities protects the future viability of the organization, no prefunding approach will be viable unless USPS can make the required payments, but attempting to do so in the short term could further strain its finances. USPS currently lacks liquidity and postal costs would need to decrease or postal revenues to increase, or both, to make required prefunding payments. To the extent prefunding payments are postponed, larger payments will be required later, when they likely would be supported by less First-Class Mail volume and revenue. In 2012, we developed projections of USPS's future levels of liability and unfunded liability for its retiree health benefits. These projections showed that current law would result in a significant reduction of USPS's future unfunded liability if USPS resumed making the required payments.However, USPS has indicated that it does not expect to make any of the remaining fixed prefunding payments, through fiscal year 2016, an intention that means its unfunded liability would increase and its future payments would be greater. From the perspective of all USPS's post-employment benefit programs, any relaxation of funding requirements in the short term--for example, by suspending retiree health prefunding for a period of years--will result in a higher overall unfunded liability for these programs in total. Nonetheless, Congress has to consider the balance between (1) providing USPS with liquidity that provides breathing room in the short term in order to restructure its operations for long-term success, and (2) protecting USPS, its employees and retirees, and other stakeholders in the long term by funding its liabilities for benefits that have already been earned or accrued. It is also important to note that unfunded liabilities can be reduced in either of two ways. An unfunded liability is the difference between the liability and its supporting assets. As such, an unfunded liability can be reduced by increasing the amount of assets (i.e., through prefunding), but it can also be reduced by decreasing the size of the liability, such as by decreasing benefit levels or USPS's share of such benefit costs, where such a reduction is deemed to be feasible, fair, and appropriate. We have reported on proposals to increase the integration of USPS's retiree health benefits with Medicare, which would have the effect of reducing USPS's liability but would also involve other policy considerations. In our prior reports, we have identified funding issues related to USPS's unfunded liabilities that remain unresolved and have identified potential methods for addressing these issues: Actuarial assumptions: We support making the most accurate measurements possible of USPS's benefit liabilities, and support the development and use of assumptions specific to USPS's population of plan participants.assumptions are used, that the assumptions should continue to be recommended by an independent body, such as OPM's Board of Actuaries. We have suggested that if USPS-specific Fixed versus actuarially determined payments: We have reported that the retiree health prefunding schedule established under PAEA was significantly frontloaded, with total payment requirements through fiscal year 2016 that were significantly in excess of what actuarially determined amounts would be. We added that Congress needs to modify these payments in a fiscally responsible manner. We support proposals to replace the fixed payments with actuarially determined amounts. Funding targets: We have expressed concern about proposals to reduce the ultimate funding target for USPS's retiree health liability from the current target of 100 percent down to 80 percent. Such a reduction would have the effect of carrying a permanent unfunded liability equal to roughly 20 percent of USPS's liability, which could be a significant amount. If an 80 percent funding target were implemented because of concerns about USPS's ability to achieve a 100 percent target level within a particular time frame, an additional policy option to consider could include a schedule to achieve 100 percent funding in a subsequent time period after the 80 percent level is achieved. FERS surplus: Under current law, USPS's payments to FERS increase, appropriately, when USPS has an unfunded FERS liability, but USPS realizes no financial benefit when it has a FERS surplus. We have reported that we would support a remedy to this asymmetric treatment, but we have reported on important trade-offs to consider for different types of remedies. While the most recent estimate shows a relatively small FERS surplus for USPS--an estimated $0.5 billion--USPS has stated that it believes its FERS surplus would have been substantially larger if its FERS liability had been estimated using postal-specific demographic and pay increase assumptions. A conservative approach to permit USPS to access any FERS surplus would be to use it to reduce USPS's annual FERS contribution by amortizing the surplus over 30 years (which would mirror the legally required treatment of an unfunded FERS liability). Another approach would be to reduce USPS's annual FERS contribution by offsetting it against the full amount of surplus each year until the surplus is used up; this would be comparable to what occurs for private-sector pension plans. We have previously suggested that any return of the entire surplus all at once should be done with care, given the inherent uncertainty of the estimated liability and the existence of USPS's other unfunded liabilities.should be considered as a one-time exigent action and only as part of a larger package of postal reforms and restructurings. Any provision that would return a surplus whenever one developed would likely eventually result in an unfunded liability. A one-time-only return of the entire surplus In conclusion, we again emphasize that deferring funding liabilities in benefit programs could increase costs for future ratepayers and increase the possibility that USPS may not be able to pay for its benefit costs, and that USPS should work to reduce its unfunded liabilities to the maximum extent that its finances permit. Ultimately, however, the viability of funding promised benefits depends on the financial viability of USPS's underlying business model. We continue to recommend that Congress adopt a comprehensive package of actions that will facilitate USPS's ability to align costs with revenues based on changes in the workload and the use of mail. Chairman Farenthold, Ranking Member Lynch, and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to answer any questions that you may have at this time. For further information about this statement, please contact Frank Todisco, Chief Actuary, FSA, MAAA, EA, Applied Research and Methods, at (202) 512-2834 or [email protected]. Mr. Todisco meets the qualification standards of the American Academy of Actuaries to render the actuarial opinions contained in this testimony. Contact points for our Congressional Relations and Public Affairs offices may be found on the last page of this statement. In addition to the contact named above, Lorelei St. James, Director, Physical Infrastructure Issues; Teresa Anderson; Samer Abbas; Lauren Fassler; Thanh Lu; and Crystal Wesco made important 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.
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USPS continues to be in a serious financial crisis, with insufficient revenue to cover its expenses and financial obligations as the volume of USPS's most profitable product, First-Class Mail, continues to decline. At the end of fiscal year 2013, USPS had about $100 billion in unfunded liabilities: $85 billion in unfunded liabilities for benefits, including retiree- health, pension, and workers' compensation liabilities, and $15 billion in outstanding debt to the U.S. Treasury--the statutory limit. These unfunded liabilities are a large and growing financial burden, increasing from 83 percent of USPS revenues in fiscal year 2007 to 148 percent of revenues in fiscal year 2013. Unfunded benefit liabilities represent estimated future benefit payments to current and retired employees for which USPS has not set aside sufficient money to pay. This testimony discusses (1) the extent to which USPS's benefit liabilities are unfunded and (2) the potential impacts of USPS's unfunded benefit liabilities absent action by Congress to address them and key policy issues for consideration. This testimony is based primarily on GAO's work over the past 4 years and updated USPS financial information for fiscal year 2013. GAO has previously reported that a comprehensive package of legislative actions is needed so that USPS can achieve financial viability and assure adequate benefits funding for more than 1 million postal employees and retirees. GAO has also previously identified various approaches Congress could consider to restructure the funding of USPS retiree health benefits and pensions. The extent to which the U.S. Postal Service (USPS) has funded its liabilities varies due to different statutory funding requirements specific to each benefit program and USPS's financial means to make payments. For example, USPS has been required to prefund its pension benefit liability over decades, and as shown in the table below, its pension liability is 94 percent funded. Prefunding USPS's retiree health benefits began in 2007, and the liability is about half funded. In contrast, USPS funds its workers' compensation benefits on a pay-as-you-go basis, and the entire liability is unfunded. The largest unfunded liabilities, in order of decreasing size, are $48 billion for retiree health, $19 billion for pensions, and $17 billion for workers' compensation. The rules for calculating the amount that USPS must fund each year differ among the pension and retiree health programs, including variations in amortization periods, recognition of any surpluses, use of actuarially determined versus fixed payments, and actuarial assumptions. Reasons for prefunding include fairly allocating costs between current and future ratepayers, protecting USPS's future viability, providing greater benefit security to employees and retirees, and protecting potential third parties. Prefunding decisions involve trade-offs between USPS's current financial condition and its long-term prospects. Congress needs to modify USPS's retiree health prefunding payments in a fiscally responsible manner, and USPS should prefund any unfunded retiree- health benefits liability to the maximum extent that its finances permit. Lowering the retiree health funding target from 100 to 80 percent would have the effect of carrying a permanent unfunded liability. USPS liabilities are estimated using assumptions for the federal workforce as a whole, rather than USPS-specific assumptions. GAO supports the use of the most accurate actuarial assumptions available, and if USPS-specific assumptions are used, that they be recommended by an independent body.
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According to the Institute of Medicine, the federal government has a central role in shaping nearly all aspects of the health care industry as a regulator, purchaser, health care provider, and sponsor of research, education, and training. According to HHS, federal agencies fund more than a third of the nation's total health care costs. Given the level of the federal government's participation in providing health care, it has been urged to take a leadership role in driving change to improve the quality and effectiveness of medical care in the United States, including expanded adoption of IT. In April 2004, President Bush called for the widespread adoption of interoperable electronic health records within 10 years and issued an executive order that established the position of the National Coordinator for Health Information Technology within HHS as the government official responsible for the development and execution of a strategic plan to guide the nationwide implementation of interoperable health IT in both the public and private sectors. In July 2004, HHS released The Decade of Health Information Technology: Delivering Consumer-centric and Information-rich Health Care--Framework for Strategic Action. This framework described goals for achieving nationwide interoperability of health IT and actions to be taken by both the public and private sectors in implementing a strategy. HHS's Office of the National Coordinator for Health IT updated the framework's goals in June 2006 and included an objective for protecting consumer privacy. It identified two specific strategies for meeting this objective--(1) support the development and implementation of appropriate privacy and security policies, practices, and standards for electronic health information exchange and (2) develop and support policies to protect against discrimination based on personal health information such as denial of medical insurance or employment. In July 2004, we testified on the benefits that effective implementation of IT can bring to the health care industry and the need for HHS to provide continued leadership, clear direction, and mechanisms to monitor progress in order to bring about measurable improvements. Since then, we have reported or testified on several occasions on HHS's efforts to define its national strategy for health IT. We have recommended that HHS develop the detailed plans and milestones needed to ensure that its goals are met and HHS agreed with our recommendation and has taken some steps to define more detailed plans. In our report and testimonies, we have described a number of actions that HHS, through the Office of the National Coordinator for Health IT, has taken toward accelerating the use of IT to transform the health care industry, including the development of its framework for strategic action. We have also described the Office of the National Coordinator's continuing efforts to work with other federal agencies to revise and refine the goals and strategies identified in its initial framework. The current draft framework-- The Office of the National Coordinator: Goals, Objectives, and Strategies--identifies objectives for accomplishing each of four goals, along with 32 high-level strategies for meeting the objectives, including the two strategies for protecting consumer privacy. Federal health care reform initiatives of the early- to mid-1990s were inspired in part by public concern about the privacy of personal medical information as the use of health IT increased. Congress, recognizing that benefits and efficiencies could be gained by the use of information technology in health care, also recognized the need for comprehensive federal medical privacy protections and consequently passed HIPAA. This law provided for the Secretary of HHS to establish the first broadly applicable federal privacy and security measures designed to protect individual health care information. HIPAA required the Secretary of HHS to promulgate regulatory standards to protect certain personal health information held by covered entities, which are certain health plans, health care providers, and health care clearinghouses. It also required the Secretary of HHS to adopt security standards for covered entities that maintain or transmit health information to ensure that such information is reasonably and appropriately safeguarded. The law requires that covered entities take certain measures to ensure the confidentiality and integrity of the information and to protect it against reasonably anticipated unauthorized use or disclosure and threats or hazards to its security. HIPAA provides authority to the Secretary to enforce these standards. The Secretary has delegated administration and enforcement of privacy standards to the department's Office for Civil Rights and enforcement of the security standards to the department's Centers for Medicare and Medicaid Services. Most states have statutes that in varying degrees protect the privacy of personal health information. HIPAA recognizes this and specifically provides that its implementing regulations do not preempt contrary provisions of state law if the state laws impose more stringent requirements, standards, or specifications than the federal privacy rule. In this way, the law and its implementing rules establish a baseline of mandatory minimum privacy protections and define basic principles for protecting personal health information. The Secretary of HHS first issued HIPAA's Privacy Rule in December 2000, following public notice and comment, but later modified the rule in August 2002. Subsequent to the issuance of the Privacy Rule, the Secretary issued the Security Rule in February 2003 to safeguard electronic protected health information and help ensure that covered entities have proper security controls in place to provide assurance that the information is protected from unwarranted or unintentional disclosure. The Privacy Rule reflects basic privacy principles for ensuring the protection of personal health information. Table 1 summarizes these principles. HHS and its Office of the National Coordinator for Health IT have initiated actions to identify solutions for protecting health information. Specifically, HHS awarded several health IT contracts that include requirements for developing solutions that comply with federal privacy and security requirements, consulted with the National Committee on Vital and Health Statistics (NCVHS) to develop recommendations regarding privacy and confidentiality in the Nationwide Health Information Network, and formed the American Health Information Community (AHIC) Confidentiality, Privacy, and Security Workgroup to frame privacy and security policy issues and identify viable options or processes to address these issues. The Office of the National Coordinator for Health IT intends to use the results of these activities to identify technology and policy solutions for protecting personal health information as part of its continuing efforts to complete a national strategy to guide the nationwide implementation of health IT. However, HHS is in the early stages of identifying solutions for protecting personal health information and has not yet defined an overall approach for integrating its various privacy-related initiatives and for addressing key privacy principles. HHS awarded four major health IT contracts in 2005 intended to advance the nationwide exchange of health information--Privacy and Security Solutions for Interoperable Health Information Exchange, Standards Harmonization Process for Health IT, Nationwide Health Information Network Prototypes, and Compliance Certification Process for Health IT. These contracts include requirements for developing solutions that comply with federal privacy requirements. The contract for privacy and security solutions is intended to specifically address privacy and security policies and practices that affect nationwide health information exchange. HHS's contract for privacy and security solutions is intended to provide a nationwide synthesis of information to inform privacy and security policymaking at federal, state, and local levels and the Nationwide Health Information Network prototype solutions for supporting health information exchange across the nation. In summer 2006, the privacy and security solutions contractor selected 34 states and territories as locations in which to perform assessments of organization-level privacy- and security-related policies and practices that affect interoperable electronic health information exchange and their bases, including laws and regulations. The contractor is supporting the states and territories as they (1) assess variations in organization-level business policies and state laws that affect health information exchange, (2) identify and propose solutions while preserving the privacy and security requirements of applicable federal and state laws, and (3) develop detailed plans to implement solutions. The privacy and security solutions contractor is to develop a nationwide report that synthesizes and summarizes the variations identified, the proposed solutions, and the steps that states and territories are taking to implement their solutions. It is also to address policies and practices followed in nine domains of interest: (1) user and entity authentication, (2) authorization and access controls, (3) patient and provider identification to match identities, (4) information transmission security or exchange protocols (encryption, etc.), (5) information protections to prevent improper modification of records, (6) information audits that record and monitor the activity of health information systems, (7) administrative or physical security safeguards required to implement a comprehensive security platform for health IT, (8) state law restrictions about information types and classes and the solutions by which electronic personal health information can be viewed and exchanged, and (9) information use and disclosure policies that arise as health care entities share clinical health information electronically. These domains of interest address the use and disclosure and security privacy principles. In June 2006, NCVHS, a key national health information advisory committee, presented to the Secretary of HHS a report recommending actions regarding privacy and confidentiality in the Nationwide Health Information Network. The recommendations cover topics that are, according to the committee, central to challenges for protecting health information privacy in a national health information exchange environment. The recommendations address aspects of key privacy principles including (1) the role of individuals in making decisions about the use of their personal health information, (2) policies for controlling disclosures across a nationwide health information network, (3) regulatory issues such as jurisdiction and enforcement, (4) use of information by non- health care entities, and (5) establishing and maintaining the public trust that is needed to ensure the success of a nationwide health information network. The recommendations are being evaluated by the AHIC work groups, the Certification Commission for Health IT, the Health Information Technology Standards Panel, and other HHS partners. In October 2006, the committee recommended that HIPAA privacy protections be extended beyond the current definition of covered entities to include other entities that handle personal health information. It also called on HHS to create policies and procedures to accurately match patients with their health records and to require functionality that allows patient or physician privacy preferences to follow records regardless of location. The committee intends to continue to update and refine its recommendations as the architecture and requirements of the network advance. AHIC, a commission that provides input and recommendations to HHS on nationwide health IT, formed the Confidentiality, Privacy, and Security Workgroup in July 2006 to frame privacy and security policy issues and to solicit broad public input to identify viable options or processes to address these issues. The recommendations to be developed by this work group are intended to establish an initial policy framework and address issues including methods of patient identification, methods of authentication, mechanisms to ensure data integrity, methods for controlling access to personal health information, policies for breaches of personal health information confidentiality, guidelines and processes to determine appropriate secondary uses of data, and a scope of work for a long-term independent advisory body on privacy and security policies. The work group has defined two initial work areas--identity proofing and user authentication--as initial steps necessary to protect confidentiality and security. These two work areas address the security principle. In January 2007, the work group presented recommendations on performing patient identity proofing to AHIC. The recommendations were approved by AHIC and submitted to HHS. The work group intends to address other key privacy principles, including, but not limited to maintaining data integrity and control of access. It plans to address policies for breaches of confidentiality and guidelines and processes for determining appropriate secondary uses of health information, an aspect of the use and disclosure privacy principle. HHS has taken steps intended to address aspects of key privacy principles through its contracts and with advice and recommendations from its two key health IT advisory committees. For example, the privacy and security solutions contract is intended to address all the key privacy principles in HIPAA. Additionally, the uses and disclosures principle is to be further addressed through the advisory committees' recommendations and guidance. The security principle is to be addressed through the definition of functional requirements for a nationwide health information network, the definition of security criteria for certifying electronic health record products, the identification of information exchange standards, and recommendations from the advisory committees regarding, among other things, methods to establish and confirm a person's identity. The committees have also made recommendations for addressing authorization for uses and disclosure of health information and intend to develop guidelines for determining appropriate secondary uses of data. HHS has made some progress toward protecting personal health information through its various privacy-related initiatives. For example, during the past 2 years, HHS has defined initial criteria and procedures for certifying electronic health records, resulting in the certification of over 80 IT vendor products. In January 2007, HHS contractors presented 4 initial prototypes of a Nationwide Health Information Network (NHIN). However, the other contracts have not yet produced final results. For example, the privacy and security solutions contractor has not yet reported its nationwide assessment of state and organizational policy variations. Additionally, HHS has not accepted or agreed to implement the recommendations made in June 2006 by the NCVHS, and the AHIC Privacy, Security, and Confidentiality Workgroup is in the very early stages of efforts that are intended to result in privacy policies for nationwide health information exchange. HHS is in the early phases of identifying solutions for safeguarding personal health information exchanged through a nationwide health information network and has not yet defined an approach for integrating its various efforts or for fully addressing key privacy principles. For example, milestones for integrating the results of its various privacy-related initiatives and resolving differences and inconsistencies have not been defined, and it has not been determined which entity participating in HHS's privacy-related activities is responsible for integrating these various initiatives and the extent to which their results will address key privacy principles. Until HHS defines an integration approach and milestones for completing these steps, its overall approach for ensuring the privacy and protection of personal health information exchanged throughout a nationwide network will remain unclear. The increased use of information technology to exchange electronic health information introduces challenges to protecting individuals' personal health information. In our report, we identify and summarize key challenges described by health information exchange organizations: understanding and resolving legal and policy issues, particularly those resulting from varying state laws and policies; ensuring appropriate disclosures of the minimum amount of health information needed; ensuring individuals' rights to request access to and amendments of health information to ensure it is correct; and implementing adequate security measures for protecting health information. Table 2 summarizes these challenges. Understanding and Resolving Legal and Policy Issues Health information exchange organizations bring together multiple and diverse health care providers, including physicians, pharmacies, hospitals, and clinics that may be subject to varying legal and policy requirements for protecting health information. As health information exchange expands across state lines, organizations are challenged with understanding and resolving data-sharing issues introduced by varying state privacy laws. HHS recognized that sharing health information among entities in states with varying laws introduces challenges and intends to identify variations in state laws that affect privacy and security practices through the privacy and security solutions contract that it awarded in 2005. Several organizations described issues associated with ensuring appropriate disclosure, such as determining the minimum data necessary that can be disclosed in order for requesters to accomplish the intended purposes for the use of the health information. For example, dieticians and health claims processors do not need access to complete health records, whereas treating physicians generally do. Organizations also described issues with obtaining individuals' authorization and consent for uses and disclosures of personal health information and difficulties with determining the best way to allow individuals to participate in and consent to electronic health information exchange. In June 2006, NCVHS recommended to the Secretary of HHS that the department monitor the development of different approaches and continue an open, transparent, and public process to evaluate whether a national policy on this issue would be appropriate. Ensuring Individuals' Rights to Request Access and Amendments to Health Information to Ensure It Is Correct As the exchange of personal health information expands to include multiple providers and as individuals' health records include increasing amounts of information from many sources, keeping track of the origin of specific data and ensuring that incorrect information is corrected and removed from future health information exchange could become increasingly difficult. Additionally, as health information is amended, HIPAA rules require that covered entities make reasonable efforts to notify certain providers and other persons that previously received the individuals' information. The challenges associated with meeting this requirement are expected to become more prevalent as the numbers of organizations exchanging health information increases. Implementing Adequate Security Measures for Protecting Health Information Adequate implementation of security measures is another challenge that health information exchange providers must overcome to ensure that health information is adequately protected as health information exchange expands. For example, user authentication will become more difficult when multiple organizations that employ different techniques exchange information. The AHIC Confidentiality, Privacy, and Security Workgroup recognized this difficulty and identified user authentication as one of its initial work areas for protecting confidentiality and security. To increase the likelihood that HHS will meet its strategic goal to protect personal health information, we recommended in our report that the Secretary of Health and Human Services define and implement an overall approach for protecting health information as part of the strategic plan called for by the President. This approach should: 1. Identify milestones and the entity responsible for integrating the outcomes of its privacy-related initiatives, including the results of its four health IT contracts and recommendations from the NCVHS and AHIC advisory committees. 2. Ensure that key privacy principles in HIPAA are fully addressed. 3. Address key challenges associated with legal and policy issues, disclosure of personal health information, individuals' rights to request access and amendments to health information, and security measures for protecting health information within a nationwide exchange of health information. In commenting on a draft of our report, HHS disagreed with our recommendation and referred to "the department's comprehensive and integrated approach for ensuring the privacy and security of health information within nationwide health information exchange." However, in recent discussions with GAO, the National Coordinator for Health IT agreed with the need for an overall approach to protect health information and stated that the department was initiating steps to address our recommendation. Further, since our report was issued, HHS has reported that it has undertaken additional activities to address privacy and security concerns. For example: * NCVHS's subcommittee on privacy and confidentiality is drafting additional recommendations for the Secretary of HHS regarding the expansion of the HIPAA Privacy Rule coverage to entities that are not currently covered. The recommendations are expected to be presented to the NCVHS at its meeting later this month. * The privacy and security solutions contractor is in the process of analyzing and summarizing 34 states' final assessments of organization-level business practices and summaries of critical observations and key issues. Its initial assessment identified challenges that closely parallel those identified in our report. HHS plans to finalize the findings and final reports from the contractor after the contract ends at the end of this month. * HHS awarded another contract, the State Alliance for e-Health, which is intended to address state-level health IT issues, including privacy and security challenges and solutions. In January 2007, the alliance identified the protection of health information as a guiding principle for its work. The alliance plans to identify privacy practices and policies to help ensure the protection of personal health information exchanged within a nationwide health information network. In summary, concerns about the protection of personal health information exchanged electronically within a nationwide health information network have increased as the use of health IT and the exchange of electronic health information has also increased. HHS and its Office of the National Coordinator for Health IT have initiated activities that, collectively, are intended to protect health information and address aspects of key privacy principles. While progress continues to be made through the various initiatives, it remains highly important that HHS define a comprehensive approach and milestones for integrating its efforts, resolve differences and inconsistencies among them, fully address key privacy principles, ensure that recommendations from its advisory committees are effectively implemented, and sequence the implementation of key activities appropriately. If implemented properly, HHS's planned actions could help improve efforts to address key privacy principles and the related challenges, and ensure that the department meets its goal to safeguard personal health information as part of its national strategy for health IT. Mr. Chairman and members of the subcommittee, this concludes our statement. We would be happy to respond to any questions that you or members of the subcommittee may have at this time. If you have any questions on matters discussed in this testimony, please contact Linda D. Koontz at (202) 512-6240 or Valerie C. Melvin at (202) 512-6304 or by e-mail at [email protected] or [email protected]. Other key contributors to this testimony include Amanda C. Gill, Nancy E. Glover, M. Saad Khan, David F. Plocher, and Teresa F. Tucker. 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.
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In April 2004, President Bush called for the Department of Health and Human Services (HHS) to develop and implement a strategic plan to guide the nationwide implementation of health information technology (IT). The plan is to recommend methods to ensure the privacy of electronic health information. GAO was asked to summarize its January 2007 report. The report describes the steps HHS is taking to ensure privacy protection as part of its national health IT strategy and identifies challenges associated with protecting electronic health information exchanged within a nationwide health information network. HHS and its Office of the National Coordinator for Health IT have initiated actions to identify solutions for protecting personal health information through several contracts and with two health information advisory committees. For example, in late 2005, HHS awarded several health IT contracts that include requirements for addressing the privacy of personal health information exchanged within a nationwide health information exchange network. HHS's privacy and security solutions contractor is to assess the organization-level privacy- and security-related policies, practices, laws, and regulations that affect interoperable health information exchange. In June 2006, the National Committee on Vital and Health Statistics made recommendations to the Secretary of HHS on protecting the privacy of personal health information within a nationwide health information network and, in August 2006, the American Health Information Community convened a work group to address privacy and security policy issues for nationwide health information exchange. While its activities are intended to address aspects of key principles for protecting the privacy of health information, HHS is in the early stages of its efforts and has therefore not yet defined an overall approach for integrating its various privacy-related initiatives and addressing key privacy principles, nor has it defined milestones for integrating the results of these activities. GAO identified key challenges associated with protecting electronic personal health information in four areas.
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To enable DOD to close unneeded bases and realign others, Congress enacted BRAC legislation that instituted base closure rounds in 1988, 1991, 1993, and 1995. For the 1991, 1993, and 1995 rounds, special BRAC Commissions were established to recommend specific base realignments and closures to the President, who in turn sent the Commissions' recommendations and his approval to Congress. A special Commission established for the 1988 round made recommendations to the Senate and House Committees on Armed Services. The four commissions generated 499 recommendations--97 major closures and hundreds of smaller base realignments and closures. For the 1988 round, the legislation required DOD to complete its realignment and closure actions by September 30, 1995. For the 1991, 1993, and 1995 rounds, the 1990 act required DOD to complete all closures and realignments within 6 years from the date the President forwarded the recommended actions to Congress. However, property disposal and environmental cleanup actions may continue beyond the 6-year period. The economic impact on communities near base realignments and closures has been a long-standing source of public anxiety. Because of this concern, DOD included economic impact as one of eight criteria that it used for making BRAC recommendations in the last three rounds. While economic impact did not play as large a role in initial BRAC deliberations as did other criteria and was not a key decision factor, its importance was such that DOD components were required to estimate the economic impact of their recommendations. Generally, BRAC property no longer needed by DOD is offered first to other federal agencies. Any property remaining is then disposed of through a variety of means that initially include transfers to states and local governments for public benefit purposes and thereafter is disposed of by negotiated or public sales. Under public benefit conveyances, local redevelopment authorities can obtain property for such purposes as schools, parks, and airports for no or little cost. In 1993, the BRAC act was amended to provide local redevelopment authorities with BRAC property by sale or lease at or below fair market value or without cost for rural communities to promote the economic recovery of areas affected by closures. Later, these provisions were replaced with others that also allowed the transfer of real property at no cost to local redevelopment authorities for job generation purposes or for lease back to the federal government. Consequently, local redevelopment authorities usually first sought to obtain property at no cost since, failing that, property could still be obtained through negotiated sales. Figure 1 shows the general process used to screen real property under BRAC. Many BRAC properties require environmental cleanup. The 1990 BRAC act requires compliance with a provision of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, in transferring contaminated federal property. Under this provision, DOD has a continuing responsibility for cleanup but may, by way of so-called "early transfers," transfer BRAC property before all cleanups on the property have been completed. Under the early transfer process, either the receiving communities or DOD perform environmental cleanup. In both cases, DOD funds the costs of cleanup. While the loss of jobs for DOD civilians and other adverse effects are in the short term inescapable byproducts of base closures, such effects can continue for some time. However, our prior studies and the studies of others indicate that over time many communities have absorbed the economic losses. Several factors affect the economic recovery of communities near base realignments and closures. Local officials have cited the strong national or regional economy as one explanation of why their communities have avoided economic harm and found new areas for growth. In addition, federal programs are available to assist communities in adjusting to base closures. Economic data related to unemployment rates and average annual real per capita income growth suggest that the majority of communities surrounding closed bases are faring well economically in relation to the U.S. rates and show some improvement since base realignments and closures began with the 1988 BRAC round. In addition, while two communities we recently revisited have progressed in recovering economically, they still face problems. Figure 2 shows several factors that play a role in determining the fate of communities affected by base realignments and closures. Officials from BRAC communities have stressed the importance of having a strong national economy and local industries that could soften the impact of job losses from a base closure. Following the 1991 recession until the recent slowdown, the economic performance of the United States has been robust. In a January 1998 report, we examined defense-related spending trends in New Mexico and the relationship between those trends and New Mexico's economy. We reported that while defense-related spending had declined in the state, the state's gross product and total per capita income had increased and that this economic growth might be due to efforts to diversify the economy to counter the loss of defense jobs. Officials also pointed to regional economic trends at the time of a closure, during the transition period, and at the present. For example, officials from the communities surrounding Fort Devens, Massachusetts, said that at the time of the closure, the area was suffering from the downsizing and restructuring of the computer industry. Those same communities are now benefiting from the economic growth in the larger Boston metropolitan area. Beeville, Texas, where Chase Field Naval Air Station closed, has a long history of farming and ranching but has recently benefited from an expanding state prison industry. An area's natural resources also can help economic recovery. In Blytheville, Arkansas, for example, where Eaker Air Force Base closed, the steel industry found a foothold in the late 1980s before the announcement of the base closure and has been a growing presence ever since. The Blytheville area is attractive to the steel companies because of its access to the Mississippi River and a major interstate as well as an available labor pool. Officials from communities surrounding closed bases said that publicizing redevelopment goals and efforts for former bases is key for attracting industry and helping the community gain confidence. Leadership and teamwork among participants at the federal, state, and local levels are essential to reaching agreement on key issues such as property transfer, base reuse, and environmental cleanup. To help communities to successfully transform closing bases into new opportunities, federal agencies have provided over $1.2 billion in direct financial assistance to areas affected by base closures. This assistance was in numerous forms-- planning assistance to help communities determine how they could best develop the property, training grants to provide the workforce with new skills, and grants to improve the infrastructure on bases. Finally, the redevelopment of base property is widely viewed as a key component of economic recovery for communities experiencing economic dislocation due to jobs lost from a base closure. The closure of a base makes buildings and land available for use that can generate new economic activity in the local community. Our analysis of selected indicators shows that the economies of many BRAC-affected communities compare favorably to the overall U.S. economy. We used unemployment rates and real per capita income growth rates as broad indicators of the economic health of those communities where base closures occurred during the BRAC rounds. We identified 62 communities surrounding base realignments and closures from all four BRAC rounds for which government and contractor civilian job losses for each were estimated to be 300 or more. Our analysis of calendar year 2000 unemployment rates indicates that the rates for 62 BRAC-affected communities compare favorably with the U.S. rate. Forty-three (or 69 percent) of the 62 communities affected by the recent base closures had unemployment rates at or below the U.S. rate of 4 percent (see fig. 3). Attachment II compares the 2000 unemployment rate for each of the BRAC-affected locations, grouped by east and west of the Mississippi River for ease of presentation, to the U.S. rate. The unemployment situation is about the same as we reported in 1998. At that time, 42 (68 percent) of the 62 communities had unemployment rates at or below the then U.S. rate of 5.1 percent. For example, the 2000 unemployment rate for the Salinas area surrounding the former Fort Ord, California, dropped to 9.7 percent from 10.3 percent in 1997. Similarly, the rate for the communities near the former Naval Station and Shipyard, Charleston, South Carolina, decreased to 3 percent from 4 percent in 1997. For all BRAC-affected communities we examined with a higher average 2000 unemployment rate, only two--the Merced area surrounding the former Castle Air Force Base, California, and the Blytheville area surrounding the former Eaker Air Force Base, Arkansas--have had double-digit unemployment rates: 14.1 percent and 10.1 percent, respectively. The Merced area also had double-digit unemployment when we reported on this issue in December 1998. Local officials told us that these locations have historically had high unemployment rates, partly because of the large seasonal employment associated with the local agriculture. In a 1996 RAND National Defense Research Institute report on the effects of military base closures on three local communities, RAND concluded that "while some of the communities did indeed suffer, the effects were not catastrophic (and) not nearly as severe as forecasted." RAND's analysis showed that the burden of defense cutbacks such as base closures tended to fall more on individuals and companies rather than on the community. For example, a base with a large civilian employment might displace many workers, but the overall employment rate of the community might remain relatively stable. Finally, RAND demonstrated that economies of all types of communities can also be affected by longer term patterns of population and economic growth; the redirection of military retirees' retail and medical expenditures from the base to the local community; and the withdrawal of working spouses from the local labor market, which frees up jobs for other local citizens. In a 2000 Massachusetts Institute of Technology report for the Department of Commerce, the Institute noted that military-base employment losses did not necessarily translate into employment losses in counties where bases were closed. In its analysis of 51 counties containing 52 closed bases, 21 counties (or 41 percent) in 1997 had greater post-closure job growth rates relative to the national average, and in 6 of those counties the job growth was more than twice the national average. In the remaining 30 counties, job growth was lower than the national average, of which 7 counties had job losses. The Institute concluded that redevelopment of closed bases will take at least 20 years or more and that time is needed to identify promising companies, persuade them to locate on the closed base, find a suitable site, negotiate an acceptable lease or sale, recruit qualified workers, and find jobs that match worker skills and expectations. As with unemployment rates, our analysis indicates that average annual real per capita income growth rates for 62 BRAC-affected communities compare favorably with the U.S. average rate. During 1996-99, 33 communities (or 53 percent) had average annual per capita income growth rates that were at or above the U.S. average rate of 3.03 percent (see fig. 4). Another seven communities (or 11 percent) had average annual per capita income growth rates that were in close proximity to the U.S. average rate of 3.03. Attachment III compares the 1996-99 average annual real per capita income growth rate for each of the BRAC-affected locations, grouped by east and west of the Mississippi River for ease of presentation, to the U.S. average rate. During the same period, the rate for communities near the former Fort Ord, California, increased 6.4 percent from the $27,620 rate in 1997 to $29,393. In addition, the rate for communities near the former Naval Station and Shipyard, Charleston, South Carolina, increased 9 percent from the $21,092 rate in 1997 to $22,944. Currently, all of the 29 communities below the U.S. average rate had positive average annual per capita income growth rates. In an analysis of 51 counties containing 52 closed bases, the Massachusetts Institute of Technology reported that 31 counties (or 61 percent) had per capita income greater in 1997 relative to the national rate than it was at the time of the BRAC closing announcement. However, the counties containing the four closed naval shipyards--Mare Island and Long Beach Naval Shipyards, California; Philadelphia Naval Shipyard, Pennsylvania; and Charleston Naval Shipyard, South Carolina--did not fare well. In addition, 10 of the 20 counties that lost income relative to the national rate were in California and most of the other counties that lost income were rural, such as Aroostook County, Maine; Clinton County, New York; Bee County, Texas; and Tooele County, Utah. In our 1998 report, we augmented our use of broad economic indicators with visits to selected communities to learn firsthand how they had fared economically after base closures. We reported that in general, the communities surrounding the six major base closure sites we visited suffered initial economic disruption, including decreased retail sales; declining residential real estate values; and social losses felt in local schools, churches, and organizations. However, we also reported that these initial losses were followed by recovery. We are currently updating this information and plan to visit several of the communities we visited previously and additional communities to obtain more in-depth information on their economic recovery. We recently revisited communities surrounding two of the major base closures--Beeville, Texas, near the former Chase Field Naval Air Station, and Merced and Atwater, California, near the former Castle Air Force Base--that we reported on in 1998. As attachment IV discusses in more detail, we found that each community has continued its economic recovery from the base closures, but some problems still exist. As of August 20, 2001, DOD reported that it has essentially implemented all of the BRAC Commissions' 451 recommendations. Despite timely completion of actions on the recommendations, transfer of unneeded base property is only partially complete. DOD has decided how to dispose of about 99 percent of the 518,300 acres that the military services and components reported they do not need. DOD data as of June 2001 indicate that 229,800 acres (or 44 percent) will be retained by the federal government, 285,900 acres (or 55 percent) of the unneeded BRAC property will be transferred to nonfederal entities, and the disposition of 2,600 acres (less than 1 percent) has not yet been determined. About 206,800 acres (or 90 percent) of the federally retained property are being transferred to the Departments of the Interior and Justice for uses such as wildlife habitats and detention centers. DOD intends to retain about 14,500 acres (or 6 percent) for, among other things, administrative space for the Defense Finance and Accounting Service. DOD is actually retaining more property than this because, in many cases, during the BRAC process the property of an active military base was turned over to a reserve component without being declared excess. In our 1998 report, we noted that DOD data indicated that over 330,000 acres of BRAC property were being retained for use by the reserve components. While DOD has plans to transfer most of its unneeded property, fewer actual transfers than planned have taken place. In our December 1998 report, we noted that progress in transferring the title of BRAC properties to users had been affected by many factors. These factors included the iterative process of preparing site-specific reuse plans, preparing conveyance documentation, and environmental cleanups. As of June 2001, DOD data indicate that title to 212,400 acres (or 41 percent) of the 518,300 acres of unneeded property had been transferred to federal and nonfederal entities. Specifically, title to about 106,600 acres had been transferred to federal agencies and title to about 105,800 acres had been transferred to nonfederal entities. According to DOD officials, the transfer of the remainder of the property for federal agencies and nonfederal entities will be completed by 2007 and 2029, respectively. As discussed previously, the disposition of 2,600 acres has not yet been determined. While awaiting property transfers, communities and others can sometimes begin using base property through leasing. Of the 305,900 acres for which title has not been transferred, about 48,200 acres (or 16 percent) have been leased. According to community representatives, leasing is a useful interim measure to promote reuse and job creation. As noted earlier, Congress authorized the transfer of property prior to the completion of environmental cleanup, but the authority has been used in a limited number of instances and its implementation is still evolving. Program officials believe this approach is a powerful tool to help local communities obtain early ownership and control of property, thereby allowing for earlier reuse than otherwise possible. At the end of fiscal year 2000, DOD had transferred 10 properties at 8 BRAC-affected installations using the early transfer authority. The properties range from 12 acres to about 1,800 acres. In most of the transfers, DOD has continued the cleanup activities, but in some cases the new property owner is cleaning up the property. The advantage to the recipient in performing the cleanup is the ability to integrate cleanup and redevelopment activities, thus saving time and costs and gaining greater control for both activities. While DOD has made progress and has established numerous initiatives to expedite environmental cleanups, many cleanup activities remain. As of September 30, 2000, 99 of 204 BRAC installations requiring cleanup had cleanups under way or completed. DOD estimates that 80 additional installations will have cleanups under way or completed by fiscal year 2003, and the remaining 25 installations will have cleanups under way or completed during fiscal years 2004 through 2015. However, DOD projects that long-term monitoring will be required at some sites well after 2015 to ensure those cleanup actions are effective. Several factors have affected the progress of DOD's environmental cleanup activities. According to DOD officials, changes in the anticipated use of an installation have occasionally created stricter cleanup requirements that have increased the cost and time needed to put remedies in place. For example, a site on Fort Ord, California, which was originally planned to have limited reuse, is now slated to become a residential area, necessitating more extensive environmental and unexploded ordnance inspection and cleanup. DOD also continues to complete investigations and conduct long-term monitoring at contaminated sites, which can reveal additional previously unknown contamination. For example, at a site on McClellan Air Force Base, California, the Air Force discovered traces of plutonium mixed in with radium-contaminated rags and brushes. The intensive procedures needed to deal with plutonium have increased the estimated cost from less than $10 million to $54 million and extended scheduled completion to 2034. Of the $22 billion estimated cost for implementing the BRAC program through fiscal year 2001, about $7 billion, or 32 percent, is associated with base closure environmental activities. Furthermore, DOD estimates that $3.4 billion will be required after fiscal year 2001 for environmental activities (see fig. 5). This is a $1 billion increase over the $2.4 billion environmental cost estimate DOD reported in fiscal year 1999. DOD officials attributed this increase primarily to the inclusion of cleanup costs for unexploded ordnance, delays in the program, the refinement of cleanup requirements and DOD's cost estimates, and the use of more stringent cleanup standards due to changes in how closed installations will be used. As noted in our July 2001 report, DOD has reported that the vast majority of its BRAC environmental cleanup costs would have been incurred whether or not an installation is impacted by BRAC. DOD acknowledges, however, that environmental costs under the BRAC process may have accelerated in the shorter term. Others suggest that in some instances BRAC-related environmental cleanups may be done more stringently than would have been the case had the installation remained open. However, the marginal difference is not easily quantified and depends largely on the final use of the closed installation. The Air Force's base closure environmental activities account for 52 percent of the total estimated costs after fiscal year 2001. About $417 million of the Air Force's approximated costs of $1.8 billion is for the cleanup of the former McClellan Air Force Base. Navy officials indicated that they were revising the $808 million cost estimate for base closure environmental activities and believe that the estimate could increase by $142 million. Continuing negotiations with federal and state regulators is the major cost driver, as regulators have requested the Navy to apply more stringent standards for cleanups than originally planned. For example, during the closure of Dallas Naval Air Station, Texas, the state and local regulators asked the Navy to clean former industrial sites to residential levels, which required more extensive cleanup and increased cost. Army officials are also revising their $796 million cost estimate for base closure environmental activities due to better estimates for restoration of land with unexploded ordnance. They estimate that removal of unexploded ordnance may account for $308 million of the Army's revised estimate, of which $254 million is estimated to remove unexploded ordnance from two locations--the former Fort Ord, California, and the former Camp Bonneville, Washington. Still, Army officials said that their cost estimates for base closure environmental activities beyond fiscal year 2001 could change based on the proposed land use. For example, the Army estimates that it will cost about $77 million to remove unexploded ordnance from the former Camp Bonneville so that it can be used as a park. However, officials said that if two-thirds of the land, which is heavily wooded, became a conservation area with institutional controls that limit public access, cleanup costs could be reduced significantly. DOD has implemented a Fast-Track Cleanup Program to speed the recovery of communities affected by the BRAC program. A key element of the cleanup program is the cooperative relationship between state and federal regulators and the installation environmental program manager. This team approach is intended to reduce the time to establish and execute cleanup plans. The program also seeks better integration of cleanup efforts with the community's plan for using the properties, and it may also help to contain some environmental cleanup costs. The Congressional Budget Office reported in 1996 that DOD could reduce costs by delaying expensive cleanup projects if contamination poses no imminent threat and it lacks cost-effective cleanup technologies. The Office also stated that in the long run, new cleanup technologies represented the best hope of addressing environmental problems with available DOD funds. We have also reported that there are various options for reducing these costs. In 1996, we noted that cleanup costs at closing bases could be reduced by deferring or extending certain cleanup actions, adopting more cost-effective cleanup technologies, and sharing costs with the ultimate user of the property. We also reported that these options might adversely affect programmatic goals, thereby presenting decisionmakers with difficult choices in developing a cost-effective environmental program. - - - - - This concludes my statement. I would be pleased to answer any questions you or other members of the Subcommittee may have at this time. For further contacts regarding this statement, please contact Barry W. Holman at (202) 512-8412 or Mark Little at (202) 512-4673. Individuals making key contributions to this statement include Michael Kennedy, James Reifsnyder, Charles Perdue, Robert Poetta, Arnett Sanders, John Lee, Tom Mahalek, and John Buehler. Military Base Closures: DOD's Updated Net Savings Estimate Remains Substantial (GAO-01-971, July 31, 2001). Environmental Liabilities: DOD Training Range Cleanup Cost Estimates Are Likely Understated (GAO-01-479, Apr. 11, 2001). Military Base Closures: Unexpended Funds Raise Questions About Fiscal Year 2001 Funding Needs (GAO/NSIAD-00-170, July 7, 2000). From Barracks to Business: The M.I.T. Report on Base Redevelopment, Economic Development Administration, Department of Commerce, March 2000. Military Base Closures: Potential to Offset Fiscal Year 2000 Budget Request (GAO/NSIAD-99-149, July 23, 1999). Military Bases: Status of Prior Base Realignment and Closure Rounds (GAO/NSIAD-99-36, Dec. 11, 1998). Military Bases: Review of DOD's 1998 Report on Base Realignment and Closure (GAO/NSIAD-99-17, Nov. 13, 1998). Review of the Report of the Department of Defense on Base Realignment and Closure, Congressional Budget Office, July 1, 1998. Audit Report: Cost and Savings for 1993 Defense Base Realignments and Closures, Department of Defense Office of the Inspector General (Report No. 98-130, May 6, 1998). The Report of the Department of Defense on Base Realignment and Closure, Department of Defense, April 1998. Defense Infrastructure: Challenges Facing DOD in Implementing Reform Initiatives (GAO/T-NSIAD-98-115, Mar. 18, 1998). Base Realignment and Closure 1995 Savings Estimates, U.S. Army Audit Agency (Audit Report AA97-225, July 31, 1997). Military Bases: Lessons Learned From Prior Base Closure Rounds (GAO/NSIAD-97-151, July 25, 1997). The Effects of Military Base Closures on Local Communities: A Short- Term Perspective, RAND National Defense Institute, 1996. Military Base Closures: Reducing High Costs of Environmental Cleanup Requires Difficult Choices (GAO/NSIAD-96-172, Sept. 5, 1996). Military Bases: Closure and Realignment Savings Are Significant, but Not Easily Quantified (GAO/NSIAD-96-67, Apr. 8, 1996). As shown in figure 6, 16 (67 percent) of the 24 BRAC-affected local locations west of the Mississippi River had unemployment rates less than or equal to the U.S. rate of 4 percent in 2000. The other eight locations had unemployment rates greater than the U.S. rate. As shown in figure 7, 27 (or 71 percent) of the 38 BRAC-affected local locations east of the Mississippi River had unemployment rates less than or equal to the U.S. rate of 4 percent in 2000. The other 11 locations had unemployment rates greater than the U.S. rate. As shown in figure 8, 12 (or half) of the 24 BRAC-affected local locations west of the Mississippi River had average annual per capita income growth rates that were greater than the U.S. average growth rate of 3.03 percent during 1996-99. The other 12 locations had rates below the U.S. average rate. As shown in figure 9, 21 (or 55 percent) of the 38 BRAC-affected local locations east of the Mississippi River had average annual per capita income growth rates that were greater than or equal to the U.S. average growth rate of 3.03 percent during 1996-99. The other 17 locations had rates below the U.S. average rate. In 1998, we reported that in general, the communities surrounding the six major base closure sites we visited suffered initial economic disruption, including decreased retail sales; declining residential real estate values; and social losses felt in local schools, churches, and organizations.However, we also reported that this initial period was followed by recovery. We recently revisited communities surrounding two of the major base closures--Beeville, Texas (Chase Field Naval Air Station), and Merced and Atwater, California (Castle Air Force Base), and found that both have continued their economic recovery from the base closures but still have some problems. Table 1 shows how the closure of Chase Field Naval Air Station in February 1993 affected the surrounding communities and activities, as indicated by local officials during our visits in 1998 and 2001. In March 1998, DOD's Office of Economic Adjustment reported that 1,290 new jobs had been created from the community's reuse of the former naval air station. However, by October 2000, the reported number of jobs created dropped to 1,169. At the time of our 2001 visit, the former air station had only one tenant, who maintains the facility instead of paying rent under a negotiated 10-year lease agreement. According to local officials, the most important factor contributing to economic recovery was the decision of the Texas Department of Criminal Justice to locate a prison complex on the former air base. The medium- security prison, completed in 1994, occupies less than a third of the former base and employs about 1,200 people. Without this prison and another prison complex built earlier adjacent to the former base, local officials believe Beeville would not have survived as a community. Table 2 shows how the closure of Castle Air Force Base in September 1995 affected the surrounding communities and activities, as indicated by local officials during our visits in 1998 and 2001. DOD's Office of Economic Adjustment reported an increase of 325 new jobs as a result of the redevelopment of Castle Air Force Base from 1998 to 2000. At the time of our 2001 visit, Cingular Wireless--the largest tenant on the former air base--employed 1,200 people at its call center. However, on July 25, 2001, Cingular announced that it was cutting 400 jobs at its Castle site because the number of calls and the size of the workforce had outgrown the center's space. In addition, 42 other tenants on the former air base employed about 310 individuals.
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This testimony reviews the progress of the Department of Defense's (DOD) base realignments and closures (BRAC) in 1988, 1991, 1993, and 1995 and the implementation of the BRAC Commissions' recommendations. Although some communities surrounding closed base areas are faring better than others, most are recovering from the initial economic impact of base closures. The short-term impact can be very traumatic for BRAC-affected communities, but the long-term economic recovery of communities depends on several factors, including the strength of the national and regional economies and successful redevelopment of base property. Key economic indicators show that the majority of communities surrounding closed bases are faring well economically in relation to U.S. unemployment rates and show some improvement since the time closures began in 1988. Implementation of BRAC recommendations is essentially completed, but title to only 41 percent of unneeded base property has been transferred. As of August 20, 2001, DOD reported that it has essentially implemented all of the BRAC Commission's 451 recommendations. Although DOD has made progress and established numerous initiatives to expedite cleanup, many cleanup activities remain. Cleaning up environmental contamination on BRAC-affected installations has proven to be costly and challenging for DOD and can delay the transfer of the title of property to other users. DOD expects to continue its environmental efforts well beyond fiscal year 2001, the final year of the base closure implementation authority.
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The 1996 Military Housing Privatization Initiative allows private-sector financing, ownership, operation, and maintenance of military family and unmarried junior servicemember (barrack) housing. Under the program, the department can provide direct loans, loan guarantees, and other arrangements to encourage private developers to renovate existing housing or construct and operate housing either on or off military installations. Servicemembers, in turn, may use their housing allowance to pay rent and utilities to live in the privatized housing. Because the program represents a new way of doing business for both the military and the private sector, DOD has relied on consultants for a variety of advisory and assistance services. In completing privatization agreements, many financial, budgetary and other issues need to be resolved to the satisfaction of the government, developers, and private lenders before a deal can be closed. Further, each privatization agreement is different and involves unique issues. According to DOD officials, consultants provide the necessary expertise and assistance to help resolve these issues. Initially, DOD established the Housing Revitalization Support Office in OSD to facilitate implementation of the military housing privatization program. This office established the financial and legal framework for the new initiative and provided assistance to the services as they began to consider housing privatization. Initial progress in implementing the program was slow and, in 1998, DOD shifted primary responsibility for implementing the program to the individual services. With this change, the Housing Revitalization Support Office was eliminated, and housing privatization oversight responsibility was assigned to a newly created office in OSD--now known as the Housing and Competitive Sourcing Office. This office establishes DOD policy for the program and monitors the services' implementation of the program. Concerned about the lack of progress with the military's housing privatization program, Congress in 1998 required OSD to begin reporting quarterly on the status of all privatization projects for which funds had been appropriated. In addition, in 2000, Congress required that DOD report information quarterly on expenditures for consultants used by the services to implement the program. DOD now includes this information in its Military Housing Privatization Initiative Housing Privatization Report to the Congress. The report lists each privatization project, identifies the number of units to be privatized, shows the project milestones, and includes the cumulative amount spent on consultants by project and service. Military construction appropriations fund the military housing privatization program, including privatization support and consultant expenditures. Privatization support includes costs for consultants, federal civilian salaries, and training and travel activities. Some of the services also include costs for environmental assessments; land boundary surveys; and supervision, inspection, and overhead construction activities. Consultant costs generally include costs for advisory and assistance activities, such as individual project development, solicitation development and preparation, pre-award evaluations of project proposals, and financial and real estate analysis. Although DOD reported to Congress that the services plan to privatize most of their family housing units by the end of fiscal year 2005, these reports do not include the number of privatized units that have been renovated or newly constructed. Such data would show the program's progress in creating adequate family housing and the status of improvements to the living conditions of the servicemembers and their families. These renovation and construction numbers should accelerate over time. As of March 2003, the military services had signed contracts privatizing about 28,000 family housing units and plan to privatize a total of about 140,000 units by the end of fiscal year 2005. The services plan to privatize 72 percent of their total family housing inventory, representing about 183,000 units, as shown in figure 1, by fiscal year 2007 instead of by 2010 as originally scheduled. As a result of these privatization contracts, as of March 2003 the services had constructed 4,396 new housing units and renovated 3,184 existing units--total of 7,580 units (see table 1). We recognize it can take developers several years to renovate existing housing units or construct new ones after the military housing is privatized. However, data regarding this process, although maintained at the installation level, are not collectively tracked and reported to Congress by OSD. Thus, decision makers do not have complete data to fully assess the housing privatization program's progress. Furthermore, as the privatization program progresses, it will become increasingly important to have complete data on the status of actual renovation and new construction of privatized housing units on which to determine how quickly the program is creating adequate family housing and improving the living conditions of the servicemembers and their families. According to the services' budget data, costs for consultants are less than half of the services' total privatization support costs, actual and projected. For example, for fiscal year 2002 consultant costs were about $24 million, or about 42 percent, of the services' total support costs of about $57 million for their housing privatization efforts. Furthermore, the services incur other privatization support costs besides the costs for consultants, such as federal salaries, training, and travel. In addition, some services include the cost of environmental assessments and land boundary surveys in their privatization support costs. As the services sign the contracts to privatize most of their family housing units, service officials said their privatization support costs would decline as the need for consultants diminishes. While these costs are expected to decline, other assistance costs for portfolio management services for the privatization program are expected to become a key component of the remaining support costs as more projects are completed. As figure 2 shows, the services project sharp declines in privatization support and consultant costs after fiscal year 2004. The military services are not consistent in their definitions for privatization support and consultant costs. The differences in the services' definitions for privatization support costs result in inconsistent budgeting for these costs. Also, the differences in the services' definitions for consultant costs result in inconsistent reporting of consultant costs in the department's quarterly housing privatization report to Congress. Furthermore, OSD does not report its own program consultant costs in the quarterly report. Since OSD had not defined privatization support costs when it gave the services operational responsibility for the program in 1998, the services individually defined them, resulting in inconsistencies in the types of costs included in the services' budgeting for privatization support. The Navy, for example, does not include the costs of environmental assessments and land boundary surveys as privatization support costs while the Army and the Air Force do. Similarly, the Army and the Navy do not include the costs for supervision, inspection, and overhead construction activities as privatization support costs while the Air Force does. Without a common definition, these differences in accounting lead to an increased variance in the services' reported costs and add difficulty for DOD and Congress to accurately determine total privatization support costs across the services. According to officials in the Office of the Under Secretary of Defense (Comptroller), DOD does not have written budget guidance defining what types of privatization support costs should be included in the services' budget estimates. Thus, the services account for housing privatization support costs differently. For example, according to Navy officials, the Navy's privatization support budget account does not include costs for activities that the other services do, such as environmental assessments and land boundary surveys. As such, the Navy's privatization support expenses may not be as low as they appear in its budget. Navy has combined the management of the family housing program with its real estate, acquisition, and construction contracting expertise in the Naval Facilities Engineering Command--the command responsible for military construction. Thus, the costs for environmental assessments, land boundary surveys, and supervision, inspection, and overhead construction activities are part of how the command conducts its mission and are not captured in the Navy's privatization support budget. According to Navy officials, these activities are conducted and funded within the command and a budget request distinction is not made as to whether the costs for these activities are for a privatization housing project or a traditional military construction project. For example, Navy's estimated $5 million costs for environmental assessments for its privatization housing efforts through 2008 will not be reflected in its privatization support account although this cost is in the other services' privatization support accounts. Similarly, the Army's expenses for construction supervision, inspection, and overhead activities are part of the developers' costs; and the Army does not reflect these costs in its privatization support budget, whereas the Air Force does. DOD officials said that the budget inconsistencies have created a problem for the services. According to DOD officials, Congress has reduced the Army and the Air Force privatization support budgets due to the perception that their budgets are unreasonably high when compared with the Navy's. Because OSD had not defined the types of costs to be included in determining consultant costs, the services define them differently, resulting in inconsistent reporting of consulting expenditures in the department's quarterly housing privatization report to Congress. Specifically, the services are beginning to contract for assistance in managing the portfolio of housing privatization projects to better ensure long-term program success. The Air Force views portfolio management as a contractor cost and, as such, is not including this expense in its consultant cost data to OSD for the quarterly housing privatization report. In contrast, the Army, the Navy, and the Marine Corps view portfolio management as a consultant cost; and this expense is included in the report to Congress. As a result, OSD is providing inconsistent service data regarding consultant costs in the department's quarterly housing privatization report to Congress. Furthermore, as costs for portfolio management are expected to become a key component of remaining support costs as the services privatize more housing, the inconsistent cost reporting will become more pronounced in the future. Also, important in explaining inconsistencies and variances in consultant costs among the services is the organizational placement of the privatization program and the number of projects per service. For instance, the Navy's consulting costs are less than the other services because it has combined the management of its program with its real estate, acquisition, and construction contracting expertise in the Naval Facilities Engineering Command. According to Navy and OSD officials, that decreases the Navy's need for consultants. Then again, according to Air Force officials, the Air Force's consulting costs are higher than the other services, when its contractor's portfolio management costs are included, because it has more privatization projects needing consultant assistance and advice. Currently, the Air Force plans on 53 family housing privatization projects whereas the Army and the Navy are planning on 27 and 37 projects, respectively. The services reported in the quarterly housing privatization report to Congress that they had spent about $73 million, in total, on consultants associated with its housing privatization efforts as of March 31, 2003 (see table 2). The extent of their expenditures varied, with the Army expending $34 million, more than twice the amount expended by the Navy and the Marine Corps. OSD does not, and is not required to, include its own costs for consultants associated with its implementation of the military housing privatization program in the quarterly report to Congress. Officials within OSD's Housing and Competitive Sourcing Office stated that OSD has not reported about $10 million in consultant costs since the beginning of the program in 1996. These consultant costs were not in direct support of a particular installation and most occurred when OSD had centralized control over the program. With the transfer of operational responsibility for the program to the individual services in 1998, OSD's consultant costs have decreased significantly, currently averaging about $1 million a year. These consultant costs are mostly to assist OSD design program evaluation criteria and to help with budget scoring requirements. Although housing privatization fees paid to individual consultants vary among the services, several factors limit an evaluation and comparison of these fees. Such factors include the differences in labor categories, hours, and skills mix that each consulting firm can use to describe the work they need to do to accomplish the work specified by the services, such as the following: Labor categories. Despite some commonalities (e.g., program manager and financial analyst), the services for the most part list different labor categories and staff positions in their consultant contracts. The Air Force, for example, identified 22 labor categories for each of its five consultants, while the Navy and Army listed 5 and 7 labor categories, respectively. Labor and hour mixes. Each consulting firm generally emphasizes a different mix of staff and anticipated number of labor hours, depending on the needed work. As such, contracting with a consultant with lower hourly fees will not necessarily result in the lowest total cost because the different consultant firms use a mix of staff with varying hourly pay rates and charge different hours to complete the work. Air Force data, for example, showed that one firm, which charges higher average hourly fees, planned to dedicate fewer labor hours to a proposed task than another firm, which charges a lower average hourly fee. The particular mix of staff and labor hours proposed by both firms led to only a 3 percent cost variance for a proposed project of about $780,000. In addition, Air Force data showed that two firms proposed that its senior managers dedicate considerably fewer hours to the project although charging higher hourly fees, while another firm proposed that its senior managers dedicate considerably more hours to the project but charge significantly lower hourly fees. Thus, a comparison of consultant fees in isolation could create a misleading assessment. Scope of work. Different scopes of work within the various housing privatization projects may generate different labor mixes or entirely new labor categories for a particular consultant, making comparison difficult. For example, the Air Force uses two different sets of labor categories for the same firm--one for the portfolio management work and another, which is slightly different, for the privatization support work. Capacities. Consulting firms have different capacities--some are small businesses while others are global enterprises--and each firm has different capabilities and expertise. According to Air Force data, for example, the firms charging the lowest average hourly fee at the managerial level have only six Air Force family housing privatization projects between them. However, Air Force officials told us they believe these firms are small businesses operating at capacity and cannot take on another project, despite having lower fees than some of the other consulting firms. Even though these factors limit a comparative evaluation of consultant fees, service officials told us they believe that their particular consultant fees are fair and reasonable because they (1) awarded their consultant contracts competitively; (2) examined consulting rates published by the General Services Administration, particularly those in its Management, Organizational, and Business Improvement Services Schedule, to assist in determining if the rates were reasonable; and (3) selected consultants through "best value" determinations. In striving to obtain best value, service officials said that the services select firms offering the most advantageous deal to the government and that cost is only one of several evaluation considerations. Past performance and the capability to perform the proposed work, among other considerations, are evaluated alongside fee considerations in assessing contract awards. As a result, service officials said that they have contracted with firms that provide the best value to the government based on their needs. The military housing privatization program was established for a faster creation of quality housing for military servicemembers and their families. As such, the Secretary of Defense has directed the military services to increase their use of privatization and eliminate their inadequate housing inventory, moving the completion date for the privatization up from 2010 to 2007. However, until the number of renovated or newly constructed housing units under privatization are routinely tracked and reported to Congress, it will be difficult to adequately assess the impact of the privatization program. Further, as the program progresses and additional privatized units are expected to be under contract, more complete and informative data on the number of privatized housing units that have been renovated or newly constructed will become increasingly important to decision makers. Such data are needed to determine how quickly the privatization program is creating adequate family housing and improving the living conditions of servicemembers and their families. Until OSD provides a common definition of the types of cost to be included in determining privatization support costs, including consultant costs, the military services will continue to budget inconsistently for privatization support costs and OSD will continue to use inconsistent data from the services to report consultant costs in its quarterly housing privatization report to Congress. Similarly, without an OSD determination of whether portfolio management costs are costs that should be included as consultant costs, the services will continue to provide OSD with inconsistent data on consultant costs for its quarterly report to Congress. Furthermore, until OSD includes its own program consultant costs in the department's quarterly housing privatization report, Congress will not have complete knowledge of the total housing privatization consultant costs. Without consistent and complete information, Congress and DOD cannot make the most informed decisions regarding the appropriateness of support and consultant costs requested and expended in support of the military housing privatization program. To illustrate the number of inadequate housing units eliminated and of new or renovated units brought on line through the military housing privatization program, we recommend that the Secretary of Defense direct the Under Secretary of Defense for Acquisition, Technology and Logistics to track the supporting data and report the number of privatized units renovated and newly constructed to the Congress on a periodic basis. To provide for more consistent and complete data on military housing privatization support costs, we recommend that the Secretary of Defense direct the Under Secretary of Defense (Comptroller), in consultation with the Housing and Competitive Sourcing Office, to define privatization support costs for the military services. Specifically, this definition should address the differences in how the services consider the costs of environmental assessments; land boundary surveys; and supervision, inspection, and overhead construction activities associated with the housing privatization program. To provide for more consistent and complete data on privatization consultant costs, we recommend that the Secretary of Defense direct the Under Secretary of Defense for Acquisition, Technology, and Logistics, in consultation with the Under Secretary of Defense (Comptroller), to (1) define consultant costs, including a determination of the inclusion of portfolio management costs, for the military services; and (2) include OSD's own program consultant costs associated with its efforts to privatize military housing in the department's quarterly housing privatization report to Congress. In written comments on a draft of this report, the Director for Housing and Competitive Sourcing within the Office of the Under Secretary of Defense for Acquisition, Technology and Logistics agreed with our recommendations, stating the department is or will be taking steps to implement them. In reference to our recommendation to track supporting data and report on the number of privatized units renovated and newly constructed, DOD concurred with the recommendation, stating it is essential that project progress be monitored. However, DOD stated that its semi-annual Program Evaluation Plan report is a more appropriate vehicle to track this data than the quarterly reporting specified in our draft report and has initiated steps to do so. We believe the collection and periodic reporting of this data to the Congress, regardless of the reporting format, will benefit decision makers to better assess the housing privatization program's progress in creating adequate family housing and improving the living conditions of the servicemembers and their families. Accordingly, we modified our recommendation to recognize the potential for greater flexibility in reporting. DOD's comments are included in appendix I of this report. We performed our work at the headquarters offices responsible for implementing the privatization program for the Army, the Navy, the Marine Corps, and the Air Force. At each location, we interviewed officials cognizant of the program and reviewed applicable policies, procedures, and documents. We also interviewed officials at the Air Force Center for Environmental Excellence in San Antonio, Texas, which has responsibility for executing Air Force contracts for consultant assistance with the military housing privatization program. We also discussed our analyses with officials of OSD's Housing and Competitive Sourcing Office and the Office of the Under Secretary of Defense (Comptroller). For the military housing privatization program, our analyses mostly covered 1996--the beginning of the military housing privatization program--through 2008 when the services expect to have privatized all of their planned housing. To determine the number of projects and family housing units the services have privatized and project to privatize since program inception to fiscal year 2008, we interviewed service officials and obtained relevant data. We obtained data for the number of projects and units already privatized from OSD's Military Housing Privatization Initiative Housing Privatization Report to Congress. However, because project execution schedules for future projects change regularly and the services told us several future project dates are tentative, we requested the latest estimates of projects and units to be privatized from the services. Army and Air Force officials provided us with their privatization schedules while Navy officials told us to use their fiscal year 2004 budget request data. In addition, the services provided data on the number of units newly constructed or renovated as of March 31, 2003, but stated that estimated data was not readily available for fiscal years 2004 through 2008. To identify the portion of privatization support costs used for consultants, we obtained and analyzed budget data from the services for actual and projected amounts covering fiscal years 1996 through 2008. The services identified those activities that they considered to be a privatization support cost and consultant cost. We did not validate these recorded budget amounts. To analyze the services' consistency in defining privatization support and consultant costs, we compared budget data provided by the services and noted differences in what they considered privatization support and consultant costs. We met with service officials to discuss those differences and possible reasons for these differences. To report data on the services' cumulative expenditures as of March 31, 2003, for military housing privatization consultants, we used the department's latest quarterly housing privatization report dated April 2003. We interviewed OSD and service officials about the reporting requirements for the quarterly housing privatization report and corresponding budget guidance on privatization support and consultant costs. In addition, we met with officials from the Office of the Under Secretary of Defense (Comptroller) to obtain their views on our privatization support and consultant cost analyses. To assess how consultant fees for the military housing privatization program compare among the services, we reviewed and analyzed the services' consultant contracts and individual task orders, noting the hourly fees charged by each consultant. We obtained data from the appropriate General Services Administration federal supply schedule for Management, Organizational, and Business Improvement Services Schedule and made fee comparisons. We also interviewed service officials to discuss their assessment process for evaluating consultant fees and selecting consultants. Finally, we interviewed officials from the Air Force's Brooks City Base, San Antonio, Texas, and from the Army's Fort Sam Houston, San Antonio, Texas, to discuss DOD's use of consultants in similar privatization activities. In performing this review, we did not validate DOD's reported housing requirements or privatization information. We conducted our work from April 2003 through July 2003 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretaries of Defense, the Army, the Navy, and the Air Force; the Commandant of the Marine Corps; and the Director, Office of Management and Budget. We will also make copies available to others upon request. In addition, the report is available at no charge on GAO's Web site at www.gao.gov. Please contact me on (202) 512-8412, or my Assistant Director, Mark Little, at (202) 512-4673 if you or your staff have any questions regarding this report. Major contributors to this report were Laura Talbott, Shawn Arbogast, Jason Aquino, Jane Hunt, and R.K. Wild.
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In 2000, Congress required the Department of Defense (DOD) to report quarterly on the services' expenditures for consultants in support of the military family housing privatization programs. GAO was asked to review the costs of the consultants DOD used to support privatizing housing for servicemembers and their families. This report discusses (1) the number of family housing units the services have privatized, particularly newly constructed or renovated units, and project to be privatized by fiscal year 2005; (2) the portion of privatization support costs used for consultants; (3) the services' consistency in the definition for privatization support and consultant costs; and (4) factors that limit an evaluation of how consultant fees for the military housing initiative compare among the services. Although DOD reported to Congress that the services plan to privatize most of their family housing by fiscal year 2005, DOD's reports do not provide decision makers with the number of privatized units that have been renovated or newly constructed. As of March 2003, the services had contracts privatizing about 28,000 family housing units and planned to privatize 140,000 units by fiscal year 2005. As a result of this privatization, about 7,600 units had been constructed or renovated. It can take developers several years to renovate existing housing or construct new units after they are privatized. As the program progresses, it will become increasingly important to have complete data on which to determine how quickly the privatization program is creating adequate family housing. Costs for consultants are less than half of the services' privatization support costs. The services anticipate many privatization support and consultant costs to peak in fiscal year 2004 when the need for consultants diminishes once most privatization contracts are signed. Remaining support costs will then focus increasingly on managing the portfolio of the privatized housing. The services are not consistent in their definitions for privatization support and consultant costs. The differences in the services' definitions for privatization support costs result in inconsistent budgeting for these costs. Also, the differences in the services' definitions for consultant costs result in inconsistent reporting of consultant costs in the department's quarterly housing privatization report to Congress. Further, the Office of the Secretary of Defense does not report its own program consultant costs in the quarterly report. Several factors, such as differences in labor categories, hours, and skills mix that each consulting firm can use to accomplish work, limited our evaluation of how consultant fees for the military housing initiative compare among the services. Even though these factors hinder a comparative evaluation of consultant fees, service officials told us they believe that they have contracted with firms that provide the best value to the government based on their needs and that the consultants' fees are fair and reasonable.
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ONDCP was established by the Anti-Drug Abuse Act of 1988 to, among other things, enhance national drug control planning and coordination and represent the drug policies of the executive branch before Congress. In this role, the office is responsible for (1) developing a national drug control policy, (2) developing and applying specific goals and performance measurements to evaluate the effectiveness of national drug control policy and National Drug Control Program agencies' programs, (3) overseeing and coordinating the implementation of the national drug control policy, and (4) assessing and certifying the adequacy of the budget for National Drug Control Programs. ONDCP is required annually to develop the National Drug Control Strategy, which sets forth a plan to reduce illicit drug use through prevention, treatment, and law enforcement programs, and to develop a National Drug Control Program Budget for implementing the strategy. National Drug Control Program agencies follow a detailed process in developing their annual budget submissions for inclusion in the National Drug Control Program Budget, which provides information on the funding that the executive branch requested for drug control to implement the strategy. Agencies submit to ONDCP the portion of their annual budget requests dedicated to drug control, which they prepare as part of their overall budget submission to the Office of Management and Budget for inclusion in the President's annual budget request. ONDCP reviews the budget requests of the drug control agencies to determine if the agencies have acceptable methodologies for estimating their drug control budgets, and includes those that do in the Drug Control Budget. In FY 2016, the budget contained 38 federal agencies or programs. There are five priorities for which resources are requested across agencies: substance abuse prevention and substance abuse treatment (which are considered demand-reduction areas), and domestic law enforcement, drug interdiction, and international partnerships (which are considered supply-reduction areas) as shown in figure 1. ONDCP manages and oversees two primary program accounts: the High Intensity Drug Trafficking Areas (HIDTA) Program and the Other Federal Drug Control Programs, such as the DFC Support Program. ONDCP previously managed the National Youth Anti-Drug Media Campaign which last received appropriations in fiscal year 2011. Also, from fiscal year 1991 to fiscal year 2011, ONDCP managed the Counterdrug Technology Assessment Center (CTAC). According to ONDCP, federal drug control spending increased from $21.7 billion in FY 2007 to the approximately $27.5 billion that was allocated for drug control programs in FY 2017 as shown in figure 2. Spending on supply reduction programs, such as domestic law enforcement, interdiction, and international programs increased 16 percent from $13.3 billion in FY 2007 to $15.4 billion in FY 2017. However, federal spending for demand programs--treatment and prevention-- increased at a higher rate from FY 2007 through FY 2017. Spending in these two programs increased 44 percent from $8.4 billion in FY 2007 to $12.1 billion in FY 2017. As a result, the proportion of funds spent on demand programs increased from 39 percent of total spending in FY 2007 to 44 percent in FY 2017. According to ONDCP's National Drug Control Budget Fiscal Year 2018 Highlights, the proposed budget supports $1.3 billion in investments authorized by the Comprehensive Addiction and Recovery Act (CARA), the 21st Century Cures Act, and other opioid-specific programs to help address the opioid epidemic, including funding prevention and treatment efforts. Allocated funding for treatment increased in FY 2017 to approximately $10.6 billion, a 7.5 percent increase over FY 2016. Funding for prevention increased slightly in FY 2017 to about $1.5 billion, a 1.4 percent increase from FY 2016. According to its FY 2018 Budget Highlights document, ONDCP considers three main functions to address the drug supply: Domestic Law Enforcement, Interdiction, and International. For Domestic Law Enforcement, ONDCP noted that federal, state, local, and tribal law enforcement agencies play a key role in the Administration's approach to reduce drug use and its associated consequences. ONDCP also stated that interagency drug task forces, such as the HIDTA program, are critical to leveraging limited resources among agencies. Allocated funding for domestic law enforcement in FY 2017 is approximately $9.3 billion, which is similar to its FY 2016 spending level. According to ONDCP, the United States continues to face a serious challenge from the large-scale smuggling of drugs from abroad which are distributed to every region in the nation. Interdiction funds support collaborative activities between federal law enforcement agencies, the military, the intelligence community, and international allies to interdict or disrupt shipments of illegal drugs, their precursors, and their illicit proceeds. Allocated funding in support of Interdiction for FY 2017 is approximately $4.6 billion, a decrease of 3.5 percent from FY 2016. International functions place focus on collaborative efforts between the U.S. government and its international partners around the globe. According to ONDCP, illicit drug production and trafficking generate huge profits and are responsible for the establishment of criminal networks that are powerful, corrosive forces that destroy the lives of individuals, tear at the social fabric, and weaken the rule of law in affected countries. In FY 2017, approximately $1.5 billion was allocated to international functions, which is similar to its FY 2016 spending level. As we previously have stated, the 2010 National Drug Control Strategy was the inaugural strategy guiding drug policy under the previous Administration. According to ONDCP officials, it sought a comprehensive approach to drug policy, including an emphasis on drug abuse prevention and treatment efforts and the use of evidence-based practices-- approaches to prevention or treatments that are based in theory and have undergone scientific evaluation. ONDCP established two overarching policy goals in the 2010 Strategy for (1) curtailing illicit drug consumption and (2) improving public health by reducing the consequences of drug abuse, and seven overall sub goals under them that delineate specific quantitative outcomes to be achieved by 2015, such as reducing drug- induced deaths by 15 percent. To support the achievement of these two policy goals and seven sub goals (collectively referred to as overall goals), the Strategy included seven strategic objectives and multiple action items under each objective, with lead and participating agencies designated for each action item. Strategy objectives include, for example, "Strengthen Efforts to Prevent Drug Use in Communities" and "Disrupt Domestic Drug Trafficking and Production." Subsequent annual Strategies provided updates on the implementation of action items, included new action items intended to help address emerging drug- related problems, and highlighted initiatives and efforts that support the Strategy's objectives. In March 2013, we reported that ONDCP and the federal agencies lacked progress on achieving the Strategy goals and were in the process of implementing a new mechanism to monitor progress. As we reported in May 2016, ONDCP and the federal agencies had made moderate progress toward achieving one goal, limited progress on three goals, and no demonstrated progress on the remaining three goals. For example, we reported that the rate of drug use for young adults aged 18 to 25 had increased since 2009, moving in the opposite direction of the goal. However, we also reported that HIV infections attributable to drug use, one of the strategy's sub-measures, had decreased from 2009 to 2014 and had exceeded the strategy's established target. In many instances, the data used to assess progress, while the most up to date at the time, were several years old. Based on the most recent data available, although some of the sub-measures, such as decreasing tobacco use by eighth graders, were achieved, none of the seven overall goals in the Strategy have been fully achieved as of July 2017. Table 1 shows the 2010 Strategy goals and progress toward meeting them as of July 2017. Federal drug control agencies made mixed progress but did not fully achieve any of the four overall Strategy goals associated with curtailing illicit drug consumption. For example: Progress was made on the goal to decrease the 30-day prevalence of drug use among 12- to 17-year-olds by 15 percent. The data source for this measure-- SAMHSA's National Survey on Drug Use and Health (NSDUH)-- indicated that in 2015, 8.8 percent of 12- to 17- year-olds reported having used illicit drugs in the past month. Progress was not made on the goal to decrease the 30-day prevalence of drug use among young adults aged 18 to 25 by 10 percent. Specifically, the reported rate of drug use for young adults was 21.4 percent in 2009 and 22.3 percent in 2015, moving in the opposite direction of the goal. Marijuana remained the drug used by the highest percentage of young adults. According to the 2015 NSDUH, 19.8 percent of young adults reported having used marijuana in the past month. The rates of reported marijuana use for this measure increased by 9 percent from 2009 to 2015. Progress was also mixed on the remaining three overall Strategy goals associated with reducing the consequences of drug use. For example: Progress was not made on the goal to reduce drug-induced deaths by 15 percent. According to the CDC's National Vital Statistics System, which collects information on all deaths in the United States, 55,403 deaths were from drug-induced causes in 2015, an increase of 41.5 percent compared to 2009 and 66.5 percent more than the 2015 goal. The CDC's December 30, 2016 Morbidity and Mortality Weekly Report stated that 52,404 of these deaths were from drug overdoses, the majority of which (63 percent) involved opioids. The goal to reduce drug-related morbidity by 15 percent has two sub- measures, and progress had been made on one but not the other. Specifically, HIV infections attributable to drug use decreased by 29 percent from 2010 to 2015, exceeding the established target. However, the number of emergency room visits for substance use disorders increased by 19 percent from 2009 to 2011. The data source for this measure-- SAMHSA's Drug Abuse Warning Network--indicated that pharmaceuticals alone were involved in 34 percent of these visits and illicit drugs alone were involved in 27 percent of them. According to the 2013 Drug Abuse Warning Network report, the increase in emergency room visits for drug misuse and abuse from 2009 to 2011 was largely driven by a 38 percent increase in visits involving illicit drugs only. To advance the national dialogue on preventing illicit drug use, including preventing individuals from using illicit drugs for the first time, we convened and moderated a diverse panel of health care, education, and law enforcement experts, including from ONDCP, on June 22, 2016. The panel focused on (1) common factors related to illicit drug use; (2) strategies in the education, health care, and law enforcement sectors to prevent illicit drug use; and (3) high priority areas for future action to prevent illicit drug use, and our November 2016 report summarized the themes from the forum. Forum participants identified a number of common factors related to illicit drug use. For example, the participants agreed that first time illicit drug use typically starts in adolescence and typically involves marijuana, however, prescription pain relievers are increasingly a pathway to illicit drug use. Other common factors include: a family history of substance abuse, conflict within the family, and the early onset of anxiety disorders or substance use, among others. Forum participants also noted several strategies available in the education, health care, and law enforcement sectors for preventing illicit drug use: Education. Forum participants championed the use of school-or community-based prevention programs that research has shown to be successful in preventing illicit drug use and other behaviors. These programs include: Life Skills, Strengthening Families Program: For Parents and Youth 10-14, and Communities That Care. These programs focus generally on combatting a range of risky behaviors, giving participants skills to recognize and manage their emotions, and strengthening family and community ties. Health care. Forum participants identified and discussed three principle health care strategies for preventing illicit drug use: (1) having providers adhere to the CDC's guideline for prescribing opioids for chronic pain, (2) having providers use prescription drug monitoring programs (PDMP)--state-run electronic databases used to track the prescribing and dispensing of prescriptions for controlled substances--and (3) having primary care providers screen and intervene with patients at risk for illicit drug use. Law Enforcement. Forum participants identified four law enforcement strategies for preventing illicit drug use: (1) enforcing laws prohibiting underage consumption of alcohol and tobacco, (2) building trust between law enforcement and local communities, (3) using peers to promote drug-free lifestyles, and (4) closing prescription drug "pill mills" -- medical practices that prescribe controlled substances without a legitimate medical purpose--and other efforts to reduce the supply of illicit drugs. Forum participants also identified several high priority areas for future action to help prevent illicit drug use, including the misuse of prescription drugs. Some examples include: supporting community coalitions comprising the health care, education, and law enforcement sectors that work in concert to prevent illicit drug use at the local level; consolidating federal funding streams for multiple prevention programs into a single fund used to address the risk factors for a range of unhealthy behaviors, including illicit drug use; increasing the use of prevention programs that research has shown to be effective, such as those that are well-designed and deliver persuasive drug prevention messages on a regular basis; identifying and pursuing ways to change perceptions of substance abuse disorders and illicit drug use, such as emphasizing that a substance abuse disorder is a disease of the brain and can be treated like other diseases; supporting drug prevention efforts in primary care settings, such as exploring ways to reimburse providers for conducting preventative drug screenings; and reducing the number of prescriptions issued for opioids. In February 2017, we issued a report on the Drug-Free Communities Support Program (DFC)--a program that ONDCP and SAMHSA jointly manage. This program aims to support drug abuse prevention efforts that engage schools, law enforcement, and other sectors of a community to target reductions in the use of alcohol, tobacco, marijuana, and the illicit use of prescription drugs. We examined the extent to which the two agencies (1) use leading processes to coordinate program administration and the types of activities funded, and (2) have operating procedures that ensure DFC grantee compliance and provide a basis for performance monitoring. In 2008 we had previously reported that ONDCP and SAMHSA needed to establish stronger internal controls and had not fully defined each agency's roles and responsibilities for the management of the DFC program. In our February 2017 report, we found that ONDCP and SAMHSA had improved their joint management of the program. Specifically, we found that ONDCP and SAMHSA employed leading collaboration practices to administer the DFC program and fund a range of drug prevention activities. For example, ONDCP and SAMHSA had defined and agreed upon common outcomes, such as prioritizing efforts to increase participation from under-represented communities. The two agencies also had funded a range of DFC grantees' activities and report on these activities in their annual evaluation reports. For example, ONDCP reported that from February through July 2014, grantees educated more than 156,000 youth on topics related to the consequences of substance abuse. Other examples of grantees' efforts included those that enhanced the skill sets of community members, including parents, to identify drug abuse or limit access to prescription drugs and those that reduced language barriers precluding non-English speakers from understanding drug prevention campaigns. We also found that ONDCP and SAMHSA had operating procedures in place, but SAMHSA did not consistently follow documentation and reporting procedures to ensure grantees' compliance and had not accurately reported to ONDCP on grantee compliance. Based on a file review we conducted, we found that SAMHSA followed all processes for ensuring that the grant applicants whose files we reviewed had submitted required documentation before SAMHSA awarded them initial grant funding. However, SAMHSA was less consistent in adhering to procedures for confirming documentation in later years of the program. We found that the majority of grantees whose files we reviewed were missing required paperwork to document how they planned to sustain their programs after grant funds expired. Prior to our review, ONDCP and SAMHSA officials were not aware of the missing data in the grant files. We concluded that without close adherence to existing procedures, and a mechanism to ensure that the documentation it reports to ONDCP is accurate and complete, SAMHSA's performance monitoring capacity was limited. Moreover, SAMHSA could not be certain that grantees were engaging in intended activities and meeting their long-term program goals. We made recommendations that SAMHSA develop an action plan to strengthen the agency's grant monitoring process and ensure ONDCP gets complete and accurate information, among other things. SAMHSA concurred with our recommendations and reported to us in April 2017 that it is implementing actions to address our recommendations that should be completed by this fall. Chairman Gowdy, Ranking Member Cummings, and Committee members, this concludes my prepared statement. I would be happy to respond to any questions you may have. For questions about this statement, please contact Diana Maurer 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. Individuals who made key contributions to this statement include Aditi Archer (Assistant Director), Joy Booth (Assistant Director), Julia Vieweg, Sylvia Bascope, Jane Eyre, Stephen Komadina, Mara McMillen, David Alexander, Billy Commons, and Eric Hauswirth. Staff who made key contributions to the reports cited in this statement are identified in the source product. 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.
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According to the National Institute on Drug Abuse, in 2015, the most recent year for which national data are available, over 52,000 Americans died from drug overdoses, or approximately 144 people every day. Policymakers, criminal justice officials, health care providers, and the public at large are turning with renewed attention to the drug epidemic and its impact on our nation. To help reduce illicit drug use and its consequences, ONDCP oversees and coordinates the implementation of national drug control policy across the federal government. This statement addresses: (1) the federal government's progress in achieving Strategy goals, (2) results from a Comptroller General's Forum on preventing illicit drug use, and (3) the findings of GAO's recent review of ONDCP's DFC Support program. This statement is based on GAO's prior work issued from May 2016 through February 2017, with selected status updates as of July 2017, and updates from ONDCP's National Drug Control Budget Funding Highlight reports issued from fiscal year 2016 to fiscal year 2018. For the updates, GAO used publically available data sources that ONDCP uses to assess its progress on Strategy goals, and interviewed ONDCP officials. The federal government has made mixed progress toward achieving the goals articulated in the 2010 National Drug Control Strategy (Strategy). In the Strategy, the Office of National Drug Control Policy (ONDCP) established seven goals related to reducing illicit drug use and its consequences by 2015. In many instances, the data used to assess progress in 2015 have only recently become available. GAO's review of this updated data indicates that, as of July 2017, the federal government made moderate progress toward achieving two goals, limited progress on two goals, and no progress on the other three goals. However, none of the overall goals in the Strategy were fully achieved. For example, progress had not been made on the goal to reduce drug-induced deaths by 15 percent. Drug-induced deaths instead increased from 2009 to 2015 by 41.5 percent. Although progress was made reducing the 30-day prevalence of drug use among 12- to 17-year-olds from the 10.1 percent reported in 2009, the goal of reducing prevalence to 8.6 percent by 2015 was not achieved. According to ONDCP, as of July 2017, work is currently underway to develop a new strategy. In June 2016, GAO convened a diverse panel of experts, including from ONDCP to advance the national dialogue on preventing illicit drug use. The panel focused on (1) common factors related to illicit drug use; (2) strategies in the education, health care, and law enforcement sectors to prevent illicit drug use; and (3) high priority areas for future action to prevent illicit drug use. According to forum participants, illicit drug use typically occurs for the first time in adolescence, involves marijuana, and increasingly, legal prescriptions for opioid-based pain relievers. Forum participants also discussed strategies available in the education, health care, and law enforcement sectors for preventing illicit drug use. For example, forum participants championed the use of school- or-community-based prevention programs that research has shown to be successful in preventing illicit drug use and other behaviors. They also identified several high priority areas for future actions to prevent illicit drug use, including: supporting community coalitions, consolidating federal funding streams for prevention programs, and reducing the number of opioid prescriptions. In February 2017, GAO issued a report on the Drug-Free Communities Support Program (DFC)--a program that ONDCP and the Substance Abuse and Mental Health Services Administration (SAMHSA) jointly manage. This program aims to support drug abuse prevention efforts that engage schools, law enforcement, and other sectors of a community to target reductions in the use of alcohol, tobacco, marijuana, and the illicit use of prescription drugs. GAO reported that ONDCP and SAMHSA had strengthened their joint management of the program by employing leading collaboration practices; however, the agencies could enhance DFC grantee compliance and performance monitoring. For example, SAMHSA did not consistently confirm grantees had completed plans to achieve long-term goals after exiting the program. GAO recommended that SAMHSA develop an action plan to strengthen DFC grant monitoring and ensure it sends complete and accurate information to ONDCP. SAMHSA concurred with GAO's recommendations and reported in April 2017 that its actions to address them should be completed by this fall.
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Transit fringe benefits--employer-provided benefits designed to encourage public and private employees to use mass transit for their home-to-work commute--date back to the early 1990s. The Energy Policy Act of 1992 created a new category of qualified fringe benefits-- the "qualified transportation fringe"--that is excludible from gross income. Executive Order 13150, dated April 26, 2000, required the implementation of a transportation-fringe-benefit program for qualified federal employees, in which federal agencies offer to employees transit benefits excludable from gross income. This benefit includes transit vouchers and passes for public transportation, to be used exclusively to cover actual out-of-pocket commuting expenses, not to exceed a maximum monthly allowable dollar limit set by law, which has been adjusted for inflation over the years and currently is $130. Federal agencies can either distribute transit benefits directly to employees, enter into an interagency agreement with another agency, such as DOT, or contract with a private company for distribution. DOT's transit benefit program is administered by TRANServe, located within the Office of the Assistant Secretary for Administration. In 1998, TRANServe began offering transit benefit distribution services to other federal entities participating in the federal government's transit benefit program. Over time, TRANServe has distributed transit benefits in a variety of forms. Prior to 2011, TRANServe had distributed the benefits to participating federal employees via paper fare media--i.e., paper vouchers and paper transit passes (e.g., Metro transit vouchers in the District of Columbia)-- and smart cards (e.g., electronic transit cards). In March 2011 and April 2012, DOT published notices for public comment of its intention to adopt a new distribution methodology for transit benefits. Specifically, DOT proposed implementing electronic fare media--a debit card--in place of paper vouchers where electronic fare media is accepted by transit authorities. In its notice, DOT indicated that the move toward debit cards was the result of a growing number of state and local transit authorities transitioning to electronic fare media and rising paper voucher program costs. TRANServe indicated that electronic fare media provides a way to tighten internal controls and support the green government movement, which entails implementing more environmentally-friendly practices. Since 2011, the portion of transit benefits distributed via debit cards has increased while the portion distributed as paper vouchers has declined (see fig. 1). In fiscal year 2014, TRANServe distributed over $210 million dollars in cash equivalent fare media to over 202,000 transit-benefit participants employed by 106 federal entities (referred to as client agencies) nationwide, mostly through the TRANServe debit card. TRANServe administers transit benefits for more federal entities than any other program administrator in the federal sector.percent of the 202,000 TRANServe participants were using the debit card. As discussed in the Standards for Internal Control in the Federal Government, internal control comprises the plans, methods, and procedures used by entities to meet their missions, goals, and objectives. The phrase "internal control" does not refer to a single event, but rather a series of actions and activities that occur throughout an entity's operations on an ongoing basis and that serve as the first line of defense in safeguarding assets and preventing and detecting errors and fraud.Moreover, internal controls should be designed to provide reasonable assurance that unauthorized acquisition, use, or disposition of an entity's assets will be promptly detected. Lastly, internal control systems help government program managers achieve desired results through effective stewardship of public resources. In 2007, the Office of Management and Budget (OMB) provided guidance for federal agencies to use in establishing and implementing internal controls over their respective transit benefit programs to help managers reduce the opportunity for fraud, waste, and abuse. its guidance was in response to our 2007 testimony that confirmed allegations that federal employees in the National Capital Region committed fraud by deliberately requesting benefits they were not entitled to and then selling or using these benefits for personal gain. As a result of our investigation and testimony, OMB required all federal agencies to implement several internal controls in order to maintain the integrity of the transit benefit program. OMB issued a memorandum, Federal Transit Benefit Program, M-07-15 (May 14, 2007), to the executive departments and agencies requiring all agencies with transit benefit programs to implement several internal controls designed to deter fraud, waste, and abuse. used at merchants that have been assigned a code indicating they sell fare media. IRS described two other scenarios, one involving a smart card and another involving a debit card where employees do not substantiate their transit fare expenses, scenarios that we did not describe. the electronic media. Subsequently, IRS sent out a notice for public comment on this revenue rule and modified it in 2014. DOT's TRANServe debit-card program includes activities that correspond to the five internal control standards--(1) control environment, (2) risk assessment, (3) control activities, (4) monitoring, and (5) information and communication. In combination, these activities would be expected to provide reasonable assurance that non-transit-related purchases can be identified and denied. Based on our review of the design of TRANServe's internal controls for the TRANServe debit-card program, we found that those internal controls align with GAO's Standards for Internal Control in the Federal Government. However, certain weaknesses could exist as we did not independently test DOT's internal controls to determine whether they mitigate all possible risks and are operating as intended. TRANServe's activities for establishing a control environment--a disciplined work environment and ethical culture--amongst management and staff were generally consistent with internal control standards. The Standards for Internal Control in the Federal Government states that management and employees should establish and maintain an environment that sets a positive and supportive attitude toward internal control and conscientious management. A positive control environment is the foundation for all other standards, a foundation that provides discipline and structure as well as the climate that influences the quality of internal control. Several key factors affect the control environment, e.g., the integrity and ethical values maintained and demonstrated by management and staff. TRANServe has established a control environment framework for the debit-card program through the following: A primary goal for the debit-card program: TRANServe has set a primary goal for the debit-card program of offering enhanced internal controls to preserve transit benefits by deterring waste, fraud, and abuse. Internal controls officer: TRANServe created an internal controls officer position in April 2007, which according to officials, has been staffed since 2007 without vacancies. According to the program's policy and guidance, this position heightens review of the program's internal controls. The internal controls officer is responsible for maintenance and testing of internal controls, through a combination of inquiry, inspection, and observation. Also, the internal controls officer is responsible for designing training classes for TRANServe employees and DOT's transit benefit participants. Training: DOT requires all staff who are participants in the transit benefit program, to complete mandatory Transit Benefit Integrity Awareness Training on an annual basis. This is a mandatory electronic course that clarifies transit benefit requirements and emphasizes the internal controls in place to minimize fraud and address ramifications of noncompliance. Additionally, according to TRANServe officials, the training is available on its website for client agencies. Moreover, if requested, the TRANServe staff are available to assist or conduct the training. Online resources: Finally, TRANServe has a number of resources available for internal and external participants and client agency points of contacts. The TRANServe website houses information such as, among others, best practices for internal controls, policies and procedures, and training. This helps to improve agency-level internal controls, thereby strengthening the combined level of internal controls. TRANServe's activities for assessing and identifying relevant risks, and determining how those risks should be managed, were generally consistent with internal control standards. The Standards for Internal Control in the Federal Government states that internal control should provide for an assessment of the risks the agency faces from both internal and external sources. Risk assessment is the identification and analysis of relevant risks associated with achieving agency objectives. According to TRANserve officials, a formal risk assessment for the TRANServe program has not been conducted; however, this standard states that risk identification methods may include, among others, consideration of findings from other assessments, such as the Federal Managers Financial Integrity Act of 1982 (FMFIA) annual assessment.The following TRANServe activities are related to assessing risk. Internal controls officer: According to the program's policy and guidance, the internal controls officer is responsible for examining current internal control activities and, identifying potential program vulnerabilities, through testing of controls related to the debit card. Monitoring: According to TRANServe's standard operating procedure (SOP), monitoring debit card transactions identifies those transit benefit participants who are possibly misusing the debit card. As stated in the SOP, monitoring debit card transactions is performed on a weekly basis; this frequency is necessary to maintain program integrity and prevent the misuse of debit cards for non-acceptable transaction activity. Monitoring activities will be discussed in greater detail later under the monitoring standard. FMFIA annual assessment: DOT's annual assessment of its internal control and financial-management systems, as required by the FMFIA, is intended to provide reasonable assurance that objectives are being met. Those objectives include whether (1) financial and other resources are safeguarded from unauthorized use or disposition; (2) transactions are executed in accordance with authorizations; (3) records and reports are reliable; (4) applicable laws, regulations and policies are observed; and (5) financial systems conform to government-wide standards. For fiscal year 2014, DOT's Agency Financial Report stated that DOT utilized its standardized FMFIA internal control program approach for managing internal control and compliance activities. This approach included using the five standards of internal controls to identify, assess, document, and communicate key programmatic internal controls and related risks or weaknesses. For its part, the Office of Financial Management and Transit Benefits, which includes the TRANServe program, completes an annual assessment of the program's management controls and financial-management systems. In fiscal year 2014, TRANServe reported on a number of activities, including testing of controls related to the debit card; reviewing all SOPs to incorporate best practices and tighten internal controls for external and internal customers; and providing monthly invoices with detailed reports to client agencies on employee participation in the transit benefit program. DOT reported no internal-control material weaknesses in the TRANServe program in its FMFIA assessments and audited consolidated financial statements for fiscal years 2011 through 2014. TRANServe's activities for managing its internal control system are generally designed to be consistent with internal controls. The Standards for Internal Control in the Federal Government notes that control activities should be efficient and effective in accomplishing the agency's control objectives, and should occur at all levels of the agency. The standards also note that the responsibility for good internal control rests with managers. Management sets the objectives, puts the control mechanisms in place, and monitors and evaluates the controls. Control activities are policies, procedures, techniques, and mechanisms that help ensure an agency's objectives are met. The following describes the TRANServe program's control activities. Standard operating procedures. TRANServe has established SOPs for the following program activities. These SOPs include: Conducting debit card transaction data mining:provides the guidelines for weekly data mining, which includes reviews of debit card transactions to identify potential misuse or irregular activity, such as the purchase of non-transit items. Sending "anomaly letters" (letters detailing misuse of the debit card) to client agencies: This SOP outlines procedures to use in transmitting anomaly letters to an agency once notification has been received that a potential misuse has occurred. Potential misuse, among other things, may involve retail merchants, or irregular transaction amounts. Providing debit card transaction anomaly reporting to the financial agent bank (J. P. Morgan): Specifically, the financial agent provides debit card services to electronically deliver transit benefits to federal employees of the client agencies serviced by TRANServe. The SOP outlines procedures that are to be taken once an anomaly notice is received indicating non-acceptable transaction activity. Internal controls officer: The internal controls officer is responsible for (1) examining current internal-control activities, including identifying potential program vulnerabilities; (2) developing solutions for identified vulnerabilities; (3) having knowledge of existing rules and regulations concerning internal controls; and (4) keeping abreast of new developments for best practices in internal controls. Inherent features of the debit card: According to TRANServe officials, ensuring that transit beneficiaries do not make non-transit-related purchases is an inherent feature in the design of the debit card TRANServe has implemented through Treasury and J.P. Morgan. The debit card is designed so that it can only be used to purchase transit fare media through transit providers that are identified through a limited list of MCCs approved by DOT. However, in situations when a merchant with an approved MCC is found to be allowing purchases for non-transit items on the debit cards or where a merchant repeatedly forces a card transaction when a purchase is declined, TRANServe has the option of working with J.P. Morgan to further restrict the debit card. This additional restriction--called a merchant identification (MID) block--involves blocking attempted transactions made by TRANServe debit cardholders at a specific merchant location. As a result, the MID block prevents all future transaction activity at that particular merchant even though it has an approved MCC. The MID block mechanism allows TRANServe to maintain the integrity of the MCC while selectively blocking noncompliant points of sale. TRANServe's activities for continuous monitoring and evaluating the effectiveness of the internal control design were generally consistent with internal control standards. The Standards for Internal Control in the Federal Government states that internal control monitoring should assess the quality of performance over time and assure that ongoing monitoring occurs in the course of normal operations. The internal controls officer manages monitoring activities, which include maintenance and testing of internal controls. Consistent with federal internal control standards that call for ongoing and continual monitoring, TRANServe's monitoring activities include debit card transaction data mining. According to SOPs, debit card transaction data mining includes monitoring debit card transactions on a weekly basis. Moreover, staff identify potential misuse by reviewing debit card transaction details for retail merchants, non-compliant MCCs, irregular transaction amounts, rejected transactions, and purchases of consumer items (i.e., non-transit-related items) under a compliant MCC. When misuse of a debit card is discovered, according to TRANServe, it will send a report and a letter to the agency of the violator notifying the agency of the potential violation. TRANServe officials said that once the agency receives notification of the violator, the client agency is responsible for taking appropriate action for those found to be violating program requirements--TRANServe has no contact with the violator. TRANServe will also, if necessary, contact J.P. Morgan to implement an MID block or to recoup payment. The data-mining process has three levels of review based on SOP. Data-Mining First Level Review: This level review of debit card transactions involves querying the MCCs. MCCs are routinely reviewed for compliance and any violations identified and followed up on with agency anomaly letters and chargebacks. The process for transmitting anomaly letters is a five-step process (see table 2). From fiscal years 2011 through 2014, TRANServe sent a total of 237 anomaly letters to agencies notifying them of potential misuse of the debit card (see table 3). The amounts of the questionable charges made by cardholders for this time period ranged from $1.10 to $1,557.00.According to TRANServe officials, the majority of the questionable charges was at or below the transit benefit's statutory limit of $130 per month. In fiscal year 2014, J. P. Morgan processed over 1.5 million total purchase transactions for all TRANServe debit cards. In the same year, three charges exceeded the statutory limit. Table 3 shows the number of anomaly letters sent to agencies and the number of purchase transactions for fiscal years 2011 through 2014. Data Mining Second Level Review: This level of review involves querying the merchant name. This review involves performing key word searches. According to SOP, the key words in merchant names that will trigger an alert are parking, news, deli, cash, liquor, and coffee, among others. Data Mining Third Level Review: This level of review involves querying the transaction amount for irregular transaction, including those exceeding the statutory limit are identified, and contacting the merchant to determine the type of good or service purchased. When applicable, violations identified result in agency anomaly letters, MID blocks, and chargebacks. TRANServe provided several examples of its data mining of purchase transaction documentation that identified potential misuse of debit cards. For example, one debit card transaction was processed using a non- approved MCC. The participant used the debit card to make a purchase of $53 at a drugstore in April 2014. The internal controls officer notified the client agency of this potential misuse of the debit card and subsequently received confirmation of misuse from the client agency. TRANServe officials said that the internal controls officer typically notifies the client agencies of possible misuse within 5 to 10 days of receiving and completing the review of the data mining information. Additionally, for this transaction, TRANServe requested that J. P. Morgan reimburse the program for this amount, given that the merchant forced this transaction. TRANServe activities for collecting reliable information and providing timely communications to client agencies for relevant events were generally consistent with internal control standards. The Standards for Internal Control in the Federal Government states that for an entity to run and control its operations, it must have relevant, reliable, and timely communications relating to internal as well as external events. Information is needed throughout the agency to achieve all of its objectives. Information should be recorded and communicated to management and others within the entity who need the information and in a form and within a time frame that enables them to carry out their internal control and other responsibilities. Additionally, according to these federal internal-control standards, management should ensure there are adequate means of communicating with, and obtaining information from, external stakeholders since such information may have a significant impact on the agency achieving its goals. The following TRANServe activities align with the standard for information and communication: Transit benefit program partnership agreement: This agreement, which TRANServe has with its client agencies, states that TRANServe will maintain a database that will identify, among other things, the following: (1) all participants in the program that are currently deemed eligible by the client agency; (2) the original effective date of program participation; and (3) the value of fare media provided and the effective date of termination, as appropriate. The agreement also states that TRANServe will make other reports from its program database available upon agency request. However, as part of the partnership agreement, TRANServe states that it does not assume responsibility for ensuring client agencies' internal controls over the program nor recipient integrity with regard to the program. It is the responsibility of the client agency to ensure that its employees are fully aware of their responsibilities for participation in the program. Sending anomaly letters: As previously described, TRANServe has established a process for sending debit-card anomaly letters to client agencies when consumer purchases are detected through the data mining process. Depending on the type of anomaly identified, an email with anomaly letter attached is sent to the agency for further agency action. The TRANServe program website: The website includes information about what client agencies need to do to prevent non-transit-related purchases, such as internal control best practices, as well as warnings to users about using debit cards for non-transit-related purchases. Additionally, TRANServe debit cards have a warning indicating that participants are legally bound to abide by the terms of the Transit Benefit Program and that use of the debit cards is personal certification that they will be used by cardholders as the transit benefit for their regular home-to-work transportation (see fig. 3). FMFIA annual assessments: DOT communicates its compliance with the FMFIA through the annual letters it sends to client agencies reporting that DOT's system fully complies with federal and agency guidance. FMFIA requires agency managers to establish internal control systems that provide reasonable assurance regarding the agency's proper use of funds and resources, compliance with statutes and regulations, and preparation of reliable financial reports. TRANServe worked with IRS to demonstrate that its debit-card program was in compliance with relevant statutes, Treasury regulations, and IRS administrative rules--specifically that the debit card qualified as a "transit pass" as defined in section 132(f)--for the purposes of qualifying as a transportation fringe benefit and being excludable from gross income. According to IRS, TRANServe demonstrated that the debit card was a "transit pass" because the card restrictions effectively permit recipients of the cards to use them only to purchase fare media on mass transit In May 2011, TRANServe first tested the use of a debit card systems. in the New York metropolitan area and based on the information from its preliminary testing, obtained a letter from IRS concluding that for the New York metropolitan area the TRANServe debit card, subject to any changes, was a "transit pass" for purposes of section 132(f) of the Code and as such was a qualified transportation fringe benefit. IRS's conclusion was based on the fact that TRANServe had demonstrated that the debit card restrictions as tested (i.e., specifically the MCC restriction with MID blocking capability) effectively permit cardholders to use the debit cards to only purchase fare media on mass transit systems. In addition, IRS took into consideration TRANServe's assurance that it would complete monthly reviews of employees' TRANServe debit card accounts (i.e., anomaly monitoring) in order to identify transactions that might involve non-transit-related purchases and other anomalies. IRS further concluded that the debit card also would constitute a bona fide cash reimbursement program (with respect to systems or areas where no transit pass is readily available) for purposes of section 132(f) because the program contained the features described in Revenue Ruling 2006-57 (e.g., initial payment of transit fare with after-tax amounts for at least the first month, annual employee recertification that the debit card was used only to purchase transit fare media, among other things). Based on its experience in the New York metropolitan area, TRANServe then developed a plan to field test the debit cards in the eight service areas--geographic divisions that contain proximate states--where TRANServe had previously distributed transit paper vouchers. From 2011 to 2013, TRANServe implemented its field test, which included: researching the transit usage in the region, identifying target areas where the transit authorities are located, selecting point-of-sale locations where transit media are sold and as well as non-transit-related sales locations, distributing debit cards that already contained the MCC restrictions to testers, sending testers to the predetermined sales locations to purchase either transit fare media or non-transit-related items, assigning some testers to make debit-card purchases on-line or via telephone depending on the number of ways transit media were sold, and contacting J. P. Morgan to obtain transaction records during the field testing phase. Figure 4 shows how TRANServe implemented its field tests of the debit cards in each of the eight service areas. According to TRANServe officials, TRANServe staff reviewed the test results for each service area to determine whether the debit card restrictions were effective. The testers compiled information about their purchases and obtained transaction reports from J. P. Morgan. TRANServe reviewed this information in order to verify that the debit card restriction held and that the card was used only for authorized purchases. In some instances, TRANServe subsequently worked with J. P. Morgan to implement MID blocks. In other situations, TRANServe worked with the respective transit authorities to ensure proper usage of the debit card. Following each of the field tests, TRANServe shared the results with IRS and obtained IRS's comments or questions about the tests and results. Once IRS was satisfied with the final results in a service area, IRS sent TRANServe an email correspondence to confirm its understanding of the test results and that based on such test results, the debit card constitutes a transit pass and qualifies as a transportation fringe benefit. TRANServe substantially completed the roll out of the debit-card program by the end of fiscal year 2014. In each service area, TRANServe completed a number of debit card transactions, to test whether the debit card was sufficiently restricted. Service area 1: TRANServe began field tests in the area between July and September 2011. Testers completed 103 point-of-sale tests, of which 87 of the transactions passed (i.e., the card restrictions held so that it could only be used to purchase transit media), 10 failed, and 6 were not completed for reasons such as the merchant did not have the item in stock. Seven of the 10 failed transactions resulted from one merchant's overriding declined payments, and the remaining 3 purchases were at parking garages that used an accepted MCC. According to TRANServe officials, TRANServe worked with its financial agent to stop this merchant from overriding transactions and planned to use anomaly testing to further detect parking garage transactions. In November 2011, based on the test results, IRS officials confirmed to TRANServe that based on the test results the debit card constitutes a transit pass in the Norfolk and Baltimore metropolitan regions. In the National Capital Region, the debit card satisfied the requirements for a bona fide cash reimbursement program for purposes of transit systems that do not accept the local smart card (i.e., Washington Metropolitan Area Transit Authority SmarTrip®️ card), which is a transit pass. Service area 2: TRANServe began field tests in the area between July and September 2011. Testers completed 130 point-of-sale tests, of which 122 of the transactions passed and 8 transactions failed. The failed transactions resulted from merchants' overriding declined payments and approving transactions at certain parking garages. TRANServe indicated it would work with its financial agent to stop the merchants from overriding transactions and it would continue to monitor the parking garage activities through anomaly testing. In January 2012, IRS officials confirmed that, based on the test results, the debit card constitutes a transit pass in the service area. Service area 3: TRANServe began field tests in the area between January and March 2012, but excluded one potential target area, Milwaukee, because research on transit in the city indicated too few locations to purchase fare media with credit or debit cards. Testers completed 175 point-of-sale tests, of which 174 of the transactions passed and one transaction failed. This transaction involved the tester's making a purchase of a non-transit-related item at a transit store location that offered consumer merchandise. According to TRANServe, it worked with the transit authority to change its procedures so that only transit fare media can be purchased with the debit card. In March 2012, IRS officials confirmed that, based on the test results, the debit card constitutes a transit pass in the service area. Service area 4: TRANServe began field tests in the area between July and September 2012. Testers completed 80 point-of-sale tests, of which all of the transactions passed. In May 2013, IRS officials confirmed that, based on the test results, the debit card constitutes a transit pass in certain parts of the service area (specifically, in Portland and in Seattle--although the pass is limited to use at national van pool companies in Seattle). Service area 5: TRANServe began field tests in the area between April and June 2012. Testers completed 52 point-of-sale tests, of which all of the transactions passed. In December 2012, IRS officials confirmed that, based on the test results, the debit card constitutes a transit pass in certain parts of the service area (specifically, Boston and Newark). At that time, IRS was still evaluating TRANServe information provided for Buffalo, Philadelphia, and Pittsburgh. TRANServe subsequently completed additional tests in these locations. The tests demonstrated the effectiveness of the card restrictions, and IRS officials agreed later in December 2012 and March 2013 that, based on the test results, the debit card qualified as a transit pass in these locations. Service area 6: TRANServe began field tests in the area between January and March 2012. Testers completed 151 point-of-sale tests, of which 149 transactions passed and 2 failed. These transactions involved the purchase of parking passes through a transit authority. TRANServe did not roll out the debit card in this segment of the service area because it could not resolve the co-mingling of transit and parking purchases. In August 2012, IRS officials confirmed that, based on the test results, the debit card constitutes a transit pass in certain parts of the service area (specifically, Los Angeles, El Segundo, San Jose, San Diego, San Francisco, and Oakland). Service area 7: TRANServe began field tests in the area between April and June 2012. Testers completed 84 point-of-sale tests, of which 82 transactions passed and 2 failed because the tester was able to purchase non-transit-related items at a transit authority store and bike rental shop. TRANServe worked with J.P. Morgan to block purchases at those locations. In December 2012, IRS officials confirmed that, based on the test results, the debit card constituted a transit pass in certain parts of the service area (specifically, Salt Lake City, Ogden, Albuquerque, Denver, and Phoenix). At that time, IRS was still evaluating DOT's information provided for Honolulu. Following additional points of sale tests by TRANServe, IRS confirmed that, based on the test results, the debit card constituted a transit pass in Honolulu for van pool and bus service. Service area 8: TRANServe began field tests in the area between April and June 2012. Testers completed 79 point-of-sale tests, of which all of the transactions passed. In May 2013, IRS officials confirmed that, based on the test results, the debit card constitutes a transit pass in certain part of the service area, specifically Dallas, Houston, San Antonio, St. Louis, and Kansas City. We provided a draft of this report to the Department of Transportation and Internal Revenue Service for review and comment. DOT and 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 of this report to interested congressional committees and the Secretary of the Department of Transportation and the Commissioner of the Internal Revenue Service. In addition, this report will be available at no charge on GAO's website at http://www.gao.gov. If you or your staff have any questions or would like to discuss this work, please contact me at (202) 512-2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Individuals making key contributions to this report are listed in appendix I. In addition to the contact named above, Vashun Cole (Assistant Director); Darryl Chang; Dwayne Curry; Paul Kinney; Gail Marnik; SaraAnn Moessbauer; Susan E. Murphy; Cheryl Peterson; Neil A. Pinney; and Amy Rosewarne made key contributions to this report.
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In 1992, Congress created a transportation fringe benefit that allowed public and private employers to offer employees transit benefits, excludable from gross income, to cover out-of-pocket public transportation commuting costs. Federal agencies may distribute these transit benefits directly or enter into an agreement with another agency, such as DOT, to distribute the benefits on a fee-for-service basis. In 2011, DOT's TRANServe began using debit cards to distribute transit benefits. IRS has established rules to help employers ensure their debit card programs qualify as allowable fringe benefits. Members of Congress have questioned whether the debit card restrictions prevent non-transit-related purchases and whether DOT's program complied with IRS rules. This report describes the extent to which DOT has (1) designed internal controls to provide reasonable assurance that employees do not use the debit card to make non-transit-related purchases and (2) worked with IRS to ensure its debit card program complies with IRS's rules. GAO reviewed the design of TRANServe's internal control system for preventing non-transit purchases, but testing the system was not within the scope of the work; compared federal standards and TRANServe's practices; reviewed IRS rules on fringe benefits; and obtained TRANServe documentation of the steps taken to demonstrate that its debit card complied with the rules. GAO is not making recommendations in this report. DOT and IRS provided technical comments that were incorporated as appropriate. The Department of Transportation's (DOT) Office of Transportation Services (TRANServe) has included multiple internal control activities in the design of the TRANServe debit card program. These controls are intended to prevent federal employees from using their debit card for non-transit-related purchases, and as designed, would be expected to provide reasonable assurance that non-transit-related purchases can be identified and denied. The phrase "internal control" does not refer to a single event, but rather a series of actions that occur throughout an entity's operations on an ongoing basis for safeguarding assets and preventing and detecting errors and fraud. DOT provided evidence that the design of its TRANServe debit card program aligns with each of the five internal control standards as identified in GAO's Standards for Internal Control in the Federal Government and as described below. Control environment : DOT has established a control environment framework for the TRANServe debit card program by, among other things, setting the program's primary goal as enhancing internal controls to deter waste, fraud, and abuse of transit benefits. Risk assessment : DOT established the position of internal controls officer, in 2007, to examine control activities and identify potential program vulnerabilities through the testing of debit card controls. Control activities : TRANServe has established mechanisms for controlling the use of the debit card. For example, the debit card is restricted so it can only be used to purchase transit fare from transit providers that are identified by merchant category codes that have been approved by DOT. The codes are used to classify a business by type of goods or services it provides. Monitoring : TRANServe conducts weekly data mining, which includes reviewing debit card transactions to identify potential misuse and irregularities. Information and communication . TRANServe sends "anomaly letters" (letters detailing potential misuse of the debit card) to agencies when non-transit purchases are detected. TRANServe worked with the Internal Revenue Service (IRS) to demonstrate that the debit card program is in compliance with IRS's rules for qualified transportation fringe benefits and that in particular, it was a transit pass and effectively prevented non-transit-related purchases. From 2011 to 2013, TRANServe staff tested the debit card with transit agencies in eight areas across the country, making dozens of purchases of both transit-related and consumer-related products. In most cases the purchase restriction succeeded in preventing the debit card from purchasing non-transit-related products. In the few cases where the restriction failed, TRANServe took steps to have additional restrictions placed on the debit cards. Once it completed the tests in each region, TRANServe sent the test results to IRS, and once IRS was satisfied with the final results, IRS officials sent DOT an e-mail confirming that the debit card qualified as a transportation fringe benefit in that area. TRANServe then completed the roll out of the debit card program by the end of fiscal year 2014.
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NASA and its international partners--Canada, Europe, Japan, and Russia--are building the space station to serve as an orbiting research facility. The space shuttle is the primary vehicle supporting the assembly and resupply of the station. Figure 1 shows the Space Shuttle Endeavour docked to the International Space Station. Following the Columbia accident in February 2003, the NASA Administrator grounded the space shuttle fleet pending an investigation into the cause of the accident. The administrator appointed the Columbia Accident Investigation Board to determine the cause of the accident and to make recommendations for improving the safety of the space shuttle before it could return to flight. The board issued its report in August 2003 with 29 recommendations for improvement--15 of which must be implemented before the space shuttle can return to flight. NASA plans to return the shuttle to flight in July 2005. While the shuttle has been grounded, space station crew transfers and logistics resupply have depended on Russian Soyuz and Progress vehicles. Europe and Japan are also developing logistics cargo vehicles to support space station operations later this decade. These Russian, European, and Japanese vehicles are launched on expendable rockets. The European Automated Transfer Vehicle (ATV), scheduled to be available for missions to the space station in 2006, is being designed to rendezvous and dock with the space station's Russian Service Module. The Japanese H-II Transfer Vehicle (HTV) is scheduled to be available in 2008 and will fly within the proximity of the space station to be caught by the station's robotic arm before being berthed to the space station. The ATV and HTV also carry less cargo than the shuttle. Because the Russian Soyuz and Progress are the only vehicles currently available and carry significantly less payload than the space shuttle, operations are generally limited to transporting crew, food, potable water, as well as propellant resupply for reboosting the space station to higher orbits. Launches of space station assembly elements and large orbital replacement items for maintenance have effectively ceased. From 2000 to early 2004, NASA performed two studies that focused on the potential use of commercial launch vehicles to provide logistics services to the space station. In a 90-day study conducted in 2000, NASA determined that no commercial logistics service for the space station was possible at that time, as no launch vehicles possessed the critical capabilities necessary to provide logistics services, including automated rendezvous capabilities. As a result of this study, NASA decided to solicit and fund a more detailed review of concepts designed to provide logistics services to the space station. The Alternate Access to Station (AAS) study contracts were awarded in July 2002, with 1-year contracts given to four contractors. In summer 2003, these contractors presented architectures that relied on existing domestic or international expendable launch vehicles. In the fall of 2003, the contracts were extended, and the contractors were asked to address larger cargo delivery capabilities and "downmass" (e.g. returning research materials to earth) requirements were added for the return of cargo. This study ended in January 2004 with the contractors briefing on their study results, at which time NASA concluded that developing a domestic capability to meet most of the space station cargo service needs was possible within 3 to 5 years. In January 2004, the President announced a new Vision for Exploration that called for retiring the shuttle in 2010, requiring NASA to find an alternative to support space station operations through 2016 by the end of the decade. The President called for a shift in NASA's long-term focus, envisioning that NASA will retire the space shuttle after nearly 30 years of service as soon as assembly of the International Space Station is completed, planned for the end of the decade, and will develop a new crew exploration vehicle as well as launch human missions to the moon between 2015 and 2020. In essence, NASA's implementation plan holds aeronautics, science, and other activities at near constant levels and transitions funding currently dedicated to the space station and space shuttle programs to the new exploration strategy as the space station and space shuttle programs phase out. The vision also changed the space station's on-board research focus. Originally, the space station was to be used for conducting experiments in near-zero gravity to include life sciences research on how humans adapt to long durations in space, biomedical research, and materials-processing research. Under the new vision, the research will be focused on determining the effects of long duration space travel on humans and developing countermeasures for those effects, with the goal that the space station research necessary to support human explorers on other worlds would be complete by 2016. Figure 2 shows NASA's proposed plan for operational support of the space station until 2016. According to program officials, NASA's 2004 informal assessment concluded that alternative launch vehicles would present operational risks, technical challenges, and long program delays and would cost more than returning the space shuttle to flight, making the space shuttle the best option for both assembly and logistics missions through the end of the decade. According to previous studies and our discussions with commercial industry representatives, the time involved for developing an alternate capability would probably preclude assembly missions from consideration. However, NASA did not have sufficient knowledge to support its conclusion regarding logistic support missions. Specifically, NASA did not perform a comparative cost analysis that considered the schedule impacts or associated costs of planned space shuttle operations. Furthermore, NASA officials did not document these informal proceedings and decisions reached; therefore, the thoroughness of any assessment of alternatives cannot be verified, nor can their conclusions be validated. NASA is currently evaluating responses from commercial industry on different ways to provide logistics services to and from the space station. NASA's re-examination of its requirements for the space station and space shuttle, coupled with the cost information of alternatives obtained from commercial industry responses, provide NASA with a basis for performing a detailed analysis of alternatives to determine if any planned space shuttle logistics missions could be performed by or complemented with commercial launch vehicles later this decade. As a result of the informal assessment, NASA outlined a number of technical challenges to using an alternate vehicle for space station support, especially for assembly missions where the space shuttle's crew and remote manipulator arm perform key functions. Appendix III provides a discussion of these challenges. NASA officials stated they used the AAS study, which concentrated solely on logistics support missions, as the foundation for its 2004 informal assessment. In a summary of that study, NASA reported that the AAS contractors projected the cost to develop an alternate launch capability would be approximately $1 billion, take 3 to 5 years to develop, and require $2 to $3 billion per year for operations. We held discussions with commercial industry representatives who concurred with this time frame to develop an alternate capability to support space station operation. Since a majority of the space station assembly missions are scheduled within the next 3 years, these types of missions could preclude the use of an alternative vehicle. However, NASA did not have sufficient knowledge to conclude that the shuttle was the best option for logistics missions prior to its retirement of the shuttle in 2010. NASA officials stated that the technical challenges for developing an alternative vehicle could be overcome, but probably not before the 28 missions scheduled through 2010, of which 8 are for logistics, including 5 of the last 7 missions. However, we found no evidence of analyses performed by NASA to compare the cost and schedule impact of using alternate launch systems with the scheduled space shuttle program costs, to include the cost of returning the space shuttle to flight. We recently reported that the majority of NASA's budget estimates for returning the space shuttle to flight had not been fully developed. In fact, NASA officials stated that they did not compare estimated costs for developing alternative launch vehicles against budget estimates for the 28 space shuttle flights currently planned to support the space station, which total more than $22 billion between fiscal year 2005 and fiscal year 2010. In addition, NASA has also requested $1.8 billion for crew and cargo services over the same time frame to purchase commercial services using existing and emerging capabilities, both domestic and foreign. In its fiscal year 2006 budget request, NASA indicated that such commercial services are expected to be available not later than 2009 and that these services are a key element in the future of the space station program. In addition to lacking sufficient knowledge with regard to the use of alternatives for logistics missions, NASA did not document the proceedings and decisions reached in its 2004 assessment. Specifically, the agency did not record the processes it followed and therefore did not capture the basis of the decisions reached. When asked about the details of the assessment, NASA officials indicated that the informal assessment was based primarily on the expertise within the headquarters and they did not formally document the decision paths. While we recognize that the extensive experience of its senior managers is an important element in evaluating alternatives, the existence of any formal assessment of alternatives covering the entire range of missions for space station support cannot be verified, and the agency's position on the space shuttle being the best option cannot be validated. NASA received 26 responses from a September 2004 request for information that asked for, among other things, input from the commercial space industry regarding capabilities and market interest for missions for providing cargo launch services to, and the ability to return items from, the space station. This request for information had similar characteristics as the AAS study, which also had as its objective to explore the development of alternative cargo "upmass" and "downmass" support for the space station. The responses are being evaluated, and NASA plans to seek more detailed information from the commercial launch industry for additional study or development work in June 2005. According to NASA officials, the responses from industry with regard to space station logistics support have been very promising. The officials indicated that it might be possible to have a developed and certified capability to provide commercial cargo launch service to the space station prior to space shuttle retirement late this decade, rather than only after its retirement. However, we were told these services would not eliminate any of the scheduled space shuttle flights, but only augment the capabilities of the space shuttle. While these responses are being evaluated and knowledge is being gathered, NASA is also reviewing the space station research requirements and re-examining the planned manifest for the 28 space shuttle flights in an attempt to better align their missions to the Vision for Space Exploration. According to NASA's fiscal year 2006 budget submission, the agency is examining configurations of the space station that meet the needs of the new vision and the international partners with as few space shuttle flights as necessary. Combining the information gathered from commercial industry and a better definition of space station requirements, NASA officials agreed there is an opportunity to perform a more comprehensive assessment of alternatives, especially for the logistics missions late this decade. According to a recent revision of NASA's internal guidance, the most important aspect of formulating a program technical approach is conducting a thorough analysis of alternatives. NASA guidance defines an analysis of alternatives as a formal method that compares alternatives by estimating their ability to satisfy mission requirements through an effectiveness analysis and by estimating their life cycle costs through cost analysis. The results of these two analysis are used together to produce a cost-effectiveness comparison that allows decision-makers to assess cost and effectiveness simultaneously. An analysis of alternatives broadly examines multiple elements of program alternatives (including technical performance, risk, life cycle cost, and programmatic aspects), and is typically an important part of the formulation studies. NASA views a thorough analysis of alternatives as an important aspect in the formulation of a program technical approach. While we recognize that the extensive experience of its senior managers is an important element in evaluating alternatives, NASA did not have the full breadth of knowledge necessary to perform a comprehensive assessment of alternative launch vehicles to enable it to conclude the space shuttle was the best option to support space station operations. However, NASA's recent request for information from industry offers the agency an opportunity to enhance its knowledge of alternatives to the space shuttle for providing logistics support for the space station and to explore the use of alternatives to the existing space shuttle manifest currently under review. Although alternate vehicles would not be available for missions to the space station until later this decade and difficult to use for assembly missions, several of the space shuttle's final flights are planned logistics support missions that might be conducted using alternative launch vehicles. By completing a comprehensive analysis, NASA could also identify the feasibility and risks associated with an alternative means of providing logistics support to the space station in case delays occur requiring extension of the planned 2010 date. Furthermore, a comprehensive and thoroughly documented analysis of launch requirements and launch alternatives can provide NASA with comparative cost information and afford the agency the opportunity to use its resources more effectively and efficiently. This is particularly important now since the space station and space shuttle programs will be competing for limited resources. To better position the agency to determine the best available option for providing logistics support to the space station, we recommend the NASA Administrator take the following three steps: Direct current efforts to explore other space launch options to utilize a comprehensive and fully documented assessment of alternatives that matches mission requirements, and associated manifest, with the launch vehicles expected to be available; As part of this assessment, (a) determine the development and operation costs associated with these potential alternatives and (b) perform a detailed analysis of these alternatives to determine the best option for delivering the logistics cargo required for space station operations prior to and after space shuttle retirement; and Ensure this assessment is completed before any NASA investments are made for commercial space transportation services to the space station. In written comments on a draft of this report, NASA concurred with our recommendations and stated that the agency seeks to fully explore space launch options for assuring access to the space station in conjunction with its retirement planning for the space shuttle. NASA plans to document its acquisition strategy through a NASA Headquarters Acquisition Strategy Meeting prior to release of a request for proposal for commercial space station cargo services later this summer. In addition, NASA said it will evaluate the cost and capabilities of the proposed transportation system to meet space station and agency needs, as well as the needs of its partners. NASA also said that its acquisition strategy will be consistent with space station requirements, international partner agreements, and available funding. We are encouraged that NASA has taken steps to pursue a deliberate alternative cargo transportation system assessment. However, NASA should not limit documentation of this effort to the acquisition strategy meeting, but should also document the decision paths leading up to that event and throughout the evaluation of the transportation systems proposed by contractors responding to NASA's request for proposals. This approach should identify the decision makers involved and provide a fully documented rationale of the acquisition processes as NASA analyzes all alternatives to determine the best options for delivering the logistics cargo for space station operations. NASA's comments are reprinted in appendix II. As agreed, unless you publicly announce the contents earlier, we plan no further distribution of this report until 15 days from its issue date. At that time, we will send copies to the NASA Administrator; the Director, Office of Management and Budget; and other interested parties. We will also make copies available to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Please contact me at (202) 512-4841 if you or your staff have any questions about this report. Major contributors to this report are listed in appendix IV. To determine whether NASA conducted a detailed assessment of alternatives to the space shuttle for completing assembly and providing logistics support to the International Space Station, we: Obtained and analyzed pertinent NASA documents and briefing slides related to the International Space Station, space shuttles, and other launch alternatives, such as Expendable Launch Vehicles, including: European Space Agency Segment Specifications for the Automated Transfer Vehicle; Specification for the Japanese H-II Transfer Vehicle; International Space Station Payload Integration and Assembly Sequence specifications; Evolved Expendable Launch Vehicle configurations; space station and space shuttle status, history, and cost briefings; Return to Flight Status Briefings; and, Alternate Access to Station briefings. Reviewed previous GAO reports on NASA, the Space Shuttle Program, International Space Station Program, and best practices in many areas and multiple agencies. We also reviewed reports from the Congressional Budget Office, Congressional Research Service, Office of Management and Budget, and the Planetary Society, and Russian Space Program. Interviewed officials responsible for managing the programs within the Space Operations Mission Directorate at NASA headquarters, as well as program managers at Johnson Space Center, Texas. We also interviewed NASA officials at Kennedy Space Center, Florida, who are responsible for processing space station payloads and integrating those payloads with the launch vehicles. We interviewed contractors at Boeing Launch Services and Lockheed Martin Space Systems and reviewed pertinent documentation related to expendable launch vehicles for space station assembly and logistics support. We also reviewed NASA's request for information related to commercial industry interest in providing that capability and NASA's plans for assessing responses to the request for information and follow on activities. For this, we interviewed NASA officials within the Space Operations Mission Directorate and at Johnson Space Center, Texas. We also interviewed Air Force officials from the Evolved Expendable Launch Vehicle Program. We also received, reviewed, and analyzed follow-up written and oral comments from several individuals at these locations and NASA's Science Directorate. To accomplish our work, we visited and interviewed officials at NASA Headquarters, Washington, D.C.; Johnson Space Center, Texas; and Kennedy Space Center, Florida. These centers were chosen because they maintain primary responsibility for conducting space shuttle and space station operations on a day-to-day basis. The offices we met with at headquarters and each of these centers included space station program officials, space shuttle program officials, NASA Launch Services Office, the International Space Station Payload Processing Directorate at Kennedy Space Center, and Space Shuttle Program Integration Office at Kennedy Space Center. We also visited the Boeing Launch Services, Inc., in Huntington Beach, California, and Cape Canaveral Air Force Station, Florida; Boeing Commercial Space Systems in Research Park, Huntsville, Alabama; and Lockheed Martin Space Systems Company in Littleton, Colorado, and Cape Canaveral Air Force Station, Florida. We conducted our work from August 2004 through April 2005 in accordance with generally accepted government auditing standards. According to NASA officials involved in the 2004 assessment, accommodating a transition to other launch vehicles would create significant challenges that drive risk, schedule, and costs. NASA officials stated the space station elements were designed and built to take advantage of the more benign launch environment in the space shuttle's cargo bay, to be removed and repositioned by the space shuttle's robotic arm, and then connected together by the space shuttle crew during space walk activities. The following outlines the major challenges NASA identified: There would be a need to develop a new process to assemble the space station using only the space station crew and without the benefit of the space shuttle remote manipulator arm. Using another launch vehicle would require the redesign and retesting of space station elements already built due to the change in launch environment. NASA officials stated the space shuttle launch environment, with respect to vibration and g-force exerted on the payload, cannot be duplicated on an expendable launch vehicle. A new, unique transfer vehicle would need to be developed in order to rendezvous and dock assembly elements with the space station. For logistics cargo support, two transfer vehicles are currently being developed for logistics mission to support space station operations, the European Automated Transfer Vehicle (ATV) and the Japanese H-II Transfer Vehicle (HTV). These vehicles, much like the Russian Progress vehicle, have a limited cargo capability when compared to the space shuttle. The ATV, scheduled to be available for missions to the space station in 2006, is being designed to rendezvous and dock to the space station via the Russian Service Module. The HTV is scheduled to be available in 2008 and will fly within the proximity of the space station to be caught by the space station's robotic arm before being berthed to the space station. A carrier to go inside the new transfer vehicle to replicate the space shuttle attach points would need to be developed. According to these officials, in order to meet volume requirements, the payload fairings would have to be modified from the current 5-meter to a 6-meter version to accommodate the larger diameter payloads to the space station during assembly missions. Staff making key contributions to this report were Jim Morrison, James Beard, Rick Cederholm, Karen Sloan, and T.J Thomson.
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The National Aeronautics and Space Administration's (NASA) space shuttle fleet has been key to International Space Station operations. Since the grounding of the fleet in February 2003, Russia has provided logistics support. However, due to the limited payload capacity of the Russian space vehicles, on-orbit assembly of the space station stopped. In May 2004 and in February 2005, NASA testified before the Congress that it had assessed using alternative launch vehicles to the space shuttle for space station operations. NASA concluded that using alternatives would be challenging and result in long program delays and would ultimately cost more than returning the space shuttle safely to flight. Yet uncertainties remain about when the space shuttle will return to flight, and questions have been raised about NASA's assessment of alternatives. GAO was asked to determine whether NASA's assessment was sufficient to conclude that the space shuttle is the best option for assembling and providing logistics support to the space station. NASA's 2004 assessment identified significant challenges associated with using alternative launch vehicles for space station assembly and operation. According to previous studies and our discussions with industry representatives, these challenges would likely preclude using alternative vehicles for assembly missions. However, NASA's assessment was insufficient to conclude that the shuttle was the best option for logistics support missions prior to the proposed retirement of the space shuttle in 2010. NASA relied primarily on headquarters expertise to conduct the informal assessment, and while we recognize that the extensive experience of its senior managers is an important element in evaluating alternatives, NASA officials did not document the proceedings and decisions reached in its assessment. As a result, the existence of this assessment of alternatives cannot be verified, nor can the conclusions be validated. NASA is currently evaluating responses from a September 2004 request for information from various commercial space transportation industries that could provide launch services to support space station operations, following retirement of the shuttle in 2010, until the station's planned retirement in 2016. NASA officials indicated that a commercial launch capability to support space station operations is possible prior to the proposed shuttle retirement in 2010, but stated that this capability would not eliminate any of the scheduled space shuttle flights. NASA is also re-examining its requirements for the type of scientific research to be conducted on the space station as well as the manifest requirements of the space shuttle. Combining the information gathered from commercial industry and a better definition of space station and shuttle requirements, NASA officials agree there is an opportunity to perform a more comprehensive assessment of alternatives, especially for logistics missions late this decade.
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In July 1997, the Secretary General proposed a broad reform program to focus the United Nations on achieving results as it carried out its mandates. These reforms included restructuring U.N. leadership and operations, developing a human capital system based on results, and introducing a performance-based programming and budgeting process. Although the Secretary General does not have direct authority over specialized agencies and many funds and programs, changes at the Secretariat were intended to serve as a model for reforms throughout the U.N. system. The Secretary General launched a second round of reforms in 2002 that expanded on the 1997 initiatives and reflected new areas of focus, such as public information activities and the human rights program. The overall goal was to align U.N. activities with the priorities defined by the Millennium Declaration and the new security environment. The 1997 and 2002 initiatives followed several efforts to reform the United Nations that began soon after its creation in 1945. Despite periodic cycles of reform, U.N. member states have continued to have concerns about inefficient operations; problems of fragmentation, duplication, and poor coordination; and the proliferation of mandates. These calls have also highlighted the need for more accountable leadership and improvement in key management practices. As the largest financial contributor to the United Nations, the United States has a strong interest in the completion of these reforms and has played a significant role in promoting financial, administrative, and programmatic changes. The State Department and the U.S. Permanent Mission to the United Nations continue to promote further reforms and report on the status of major reform initiatives to the U.S. Congress. The call for reforms has also grown as a result of problems identified in the United Nations' management of the Oil for Food program. Last year we reported that the former Iraqi government obtained $10.1 billion through oil smuggling and illicit commissions and surcharges on commodity and oil contracts. The Iraq Survey Group, responsible for investigating Iraq's activities in developing weapons of mass destruction, estimated illicit revenues at $10.9 billion and found similar irregularities in contract overpricing and surcharges. In April 2004, the Secretary General established the U.N. Independent Inquiry Committee (IIC) to investigate allegations of mismanagement and misconduct within the Oil for Food program. In February 2005, the IIC issued an interim report on the initial procurement of U.N. contractors, recipients of oil allocations, internal audit structure and activities, and management of administrative expenses. The Committee offered numerous recommendations for improving the United Nations' internal audit function. Sustained oversight at all levels of the organization is needed for the United Nations to advance its reform agenda and achieve lasting results. The United Nations had completed 51 percent of its 1997 and 2002 reform initiatives. However, it has not periodically conducted comprehensive assessments to determine the status and impact of the reforms. Consequently, the Secretariat could not determine if it was meeting the Secretary General's overall reform goals. The Secretary General launched two major reform initiatives, in 1997 and 2002, to address the United Nation's core management challenges--poor leadership of the Secretariat, duplication among its many offices and programs, and the lack of accountability for staff performance. In assessing the status of these reforms, we found that the United Nations had made some progress in implementing these initiatives, putting in place 51 percent of all reforms. We found that 60 percent of the 88 reform initiatives in the 1997 agenda and 38 percent of the 66 reforms in the 2002 agenda were in place. The 1997 agenda consisted of initiatives that the Secretary General could implement on his own authority and those that required member states' approval. The implementation of reforms under the Secretary General's authority advanced more quickly than those under the authority of member states. We found that 70 percent of reform initiatives under the Secretary General's authority were in place, compared with 44 percent of the initiatives requiring member state approval. Delays in acquiring member state approval are due, in part, to the longer time needed for the General Assembly to reach agreement from the majority. In addition, many reform efforts comprise only the first step in achieving longer-term goals. More than one-quarter of the Secretary General's completed reforms in both the 1997 and 2002 agendas consisted of developing a written plan or establishing a new office. Although the establishment of a new office or department--such as the office to manage the U.N.'s interrelated programs to combat crime, drugs, and terrorism--can be counted as a completed reform, it is the office's performance in meeting its objectives that will determine its impact and the extent to which it contributes to the Secretary General's overall reform goals. We also reported that the Secretariat had not conducted systematic, comprehensive assessments of the status and impact of the Secretary General's 1997 and 2002 reform initiatives. Without such assessments, the Secretariat was not able to determine what progress had been made and where further improvements were needed. Individual departments and offices within the Secretariat tracked reforms that related to their specific area of work. OIOS also monitored and evaluated the impact of selected reforms but was not responsible for overseeing the implementation of the overall reform agendas. In addition, the Deputy Secretary General, who is responsible for overseeing the overall reform process, neither systematically assessed departments' performance in implementing reforms nor held managers directly accountable. The office of the Deputy Secretary General had only one full-time professional staff member dedicated to reform issues. In 1998 and 2003, the Secretary General issued status reports on the 1997 and 2002 reforms, respectively. These reports did not cover all of the initiatives in the respective reform plans or include comprehensive assessments of the reforms. In February 2005, we contacted the Office of the Deputy Secretary General to determine recent actions it has taken to report on the status and impact of the Secretary General's reform initiatives. An official stated that the office has conducted an internal assessment but has not released this document to member states. The Secretary General announced his intention to submit additional reform proposals to improve the organization's transparency and accountability before a September 2005 summit of world leaders. Holding staff accountable for implementing these reforms and measuring their impact is difficult without regular, comprehensive reports on the overall status and impact of reform initiatives. Adopting key practices in management, oversight, and accountability for reforms, such as systematic monitoring and evaluation, could facilitate the achievement of the Secretary General's overall reform goals. At the program level, management reviews that compare actual performance to expected outcomes are critical elements of effective oversight and accountability. The United Nations has completed the initial phase of implementing reforms in a key area--performance-based budgeting. It adopted a budget that reflects a result-based budgeting format, including specific program costs, objectives, expected results, and performance indicators to measure results. However, it has yet to develop a system to regularly monitor and evaluate program results to shift resources to more effective programs. Program reviews that compare actual performance to expected outcomes are important to account for resources and achieve effective results. We reported in February 2004 report that the United Nations had begun to adopt a performance-based budgeting system. A performance-based budgeting framework includes three key elements: (1) a budget that reflects a budgeting structure based on results, linking budgeted activities to performance expectations; (2) a system to regularly monitor and evaluate the impact of programs; and (3) procedures to shift resources to meet program objectives. In December 2000, the Secretariat implemented the first key element of a performance-based budgeting framework by adopting a budget that reflects a results-based budgeting format, including specific program costs, objectives, expected results, and performance indicators to measure the results. For the first time, the 2004-2005 budget included specific performance targets and baseline data for many performance indicators that can help measure performance over time and allow program managers to compare actual achievements to expected results. However, oversight committees have reported that some programs still lacked clear and concise expected outcomes and performance indicators. Further, although the United Nations had developed measures for assessing program progress, many of these measures represent tasks and outputs rather than outcomes. For example, in 2003, a key objective of the peacekeeping operation in East Timor was to increase the capacity of the national police force to provide internal security. The indicator for measuring results was the number of police trained--a goal of 2,830 police by 2004. We reported, however, that the number of police trained did not reflect the quality of their training or whether they improved security in East Timor. The Secretariat had not systematically monitored and evaluated program impact or results--the second element of performance budgeting. In 2002, the Office of Internal Oversight Services (OIOS) found that nearly half of U.N. program managers did not comply with U.N. regulations to regularly monitor and evaluate program performance. Program managers were not held accountable for meeting program objectives because U.N. regulations prevented linking program effectiveness and impact with program managers' performance. OIOS did not provide statistics on the number or percentage of program managers complying with U.N. regulations regarding monitoring and evaluation activities in its most recent report on the Secretariat's evaluation efforts. However, OIOS reported that program managers did not develop comprehensive monitoring and evaluation plans in 12 out of 20 programs surveyed, and management review of evaluations was inconsistent among programs. OIOS also reported that, overall, evaluation findings were not used to improve program performance. In some cases, such as with the Office of the High Commissioner for Human Rights, monitoring and evaluation responsibilities were assigned to low-level staff with minimal oversight from program managers. Further, for the majority of programs, no resources had been assessed or allocated for monitoring and evaluation activities. As a result, it is unlikely that the Secretariat will meet its goal of implementing a full performance-based budgeting system by 2006. The final component of performance budgeting--procedures to review evaluation results, eliminate obsolete programs, and shift resources to other programs--was not in place. The Advisory Committee on Administrative and Budgetary Questions reported in 2003 that it did not receive systematic information from the Secretariat on program impact and effectiveness to determine whether a program was meeting its expected results. In 2004, the Committee for Program and Coordination recommended that the Secretariat improve its monitoring and evaluation system to measure impact and report on results. In December 2003, the General Assembly approved the elimination of 912 of more than 50,000 outputs in the 2004-2005 program budget based on the Secretariat's review of program activities. However, in 2003, the Advisory Committee on Administrative and Budgetary Questions and the Committee for Program and Coordination reported that many sections in the budget still lacked justifications for continuing certain outputs. The committees recommended that program managers in the Secretariat identify obsolete outputs in U.N. budgets in compliance with U.N. regulations so resources could be moved to new priority areas. Our February 2004 report contained recommendations to promote full implementation and accountability of the Secretary General's overall actions. Specifically, we recommended that the United States work with other member states to encourage the Secretary General to (1) report regularly on the status and impact of the 1997 and 2002 reforms and other reform that may follow, (2) differentiate between short- and long-term goals and establish time frames for completion, and (3) conduct assessments of the financial and personnel implications needed to implement the reforms. In addition to a systematic monitoring and evaluation system, a strong internal audit and evaluation function can provide the independent assessments needed to help ensure oversight and accountability. OIOS provides this service through audits, evaluations, inspections, and investigations of U.N. funds and programs. This office provided detailed oversight of many aspects of the Oil for Food program, and its 58 reports point to the need for continued U.N. attention to management reforms. Specifically, reports by the internal auditors and the Independent Inquiry Commission revealed lax oversight of Oil for Food program contracts that resulted in repeated violations of procurement rules and weaknesses in contract management. In addition, constraints on the internal auditors' scope and authority prevented the auditors from examining and reporting more widely on some critical areas of the Oil for Food program. U.N. oversight bodies did not obtain timely reporting on serious management problems and were unable to take corrective actions when needed. These constraints limited the internal audit unit's effectiveness as an oversight tool. Our review of the OIOS audit reports of the Oil for Food program released in January 2005 identified 702 findings and 667 recommendations across numerous programs and sectors. OIOS found recurring problems in procurement, financial and asset management, personnel and staffing, project planning and coordination, security, and information technology. The findings in these audits, which were conducted from 1999 to 2004, suggested a lack of oversight and accountability by the offices and entities audited. In particular, we identified 219 findings and 212 recommendations related to procurement and contract management deficiencies. In February 2005, the IIC also reported that the initial procurement of three major Oil for Food contracts awarded in 1996 did not meet reasonable standards of fairness and transparency. The IIC reported that it will make recommendations concerning greater institutional transparency and accountability in a later report. OIOS also conducted audits of three key contracts for inspecting commodities coming into Iraq and for independent experts to monitor Iraq's oil exports. OIOS' findings in the management of two of these contracts supplemented the IIC's information on the bidding and awarding process. The IIC found that the initial selection process did not conform to competitive bidding rules, while OIOS found lax oversight by the U.N. Office of the Iraq Program (OIP) over contractor performance. The IIC reviewed three major contracts awarded in 1996 to determine if their selections were free from improper influence and were conducted in accordance with U.N. regulations. These contracts were awarded to Lloyd's Register Inspection Ltd. to inspect humanitarian goods coming into Iraq, Saybolt Eastern Hemisphere BV to inspect oil exported from Iraq, and Banque National de Paris to maintain revenues from Iraqi oil sales. In its February 2005 report, the IIC found that the United Nations initiated expedited competitive bidding processes for both the humanitarian goods and oil inspection contracts. The IIC concluded that, during the bid process, the U.N. Iraq Steering Committee and the Chief of the Sanctions Branch prejudiced and preempted the competitive process by rejecting the lowest qualified bidder in favor of an award to Lloyd's Register. The IIC found that the regular bidding process was tainted when the branch chief provided a diplomat from the United Kingdom with insider information on the bid amount that Lloyd's Register needed to win the contract. Similarly, the IIC found that a U.N. procurement officer allowed Saybolt to amend its bid to become the lowest bidder. The IIC characterized the bidding process for this contract as neither fair nor transparent. The IIC also found irregularities in the award of a contract to Banque National de Paris. The decision did not conform to the U.N. requirement to award contracts to the lowest acceptable bidder, and no official justified the rejection of the lowest acceptable bidder in writing, as required by U.N. regulations. OIOS conducted audits of the Lloyd's Register and Saybolt contracts as well as the contract to Cotecna Inspection SA, the company that succeeded Lloyd's Register for the inspection of humanitarian goods. In a July 1999 audit of the Lloyd's Register contract, OIOS found contractor overcharges, unverified invoices, violations of procurement regulations, and limited U.N. oversight. For example, while the contract allowed the United Nations to inspect and test all contractor services, the auditors found that OIP had received, certified, and approved the contractor's invoices without on-site verification or inspection reports. In responding to the auditors findings, OIP rejected the call for on-site inspections and stated that any dissatisfaction with the contractor's services should come from the suppliers or their home countries. A July 2002 audit of Saybolt's operation found similar problems, including inadequate documentation for contractor charges and payments made for equipment already included in the contractor's daily staff cost structure. As with the Lloyd's Register contract, OIOS found that OIP officials charged with monitoring the Saybolt contract had made no inspection visits to Iraq but had certified the contractor's satisfactory compliance with the contract and approved extensions to the contract. In an April 2003 report, OIOS cited concerns about amendments and extensions to Cotecna's original $4.9 million contract. Specifically, OIOS found that OIP increased Cotecna's contract by $356,000 4 days after the contract was signed. The amendment included additional costs for communication equipment and operations that OIOS asserted were included in the original contract. In addition, OIOS found that the contract equaled the offer of the second lowest bidder through amendments and extensions during the contract's first year. Accordingly, OIOS concluded that, one year after the start of the contract, the reason for awarding the contract to Cotecna--on the grounds that it was the lowest bidder--was no longer valid. In addition to the three inspection contracts, OIOS reported procurement weaknesses in other areas of the Oil for Food program. For example, in November 2002, OIOS reported that almost $38 million in procurement of equipment for the U.N.-Habitat program was not based on a needs assessment. As a result, 51 generators went unused from September 2000 to March 2002, and 12 generators meant for project-related activities were converted to office use. OIOS further reported that 11 purchase orders totaling almost $14 million showed no documentary evidence supporting the requisitions. In 1994, the General Assembly established OIOS to conduct audits, evaluations, inspections, and investigations of U.N. programs and funds. Its mandate reflects many characteristics of U.S. inspector general offices in purpose, authority, and budget. For example, OIOS staff have access to all U.N. records, documents, or other material assets necessary to fulfill their responsibilities. We reported in 1997 that OIOS was in a position to be operationally independent, had overcome certain start-up problems, and had developed policies and procedures for much of its work. We could not test whether OIOS exercised its authority and implemented its procedures in an independent manner because OIOS did not provide us with access to certain audit and investigation reports and its working papers. However, we concluded that OIOS could do more to help ensure that the information it presents, the conclusions it reaches, and the recommendations it makes can be relied upon as fair, accurate, and balanced. The IIC also made a number of recommendations in January 2005 to help provide OIOS' audit division with the mandate, structure, and support it needs to operate effectively. The IIC found a need for greater reporting and budgetary independence for OIOS and its internal audit division. This division has two funding sources: (1) the U.N. regular budget, which covers normal, recurring audit activities; and (2) extra-budgetary funds allocated outside the U.N. regular budget, which cover audits of special non-recurring funds and programs, such as the Oil for Food program. OIOS' internal audit division received extra-budgetary funds directly from the Oil for Food program managers it audited. It assigned 2 to 6 auditors to cover the program. The IIC found that this level of staffing was low compared to OIOS' oversight of peacekeeping operations and to levels recommended by the U.N. Board of Auditors. The IIC found that the practice of allowing executive directors of funds and programs the right to approve the budgets and staffing of internal audit activities can lead to critical and high risk areas being excluded from internal audit examination and review by oversight bodies. For example: Since its inception, OIOS has generally submitted its audit reports only to the head of the audited agency. However, in August 2000 OIOS tried to widen its report distribution by sending its Oil for Food reports to the Security Council. However, the OIP director opposed this proposal, stating that it would compromise the division of responsibility between internal and external audit. The Deputy Secretary General also denied the request, and OIOS subsequently abandoned any efforts to report directly to the Security Council. OIOS did not examine OIP's oversight of the contracts for humanitarian goods in central and southern Iraq that accounted for almost $40 billion in Oil for Food proceeds. OIP was responsible for examining these contracts for price and value at its New York headquarters. The Iraqi government's ability to negotiate contracts directly with commodity suppliers was an important factor in enabling Iraq to levy illegal commissions. OIOS believed that these contracts were outside its purview because the Security Council's sanctions committee was responsible for their approval. However, OIP management also steered OIOS toward program activities in Iraq rather than headquarters functions where OIP reviewed the humanitarian contracts. In May 2002, OIP's executive director did not approve the auditors' request to conduct a risk assessment of OIP's Program Management Division, citing financial reasons. We reported last year that it was unclear how certain entities involved in the Oil for Food program, including OIP, exercised their oversight responsibilities over humanitarian contracts and sanctions compliance by member states. Such an assessment might have clarified OIP's oversight role and the actions it was taking to carry out its management responsibilities. In 2002, the U.N. Compensation Commission challenged OIOS' audit authority. In its legal opinion, the U.N. Office of Legal Affairs noted that the audit authority extended to computing the amounts of compensation but did not extend to reviewing those aspects of the panels' work that constitute a legal process. However, OIOS disputed the legal opinion, noting that its mandate was to review and appraise the use of U.N. financial resources. OIOS believed that the opinion would effectively restrict any meaningful audit of the claims process. OIOS identified more than $500 million in potential overpayments by the Commission. However, as a result of the legal opinion, the Commission did not respond to many OIOS observations and recommendations, considering them beyond the scope of an audit. Constraints on the internal auditors' scope and authority prevented the auditors from examining and reporting more widely on problem areas in the Oil for Food program. These limitations hampered the auditors' coverage of the Oil for Food program and its effectiveness as an oversight tool. U.N. oversight bodies did not obtain timely reporting on serious management problems and were unable to take corrective actions when needed. However, in December 2004, the General Assembly required OIOS to include in its annual and semi-annual reports titles and brief summaries of all OIOS reports issued during the reporting period and to provide member states with access to original versions of OIOS reports upon request. The IIC also recommended that OIOS and its internal audit division directly report to a non-executive board and that budgets and staffing levels for all audit activities be submitted to the General Assembly and endorsed by an independent board. The Secretary General's announcement that he intends to offer a U.N. reform agenda in September 2005 offers the United Nations an opportunity to take a more strategic approach to management reform. A systematic review of the status of the 154 reforms begun in 1997 and 2002 and information from the Oil for Food program would allow the Secretary General to develop a comprehensive, prioritized agenda for continued U.N. reform. We also encourage continued attention to our February 2004 recommendation that the United States work with other member states to encourage the Secretary General to report regularly on the status of reform efforts, prioritize short- and long-term goals, and establish time frames to complete reforms. Mr. 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, please contact Joseph A. Christoff on (202) 512- 8979. Individuals making key contributions to this testimony and the reports on which it was based are Phyllis Anderson, Leland Cogliani, Lynn Cothern, Katie Hartsburg, Jeremy Latimer, Tetsuo Miyabara, Michael Rohrback, and Audrey 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.
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The U.N. regular budget for the 2004-2005 biennium exceeded $3 billion for the first time. In light of the organization's increasing demands, the U.N. Secretary General and member states have called on the Secretariat to better define priorities and eliminate outdated activities. In response, the Secretary General launched major reform initiatives in 1997 and 2002, and we reported on the status of these efforts in February 2004. Audits and investigations of the U.N. Oil for Food program have also brought attention to recurring management weaknesses. As the largest financial contributor to the United Nations, the United States has a strong interest in the completion of the Secretary General's reforms. GAO provides observations on areas for U.N. reform based on our 2004 report and our continuing review of the Oil for Food program, including our analysis of internal audit reports and other documents. The United Nations needs sustained oversight at all levels of the organization to achieve lasting results on its reform agenda. We reported in 2004 that the Secretariat had made progress in implementing 51 percent of the Secretary General's 1997 and 2002 management reform initiatives. However, we found that more than one-quarter of the completed reforms only consisted of developing plans or establishing new offices--the first steps in achieving longer term reform goals. In addition, the Secretariat had not periodically conducted comprehensive assessments of the status and impact of its reforms. Accordingly, the Secretariat had not been able to determine what progress had been made or where future improvements were needed. A t the program level, management reviews that compare actual performance to expected results are critical elements of effective oversight and accountability. The United Nations has completed the initial phase of implementing reforms in a key area--performance-based budgeting. It adopted a budget that reflects a result-based budgeting format, including specific program costs, objectives, expected results, and performance indicators to measure results. However, the United Nations has yet to implement the next critical step in performance-based budgeting--a system to monitor and evaluate program impact or results. Program reviews that compare actual performance to expected outcomes are important for accounting for resources and achieving effective results. A strong internal audit function provides additional oversight and accountability through independent assessments of U.N. activities, as demonstrated by audits of the U.N Oil for Food program. U.N. internal auditors found recurring management weaknesses in 58 audits it conducted over 5 years. However, constraints on their scope and authority prevented the auditors from examining and reporting widely on problems in the Oil for Food program. U.N. oversight bodies did not obtain timely reporting on serious management problems and were unable to take corrective actions when needed. These constraints limited the internal audit unit's effectiveness as an oversight tool. GAO plans to conduct more detailed work on the role of the internal auditors in upcoming engagements.
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A range of programs and tax expenditures assist individuals and families. Programs under the jurisdiction of the Subcommittee on Human Resources can roughly be grouped under three missions for children and working-age adults: providing income support, providing child care, and providing child welfare services. Other key programs address other needs of these households, such as Medicaid, housing, nutrition assistance, and Workforce Investment Act (WIA) employment and training programs. These programs fall under the jurisdiction of four other House committees. In addition, a wide array of tax expenditures assist individuals and families in these areas. Figure 1 shows an illustrative set of programs and tax expenditures. # Dependent Cre Tx Credit # Promoting Safe nd Sable Fmillie# Workforce Invetment Act progr (WIA) # Erned Income Tx Credit (EITC) # SupplementSecrity Income (SSI) Various federal agencies are responsible for the oversight of these programs and tax expenditures, as shown in figure 2. In addition, while the federal government is involved in some aspects of the design and funding of each of these supports, state governments are sometimes responsible for directly administering the benefits and services. For example, while SSI is directly administered by federal employees within the Social Security Administration, UI, TANF, subsidized child care, and various other programs are overseen by state governments and directly administered by state and, in some cases, local government employees as well as by nonprofit and for-profit entities. Across some of the programs and tax expenditures under the jurisdiction of the Subcommittee and Committee, key characteristics such as the population eligible for each and funding design vary. (See table 1.) For example, individuals and families are sometimes eligible for specific federal tax expenditures based on their employment or family-related circumstances, such as with an adoption. Further, SSI and TANF both provide monthly cash benefits to low-income people, but for SSI, individuals must be aged, blind, or disabled, and for TANF, a family must include dependent children. In terms of funding design, SSI benefits and the tax expenditures are provided to all who apply and meet eligibility requirements. So too is the case with the EITC, which has a refundable portion for those without enough income to owe income taxes. Similarly, federal funding for monthly payments to support children in foster care, adoption, and kinship guardianship placements is also not capped and is dependent on the number of children eligible for such assistance. On the other hand, the federal funding level is fixed for programs such as TANF and subsidized child care and does not increase with the numbers of eligible people who apply. With this array of human services programs, a family and its members may receive benefits or services from one or more of these programs. Interactions between the programs vary, and in some cases, the programs are specifically designed to provide multiple sources of support for individuals and families. For example, a low-income family may be eligible for and receive income support through TANF, EITC, and Child Support Enforcement, as well as subsidized child care assistance. However, at the same time, another family may be eligible for only one of those supports, such as EITC, due to income or other eligibility requirements. Also due to varying eligibility criteria, a family may have several members who are receiving income support through TANF while another member receives such support through SSI. While these programs provide important supports and services to millions of households each year, they comprise a patchwork of support developed over time and under different circumstances. Some programs were begun under the original Social Security Act passed in 1935 and have evolved over time. Congress has added other programs to meet emerging needs. For example, to encourage more low-income women to move into the workforce, Congress created child care subsidy programs designed to support parents' work efforts. Today, our work has shown this patchwork of programs to be too fragmented and overly complex--for clients to navigate, for program operators to administer efficiently, and for program managers and policymakers to assess program performance. People seeking aid often must visit multiple offices and provide the same information numerous times. The routes by which people access services varies by program, state, and sometimes locality, and can be cumbersome for those seeking aid from more than one program. Low-income individuals and families often receive aid from multiple programs to meet their income support, health, nutrition, employment and training, and housing needs. Typically, clients may access several programs through one office that administers TANF, the Supplemental Nutrition Assistance Program (SNAP), and Medicaid. However, clients may need visits to other offices to apply for housing assistance and SSI, while they must file a tax return with the Internal Revenue Service (IRS) for the EITC. Typically, clients have to provide the same basic information and required documentation multiple times if they are trying to access more than one program. Some states and localities have moved toward more use of call centers and online applications, though this varies among the programs and states. The complexity and variation in eligibility and other rules and requirements among the programs have contributed to time-consuming and duplicative administrative processes that are inefficient and add to overall costs. Separate eligibility processes for some programs result in considerable duplication of administrative activities because caseworkers in different offices collect and document much of the same personal and financial information. Even when programs are administered jointly, each has its own eligibility rules and reporting requirements, limiting the extent to which joint administration reduces administration costs. In our previous work, state and local officials reported that this complicated the work required of caseworkers to determine eligibility and also contributed to errors. Excessive time spent working through complex procedures can consume resources and diminish staffs' ability to focus on other activities that might improve service quality or improve program integrity. In addition, other complex processes occur to meet federal cost allocation requirements. For example, we heard from some local staff that they track the amount of time they spend working on different programs and report this information to financial managers. Local financial managers then determine what portion of staffs' time is defined as administrative costs in each of the programs and charge the programs appropriately. Providing similar services through separate programs can lead to additional inefficiencies. We recently reported on the potential overlap and duplication in employment and training programs. Specifically, we found that TANF, Workforce Investment Act Adult (WIA Adult), and Employment Service (ES) programs often maintain separate administrative structures to provide some of the same services, such as job search assistance, to low-income individuals. Some individuals may be receiving similar services from each program, although the extent to which this is occurring is not known. We recommended that Labor and HHS disseminate information on state efforts to consolidate administrative structures and colocate services. Both agencies agreed with our recommendation and we will follow up on their efforts in the future. While we have not reviewed all of the accountability measures for the relevant programs, we have identified some information gaps that hinder oversight of some programs. For example, our work on the TANF program has shown that work participation rates--a key performance measure for TANF, as currently measured and reported, do not appear to be achieving the intended purpose of encouraging states to engage specified proportions of TANF adult recipients in work activities. In addition, although states have shifted a large share of their TANF funds from cash assistance to other programs, supports, and services such as child care subsidies and child welfare, existing oversight mechanisms continue to focus on cash assistance. As a result, there are gaps in the information available at the federal level on how many families received TANF services and on how states have used funds to meet TANF goals. While a key feature of the TANF program is flexibility in the use of federal funds, this flexibility must be balanced with mechanisms to ensure state programs are held accountable for meeting program goals. Information gaps hinder decision makers in considering the success of TANF and what trade-offs might be involved in making any possible changes to TANF through the reauthorization process. In addition, in our work on potential duplication of TANF and WIA, we noted that lack of data hindered our ability to assess the extent to which individuals may have received services from both programs. We also identified information gaps that make it difficult to assess fully the federal role in supporting child care assistance for families. Such an assessment is also complicated by the use of tax expenditures in supporting families' child care needs. With the flexibility allowed under TANF, states have used a significant portion of their TANF funds to augment their child care subsidy programs. However, states do not need to report on the numbers or types of families provided TANF-funded child care, leaving an incomplete picture of the numbers of children receiving federally-funded child care subsidies, which would be useful information for policymakers. In addition, because tax expenditures do not compete overtly with other priorities in the annual budget process, policymakers do not typically consider tax expenditures along with other programs when making budgetary and programmatic decisions. Nevertheless, considerable resources are provided to families through the Dependent Care Tax Credit for their child care and other dependent care needs. A more complete picture of the federal role in child care subsidies and who benefits would include tax expenditure information. We identified the importance of paying more attention to tax expenditures in our recent work on opportunities to reduce duplication in federal government programs. The need for improving the administration of these programs has been voiced recurrently for the past several decades. Stretching as far back as the 1960s, studies and reports have called for changes to human service programs, and we issued several reports during the 1980s that focused on welfare simplification. Over the years, Congress has taken many steps to simplify programs and procedures. For example, in 1996 Congress replaced the previous welfare program with the TANF block grant and consolidated several child care programs into one program, which our previous work has shown provided states with additional flexibility to design and operate programs. In addition, numerous pilot and demonstration projects have given particular states and localities flexibility to test approaches to integrating and coordinating services across a range of human service programs. Some states have taken advantage of recent changes and additional flexibility granted by the federal government to simplify eligibility determination processes across programs. For example, states may automatically extend eligibility to SNAP applicants based on their participation in the TANF cash assistance program--a provision referred to as "categorical eligibility." While the need for simplification of program policies and other improvements has been widely acknowledged, there has also been a general recognition that achieving substantial improvements in this area is exceptionally difficult. Many of these efforts have had limited success due, in part, to the considerable challenges that streamlining program processes entail, given the involvement of numerous congressional committees and federal agencies involved in shaping human service program policies. An additional challenge to systematic policy simplification efforts is the lack of information on the costs and effects of these efforts. Streamlining policies could expand client access and increase caseloads and program costs, but it could also limit access for particular populations, depending on which policies were adopted. In addition, no definitive information exists to demonstrate the type and extent of changes that might result in reduced administrative costs or to demonstrate how strategies might work differently in different communities. To help address these issues, in 2001 and 2006, we recommended that Congress consider authorizing demonstration projects designed to streamline eligibility determination and other processes across federal human services programs. In the Consolidated Appropriations Act, 2010, Congress appropriated funds for pilot projects that, in part, demonstrate the potential to streamline administration or strengthen program integrity. Using the funds appropriated by Congress, the Partnership Fund for Program Integrity Innovation funds pilot projects that test and evaluate ideas for improving federal assistance programs through the following measures: reducing improper payments, improving administrative efficiency, improving service delivery, and protecting and improving program access for eligible beneficiaries. The current environment calls for continued and increased attention to this set of programs and opportunities to reduce inefficiencies. At both the federal and state levels of government, short-term and longer-term budgetary conditions require review of all federal programs and activities and efforts to make government more efficient and effective. Based on our review of our past and recent work, we have identified three approaches that warrant increased attention in this environment. 1. Simplifying policies and processes Simplifying policies and processes--especially those related to eligibility determination processes and various federal funding sources--could potentially save resources, improve productivity, and help staff focus more time on performing essential program activities, such as providing quality services and accurate benefits to recipients. In our 2006 report, we noted that many believe that being able to draw funds from more than one federal assistance program while simplifying the administrative requirements for managing those funds would ease states' administrative workload and reduce administrative spending. This would also serve to help service providers better meet the complex needs of at-risk families. Such efforts are in keeping with the February 28, 2011, Presidential Memorandum issued for the heads of executive departments and agencies on the subject of administrative flexibility, lower costs, and better results for state, local, and tribal governments. Another way to streamline programs is consolidation. Consolidation has been a useful approach in the past to easing the burdens of federal rules and requirements, though care must be taken to ensure intended target groups still have their needs meet. In addition, adequate accountability measures can be challenging to design. 2. Facilitating technology enhancements Facilitating technology enhancements across programs may save administrative and benefit costs by creating more efficient processes and improving program integrity. Our previous work indicates that the federal government can help simplify processes and potentially reduce long-term costs by facilitating technology enhancements across programs and in states. Technology plays a central role in the management of human service programs and keeping up with technological advancements offers opportunities for streamlining eligibility processes, providing timely services, and improving program integrity. Along with technology enhancements, data-sharing arrangements, where permitted, allow programs to share client information that they otherwise would each collect and verify separately, thus reducing duplicative effort, saving money, and improving integrity. For example, by receiving verified electronic data from SSA, state human service offices are able to determine SSI recipients' eligibility for Food Stamp benefits without having to separately collect and verify applicant information. According to officials we spoke with, this arrangement saves administrative dollars and reduces duplicative effort across programs. We also recently reported that more data matching of applicant information with existing databases could help prevent fraud in state CCDF programs. Progress on technology improvements could be further facilitated through greater collaboration across program agencies and levels of government as well as additional sharing of technology strategies among the states. For example, call centers and scanning of required documentation have been strategies used by some states to meet increasing workloads attributed to the weakened economy at the same time the states faced tightened budgets. 3. Fostering state innovation and evaluation for evidence-based decisionmaking In our complex, decentralized intergovernmental system, states and localities have frequently served as laboratories that foster innovation and test approaches that can benefit the nation. Providing states and localities with additional demonstration opportunities would allow them to challenge the current stovepipes and open the door to new cost-efficient approaches for administering human service programs. Demonstration projects would allow for testing and evaluating new approaches that aim to balance cost savings with ensuring program effectiveness and integrity. The information from these evaluations would help the federal government determine which strategies are most effective without investing time and resources in unproven strategies. Congress can allow for such approaches to thrive by not only giving states opportunities to test these approaches but by following up to identify and implement successful strategies. While it may be difficult to fully determine the extent to which observed changes are the result of the demonstration projects, such projects would be useful to identify lessons learned and help identify possible unintended consequences. Essential to all of these approaches is collaboration among many entities. We recently identified collaboration as a governmentwide management challenge. Achieving meaningful results in many policy and program areas requires some combination of coordinated efforts among various actors across federal agencies, with other governments at state and local levels, nongovernmental organizations, for-profit and not-for-profit contractors, and the private sector. Congress will increasingly need to rely on integrated approaches to help its decision making on the many issues requiring effective collaboration across federal agencies, levels of government, and sectors. In addition to collaboration, caution is urged in addressing any duplication and resulting inefficiencies in these programs that many individuals and families rely on. Because of the array of services provided to meet households' various needs, it is not surprising to see various entities involved, with some fragmentation of administration, some overlap in populations served, and some duplication of services offered. These features may be warranted, for example, to ensure quality services are provided and certain populations are served. However, our work indicates that further exploration of the extent of fragmentation, overlap, and duplication is warranted to better identify ways to streamline and improve programs. We are happy to work with the Subcommittee to meets its needs in this area. We provided a draft of the reports we drew on for this testimony to the relevant agencies for their review and copies of the agency's written responses can be found in the appendices of the relevant reports. Chairman Davis, this concludes my statement. I would be pleased to respond to any questions you, Ranking Member Doggett, or other Members of the Subcommittee may have. For questions about this statement, please contact me at (202) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this testimony include Rachel Frisk, Gale Harris, Kathryn Larin, and Yunsian Tai. Additional staff who contributed to this testimony include James Bennett, Susan Bernstein, Alexander Galuten, and Carla Rojas. Opportunities to Reduce Potential Duplication in Government Programs, Save Tax Dollars, and Enhance Revenue, GAO-11-318SP, Washington, D.C.: March 1, 2011. Multiple Employment and Training Programs: Providing Information on Colocating Services and Consolidating Administrative Structures Could Promote Efficiencies, GAO-11-92, Washington, D.C.: January 13, 2011. Child Care and Development Fund: Undercover Tests Show Five State Programs Are Vulnerable to Fraud and Abuse, GAO-10-1062, Washington, D.C.: September 22, 2010. Temporary Assistance for Needy Families: Implications of Recent Legislative and Economic Changes for State Programs and Work Participation Rates, GAO-10-525, Washington, D.C.: May 28, 2010. Supplemental Nutrition Assistance Program: Payment Errors and Trafficking Have Declined, but Challenges Remain, GAO-10-956T, Washington, D.C.: July 28, 2010. Temporary Assistance for Needy Families: Implications of Recent Legislative and Economic Changes for State Programs and Work Participation Rates, GAO-10-525, Washington, D.C.: May 28, 2010. Child Care: Multiple Factors Could Have Contributed to the Recent Decline in the Number of Children Whose Families Receive Subsidies, GAO-10-344, Washington, D.C.: May 5, 2010. Domestic Food Assistance: Complex System Benefits Millions, but Additional Efforts Could Address Potential Inefficiency and Overlap among Smaller Programs, GAO-10-346, Washington, D.C.: April 15, 2010. Temporary Assistance for Needy Families: Fewer Eligible Families Have Received Cash Assistance Since the 1990s, and the Recession's Impact on Caseloads Varies by State, GAO-10-164, Washington, D.C.: February 23, 2010. Support for Low-Income Individuals and Families: A Review of Recent GAO Work, GAO-10-342R, Washington, D.C.: February 22, 2010. Highlights of a Forum: Ensuring Opportunities for Disadvantaged Children and Families, GAO-09-18SP, Washington, D.C.: November 13, 2008. Human Services Programs: Demonstration Projects Could Identify Ways to Simplify Policies and Facilitate Technology Enhancements to Reduce Administrative Costs, GAO-06-942 Washington, D.C.: September 19, 2006. Child Care: Additional Information Is Needed on Working Families Receiving Subsidies, GAO-05-667, Washington, D.C.: June 29, 2005. Means-Tested Programs: Information on Program Access Can Be an Important Management Tool, GAO-05-221, Washington, D.C.: March 11, 2005. Welfare Reform: Information on Changing Labor Market and State Fiscal Conditions, GAO-03-977, Washington, D.C.: July 15, 2003. Means-Tested Programs: Determining Financial Eligibility Is Cumbersome and Can Be Simplified, GAO-02-58, Washington, D.C.: November 2, 2001. 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.
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The federal government, often in concert with states, provides assistance to millions of individuals and families each year through a multiplicity of programs. These programs play a key role in supporting workers who have lost their jobs, families with low-incomes, and vulnerable children who have experienced abuse and neglect. However, given the fiscal pressures facing the federal government and the continued demands placed on assistance programs, it is critical that programs designed to serve those most in need provide benefits and services as effectively and efficiently as possible. In light of concerns about fragmentation, duplication, and overlap in government programs, this testimony addresses: (1) the key characteristics of some programs and tax expenditures that provide assistance to individuals and families; (2) problems in administering and providing services through multiple programs; and (3) actions that may help address these problems. We focused on programs under the jurisdiction of the Subcommittee of Human Resources and some related programs and tax expenditures for children and working-age adults; we developed an illustrative but not all-inclusive list of these programs. We relied on work conducted between 2001 and 2011, which employed an array of methodologies. These included surveys of federal and state officials; site visits to states and local areas; interviews with local, state, and federal officials; and analysis of agency data and documents. Various federal programs and tax expenditures exist to assist individuals and families by providing income support, child care, and child welfare services. Other programs help meet these households' needs in other areas, such as health and nutrition. Overall, several congressional committees as well as six federal agencies oversee these programs at the federal level, while federal agencies, state and local agencies, as well as for-profit and nonprofit agencies directly provide services at the local level. Families can receive benefits from one or more of these programs. For example, a low-income family may be eligible for and receive income support through Temporary Assistance for Needy Families (TANF), the Earned Income Tax Credit (EITC), and Child Support Enforcement, as well as subsidized child care assistance. This array of programs plays a key role in supporting those in need, but our work has shown it to be too fragmented and overly complex--for clients to navigate, for program operators to administer efficiently, and for program managers and policymakers to assess program performance. Individuals often must visit multiple offices to apply for aid and provide the same information and documentation each time--a process that is cumbersome and inefficient. The complexity and variation in eligibility rules and other requirements among programs contribute to time-consuming and duplicative administrative processes that add to overall costs. Some programs provide similar services through separate programs, resulting in additional inefficiencies. For example, we recently reported that TANF, Workforce Investment Act Adult (WIA Adult), and Employment Service (ES) programs often maintain separate administrative structures to provide some of the same services and activities, such as job search assistance, to low-income individuals. In addition, gaps in information can hamper program oversight. Approaches such as simplifying policies, improving technology, and fostering innovation and evaluation can improve services and reduce costs. Simplifying policies can improve productivity and help staff focus more time on activities such as ensuring the accuracy of benefits. Facilitating technology enhancements can streamline eligibility processes and improve program integrity. In addition, fostering state innovation and evaluation can help the federal government and policymakers determine which approaches are the most cost-effective and limit investment in unproven strategies. Because federal programs have evolved over time to meet various needs, it is not surprising to see multiple programs with some fragmentation of administration, some overlap in populations served, and some duplication of services offered. These features may be warranted, for example, to ensure quality services are provided and certain populations are served. However, our work indicates that further exploration of the extent of fragmentation, overlap, and duplication could help better identify ways to streamline and improve programs and to reduce inefficiencies.
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The number of defined-contribution pension plans, especially 401(k)s, has been growing, and by 1993, they accounted for 88 percent of all pension plans and 61 percent of all active pension-plan participants. Many participants' defined-contribution plans supplement another pension plan. A 401(k) pension, or salary-reduction, plan is a defined-contribution plan that allows participants to contribute, before taxes, a portion of their salary to a qualified retirement account. Investment income earned on 401(k) account balances accumulates tax-free until the individual withdraws the funds at retirement. However, participation in 401(k) is voluntary, and contribution levels are determined by the individual but can be no larger than $9,500 per year. About 85 percent of 401(k) pension plans are the only pension plan sponsored by the employer, although the majority of 401(k) plan participants are covered by another pension plan. A recent study of selected 401(k) plans shows that worker participation rates for these plans varies from about 50 percent to over 90 percent. Participant contributions to 401(k) accounts, on average, are about 7 percent of earnings. To encourage participation in and contributions to these pension plans, plan sponsors may wholly or partially match employee contributions and provide education on the importance of retirement saving. In addition, over half of all 401(k) pension plans allow participants to borrow from their pension accounts. Borrowing from 401(k) pension plans is legally permissible and allows plan participants to borrow the lesser of $50,000 or one half of their vested account balance. The term of the loan cannot exceed 5 years, unless the loan is used to purchase a primary home. Furthermore, the loans are generally offered at very favorable interest rates. A recent survey of 401(k) plans found that about 70 percent of the plans that allow borrowing charge an interest rate equal to or less than the prime rate plus one percentage point, while less than 10 percent charge an interest rate equal to the local bank's lending rate. The repayment of loan principal and, unless the primary residence is used to secure the loan, interest payments are not tax-deductible. Failure to repay the loan results in the outstanding loan balance being considered a taxable pension distribution. The borrower is then responsible for paying all taxes on the distribution plus a 10-percent early withdrawal penalty if the borrower is under 59-1/2 years old. Overall, about half of all firms with 100 or more employees that offer savings and thrift plans permit participant loans. Previously, GAO reported that 57 percent of the firms with 100 to 499 employees that offer a 401(k) plan permit participant loans. Similarly, 80 percent of firms with 500 to 4,999 employees and 46 percent of firms with 5,000 or more employees permit loans against 401(k) accounts. In addition, over 95 percent of 401(k) plans that offer loans have at least one plan participant with an outstanding loan. Pension-plan loan provisions, however, are controversial. Advocates argue that loan provisions are an incentive to lower-income workers to participate in pension plans where participation is voluntary. Furthermore, many 401(k) plan administrators think loan provisions also have a somewhat positive impact on participants' contribution rates to pension accounts. A survey conducted by the Employee Benefit Research Institute (EBRI) suggests that most workers think that participants should be able to withdraw retirement funds to pay for financial emergencies, to buy a house, or to pay for a child's education. Workers may be more willing to save for retirement if they can have access to their savings for emergencies before retirement. Opponents of loan provisions argue that permitting participants to borrow from their retirement accounts works against the policy objective of enhancing retirement income. Almost half of the companies that do not permit 401(k) loans surveyed by William M. Mercer say that loan programs are contrary to plan philosophy. Almost 60 percent of employed respondents to a recent EBRI survey think about using their own retirement funds only at the time of retirement. Our analysis of the two databases on worker characteristics and pension-account activity shows that pension-plan borrowing increases participation in 401(k) plans (see app. II). However, a number of other factors, such as employer matching and size of firm, also influence participation and contribution amounts. Participation rates in plans with loan provisions are about 6 percentage points higher than plans with no loan provisions (see fig. 1). Employer matching also increases participation rates by about 20 percentage points depending on the match rate. These findings are consistent with the results of other research. Under the typical situation--where the employer contributes about half of what participants contribute--borrowing provisions plus employer matching increases participation by about 28 percentage points--from 55 percent to 83 percent. Our analysis also indicates that smaller firms tend to have slightly higher participation rates than larger firms. This may be due to smaller firms more effectively targeting benefits to employee needs. In addition, a recent study found that the type and quality of information provided to employees on 401(k) plans may also be an important factor in encouraging employee participation in 401(k) pension plans. The impact of providing high-quality information appears to be greatest on workers with lower earnings. In our analysis of 401(k) plans, we also found that average annual employee contribution amounts are 35 percent higher in 401(k) plans with loan provisions than in 401(k) plans with no loan provisions. Employer matching also increases average contribution amounts in 401(k) plans but not to the same extent as loan provisions. Depending on the employer match rate, we estimate that average annual employee contribution amounts are typically 10- to 24-percent higher than with no employer matching. The effect of both loan provisions and employer matching can be dramatic--an increase in average contribution amounts of over $600 per year (see fig. 2). Furthermore, one study suggests that providing high-quality pension-plan information to plan participants may also increase contribution levels to 401(k) plans. These results are further corroborated when we examined individual participant contributions to 401(k) pension accounts. We estimate that a typical 401(k) participant covered by a pension with loan provisions and receiving an average employer match rate will contribute a higher proportion of earnings to his or her 401(k) account than an identical participant covered by a plan with no loan provision or employer matching--8.6 percent versus 4.9 percent (see fig. 3). Plan participants with no outstanding plan loans are in a better financial position than borrowers. Plan borrowers, on average, have less family income, lower net worth, and more nonhousing debt than nonborrowers. Total family income of borrowers is 83 percent of that of nonborrowers (see table 1). The total net worth and nonhousing net worth of borrowers is also considerably lower than that of nonborrowers. In addition, retirement-account borrowers have about $1,500 more in nonhousing debt and have much higher nonhousing-debt-to-income ratios than nonborrowers. Nevertheless, our analysis indicates that 401(k) plan participants who also are covered by another pension plan are 50-percent more likely to have an outstanding loan than other participants (see app. II). Those with only a 401(k) pension plan--and, thus, with the most to lose by borrowing from their pension accounts--are less likely to do so. But participants who have recently been turned down for a loan from another source are almost 40-percent more likely to borrow against their pension account than other plan participants, holding all else equal. Black and Hispanic pension-plan participants are almost twice as likely as white participants to borrow against their pension account (see app. II), after controlling for income and assets. Minorities may have more difficulties obtaining commercial loans, including mortgages. Our results also indicate that other characteristics of an individual, such as age, gender, and marital status, do not significantly affect pension-plan borrowing. Pension-plan borrowers may use their pension-plan loan for living expenses, an automobile purchase, or housing (rather than borrowing from a commercial source to finance a home purchase), all of which could be considered necessities. A smaller proportion of pension-plan borrowers report having housing debt than nonborrowers, but a larger proportion report having education loans (see table 2). Attitudes toward borrowing money also differ between plan borrowers and nonborrowers. A larger proportion of plan borrowers think it is all right to borrow to finance an automobile, but a slightly smaller proportion think it is all right to borrow to finance education expenses. Almost half of the plan borrowers say it is all right to borrow money to cover living expenses compared to about a third of nonborrowers. Less than 10 percent of each group think it is all right to borrow to finance luxury goods, such as jewelry, and less than 10 percent of plan borrowers think it is all right to borrow to cover the expenses of a vacation. This suggests that relatively few participants--whether borrowers or nonborrowers--would elect to borrow against their pension accounts to finance the purchase of nonnecessities. Pension-plan participants who borrow from their pension accounts risk having substantially lower pension balances at retirement. Under reasonable assumptions about pension-plan savings and borrowing behavior, a borrower could have 2- to 28-percent less pension income at retirement (see app. II). Many 401(k) participants have a substantial amount of their pension balances invested in the stock market and earn a relatively high rate of return. Pension-plan loans, however, generally have a favorable interest rate, which may be much lower than the return on the pension-account investments. Consequently, a borrower may earn less on the loan balance because he or she is making interest payments to the account at the relatively low interest rate rather than earning higher returns from investments, such as equities. How much pension income is lost depends on the size of the loan, the interest rate of the loan, the rate of return of pension account investments, and whether or not the borrower continues to make pension contributions while repaying the loan. For example, if a borrower decides to forgo making pension-plan contributions during loan repayment, he or she could have over 20-percent less retirement income. Continuing pension-plan contributions while repaying the loan, on the other hand, could lead to a relatively small retirement income loss of less than 7 percent. People save for many reasons, including retirement, emergencies, home purchase, and a college education. Saving for retirement receives favorable tax treatment, but in the past, it was at the cost of being virtually inaccessible until late in life. Since retirement savings could not be used for other purposes, people were reluctant to save in retirement accounts. Allowing participants to borrow against their 401(k) pension accounts for reasons unrelated to retirement can increase both participation in these plans and participant contributions. However, pension-plan borrowing is a two-edged sword: Individuals who were prompted to participate because of the borrowing provision increase their retirement savings, but individuals who opt to borrow lose some of the tax advantages to retirement savings and risk having less income at retirement. Our findings have implications for other sources of retirement income. Since participation in IRAs is voluntary, our results suggest that early access to IRA funds may increase both participation in and contributions to these accounts but at the risk of lower retirement income. On the other hand, individual Social Security accounts--if created--would require participation, and contribution levels would be set by law. Consequently, individual Social Security accounts would not benefit from the positive aspects of borrowing provisions, but the borrowing provisions would increase the risk of reduced retirement income. We asked pension plan experts to comment on a draft of this report. They generally agreed with the study approach and results. They made a few technical suggestions, which we incorporated where appropriate. We are sending copies of this report to the Secretary of Labor, relevant congressional committees, and other interested parties. We will make copies available to others on request. This report was prepared under my direction. Please contact Francis P. Mulvey, Assistant Director, at (202) 512-3592 or Thomas L. Hungerford, Senior Economist, at (202) 512-7028 if you or your staff have any questions concerning this report. To determine how pension-plan borrowing affects workers' participation in and contributions to a pension plan and retirement income, we addressed the following questions: Does the ability to borrow from defined contribution pension accounts increase participation in and contributions to 401(k) pension plans? What are the demographic and economic characteristics of workers who borrow from their pension accounts? What are the potential consequences for participants who borrow from their retirement accounts? To conduct our work, we analyzed two data sources. The first, the 1992 Survey of Consumer Finances prepared by the Federal Reserve, provided a nationally representative individual-level sample. The second, the 1992 research database of Internal Revenue Service (IRS) Form 5500 reports, which are maintained by the Pension and Welfare Benefits Administration of the Department of Labor, provided a nationally representative plan-level sample. We also reviewed the relevant technical literature and talked to pension experts. The Survey of Consumer Finances randomly sampled 3,906 households regarding current and past employment by family members, assets and debts, and demographic information. Included in the current employment portion of the survey were detailed questions about pension participation. From the survey, we created a database containing information on respondents and their spouses who were working and between the ages of 18 and 64 at the time of the survey. We did not independently verify the accuracy of the Survey of Consumer Finances database because it is commonly used by researchers. We used the Survey of Consumer Finances to determine the effects of pension-plan borrowing on participation in and contributions to 401(k) pension plans and to describe the demographic and economic characteristics of workers who borrow from their pension accounts. For the analysis of the impact of borrowing on contributions to pension accounts, the subsample of the survey contained information on 477 workers who participate in a 401(k) pension plan. Since the dependent variable is a continuous variable, which can be no less than zero, the multivariate regression estimation technique used is a tobit model. A tobit model takes into account the fact that the participation rate can be no less than 0 percent, and the results from this model will not predict a participation rate of less than 0 percent. Let C* be an individual's desired contribution rate, which is affected by the individual's characteristics. If the desired contribution rate is greater than zero, then the individual contributes to his or her pension account. If it is less than or equal to zero, then the individual does not contribute to his or her account. Formally, the model is written as where the X vector contains the variables, the b parameters to be estimated, and the last term is the random error that captures the unobserved factors affecting the desired contribution rate. The dependent variable--that is, the observed contribution rate--is C = C* if C*>0 C = 0 if C*PS 0. To describe the demographic and economic characteristics of workers who borrow from their pension accounts, the subsample we used for our analysis contained information on 769 workers with defined-contribution pension plans that allowing borrowing. We were interested in determining how participant characteristics affect the likelihood or probability that an individual has an outstanding loan against his or her pension account. The dependent variable for this analysis is a variable that is equal to one if the individual has an outstanding pension-account loan and equal to zero if he or she does not have an outstanding loan. The multivariate estimation technique used for the analysis is a logit model, which will prevent predictions from being outside the probability range of 0 to 1. In the logit model, the probability that an individual will have an outstanding pension plan loan is a function of the individual's characteristics: P = f(b where P is the probability, the X vector contains the variables or characteristics used in the estimation, the b parameters to be estimated, and f is the cumulative logistic probability function. The parameter vector is estimated using maximum likelihood techniques. The primary variables of interest are whether or not a worker can withdraw funds from his or her pension account, the proportion of salary contributed to the defined-contribution pension plan account, and whether or not the worker has an outstanding pension-plan loan. The Survey of Consumer Finances asks respondents who have defined-contribution pension plans, "Can you borrow against that account?" and "If you needed money in an emergency, could you withdraw some of the funds in that account?" If the answer to either of these questions was "yes," we considered that plan as allowing participants to withdraw funds from their account before retirement. Respondents to the survey also were asked how much they contribute to their pension account. The contribution rate is the ratio of the respondent's contribution to his or her salary. Other variables used in the analysis include sex, race, income, net worth, education, recent loan experiences, and whether or not the individual is covered by another pension plan (see table I.1). L = 0 if L*PS 0. See Greene, Econometric Analysis, ch. 19, for the derivation of the likelihood function. The natural logarithm of the number of years the worker has been covered by his or her pension plan (continued) We used IRS' Form 5500 research database for 1992 to determine the effects of pension-plan borrowing on participation in and contributions to 401(k) pension plans. Under the Employee Retirement Income Security Act of 1974, private employers must annually file a separate Form 5500 with the IRS for each employee's pension plan. Each report contains financial, participant, and actuarial information. We did not independently verify the accuracy of the Form 5500 research database because this database is commonly used by researchers. The 1992 Form 5500 research database was obtained from the Pension and Welfare Benefits Administration of the Department of Labor. The plans selected for analysis are plans that had 100 or more participants and offered defined-contribution plans with 401(k) features as the primary plan. All plans that were terminated during the year or where there was a resolution to terminate the plan are not included in the sample. Furthermore, we selected only plans that had one or more active participants, that is, those with pension accounts. The final sample used in the analysis contains 7,245 plans with an average of 337 active participants. The analysis consists of estimating two multivariate statistical models. The first model estimated examined the impacts of firm and plan characteristics on participation in the plan. The dependent variable is the percent of employees eligible to participate who participate in the plan.The second model examines average employee contributions to the plan. Ordinary least squares regression techniques were used to estimate both models. Formally, the models can be expressed as where Y is the dependent variable, which is either the participation rate or the natural logarithm of average contribution amounts; the X vector contains the independent variables; the b to be estimated; and the last term is the random error that captures the unobserved factors influencing the dependent variable. The first dependent variable is the ratio of active participants to the number of all employees eligible to participate in the plan. The second dependent variable is the natural logarithm of the average contribution rate. The average employee contribution variable is the ratio of total contributions to the plan to the number of active participants. The independent variables used in the analysis are variables used by other researchers, such as employer matching and firm size, plus a variable denoting if the plan participants had any outstanding loans (see table I.2). To determine the potential consequences of borrowing from a 401(k) account, we prepared a simulation model. We created a 35-year annual earnings series with a starting salary of $25,000. Annual earnings were allowed to grow with age and with inflation (assumed to be 3 percent). The contributions to the 401(k) account are 6.8 percent of annual earnings. We assumed that the 401(k) account balance earns an annual rate of return of 11 percent. The simulation involves a $40,000 loan against the pension account made in the 15th year and paid back over a 10-year period in equal installments. Pension account balances were determined for several different loan interest rates. We created simulations under two extreme scenarios: (1) the borrower continues to make contributions to the 401(k) account while repaying the loan and (2) the borrower suspends making contributions to the 401(k) account while repaying the loan. This appendix contains supplementary tables of multivariate statistical results from the two databases that we used to conduct our work. The coefficient estimates from the regression model of the participation rate are shown in table II.1. The coefficient estimates indicate the effect of a change in an independent variable on a plan's participation rate holding the values of all other independent variables constant. For example, the coefficient estimate of 0.0591 for the borrowing variable indicates that plans that allow participant borrowing have participation rates that are about 6 percentage points higher than plans that do not allow borrowing. Coefficient estimate (standard error) -0.0020(0.0006) Firm size squared (x1000) The regression results of the effects of pension-plan characteristics on average employee contribution levels are reported in table II.2. The coefficient estimates indicate the effect of a change in an independent variable on average contribution levels holding the values of all other independent variables constant. For example, the coefficient estimate of 0.3682 for the borrowing variable indicates that borrowing provisions increase average employee contribution levels by 36.8 percent. Table II.2: Regression Results for Average Employee Contribution Levels (Dependent Variable: Natural Logarithm of Average Employee Contribution) Coefficient estimate (standard error) -0.0043(0.0015) Firm size squared (x1000) 0.0119(0.0044) 0.3682(0.0167) -0.1300(0.0231) 0.1608(0.0410) 0.1042(0.0302) 0.1205(0.0313) 0.2427(0.0317) 0.1222(0.0343) 0.1779(0.0412) 0.1460(0.0446) 0.1838(0.0464) 0.1615(0.0529) 0.1211(0.0569) 0.0991(0.0374) (0.0493) The tobit-model results of individual pension-plan participants reported in table II.3 examine the influence of participant characteristics on contribution rates holding all other characteristics constant. When a variable changes, it will have two effects on the overall contribution rate. First, for individuals already making a contribution, an increase in a variable with a positive coefficient estimate will directly increase the contribution rate. Second, for individuals who are not making contributions to their 401(k) accounts, an increase in this variable will increase the likelihood that they contribute to their plan account. The marginal impacts of a variable change reported in table II.3 include both these impacts on the expected value of the contribution rate. For example, the marginal impact of 3.0247 for the borrowing variable indicates that, on average, contribution rates of participants in plans with borrowing provisions are about 3 percentage points higher than for participants in other plans. Coefficient estimate (standard error) (0.3244) Age 35 to 44 years -0.8662(0.4105) Age 45 to 54 years 1.4346(0.4576) Age 55 to 64 years (0.5946) -1.7866(0.4298) Dropped out of school before the 12th grade (1.1460) 1 to 4 years of college; no degree -0.6867 (0.4776) 4 or more years of college; college degree -1.5289(0.4462) -0.5284 (0.7617) (continued) Coefficient estimate (standard error) (1.0690) Covered by another pension plan 1.3272(0.3223) Natural logarithm of employer match rate 0.7589(0.1620) Can withdraw funds from pension account 3.7530(0.4430) Family income $25,000 to $34,999 per year (0.7846) Family income $35,000 to $44,999 per year 4.8156(0.8101) Family income $45,000 to $59,999 per year 2.9547(0.7905) Family income $60,000 to $74,999 per year 4.1386(0.8635) Family income $75,000 or more per year 4.5341(0.8446) Natural logarithm of number of years covered by this defined-contribution plan -0.3309 (0.1900) Family net worth $50,001 to $100,000 1.6156(0.4819) Family net worth $100,001 to $250,000 2.2099(0.5198) Family net worth $250,001 to $1,000,000 3.6329(0.6248) Family net worth over $1,000,000 (0.6746) 7.0546(0.1142) A logit model was estimated to determine the magnitude of the effects of participant characteristics on the likelihood of having an outstanding pension-plan loan (see table II.4). The coefficient estimates do not indicate the magnitude of the impacts on the likelihood of having an outstanding loan due to changes in the variables. Consequently, the marginal impacts of changes in the variables on the likelihood were calculated and are reported in the third column of table II.4. For example, the marginal impact of 0.0578 for black participants indicates that the likelihood of blacks having an outstanding loan is 5.8 percentage points higher than for whites. Given that about 7.6 percent of plan participants have outstanding loans, then blacks are about 5.8/7.6 times 100--or 76 percent--more likely to have an outstanding pension-plan loan than whites. Parameter estimate (standard error) -0.2854 (0.1550) Age 35 to 44 years (0.1920) Age 45 to 54 years (0.2184) Age 55 to 64 years -0.1426 (0.3006) (0.1976) Dropped out of school before the 12th grade (0.3921) 1 to 4 years of college; no degree (0.2291) 4 or more years of college; college degree 0.7249(0.2127) 1.1337(0.2068) 1.7382(0.2934) Covered by another pension plan 0.7651(0.1515) Recently turned down for loan 0.5829(0.1855) Family income $25,000 to $34,999 per year (0.2937) Family income $35,000 to $44,999 per year (0.2975) Family income $45,000 to $59,999 per year -0.3429 (0.3128) (continued) Parameter estimate (standard error) Family income $60,000 to $74,999 per year -0.4968 (0.3411) Family income $75,000 or more per year -1.0754(0.3522) Natural logarithm of number of years covered by this defined-contribution plan 0.2608(0.0900) Family net worth $50,001 to $100,000 -0.9459(0.2722) Family net worth $100,001 to $250,000 -0.0553 (0.2251) Family net worth $250,001 to $1,000,000 -0.3286 (0.2913) Family net worth over $1,000,000 -0.1263 (0.3226) Our simulation results are presented in table II.5 and show the pension account balance after 35 years for each scenario. The results show that as long as the interest rate of the loan is less than the rate of return of the pension account balance (assumed to be 11 percent), borrowers will have a lower account balance at retirement. The actual reduction depends on the gap between the account rate of return and the loan interest rate, and whether or not pension contributions continue during the loan repayment period. Furthermore, these results hold only if the loan is repaid. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. 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Pursuant to a congressional request, GAO: (1) determined the effects of pension-plan borrowing on participation in and contributions to 401(k) pension plans; (2) described the demographic and economic characteristics of workers who borrow from their pension accounts; and (3) identified the potential consequences for participants who borrow from their pension accounts. GAO found that: (1) plans that allow borrowing have a somewhat higher proportion of employees participating than other plans, all other factors being equal; (2) in addition to employer matching, allowing borrowing increases participation among eligible employees, especially lower-income employees; (3) allowing pension-plan borrowing also significantly affects how much employees contribute; (4) participants in plans that allow borrowing contribute, on average, 35 percent more to their pension accounts than participants in plans that do not allow borrowing; (5) based on individual financial data GAO examined, relatively few plan participants--less than 8 percent--have one or more loans from their pension accounts; (6) this is true for a point in time and would not include those who had repaid a past loan or who might borrow in the future; (7) blacks and hispanics, lower-income individuals, participants who have recently been turned down for a loan, and workers who also are covered by other pension plans are more likely to borrow from their pension account than other participants; (8) plan borrowers, on average, have fewer assets than nonborrowers and have more nonhousing debt relative to income than nonborrowers; (9) while borrowing provisions may reduce retirement income, they also can encourage workers to save for their retirement; (10) loan provisions of many pension plans provide for repaying the loan at favorable interest rates, which may be lower than the investment yield that could have been earned had the money been left in the pension account; (11) consequently, the borrower will have a smaller pension balance at retirement, since the interest paid to the account is less than what the account balance could have earned form investing in equities; however, other potential effects of borrowing could outweigh these disadvantages; (12) if loan provisions influenced the employee's decision to participate in the pension plan, the employee's retirement income would likely have been even less had there not been such provisions; (13) allowing participants to borrow from their defined-contribution pension plan, therefore, may be a double-edged sword; and (13) there are both advantages and disadvantages to borrowing from other voluntary retirement savings accounts, such as individual retirement accounts, however, few of the positive effects of pension-plan borrowing would be realized in mandatory retirement programs like Social Security.
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Created in 1961, Peace Corps is mandated by statute to help meet developing countries' needs for trained manpower while promoting mutual understanding between Americans and other peoples. Volunteers commit to 2-year assignments in host communities, where they work on projects such as teaching English, strengthening farmer cooperatives, or building sanitation systems. By developing relationships with members of the communities in which they live and work, volunteers contribute to greater intercultural understanding between Americans and host country nationals. Volunteers are expected to maintain a standard of living similar to that of their host community colleagues and co-workers. They are provided with stipends that are based on local living costs and housing similar to their hosts. Volunteers are not supplied with vehicles. Although the Peace Corps accepts older volunteers and has made a conscious effort to recruit minorities, the current volunteer population has a median age of 25 years and is 85 percent white. More than 60 percent of the volunteers are women. Volunteer health, safety, and security is Peace Corps' highest priority, according to the agency. To address this commitment, the agency has adopted policies for monitoring and disseminating information on the security environments in which the agency operates, training volunteers, developing safe and secure volunteer housing and work sites, monitoring volunteers, and planning for emergencies such as evacuations. Headquarters is responsible for providing guidance, supervision, and oversight to ensure that agency policies are implemented effectively. Peace Corps relies heavily on country directors--the heads of agency posts in foreign capitals--to develop and implement practices that are appropriate for specific countries. Country directors, in turn, rely on program managers to develop and oversee volunteer programs. Volunteers are expected to follow agency policies and exercise some responsibility for their own safety and security. Peace Corps emphasizes community acceptance as the key to maintaining volunteer safety and security. The agency has found that volunteer safety is best ensured when volunteers are well integrated into their host communities and treated as extended family and contributors to development. Reported incidence rates of crime against volunteers have remained essentially unchanged since we completed our report in 2002. Reported incidence rates for most types of assaults have increased since Peace Corps began collecting data in 1990, but have stabilized in recent years. The reported incidence rate for major physical assaults has nearly doubled, averaging about 9 assaults per 1,000 volunteer years in 1991-1993 and averaging about 17 assaults in 1998-2000. Reported incidence rates for major assaults remained unchanged over the next 2 years. Reported incidence rates of major sexual assaults have decreased slightly, averaging about 10 per 1,000 female volunteer years in 1991-1993 and about 8 per 1,000 female volunteer years in 1998-2000. Reported incidence rates for major sexual assaults averaged about 9 per 1,000 female volunteer years in 2001-2002. Peace Corps' system for gathering and analyzing data on crime against volunteers has produced useful insights, but we reported in 2002 that steps could be taken to enhance the system. Peace Corps officials agreed that reported increases are difficult to interpret; the data could reflect actual increases in assaults, better efforts to ensure that agency staff report all assaults, and/or an increased willingness among volunteers to report incidents. The full extent of crime against volunteers, however, is unknown because of significant underreporting. Through its volunteer satisfaction surveys, Peace Corps is aware that a significant number of volunteers do not report incidents, thus reducing the agency's ability to state crime rates with certainty. For example, according to the agency's 1998 survey, volunteers did not report 60 percent of rapes and 20 percent of nonrape sexual assaults. Reasons cited for not reporting include embarrassment, fear of repercussions, confidentiality concerns, and a belief that Peace Corps could not help. In 2002, we observed that opportunities for additional analyses existed that could help Peace Corps develop better-informed intervention and prevention strategies. For example, our analysis showed that about a third of reported assaults after 1993 occurred from the fourth to the eighth month of service--shortly after volunteers completed training, arrived at sites, and began their jobs. We observed that this finding could be explored further and used to develop additional training. Since we issued our report, Peace Corps has taken steps to strengthen its efforts for gathering and analyzing crime data. The agency has hired an analyst responsible for maintaining the agency's crime data collection system, analyzing the information collected, and publishing the results for the purpose of influencing volunteer safety and security policies. Since joining the agency a year ago, the analyst has focused on redesigning the agency's incident reporting form to provide better information on victims, assailants, and incidents and preparing a new data management system that will ease access to and analysis of crime information. However, these new systems have not yet been put into operation. The analyst stated that the reporting protocol and data management system are to be introduced this summer, and responsibility for crime data collection and analysis will be transferred from the medical office to the safety and security office. According to the analyst, she has not yet performed any new data analyses because her focus to date has been on upgrading the system. We reported that Peace Corps' headquarters had developed a safety and security framework but that the field's implementation of this framework was uneven. The agency has taken steps to improve the field's compliance with the framework, but recent Inspector General reports indicate that this has not been uniformly achieved. We previously reported that volunteers were generally satisfied with the agency's training programs. However, some volunteers had housing that did not meet the agency's standards, there was great variation in the frequency of staff contact with volunteers, and posts had emergency action plans with shortcomings. To increase the field's compliance with the framework, in 2002, the agency hired a compliance officer at headquarters, increased the number of field- based safety and security officer positions, and created a safety and security position at each post. However, recent Inspector General reports continued to find significant shortcomings at some posts, including difficulties in developing safe and secure sites and preparing adequate emergency action plans. In 2002, we found that volunteers were generally satisfied with the safety training that the agency provided, but we found a number of instances of uneven performance in developing safe and secure housing. Posts have considerable latitude in the design of their safety training programs, but all provide volunteers with 3 months of preservice training that includes information on safety and security. Posts also provide periodic in-service training sessions that cover technical issues. Many of the volunteers we interviewed said that the safety training they received before they began service was useful and cited testimonials by current volunteers as one of the more valuable instructional methods. In both the 1998 and 1999 volunteer satisfaction surveys, over 90 percent of volunteers rated safety and security training as adequate or better; only about 5 percent said that the training was not effective. Some regional safety and security officer reports have found that improvements were needed in post training practices. The Inspector General has reported that volunteers at some posts said cross-cultural training and presentations by the U.S. embassy's security officer did not prepare them adequately for safety-related challenges they faced during service. Some volunteers stated that Peace Corps did not fully prepare them for the racial and sexual harassment they experienced during their service. Some female volunteers at posts we visited stated that they would like to receive self-protection training. Peace Corps' policies call for posts to ensure that housing is inspected and meets post safety and security criteria before the volunteers arrive to take up residence. Nonetheless, at each of the five posts we visited, we found instances of volunteers who began their service in housing that had not been inspected and had various shortcomings. For example, one volunteer spent her first 3 weeks at her site living in her counterpart's office. She later found her own house; however, post staff had not inspected this house, even though she had lived in it for several months. Poorly defined work assignments and unsupportive counterparts may also increase volunteers' risk by limiting their ability to build a support network in their host communities. At the posts we visited, we met volunteers whose counterparts had no plans for the volunteers when they arrived at their sites, and only after several months and much frustration did the volunteers find productive activities. We found variations in the frequency of staff contact with volunteers, although many of the volunteers at the posts we visited said they were satisfied with the frequency of staff visits to their sites, and a 1998 volunteer satisfaction survey reported that about two-thirds of volunteers said the frequency of visits was adequate or better. However, volunteers had mixed views about Peace Corps' responsiveness to safety and security concerns and criminal incidents. The few volunteers we spoke with who said they were victims of assault expressed satisfaction with staff response when they reported the incidents. However, at four of the five posts we visited, some volunteers described instances in which staff were unsupportive when the volunteers reported safety concerns. For example, one volunteer said she informed Peace Corps several times that she needed a new housing arrangement because her doorman repeatedly locked her in or out of her dormitory. The volunteer said staff were unresponsive, and she had to find new housing without the Peace Corps' assistance. In 2002, we reported that, while all posts had tested their emergency action plan, many of the plans had shortcomings, and tests of the plans varied in quality and comprehensiveness. Posts must be well prepared in case an evacuation becomes necessary. In fact, evacuating volunteers from posts is not an uncommon event. In the last two years Peace Corps has conducted six country evacuations involving nearly 600 volunteers. We also reported that many posts did not include all expected elements of a plan, such as maps demarcating volunteer assembly points and alternate transportation plans. In fact, none of the plans contained all of the dimensions listed in the agency's Emergency Action Plan checklist, and many lacked key information. In addition, we found that in 2002 Peace Corps had not defined the criteria for a successful test of a post plan. Peace Corps has initiated a number of efforts to improve the field's implementation of its safety and security framework, but Inspector General reports continued to find significant shortcomings at some posts. However, there has been improvement in post communications with volunteers during emergency action plan tests. We reviewed 10 Inspector General reports conducted during 2002 and 2003. Some of these reports were generally positive--one congratulated a post for operating an "excellent" program and maintaining high volunteer morale. However, a variety of weaknesses were also identified. For example, the Inspector General found multiple safety and security weaknesses at one post, including incoherent project plans and a failure to regularly monitor volunteer housing. The Inspector General also reported that several posts employed inadequate site development procedures; some volunteers did not have meaningful work assignments, and their counterparts were not prepared for their arrival at site. In response to a recommendation from a prior Inspector General report, one post had prepared a plan to provide staff with rape response training and identify a local lawyer to advise the post of legal procedures in case a volunteer was raped. However, the post had not implemented these plans and was unprepared when a rape actually occurred. Our review of recent Inspector General reports identified emergency action planning weaknesses at some posts. For example, the Inspector General found that at one post over half of first year volunteers did not know the location of their emergency assembly points. However, we analyzed the results of the most recent tests of post emergency action plans and found improvement since our last report. About 40 percent of posts reported contacting almost all volunteers within 24 hours, compared with 33 percent in 2001. Also, our analysis showed improvement in the quality of information forwarded to headquarters. Less than 10 percent of the emergency action plans did not contain information on the time it took to contact volunteers, compared with 40 percent in 2001. In our 2002 report, we identified a number of factors that hampered Peace Corps efforts to ensure that this framework produced high-quality performance for the agency as a whole. These included high staff turnover, uneven application of supervision and oversight mechanisms, and unclear guidance. We also noted that Peace Corps had identified a number of initiatives that could, if effectively implemented, help to address these factors. The agency has made some progress but has not completed implementation of these initiatives. High staff turnover hindered high quality performance for the agency. According to a June 2001 Peace Corps workforce analysis, turnover among U.S. direct hires was extremely high, ranging from 25 percent to 37 percent in recent years. This report found that the average tenure of these employees was 2 years, that the agency spent an inordinate amount of time selecting and orienting new employees, and that frequent turnover produced a situation in which agency staff are continually "reinventing the wheel." Much of the problem was attributed to the 5-year employment rule, which statutorily restricts the tenure of U.S. direct hires, including regional directors, country desk officers, country directors and assistant country directors, and Inspector General and safety and security staff. Several Peace Corps officials stated that turnover affected the agency's ability to maintain continuity in oversight of post operations. In 2002, we also found that informal supervisory mechanisms and a limited number of staff hampered Peace Corps efforts to ensure even application of supervision and oversight. The agency had some formal mechanisms for documenting and assessing post practices, including the annual evaluation and testing of post emergency action plans and regional safety and security officer reports on post practices. Nonetheless, regional directors and country directors relied primarily on informal supervisory mechanisms, such as staff meetings, conversations with volunteers, and e-mail to ensure that staff were doing an adequate job of implementing the safety and security framework. One country director observed that it was difficult to oversee program managers' site development or monitoring activities because the post did not have a formal system for performing these tasks. We also reported that Peace Corps' capacity to monitor and provide feedback to posts on their safety and security performance was limited by the small number of staff available to perform relevant tasks. We noted that the agency had hired three field-based safety and security specialists to examine and help improve post practices, and that the Inspector General also played an important role in helping posts implement the agency's safety and security framework. However, we reported that between October 2000 and May 2002 the safety and security specialists had been able to provide input to only about one-third of Peace Corps' posts while the Inspector General had issued findings on safety and security practices at only 12 posts over 2 years. In addition, we noted that Peace Corps had no system for tracking post compliance with Inspector General recommendations. We reported that the agency's guidance was not always clear. The agency's safety and security framework outlines requirements that posts are expected to comply with but did not often specify required activities, documentation, or criteria for judging actual practices--making it difficult for staff to understand what was expected of them. Many posts had not developed clear reporting and response procedures for incidents, such as responding to sexual harassment. The agency's coordinator for volunteer safety and security stated that unclear procedures made it difficult for senior staff, including regional directors, to establish a basis for judging the quality of post practices. The coordinator also observed that, at some posts, field-based safety and security officers had found that staff members did not understand what had to be done to ensure compliance with agency policies. The agency has taken steps to reduce staff turnover, improve supervision and oversight mechanisms, and clarify its guidance. In February 2003, Congress passed a law to allow U.S. direct hires whose assignments involve the safety of Peace Corps volunteers to serve for more than 5 years. The Peace Corps Director has employed his authority under this law to designate 23 positions as exempt from the 5-year rule. These positions include nine field-based safety and security officers, the three regional safety and security desk officers working at agency headquarters, as well as the crime data analyst and other staff in the headquarters office of safety and security. They do not include the associate director for safety and security, the compliance officer, or staff from the office of the Inspector General. Peace Corps officials stated that they are about to hire a consultant who will conduct a study to provide recommendations about adding additional positions to the current list. To strengthen supervision and oversight, Peace Corps has increased the number of staff tasked with safety and security responsibilities and created the office of safety and security that centralizes all security- related activities under the direction of a newly created associate directorate for safety and security. The agency's new crime data analyst is a part of this directorate. In addition, Peace Corps has appointed six additional field-based safety and security officers, bringing the number of such individuals on duty to nine (with three more positions to be added by the end of 2004); authorized each post to appoint a safety and security coordinator to provide a point of contact for the field-based safety and security officers and to assist country directors in ensuring their post's compliance with agency policies, including policies pertaining to monitoring volunteers and responding to their safety and security concerns (all but one post have filled this position); appointed safety and security desk officers in each of Peace Corps' three regional directorates in Washington, D.C., to monitor post compliance in conjunction with each region's country desk officers; and appointed a compliance officer, reporting to the Peace Corps Director, to independently examine post practices and to follow up on Inspector General recommendations on safety and security. In response to our recommendation that the Peace Corps Director develop indicators to assess the effectiveness of the new initiatives and include these in the agency's annual Government Performance and Results Act reports, Peace Corps has expanded its reports to include 10 quantifiable indicators of safety and security performance. To clarify agency guidance, Peace Corps has created a "compliance tool" or checklist that provides a fairly detailed and explicit framework for headquarters staff to employ in monitoring post efforts to put Peace Corps' safety and security guidance into practice in their countries, strengthened guidance on volunteer site selection and development, developed standard operating procedures for post emergency action plans, concluded a protocol clarifying that the Inspector General's staff has responsibility for coordinating the agency's response to crimes against volunteers. These efforts have enhanced Peace Corps' ability to improve safety and security practices in the field. The threefold expansion in the field-based safety and security officer staff has increased the agency's capacity to support posts in developing and applying effective safety and security policies. Regional safety and security officers at headquarters and the agency's compliance officer monitor the quality of post practices. All posts were required to certify that they were in compliance with agency expectations by the end of June 2003. Since that time, a quarterly reporting system has gone into effect wherein posts communicate with regional headquarters regarding the status of their safety and security systems and practices. The country desks and the regional safety and security officers, along with the compliance officer, have been reviewing the emergency action plans of the posts and providing them with feedback and suggestions for improvement. The compliance officer has created and is applying a matrix to track post performance in addressing issues deriving from a variety of sources, including application of the agency's safety and security compliance tool and Inspector General reports. The compliance officer and staff from one regional office described their efforts, along with field- based safety and security staff and program experts from headquarters, to ensure an adequate response from one post where the Inspector General had found multiple safety and security weaknesses. However, efforts to put the new system in place are incomplete. As already noted, the agency has developed, but not yet introduced, an improved system for collecting and analyzing crime data. The new associate director of safety and security observes that the agency's field-based safety and security officers come from diverse backgrounds and that some have been in their positions for only a few months. All have received training via the State Department's bureau of diplomatic security. However, they are still employing different approaches to their work. Peace Corps is preparing guidance for these officers that would provide them with a uniform approach to conducting their work and reporting the results of their analyses, but the guidance is still in draft form. The Compliance Officer has completed detailed guidance for crafting emergency action plans, but this guidance was distributed to the field only at the beginning of this month. Moreover, following up on our 2002 recommendation, the agency's Deputy Director is heading up an initiative to revise and strengthen the indicators that the agency uses to judge the quality of all aspects of its operations, including ensuring volunteer safety and security, under the Government Performance and Results Act. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions you or other Members of the Committee may have at this time. For further information regarding this statement, please contact Phyllis Anderson, Assistant Director, International Affairs and Trade, at (202) 512-7364 or [email protected]. Individuals making key contributions to this statement were Michael McAtee, Suzanne Dove, Christina Werth, Richard Riskie, Bruce Kutnick, Lynn Cothern, and Martin de Alteriis. 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.
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About 7,500 Peace Corps volunteers currently serve in 70 countries. The administration intends to increase this number to about 14,000. Volunteers often live in areas with limited access to reliable communications, police, or medical services. As Americans, they may be viewed as relatively wealthy and, hence, good targets for crime. In this testimony, GAO summarizes findings from its 2002 report Peace Corps: Initiatives for Addressing Safety and Security Challenges Hold Promise, but Progress Should be Assessed, GAO-02-818 , on (1) trends in crime against volunteers and Peace Corps' system for generating information, (2) the agency's field implementation of its safety and security framework, and (3) the underlying factors contributing to the quality of these practices. The full extent of crime against Peace Corps volunteers is unclear due to significant under-reporting. However, Peace Corps' reported rates for most types of assaults have increased since the agency began collecting data in 1990. The agency's data analysis has produced useful insights, but additional analyses could help improve anti-crime strategies. Peace Corps has hired an analyst to enhance data collection and analysis to help the agency develop better-informed intervention and prevention strategies. In 2002, we reported that Peace Corps had developed safety and security policies but that efforts to implement these policies in the field had produced varying results. Some posts complied, but others fell short. Volunteers were generally satisfied with training. However, some housing did not meet standards and, while all posts had prepared and tested emergency action plans, many plans had shortcomings. Evidence suggests that agency initiatives have not yet eliminated this unevenness. The inspector general continues to find shortcomings at some posts. However, recent emergency action plan tests show an improved ability to contact volunteers in a timely manner. In 2002, we found that uneven supervision and oversight, staff turnover, and unclear guidance hindered efforts to ensure quality practices. The agency has taken action to address these problems. To strengthen supervision and oversight, it established an office of safety and security, supported by three senior staff at headquarters, nine field-based safety and security officers, and a compliance officer. In response to our recommendations, Peace Corps was granted authority to exempt 23 safety and security positions from the "5-year rule"--a statutory restriction on tenure. It also adopted a framework for monitoring post compliance and quantifiable performance indicators. However, the agency is still clarifying guidance, revising indicators, and establishing a performance baseline.
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Historically, new weapon systems have been developed by the military services to counter specific threats. Under DOD's Requirements Generation System, the precursor to JCIDS, requirements frequently grew out of the military services' unique strategic visions and often lacked clear linkages to the national military strategy and the needs of the joint force commanders, who are responsible for carrying out military operations. This service-centric, stovepiped approach often created weapon systems that lacked interoperability, were duplicative, or did not fill critical gaps. In a 2002 memo, the Secretary of Defense expressed dissatisfaction with the requirements system and commented that the system "continues to require things that ought not to be required, and does not require things that need to be required." As part of its 2001 Quadrennial Defense Review, DOD determined that the department needed to shift from threat-based defense planning to a capabilities-based model that focuses more on how an adversary might fight than who the adversary might be or where a war might be fought. JCIDS was established to provide the department with an integrated, collaborative process to identify and guide development of a broad set of new capabilities that address the current and emerging security environment. Through JCIDS, capabilities are to be developed from national military strategy and should relate to joint concepts that describe how the strategy will be implemented. JCIDS is also intended to ensure a strong voice for warfighters and identify needs from a joint perspective to ensure that current and future warfighters are provided the capabilities they need to accomplish assigned missions. Furthermore, JCIDS emphasizes that needs be derived in terms of capabilities instead of specific system solutions. The JCIDS process is overseen by the Joint Requirements Oversight Council (JROC) and supports the Chairman of the Joint Chiefs of Staff, who is responsible for advising the Secretary of Defense on the priorities of military requirements in supporting the national military strategy. Within JCIDS, FCBs--headed by a general or an admiral and made up of military and civilian representatives from the military services, joint staff, COCOMs, and the Office of the Secretary of Defense--manage different capability area portfolios. The FCBs are intended to support the JROC by evaluating capability needs, recommending enhancements to capabilities integration, examining joint priorities, assessing program alternatives, and minimizing duplication of effort across the department. The JCIDS process requires that gaps in military capabilities be identified and potential materiel and nonmateriel solutions for filling those gaps be developed based on formal capability assessments. The results of these capability assessments are formally submitted as initial capabilities documents (ICD)--a capability proposal--by a military service, defense agency, COCOM, FCB, or other sponsor. ICDs are intended to document a specific capability gap or set of gaps that exist in joint warfighting functions and propose a prioritized list of various solutions to address the gap(s). When a capability proposal is submitted, a Joint Staff "gatekeeper" conducts an initial review to determine what level of joint interest and review there should be and which FCB should take the lead. Capability proposals deemed to have a significant impact on joint warfighting, such as those involving potential major defense acquisition programs, are designated as "JROC interest" and must be validated or approved by the JROC. A JROC-validated ICD provides the basis for starting a major weapon system acquisition. Specifically, it should lead to an analysis of alternatives, a concept refinement phase, and a decision on a preferred system concept. Before a weapon system program is approved to begin system development, the sponsor is required to submit a capability development document (CDD)--which defines a specific solution as identified in the analysis of alternatives--through JCIDS for approval by the JROC. The CDD defines the system's key performance parameters or attributes against which the delivered increment of capability will be measured. Finally, the sponsor prepares a capability production document (CPD) to address the production elements of an acquisition program prior to the program starting production. Figure 1 shows how the documentation relates to the major milestones for a weapon system program in the Defense Acquisition System. While JCIDS is intended to determine needs from a joint, departmentwide perspective, capability needs continue to be proposed and defined primarily by the military services, with little involvement from the joint community--including the COCOMs, which plan and implement military operations. This can lead to stovepiped and duplicative solutions that do not necessarily support a joint force on the battlefield. In addition, virtually all of the proposals for new capability needs and weapon system solutions completing the JCIDS process since 2003 have been validated. The JCIDS process has also proven to be lengthy, taking on average up to 10 months to validate a need. Such a protracted process further undermines the department's efforts to effectively respond to the needs of the warfighter, especially those that are near term. Our review of the documentation associated with 90 "JROC interest" ICDs submitted to JCIDS since 2003 showed that 60 proposals, or 67 percent, were sponsored by a military service, and 23, or 26 percent, were sponsored by a COCOM, an FCB, or the Joint Staff. (See fig. 2.) JCIDS is intended to encourage collaboration among the services, COCOMs, and other DOD organizations to identify joint solutions to capability gaps, and there are some cases where this has occurred. For example, the Navy submitted a capability proposal through JCIDS to get a precision and landing system in place to avoid delays in delivering its aircraft carriers in development. The lead FCB reviewed the Navy's proposal and recognized that it was similar to a need identified by the Air Force and determined that the Air Force's needs could be met under the same proposal. However, according to JCIDS officials, FCB, COCOM, and other stakeholder reviews have had little influence in promoting joint solutions. Past studies have also raised concerns that the services and the COCOMs do not routinely collaborate to identify possible joint solutions. For example, in 2006 the Army Audit Agency recommended that the Army improve collaboration with the joint community early in the capabilities planning process to improve the quality of its capabilities documents and facilitate more timely reviews of proposals that are submitted into the JCIDS process. In January 2006, the Defense Acquisition Performance Assessment Panel concluded that JCIDS resulted in capabilities that did not meet warfighter needs in a timely manner and recommended that JCIDS be replaced with a COCOM-led requirements process in which the services and defense agencies compete to provide solutions. The Defense Science Board similarly reported that JCIDS has not provided for increased warfighter influence, but instead actually suppresses joint needs in favor of military service interests, and recommended an increase in the formal participation role of the COCOMs in the JCIDS process. The Center for Strategic and International Studies has also pointed out that while the services are responsible for supplying operationally capable armed forces, the COCOMs are responsible for responding to threats and executing military operations. Therefore, it recommended that the Joint Forces Command take the lead in conducting capabilities development planning for the COCOMs and become a formal member of the JROC. By continuing to rely on stovepiped solutions to address capability needs, DOD may be losing opportunities to improve joint warfighting capabilities and reduce the duplication of capabilities in some areas. In January 2006, we reported that military operations continue to be hampered by the inability of communication and weapon systems to operate effectively together on the battlefield. In May 2007, we reported that while the military services have successfully planned and fielded a number of unmanned aerial vehicle systems over the past several years, DOD has struggled to coordinate the development of these systems across the services and ensure that they complement one another and avoid duplicating capabilities. Specifically, despite similarities in proposed capabilities between two key unmanned aerial vehicle systems--the Air Force's Predator program and the Army's Warrior program--the Army awarded a separate development contract to the same contractor producing the Predator. By taking separate tracks to developing these two systems, the Air Force and the Army missed an opportunity to identify potential similarities in their requirements and thereby avoid redundant or non-interoperable systems. Although the Army and Air Force agreed to consider cooperating on the acquisition of the two systems, the services are struggling to agree on requirements. JCIDS is intended to support senior decision makers in identifying and prioritizing warfighting capability needs. As such, it is meant to be an important tool in maintaining a balanced portfolio of acquisition programs that can be executed within available resources. However, the vast majority of proposals completing the JCIDS process are approved--or validated. Adding to a portfolio that already contains more programs than resources can support is likely to perpetuate instability and poor outcomes in weapon system programs. Of the 203 JROC-interest capability proposals (ICDs and CDDs) we reviewed, 140 completed the JCIDS process and were validated. Of the remaining proposals, 57 are still under review, and 6 are considered inactive (see fig. 3). According to a Joint Staff representative, some proposals are returned to sponsors for modifications because the supporting documentation lacked sufficient analysis to justify the capability gap and solutions being presented, or because reviewers raised other technical concerns that needed to be resolved. Returned proposals are usually modified and resubmitted to the JCIDS process. The 6 proposals that are considered inactive were not resubmitted by the sponsors. According to JCIDS officials, proposals are not prioritized across capability and mission areas. Instead, the extent to which any prioritization has occurred within JCIDS has been limited to the key performance parameters or requirements within individual capability proposals. For example, the Special Forces Command wanted to add capabilities to a Navy-sponsored JCIDS proposal--described in a CDD-- for a high-speed intratheater surface lift capability to transport military units and supplies into shallow and remote areas. However, addressing a key capability requested by the Special Forces Command--to land a V-22 aircraft on the surface ship--would have necessitated a major redesign for the proposed Navy ship and delayed providing capabilities to the warfighter by several years. While the JROC agreed that the Special Forces Command's requirement was valid, it decided to approve the Navy capability proposal without the Special Forces Command requirement and requested that a study be undertaken to identify how this requirement could be addressed in the future. The lack of early prioritization of capability needs through JCIDS makes it difficult for DOD to balance its portfolio of weapons programs. Validated proposals tend to gain momentum and win approval to become formal weapon system programs--in part because other reviews are not conducted prior to the start of system development and demonstration, or Milestone B. In prior work, we found that 80 percent of the programs we reviewed entered the acquisition system at Milestone B without a Milestone A or other prior major review. By this time, the military services have already established a budget and formed a constituency for their individual capability needs. Successful commercial companies we have reviewed value and use a disciplined approach to prioritize needs early and often--one that views potential product development programs as related parts of a companywide portfolio. These companies make tough decisions to defer or say no to proposed products and achieve a balanced portfolio--one that matches requirements with resources and weighs near- and long-term needs. Since JCIDS was implemented, the number of major defense acquisition programs in DOD's portfolio has increased from 77 to 93, or by 21 percent. This increase is likely to exacerbate an already sizable disparity between what programs are expected to cost and available funding. The estimated acquisition costs remaining for major weapon system programs increased 130 percent from fiscal year 2000 through fiscal year 2007, while the annual funding for these programs increased by a more modest 67 percent (see fig. 4). During the same time frame, the remaining costs for the major weapon systems in DOD's portfolio went from being about four times greater to almost six times greater than annual funding. Shortfalls as significant as this are likely to be fiscally unsustainable. As we recently reported, to compensate for funding shortfalls, DOD has made unplanned and inefficient program adjustments--including shifting funding between programs, deferring work and associated costs into the future, or cutting procurement quantities. Such reactive practices contribute to the instability of many programs and undesirable acquisition outcomes. The JCIDS process may lack the efficiency and agility needed to respond to warfighter needs--especially those that are near term--because the review and validation of capability proposals can take a significant amount of time. A proposal submitted to JCIDS can go through several review and comment resolution phases before consensus is reached on the proposal, and through several levels of approval before the JROC validates the proposal. Our review of capability proposals submitted to JCIDS from fiscal years 2003 through 2008 found that review and validation takes on average 8 to 10 months (see fig. 5). JCIDS and service officials also indicated that prior to submitting a JCIDS proposal, the sponsor can take a year or more to complete a capabilities-based assessment and get a proposal approved. In other words, 2 years or more can elapse from the time a capability need is identified by a sponsor to the time the capability is validated by the JROC. Given the size and complexity and level of funding that will be committed to many of these capability needs, the length of the process may be warranted. However, concerns have been raised by officials within the department about how responsive JCIDS can be--concerns that may prompt some sponsors to bypass the process. According to some department officials, too much time is spent reviewing individual capability proposals with little evidence of increased attention to prioritization or jointness. Senior COCOM officials we spoke with also stated that the JCIDS process is not conducive to addressing near-term requirements--the primary focus of the COCOMs--and that the lengthy nature of the JCIDS process makes it difficult to adjust to emerging needs. In one case, the Army used extraordinary measures, going outside DOD's normal requirements, acquisition, and budgeting process to acquire and field the Joint Network Node-Network (JNN-N)--a $2 billion, commercial- based system designed to improve satellite communication capabilities for deployed military units in Afghanistan and Iraq. While JNN-N provided enhanced capability for the warfighter, the work-around allowed the Army to bypass the management and oversight typically required of DOD programs of this magnitude. In 2005, DOD established the Joint Urgent Operational Need (JUON) process to respond to urgent needs associated with combat operations in Afghanistan and Iraq and the war on terror. The JUON process is intended to prevent mission failure or loss of life and is generally considered to be more efficient than JCIDS for meeting urgent needs. However, short-term needs that do not qualify as urgent operational needs--such as JNN-N--must still go through JCIDS. DOD lacks the necessary framework for more effective implementation of JCIDS. The department has not yet developed a structured, analytical approach to prioritize capability proposals submitted to the JCIDS process. Additionally, the FCBs, which were established to manage the JCIDS process, do not have the capacity to effectively take the lead in prioritizing capability needs. Without an approach and entity in charge to determine what capabilities are needed, all proposals tend to be treated as priorities within the JCIDS process. The Joint Staff has recently taken steps to improve the prioritization of capability needs across DOD. DOD's failure to prioritize capability needs through the JCIDS process is due in part to the lack of an analytic framework to determine and manage capability needs from a departmentwide perspective. To date, JCIDS largely responds to capability proposals that are submitted by component sponsors on a case-by-case basis. Lacking a more proactive approach, JCIDS has been ineffective at integrating and balancing needs from the military services, COCOMs, and other defense components. DOD has several different approaches to identify capability needs but they do not appear to be well integrated with JCIDS. For example, each COCOM submits annually to the Chairman of the Joint Chiefs of Staff an integrated priority list, which defines the COCOM's highest-priority capability gaps for the near term, including shortfalls that may adversely affect COCOM missions. However, it is unclear to what extent integrated priority lists or other approaches, such as JUONs and lessons learned from recent and ongoing military operations, inform the JCIDS process. According to officials from several COCOMs, needs identified through integrated priority lists are not typically developed into JCIDS capability proposals. These officials indicated that to be successful in getting a need addressed, they have to build a coalition with one or more services that may have similar needs. At the same time, the military services continue to drive the determination of capability needs, in part because they retain most of DOD's analytical capacity and resources for requirements development. According to Air Force and Army officials, they have several hundred staff involved in capabilities planning and development. In contrast, the FCBs are relatively small, with the majority having 12 or fewer staff members. FCB officials noted that the assessments that must be conducted to support a capability proposal can cost several million dollars and require several staff years of effort. Consequently, the FCBs only sponsored five capability development proposals over the last 5 years and generally devote most of their time and effort to reviewing documents submitted by sponsors and providing recommendations on them to the JROC. In March 2008, we reported that the FCB responsible for intelligence, surveillance, and reconnaissance capabilities lacked sufficient resources to engage in early coordination with sponsors and review the sponsors' capability assessments. Representatives from several of the FCBs also indicated that they lack the expertise to effectively weigh in on the technical feasibility and costs of sponsors' capability proposals and identify trade-offs that may be needed to modify proposals. A study performed under contract for the Joint Staff in July 2007 also found that some FCBs were under resourced for performing their duties. COCOMs, particularly the regional commands, also lack analytic capacity and resources to become more fully engaged in JCIDS--either by developing their own capability assessments or participating in reviews and commenting on proposals submitted to JCIDS. Some COCOM officials pointed out that because of their limited resources, they must pick and choose capability proposals to get involved in. Several studies have recommended that DOD increase joint analytic resources for a less stovepiped understanding of warfighting needs. In 2006, the JROC developed a most pressing military issues list in an effort to identify the most important high-level issues facing the department and thereby provide better guidance to sponsors and FCBs on what capability assessments to focus on. In addition, the JROC directed the FCBs to develop and implement an approach to synthesize the COCOMs' annual integrated priority lists and bring greater focus to prioritizing joint capability needs. This resulted, in 2007, in a consolidated list of capability needs. The JROC has also increased its involvement with the COCOMs through regular trips and meetings to discuss capability needs and resourcing issues. According to joint staff officials, these efforts have helped the JROC gain an increased understanding of the COCOMs' needs as well as provided the COCOMs with a forum for communicating their needs. Officials from several COCOMs noted that many of the near- term needs reflected in their integrated priority lists are now being addressed more effectively through annual budget adjustments and force structure changes. At the direction of the Deputy Secretary of Defense, the Joint Staff has also recently begun a project to provide a more systematic approach to prioritizing capability areas and gaps that need to be addressed across the department. This effort is intended to identify the near-, mid-, and long- term needs of the military services and other defense components and synthesize them with the needs of the COCOMs. The project's first step, which is expected to be completed by the Joint Staff by the end of 2008, focuses on establishing what capabilities are most important to carrying out military operations either now or in the future. Capability areas will then be assessed to identify and prioritize where deficiencies or gaps in capabilities exist, and where additional capabilities may or may not be needed. The framework being used in the project is similar to one that the Institute for Defense Analysis developed with the U.S. Pacific Command a few years ago to strengthen the analytical basis for the integrated priority lists. The framework used by U.S. Pacific Command links capability needs to elements of the operational plans that the command is responsible for executing. Capability needs are determined by consolidating the views of operational planners, capability developers, and other subject matter experts from within the command. If the project achieves expected results, the FCBs--and ultimately, the JROC--would be able to screen new capabilities proposals during the JCIDS review process while having knowledge of the capacity and sufficiency of existing requirements. According to Joint Staff officials, however, there are key challenges to implementing the project and coming up with a credible prioritization of capability needs. A major challenge will be to determine how best to integrate service and COCOM capability perspectives that are typically based on different roles, missions, and time frames. The military services tend to address capabilities in terms of defense planning scenarios that identify the mid- and long-term challenges the department must be prepared to handle. This has led to the development of capability proposals that advocate the need for the "next generation" of weapon system capability. In contrast, the COCOMs tend to address capabilities in terms of being able to execute operational plans they have developed for assigned missions in their geographic areas of responsibility. As such, the COCOMs' focus has been on current and near- term needs. The Center for Strategic and International Studies and others have advocated that mid- and long-term capability planning capacity is needed for COCOMs and that the functional COCOMs should perhaps play a stronger role in representing the regional COCOMs. Another challenge will be in developing appropriate criteria and measures for identifying capability gaps and determining the relative importance of these needed capabilities. Such criteria and measures have generally been lacking in the JCIDS process. Adjustments have also been made to try to streamline the JCIDS process to reduce the time it typically takes to validate capability proposals. One recent change to the process means a sponsor does not have to submit a CPD if the program is on track and there are no changes since the CDD was validated. In addition, the Joint Staff has been tracking the amount of time it takes to get through the various review and comment phases of JCIDS and implemented measures to speed up the adjudication of reviewers' comments on capability proposals. As a result, there has been some improvement in reducing the time it takes to validate capability proposals. For example, we found that capability proposals (ICDs and CDDs) took about 9.5 months to be validated during 2003 to 2005 compared to about 8 months during 2006 to 2008. The Joint Staff has also recognized that the definitions used to determine what capability proposals must be brought to the JROC for approval is too broad and some proposals could be delegated to other authorities for validation. The definitions are being modified in part to focus JROC oversight on proposals that may truly warrant JROC involvement. Furthermore, the JROC is considering delegating authority for some JROC-interest capability proposals to lower levels, such as the Joint Capabilities Board and the FCBs. By establishing JCIDS, DOD has, to some extent, recognized the need to better ensure that joint warfighting needs can be addressed within fiscal resource constraints. However, the process has not proven to be an effective approach to increase the level of joint participation or to prioritize the capability needs of the services, COCOMs, and other DOD components. While DOD has begun initiatives to improve JCIDS, the department continues to lack an analytic approach and an appropriate alignment of resources to balance competing capability needs. Consequently, DOD continues to start more weapons programs than current and likely future financial resources can support and miss opportunities to improve joint warfighting capabilities. Until JCIDS evolves from a service-centric process to a process that balances service and joint near-, mid-, and long-term capability needs, DOD will continue to contend with managing a portfolio that does not match available resources and risk failing to provide joint capabilities needed by the warfighter. We recommend that the Secretary of Defense direct the Chairman of the Joint Chiefs of Staff to develop an analytic approach within JCIDS to better prioritize and balance the capability needs of the military services, COCOMs, and other defense components. The Joint Staff should consider whether current efforts--particularly, the capabilities prioritization project--should be adopted as a framework for this approach. The approach should also establish appropriate criteria and measures for identifying capability gaps and determining the relative importance of near-, mid-, and long-term capability needs. Ultimately, the approach should provide a means to review and validate proposals more efficiently and ensure that the most important capability needs of the department are being addressed. We also recommend that the Secretary of Defense determine and allocate appropriate resources for joint capabilities development planning. In so doing, the Secretary should consider whether the responsibility and capacity of the COCOMs and FCBs to conduct joint capabilities development planning should be increased, whether one or more of the functional COCOMs should be given the responsibility and capacity to conduct joint capabilities development planning, and whether resources currently residing within the military services for capabilities development planning should be shifted to the COCOMs and FCBs. In written comments on a draft of this report, DOD partially concurred with our first recommendation and concurred with the second recommendation. DOD's partial concurrence with our first recommendation--that an analytic approach be developed within JCIDS to better prioritize and balance the capability needs of the military services, COCOMs, and defense components--is based on the premise that prioritization occurs through several existing processes in the department, and that JCIDS is not intended to be the primary means of prioritizing. DOD's concurrence with our second recommendation--to determine and allocate appropriate resources for joint capabilities development planning--is based on its position that resources are adequate and have been allocated appropriately. The department's response to both of our recommendations leads us to conclude that it does not see a need to improve its ability to prioritize and balance joint capability needs. In commenting on our first recommendation, DOD pointed out that identifying, prioritizing, and balancing joint capability needs occurs through multiple processes both within and outside of JCIDS, such as COCOM integrated priority lists and JUONs, as well as through the department's budgeting and acquisition systems. We acknowledge that these DOD processes play a role in delivering capabilities to the warfighter; however, as we note in our report, these processes do not appear to be well integrated with JCIDS. Regardless, DOD established JCIDS as the principal process to support senior decision makers in identifying, assessing, and prioritizing joint warfighting needs. The process was intended to move the department away from a service-centric, stovepiped approach to a joint approach that helps ensure that COCOMs are provided the capabilities needed to carry out military operations. However, many of the COCOMs do not believe that their needs are sufficiently addressed through JCIDS and there is no evidence that the process has achieved its intended goals. In fact, capability proposals submitted through JCIDS are not prioritized and largely continue to reflect insular interests. Unless an analytic approach to prioritize and balance the capability needs of the services, COCOMs, and other defense components is established, DOD will continue losing opportunities to strengthen joint warfighting capabilities and constrain its portfolio of weapon system programs. Given that JCIDS was established for this purpose, it seems logical to build such an approach within JCIDS. In concurring with our second recommendation, DOD asserts that the resources currently allocated for joint capabilities development planning are appropriate. However, while the FCBs may be sufficiently resourced to review capability proposals submitted by sponsors into JCIDS, they lack the resources and capacity to play a leading role in defining and prioritizing joint capability needs for their functional capability areas. In addition, while the JCIDS process provides opportunities for their participation, the COCOMs lack the resources and analytic capacity to conduct their own capability assessments or review proposals submitted by other sponsors. Several other recent studies similarly indicated that the COCOMs are underrepresented in the department's efforts to determine joint capabilities. We continue to believe that a better alignment of resources for conducting joint capabilities planning--among the services, FCBs, and COCOMs--would help the department to more effectively prioritize and balance competing capability needs. DOD also provided information about recent initiatives that are being implemented to improve the JCIDS, budgeting, and acquisition processes, and to strengthen the involvement of the joint community in determining capability needs. For example, since completing our draft report, the JROC moved to give the COCOMs a greater voice in the JCIDS process by delegating responsibility for validating requirements in the command and control functional area to the Joint Forces Command. While this initiative and others appear promising, as DOD notes, it is too early to determine whether the full benefits of these initiatives will be realized. In addition, DOD commented that our report did not sufficiently recognize the extent of joint participation that occurs through the JCIDS process. DOD stated that many of the services' proposals are in direct response to capability gaps identified by the COCOMs and that the JCIDS process is structured to provide the joint community multiple opportunities and time to review proposals and ensure that they correctly state the needs of the joint warfighter. While we agree that some proposals submitted to JCIDS do address joint needs, the services still largely drive the vast majority of capability needs that are pursued in the department. Furthermore, once proposals are submitted to JCIDS, there is little evidence of increased attention to prioritization or jointness that results from the review of these proposals. DOD's letter, with its written comments and description of new initiatives, is reprinted in appendix IV. We are sending copies of this report to the Secretary of Defense; the Secretaries of the Air Force, Army, and Navy; and the Director of the Office of Management and Budget. We will provide copies to others on 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 about this report or need additional information, please contact me at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report were John Oppenheim, Assistant Director; John Krump; Sean Seales; Karen Sloan; and Don Springman. To determine whether the Joint Capabilities Integration and Development System process has achieved its objective to prioritize joint warfighting needs, we analyzed information and capability documents contained in the Joint Staff's Knowledge Management/Decision Support tool compiled since the inception of JCIDS. First, we determined how many capability documents--initial capabilities documents (ICD) and capability development documents (CDD)--were designated "JROC-interest," which are defined as all Acquisition Category (ACAT) I programs and other programs whose capabilities have a significant impact on joint warfighting. We identified a total of 203 capability documents--90 ICDs and 113 CDDs. We then analyzed and determined whether the capability documents were sponsored by the joint community, military services, and other Department of Defense (DOD) agencies. In addition, we determined which documents had completed the JCIDS process and been validated, which had completed the process and are inactive, and which are still under review. We also determined the amount of time required for capability documents to complete the JCIDS process and the amount of time other documents have remained in the process. We also reviewed Joint Requirements Oversight Council (JROC) memorandums validating requirements documents to determine if requirements were assigned a priority upon validation. Further, we reviewed budgeted and projected program costs for major defense acquisitions reported by DOD's Selected Acquisition Report summary tables for the years 2000 to 2007, covering periods before and after the inception of JCIDS. To identify factors affecting DOD's ability to effectively implement JCIDS, we analyzed the existing structure of the JCIDS process and evaluated the sufficiency of the Joint military community workforce for preparing and reviewing JCIDS requirements documents. We provided written questionnaires to functional capability boards (FCB) to determine staffing and resource levels. We also evaluated recent DOD initiatives designed to improve the JCIDS process. In researching both of our primary objectives, we interviewed officials from the Joint Staff; DOD's FCBs; U.S. Special Operations Command; U.S. Joint Forces Command; U.S. Pacific Command; U.S. Central Command; Department of the Air Force; Department of the Navy; and Department of the Army. We reviewed statements made by DOD officials in prior congressional testimony. We reviewed prior GAO and other audit reports as well as DOD-sponsored studies related to JCIDS that were conducted by the Center for Strategic and International Studies, the Institute for Defense Analyses, the Defense Acquisition Performance Assessment Project, the Defense Science Board, and Booz Allen Hamilton. We reviewed guidance and regulations issued by the Joint Staff, the military services, and DOD, as well as other DOD-produced documentation related to JCIDS. We conducted this performance audit from May 2007 to August 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. Nine FCBs have been established by the JROC to evaluate issues impacting their respective functional areas and provide subject matter expertise to the JROC. The assigned functional areas and sponsoring organizations of the FCBs are shown in table 1. FCBs assist the JROC in overseeing capabilities development within JCIDS, to include assessment of ICDs, CDDs, and CPDs. FCBs can only make recommendations, and are not empowered to approve or disapprove of proposals. There are currently 10 unified combatant commands (COCOM) serving as DOD's operational commanders--6 with geographic responsibilities and 4 with functional responsibilities. The 6 COCOMs with geographic responsibilities are U.S. Africa Command, U.S. Central Command, U.S. European Command, U.S. Northern Command, U.S. Pacific Command, and U.S. Southern Command. Their geographic areas of responsibility are shown in figure 6. The four functional COCOMs are U.S. Joint Forces Command, which engages in joint training and force provision; U.S. Special Operations Command, which trains, equips, and deploys special operations forces to other COCOMs and leads counterterrorist missions worldwide; U.S. Strategic Command, whose missions include space and information operations, missile defense, global command and control, intelligence, surveillance, and reconnaissance, strategic deterrence, and integration and synchronization of DOD's departmentwide efforts in combating weapons of mass destruction; and U.S. Transportation Command, which provides air, land, and sea transportation for DOD.
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Increasing combat demands and fiscal constraints make it critical for the Department of Defense (DOD) to ensure that its weapon system investments not only meet the needs of the warfighter, but make the most efficient use of available resources. GAO's past work has shown that achieving this balance has been a challenge and weapon programs have often experienced cost growth and delayed delivery to the warfighter. In 2003, DOD implemented the Joint Capabilities Integration and Development System (JCIDS) to prioritize and ensure that the warfighter's most essential needs are met. In response to Senate Report 109-69, GAO reported in March 2007 that DOD lacks an effective approach to balance its weapon system investments with available resources. This follow-on report focuses on (1) whether the JCIDS process has achieved its objective to prioritize joint warfighting needs and (2) factors that have affected DOD's ability to effectively implement JCIDS. To conduct its work, GAO reviewed JCIDS guidance and capability documents and budgetary and programming data on major weapon systems, and interviewed DOD officials. The JCIDS process has not yet been effective in identifying and prioritizing warfighting needs from a joint, departmentwide perspective. GAO reviewed JCIDS documentation related to proposals for new capabilities and found that most--almost 70 percent--were sponsored by the military services, with little involvement from the joint community--including the combatant commands (COCOMs), which are largely responsible for planning and carrying out military operations. By continuing to rely on capability proposals that lack a joint perspective, DOD may be losing opportunities to improve joint warfighting capabilities and reduce the duplication of capabilities in some areas. In addition, virtually all capability proposals that have gone through the JCIDS process since 2003 have been validated--or approved. DOD continues to have a portfolio with more programs than available resources can support. For example, the remaining costs for major weapon system programs in DOD's portfolio went from being about four times greater to almost six times greater than annual funding available during fiscal year 2000 through 2007. The JCIDS process has also proven to be lengthy--taking on average up to 10 months to validate a need--which further undermines efforts to effectively respond to the needs of the warfighter, especially those that are near-term. DOD lacks an analytical approach to prioritize joint capability needs and determine the relative importance of capability proposals submitted to the JCIDS process. Further, the functional capabilities boards, which were established to manage the JCIDS process and facilitate the prioritization of needs, have not been staffed or resourced to effectively carry out these duties. Instead, the military services retain most of DOD's analytical capacity and resources for requirements development. The Joint Staff recently initiated a project to capture the near-, mid-, and long-term needs of the services and other defense components, and to synthesize them with the needs of the COCOMs. However, DOD officials told us that determining how best to integrate COCOM and service capability perspectives will be challenging because of differences in roles, missions, and time frames. Efforts have also begun to streamline the process and reduce the time it takes to validate proposals.
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The government has been providing housing assistance in rural areas since the 1930s. At that time, most rural residents worked on farms, and rural areas were generally poorer than urban areas. For example, in the 1930s very few rural homes had electricity or indoor plumbing. Accordingly, the Congress authorized housing assistance specifically for rural areas and made USDA responsible for administering it. However, rural demographic and economic characteristics have greatly changed over time. By the 1970s virtually all rural homes had electricity and indoor plumbing. Today, less than 2 percent of the nation's population lives on farms, and advances in transportation, technology, and communications have - or have the potential to - put rural residents in touch with the rest of the nation. The federal role has also evolved, with HUD, the Department of Veterans Affairs (VA), and state housing finance agencies becoming significant players in administering housing programs. Homeownership in the United States is at an all-time high with 68 percent of the nation's households owning their own home. In rural areas, the homeownership rate is even higher -- 76 percent. However, according to the Housing Assistance Council, affordability is the biggest problem facing low-income rural households. Rural housing costs have increased and income has not kept pace, especially for rural renters who generally have lower incomes than owners. As a result, rural renters are more likely to have affordability problems and are twice as likely as rural owners to live in substandard housing. Although the physical condition of rural housing has greatly improved over time, it still lags somewhat behind that of urban housing. The most severe rural housing quality problems are found farthest from the nation's major cities, and are concentrated in four areas in particular: the Mississippi Delta, Appalachia, the Colonias on the Mexican border, and on Indian trust land. Minorities in these areas are among the poorest and worst housed groups in the nation, with disproportionately high levels of inadequate housing conditions. Migrant farm workers in particular have difficulty finding affordable, livable housing. The higher incidence of housing quality problems, particularly in these four areas, offsets many of the advantages of homeownership, including the ability to use homes as investments or as collateral for credit. USDA's Farmers Home Administration managed rural housing programs and farm credit programs until reorganization legislation split these functions in 1994. Farm credit programs were then shifted to the new Farm Service Agency. Housing programs were moved to the newly created RHS in the new Rural Development mission area which was tasked with helping improve the economies of rural communities. RHS currently employs about 5,500 staff to administer its single family, multifamily, and community facilities programs. RHS's homeownership programs provide heavily subsidized direct loans to households with very low and low incomes, guaranteed loans to households with low and moderate incomes, and grants and direct loans to low-income rural residents for housing repairs. Multifamily programs provide direct and guaranteed loans to developers and nonprofit organizations for new rental housing that is affordable to low and moderate income tenants; grants and loans to public and nonprofit agencies and to individual farmers to build affordable rental housing for farm workers; housing preservation grants to local governments, nonprofit organizations, and Native American tribes; and rental assistance subsidies that are attached to about half the rental units that RHS has financed. In addition, RHS administers community facilities programs that provide direct and guaranteed loans and grants to help finance rural community centers, health care centers, child care facilities, and other public structures and services. For fiscal year 2003, RHS received an appropriation of $1.6 billion. Of this amount, the largest share, $721 million, is for its rental assistance program. Congress also authorized about $4.2 billion for making or guaranteeing loans, primarily for guaranteeing single-family loans. RHS oversees an outstanding single-family and multifamily direct loan portfolio of about $28 billion. Table 1 lists RHS's programs, briefly describes them, and compares the spending for them in fiscal year 1999 with the spending for them in fiscal years 1979 and 1994. The table also shows that, although RHS's single and multifamily guaranteed programs are relatively new, by 1999 RHS had guaranteed more single- and multifamily loans than it made directly. While RHS administers its programs in rural areas, HUD, VA, and state housing finance agencies provide similar programs nationwide, including assistance to households that may be eligible for RHS programs in rural areas. For example, RHS's single-family loan guarantee program serves moderate-income homebuyers as does the Federal Housing Administration's (FHA) much larger single-family insurance program. VA and most state housing finance agencies also offer single-family loan programs. In the multifamily area, HUD's multifamily portfolio is similar to RHS's multifamily portfolio and HUD's project-based section 8 program operations parallel RHS's rental assistance program. Further, in contrast to RHS, HUD has more established systems for assessing the quality of its multifamily portfolio through its Real Estate Assessment Center (REAC) and for restructuring financing and rental assistance for individual properties through its Office of Multifamily Housing Assistance Restructuring (OMHAR). Given the diminished distinctions between rural and urban areas today, improvements in rural housing quality and access to credit, and RHS's increasing reliance on guaranteed lending and public/private partnerships, our September 2000 report found the federal role in rural housing is at a crossroads. We listed arguments for and against fundamentally changing the programs' targeting, subsidy levels, and delivery systems, as well as merging RHS's programs with HUD's or other agencies' comparable programs. A number of arguments have been presented to support continuing RHS's housing programs separately from HUD and other agencies or for maintaining a separate system for delivering these programs, including the following: Some rural residents need the close supervision offered by RHS local offices because they do not have access to modern telecommunications or other means of obtaining information on affordable housing opportunities; Rural borrowers often need a local service office familiar with their situation in the first year of a loan; Rural areas could lose their federal voice in housing matters; Rural areas could lose the benefits of the lower rates and terms RHS's direct and guaranteed loan programs currently offer; and HUD and other potential partners have not focused on rural areas. Proponents of arguments for merging RHS's housing programs with other housing programs or not maintaining a separate system for delivering housing programs in rural areas present a different set of arguments: RHS's field role has changed from primarily originating and servicing direct loans to leveraging deals with partner organizations; In some states, local banks, nonprofit organizations, social workers, and other local organizations are doing much of the front-line work with rural households that was previously done by RHS staff; The thousands of RHS staff with local contacts could provide a field presence for HUD, and other public partners, applying their leveraging and partnering skills to all communities; and RHS and HUD could combine management functions for their multifamily portfolios that are now provided under separate systems. We also noted that without some prodding, the agencies are not likely to examine the benefits and costs of merging as an option. As a first step toward achieving greater efficiency, we suggested that the Congress consider requiring RHS and HUD to explore the potential benefits of merging similar programs, such as the single-family insured lending programs and the multifamily portfolio management programs, taking advantage of the best practices of each and ensuring that targeted populations are not adversely affected. Since we issued our report in September 2000, it appears that RHS and FHA have shared some mutually beneficial practices. First, RHS's single- family guaranteed program plans to introduce its automated underwriting capabilities through technology that FHA has already developed and has agreed to share with RHS. Second, RHS, FHA, and VA have collaborated in developing common reporting standards for tracking minority and first- time homeownership statistics. Third, we understand that there have been discussions between RHS and HUD staff on developing a model to restructure RHS section 515 mortgages using techniques that HUD has learned through restructuring similar HUD section 236 mortgages. Our September 2000 report also identified a number of actions that RHS officials and others have identified that could increase the efficiency of existing rural housing programs, whether or not they are merged. I will limit my discussion today to two issues that deal with RHS's field structure. The first issue involves state delivery systems. When state Rural Development offices were given the authority to develop their own program delivery systems as part of the 1994 reorganization, some states did not change, believing that they needed to maintain a county-based structure with a fixed local presence to deliver one-on-one services to potential homeowners. Other states tried innovative, less costly approaches to delivering services, such as consolidating local offices to form district offices and using traveling loan originators for single-family programs. However, RHS has undergone a major shift in mission during the past few years. RHS is still a lending agency like its predecessor, the Farmers Home Administration, but it now emphasizes community development, and uses its federal funding for rural communities to leverage more resources to develop housing, community centers, schools, fire stations, health care centers, child care facilities, and other community service buildings. Some state Rural Development officials we spoke with questioned the efficiency and cost-effectiveness of maintaining a county- based field structure in a streamlined environment where leveraging, rather than one-on-one lending, has become the focus of the work. For example, the shift in emphasis from direct to guaranteed single-family lending moved RHS from relying on a labor intensive loan generation process to one that relies on private lenders to underwrite loans. When we performed our audit work in 2000 we found that Mississippi, which maintains a county-based Rural Development field structure, had more staff and field offices than any other state but the next to lowest productivity as measured by dollar program activity per staff member. Ohio, however, which ranked fifth in overall productivity, operated at less than one-fifth of Mississippi's cost per staff member. We recognize that it is more difficult to underwrite single-family loans in the Mississippi Delta and other economically depressed areas than in rural areas generally, and Mississippi does have a substantial multifamily portfolio. Nevertheless, the number of field staff in Mississippi far exceeded that in most other states. Ohio, whose loan originators were based in four offices and traveled across the state with laptop computers, ranked seventh in the dollar value of single-family guaranteed loans made and fifth in the dollar amount per staff member of direct loans made. Ohio had also done a good job of serving all of its counties, while Mississippi had experienced a drop in business in the counties where it had closed local offices. Ohio's travel and equipment costs had increased with the use of traveling loan originators. The Maine Rural Development office had also fundamentally changed its operational structure, moving from 28 offices before the reorganization to 15 afterwards, and in 2000 it operated out of 3 district offices. The state director at the time, who had also headed the Farmers Home Administration state office in the 1970s, said that he had headed the agency under both models and believed the centralized system to be much more effective. He added that under the new structure, staff could no longer sit in the office waiting for clients to come to them but had to go to the clients. He also maintained that a centralized structure was better suited to building the partnerships with real estate agents, banks, and other financial institutions that had become the core element of RHS's work. The second issue involves the location of field offices. Consistent with its 1994 reorganization legislation, USDA closed or consolidated hundreds of county offices and established "USDA service centers" with staff representing farm services, conservation, and rural development programs. However, the primary goal of the task team that designed the service centers was to place all the county-based agencies together, particularly those that dealt directly with farmers and ranchers, to reduce personnel and overhead expenses by sharing resources. But while the farm finance functions from the old Farmers Home Administration fit well into the new county-based Farm Service Agency, the housing finance functions that moved to the new state Rural Development offices were never a natural fit in the centers. The decision to collocate Rural Development and Farm Service offices was based on the fact that Rural Development had a similar county-based field structure and the Department needed to fill space in the new service centers. Collocating Rural Development and Farm Service offices designed to serve farmers and ranchers makes less sense today, especially in states where Rural Development operations have been centralized. How to deal with the long-term needs of an aging portfolio is the overriding issue for section 515 properties. In the program's early years, it was expected that the original loans would be refinanced before major rehabilitation was needed. However, with prepayment and funding restricted, this original expectation has not been realized, and RHS does not know the full cost of the long-term rehabilitation needs of the properties it has financed. RHS field staffs perform annual and triennial property inspections that identify only current deficiencies rather than the long-term rehabilitation needs of the individual properties. As a result, RHS does not know whether reserve accounts will cover long-term rehabilitation needs. Without a mechanism to prioritize the portfolio's rehabilitation needs, including a process for ensuring the adequacy of individual property reserve accounts, RHS cannot be sure it is spending its limited rehabilitation funds as effectively as possible and cannot tell Congress how much funding it will need to cover the portfolio's long-term rehabilitation costs. RHS's state personnel annually inspect the exterior condition of each property financed under the section 515 program and conduct more detailed inspections every 3 years. However, according to RHS guidelines, the inspections are intended to identify current deficiencies, such as cracks in exterior walls or plumbing problems. Our review of selected inspection documents in state offices we visited confirmed that the inspections are limited to current deficiencies. RHS headquarters and state officials confirmed that the inspection process is not designed to determine and quantify the long-term rehabilitation needs of the individual properties. RHS has not determined to what extent properties' reserve accounts will be adequate to meet long-term needs. According to RHS representatives, privately owned multifamily rental properties often turn over after just 7 to 12 years, and such a change in ownership usually results in rehabilitation by the new owner. However, given the limited turnover and funding constraints, RHS properties primarily rely on reserve accounts for their capital and rehabilitation needs. RHS officials are concerned that the section 515 reserve accounts often are not adequate to fund needed rehabilitation. RHS and industry representatives agree that the overriding issue for section 515 properties is how to deal with the long-term needs of an aging portfolio. About 70 percent of the portfolio is more than 15 years old and in need of repair. Since 1999, RHS has allocated about $55 million in rehabilitation funds annually, but owners' requests for funds to meet safety and sanitary standards alone have totaled $130 million or more for each of the past few years. RHS headquarters has encouraged its state offices to support individual property owners interested in undertaking capital needs assessments and has amended loan agreements to increase their rental assistance payments as necessary to cover the future capital and rehabilitation needs identified in the assessments. However, with varying emphasis by RHS state offices and limited rental assistance funding targeted for rehabilitation, the assessments have proceeded on an ad hoc basis. As a result, RHS cannot be sure that it is spending these funds as cost-effectively as possible. To better ensure that limited funds are being spent as cost-effectively as possible, we recommended that USDA undertake a comprehensive assessment of the section 515 portfolio's long-term capital and rehabilitation needs, use the results of the assessment to set priorities for the portfolio's immediate rehabilitation needs, and develop an estimate for Congress on the amount and types of funding required to deal with the portfolio's long-term rehabilitation needs. USDA agreed with the recommendation and requested $2 million in the President's 2003 budget to conduct a comprehensive study. RHS staff drafted a request for proposal that would have contracted out the study, but the Undersecretary for Rural Development chose to lead the study himself. Plans are to develop an inspection and rehabilitation protocol by February 2004 on the basis of an evaluation of a sample of properties. Finally, I would like to mention some work we have begun on the Section 521 rental assistance program. With an annual budget of over $700 million, the rental assistance program is the largest line item appropriation to the Rural Housing Service. This is a property-based subsidy that provides additional support to units created through the Section 515 multifamily and farm labor housing programs. RHS provides this subsidy to property owners through 5-year contracts. The objectives for our current work are to review (1) how RHS estimates the current and future funding needs of its Section 521 rental assistance program; (2) how RHS allocates the rental assistance; and (3) what internal controls RHS has established to monitor the administration of the rental assistance program. We anticipate releasing a report on our findings in February of 2004. Mr. Chairman, this concludes my prepared remarks. I would be pleased to answer any questions you or any other members of the Committee may have. For questions regarding this testimony, please contact William B. Shear on (202) 512-4325 or at [email protected], or Andy Finkel on (202) 512-6765 or at [email protected]. Individuals making key contributions to this testimony included Emily Chalmers, Rafe Ellison, and Katherine Trimble. 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.
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Federal housing assistance in rural America dates back to the 1930s, when most rural residents worked on farms. Without electricity, telephone service, or good roads connecting residents to population centers, residents were comparatively isolated and their access to credit was generally poor. These conditions led Congress to authorize separate housing assistance for rural residents, to be administered by USDA. Over time, the quality of the housing stock has improved and credit has become more readily available in rural areas. Also, advances in transportation, computer technology, and telecommunications have diminished many of the distinctions between rural and urban areas. These changes call into question whether rural housing programs still need to be maintained separately from urban housing programs, and whether RHS is adapting to change and managing its resources as efficiently as possible. Our testimony is based on two reports--the September 2000 report on rural housing options and May 2002 report on multifamily project prepayment and rehabilitation issues. GAO found that while RHS has helped many rural Americans achieve homeownership and has improved the rural rental housing stock, it has been slow to adapt to changes in the rural housing environment. Also, RHS has failed to adopt the tools that could help it manage its housing portfolio more efficiently. Specifically, dramatic changes in the rural housing environment since rural housing programs were first created raise questions as to whether separately operated rural housing programs are still the best way to ensure the availability of decent, affordable rural housing. Overlap in products and services offered by RHS, HUD, and other agencies has created opportunities for merging the best features of each. Even without merging RHS's programs with HUD's or those of other agencies, RHS could increase its productivity and lower its overall costs by centralizing its rural delivery structure. RHS does not have a mechanism to prioritize the long-term rehabilitation needs of its multifamily housing portfolio. As a result, RHS cannot be sure it is spending limited rehabilitation funds as effectively as possible and cannot tell Congress how much funding it will need in the future.
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In August 2015, we reported that USCIS had identified fraud and national security risks in the EB-5 Program in various assessments it conducted over time and in collaboration with its interagency partners. For example, in 2012, USCIS met with interagency partners and National Security Staff to assess fraud and national security risks in the EB-5 Program. An internal memo discussing this effort also highlighted steps to enhance the program's ability to mitigate fraud such as through improved collaboration with the SEC and the FBI. Further, later in 2012, USCIS worked with FBI and the Department of Treasury Financial Crimes Enforcement Network, among others, to assess the benefits of incorporating enhanced security screenings to improve its vetting of EB-5 Program petitioners, including the need to provide dedicated fraud personnel to the EB-5 Program, according to FDNS personnel. Most recently, in early 2015, DHS's Office of Intelligence and Analysis prepared a classified report, which updated the program's 2012 assessment of the fraud risks to the EB-5 Program. USCIS officials said that they also identify potential fraud risks in the EB-5 Program through their day-to-day oversight work, and that law enforcement agencies such as HSI, the SEC, and the FBI may also uncover fraud through their own investigative efforts and may share the information with USCIS, as appropriate. Although the risk assessments conducted by USCIS and other agencies have helped provide information to USCIS to better understand and manage risks to the EB-5 Program, these assessments were onetime exercises, and, as we reported in August 2015, USCIS did not have documented plans to conduct regular future risk assessments of the program because, according to USCIS officials, the agency would perform them on an "as needed" basis. However, FDNS officials noted that fraud risks and schemes in the EB-5 Program were constantly evolving, and stated that the office regularly identifies new fraud schemes and that they must work to stay on top of emerging issues. We also reported that the EB-5 program has grown substantially over time--the total number of EB-5 visas issued increased from almost 3,000 in fiscal year 2011 to over 9,000 in fiscal year 2014, according to State data, which creates additional opportunities for fraud. According to the risk assessments and FDNS officials, the EB-5 Program possesses several risks that are generally not present in other types of immigration programs. Specifically, a senior FDNS official noted that, as is the case with other immigration benefits, EB-5 adjudications center on the eligibility of the petitioner or applicant, however, the EB-5 Program also has an investment component that creates increased program complexity and the potential for fraud risks. Fraud risks which USCIS and other agencies have identified for the EB-5 Program included those related to both the investors and regional centers, such as the following. Uncertain source of immigrant investor funds. USCIS's 2012 risk assessment identified the source of EB-5 petitioner funds as an area at risk for fraud. As previously discussed, to be eligible for the EB-5 Program, immigrant investors must invest a minimum of $1 million--or $500,000 in a targeted employment area--in a job-creating enterprise, and investors must provide documentation showing that these funds come from a lawful source. USCIS officials said that some petitioners may have strong incentives to report inaccurate information about the sources of their funds on their petitions or use fraudulent documents in instances when the funds come from illicit--and thus ineligible--sources, such as funds obtained through drug trade, human trafficking, or other criminal activities. USCIS and State officials noted that verifying a lawful source of funds was difficult as they did not have authority to access and verify banking information with many foreign countries, and USCIS officials said that therefore IPO and FDNS did not have a means to verify self-reported immigrant financial information stated to come from these foreign banks. Legitimacy of investment entity. The amount of investment required to participate in the EB-5 Program, coupled with the fact that investors are making an investment in order to obtain an immigration benefit (i.e., green card), can create fraud risks tied to regional center operators and intermediaries. For example, SEC officials noted that immigrant investors may be vulnerable to fraud schemes because they may be primarily focused on obtaining their visas. As of May 2015, FDNS documentation tracking investigations by program stakeholders such as the SEC and HSI showed that over half (35) of the 59 open investigations were primarily focused on securities fraud. Moreover, in January 2016, the SEC's Office of Inspections and Examinations identified the EB-5 Program in its examination priorities for 2016. Given these identified fraud risks, and the constantly evolving nature of risks to the program, we recommended in our August 2015 report that USCIS plan and conduct regular fraud risk assessments of the EB-5 Program to better position it to identify, address, and mitigate emerging fraud risks to the program. DHS concurred, stating that the EB-5 Branch of USCIS's FDNS would continue to conduct a minimum of one fraud, national security, or intelligence assessment on an aspect of the program annually. In February 2016, USCIS officials stated that they had completed the data collection for their first review, which they estimated completing by September 2016. This review will focus on all identified national security concern cases initiated in the Fraud Detection and National Security Detection System from fiscal years 2011 through 2015. They also provided draft policy documents demonstrating their intention to require a minimum of one fraud assessment annually; however, these documents had not yet been finalized. To fully address the intent of our recommendation, USCIS needs to conduct at least one review, as planned, and document plans for future assessments. In August 2015, we reported that USCIS had taken some steps to enhance its fraud risk management efforts. These included establishing a dedicated entity to design and oversee its fraud risk management activities, creating an organizational structure conducive to fraud risk management, conducting fraud-awareness training, and establishing collaborative relationships with external stakeholders, including law enforcement agencies. In November 2013, USCIS established a fraud specialist unit for the EB-5 Program within FDNS. As of May 2015, FDNS was in the process of hiring an additional 8 dedicated staff with specialized fraud expertise to enhance its EB-5 Program fraud detection capabilities and oversight, bringing the total FDNS EB-5 Program staff to 21. According to FDNS officials, as of January 2016, the FDNS EB-5 Division included 22 full-time equivalent staff, of which 18 positions were currently occupied. We further reported in August 2015 that in 2013 USCIS also colocated staff who screen and adjudicate EB-5 petitions within IPO and began having FDNS officers and intelligence professionals work alongside EB-5 Program adjudicators to facilitate fraud-related information sharing. FDNS established training opportunities to include specialized fraud training at the Federal Law Enforcement Training Center related to money laundering and an internal "EB-5 University" to provide staff with monthly presentations on specific fraud-related topics believed to be immediately relevant to EB-5 Program adjudication. According to SEC, ICE, FBI, and USCIS officials, USCIS also increased its level of coordination with law enforcement agencies to cross-train staff with additional expertise and increase communication and collaboration on investigations and enforcement actions that can be taken when potential fraud, criminal activity, or national security threats are detected in the EB-5 Program. However, in our August 2015 report we also reported that USCIS faced significant challenges in its efforts to detect and mitigate fraud risks. Specifically, we found that USCIS's information systems and processes limit its ability to collect and use data on the EB-5 Program to identify fraud related to individual investors or investments or to determine any fraud risk trends across the program. USCIS relies heavily on paper- based documentation. While USCIS personnel are to enter certain information from these paper documents into various electronic databases, these databases have limitations that reduce their usefulness for conducting fraud-mitigating activities. For example, information that could be useful in identifying program participants linked to potential fraud is not required to be entered into USCIS's database, such as the applicant's name, address, and date of birth on the Form I-924 used to apply for regional center participation in the EB-5 Program. USCIS officials stated that the agency will be able to collect and maintain more complete data on EB-5 Program petitioners and applicants through the deployment of electronic forms in its new system, the Electronic Immigration System (ELIS). However, USCIS has faced long-standing challenges in implementing ELIS, which, as we reported in May 2015, was nearly 4 years delayed and $1 billion over budget. As we reported in August 2015, USCIS has taken alternative steps to gather information to mitigate fraud risk while improvements to its information systems are delayed, such as expanding its site visits program to include random checks of the operation of EB-5 Program projects. However, opportunities remain to expand information collection through interviews with immigrant investors and expanded EB-5 Program petition and application forms. USCIS is statutorily required to conduct interviews of immigrant investors within 90 days after they submit the Form I-829 petition to remove conditions on their permanent residency. However, USCIS also has the statutory authority to waive the requirement for such interviews. As of April 2015, USCIS officials stated that USCIS IPO had not conducted an interview at the I-829 stage. We reported that conducting interviews at this stage to gather additional corroborating or contextual information could help establish whether an immigrant investor is a victim of or complicit in fraud--a concern shared by both ICE HSI and SEC officials, who noted that gathering additional information and context about individual investors could help to inform investigative work. USCIS officials said they anticipate conducting these interviews in the near future, but had not developed plans or a strategy for conducting interviews at this stage primarily because IPO was relatively new and began adjudicating I-829 petitions in September 2014. In August 2015, we also reported that USCIS does not collect certain applicant information that could help mitigate fraud. Specifically, USCIS does not require information on the Form I-924 about the businesses supported by the regional center and program investments coordinated by the regional center, such as the names of principals or key officers associated with the underlying businesses, or information on advisers to investors such as foreign brokers, marketers, attorneys, and other advisers receiving fees from investors. According to USCIS officials, at the time of our August 2015 report, USCIS was drafting revised Forms I-924 and I-924A that would seek to address many of these concerns. However, as these revisions have not been completed, it is too early to tell the extent to which they will position USCIS to collect additional applicant information. Given that information system improvements with the potential to expand USCIS's fraud mitigation efforts will not take effect until 2017 at the earliest and that gaps exist in USCIS's other information collection efforts, we concluded that collecting additional information would better position USCIS to identify and mitigate potential fraud. We recommended that USCIS develop a strategy to expand information collection, including considering the increased use of interviews at the I-829 phase as well as requiring the additional reporting of information in applicant and petitioner forms. DHS concurred and, as of February 2016, officials reported that USCIS continues to take steps to develop and implement a strategy to expand information collection that includes revisions to the Form I-924, I-924A, I-526, and I-829 applications and petitions to capture more information. In addition, these officials stated that USCIS had not yet conducted an interview at the I-829 stage, but they were finalizing an interview process and planned to begin conducting interviews in the third quarter of fiscal year 2016. We reported in August 2015 that USCIS had taken action to increase its capacity to verify job creation in response to past GAO and DHS OIG reports that found that USCIS did not have staff with the expertise to verify job creation estimates and that the agency's methodologies for verifying such estimates were not rigorous. In particular, in December 2013, the DHS OIG reported that USCIS lacked meaningful economic expertise to conduct independent and thorough reviews of economic models used by investors to estimate indirect job creation for regional center projects, and recommended that USCIS coordinate with other federal agencies to provide expertise in the adjudication process. USCIS took action over time to increase the size and expertise of its workforce, provide clarifying guidance and training, and revise its process for assigning applications for adjudication. For example, in fiscal year 2013, USCIS increased its staffing from 9 adjudicators to 58, including 22 economists, and issued a policy memorandum clarifying existing guidance to help ensure consistency in the adjudication of petitions and to provide greater transparency for the EB-5 Program stakeholder community, according to IPO officials. In addition, USCIS improved its training curriculum to better ensure consistency and compliance with applicable statutes, regulations, and agency policy, including an update in 2014 of the new employee EB-5 training program and the establishment of an ongoing training focusing on recurring issues and petition cases that are novel in nature. Further, as we reported in August 2015, USCIS provided its economists with access to data from the Regional Input-Output Modeling System (RIMS II) economic model in fiscal year 2013 that increased their capacity to verify job creation estimates reported by investors for investments in regional center projects. IPO program managers estimated that as of fiscal year 2015, about 95 percent of EB-5 Program participants used economic models to estimate job creation, with about 90 percent of those investors using RIMS II. The RIMS II model is widely used across the public and private sectors and is considered to be among those valid to verify estimates of indirect and induced jobs reported for investments in regional center projects, according to USCIS and Department of Commerce (Commerce) economists, as well as industry and academic experts. Indirect jobs include jobs that are not directly created by a regional center business, but may result from increased employment in other businesses that supply goods and services to the regional center business as well as induced jobs created from workers' spending of increased earnings on consumer goods and services. However, we also reported in August 2015 that the use of RIMS II data alone does not provide USCIS with the capacity to determine the location of jobs created, such as the number of jobs created in targeted employment areas that most immigrant investors use to qualify for a lower investment amount. USCIS's May 2013 policy memorandum notes that Congress expressly provided for a reduced investment amount in a rural area or an area of high unemployment in order to spur immigrants to invest in new commercial enterprises that are principally doing business in--and creating jobs in--areas of greatest need. IPO program managers stated that approximately 90 percent of immigrant investors qualify for a reduced investment amount--$500,000 instead of $1 million--to participate in the EB-5 Program because they are claiming investment in a commercial enterprise which will create employment in a targeted employment area. The remaining 10 percent of immigrant investors pay twice that amount to participate in projects that are not limited to these locations. The IPO Economics Division Chief said that USCIS has not identified a need to verify the creation of jobs in a targeted employment area because the law permits regional center investors to use input-output models that do not have this capacity and program regulation and policy require that the investment capital be made available to the job creating entity which is principally doing business in the targeted employment area. IPO economists we interviewed also said that given the relative ease of proving job creation through economic modeling compared with documentation requirements to prove creation of direct jobs, immigrant investors generally claim indirect jobs, rather than direct jobs, to qualify for the program. In August 2015, we reported that USCIS's methodology for reporting EB-5 Program outcomes and economic benefits was not valid and reliable because it is based on the minimum program requirements for job creation and investment. To estimate job creation, USCIS multiplies the number of immigrant investors who have successfully completed the program with an approved Form I-829, by 10--the minimum job creation requirement per investor. To estimate overall investment in the economy, the agency multiplies the number of immigrant investors approved to participate in the program with an approved Form I-526, by $500,000-- the minimum investment amount, assuming all investments were made for projects in a targeted employment area. Accordingly, USCIS reported that from program inception in fiscal year 1990 through fiscal year 2014, the EB-5 Program has created a minimum of 73,730 jobs and more than $11.2 billion in investments. Our review and past GAO and DHS OIG audits of the program have pointed out the limitations of this methodology to report reliable program outcomes in that the data can be understated or overstated in certain circumstances. For example, USCIS officials stated that 90 percent of immigrant investors reported creating more than the 10-job minimum, and 10 percent of immigrant investors pay $1 million instead of $500,000 because they invest in projects outside of a targeted employment area. Estimating economic outcomes using the minimum program requirements in these circumstances would lead to an underestimate of the program's benefits. For example we reviewed one project with about 450 immigrant investors that created over 10,500 jobs, or about 23 jobs per investor, while USCIS counted only the 10-job minimum per investor, a total difference of 6,000 jobs. Additionally, according to DHS's 2013 Immigration Statistics Yearbook, about 32 investors paid $1 million instead of $500,000 into the program in fiscal year 2013, a total difference of $16 million not counted by USCIS. Conversely, USCIS's methodology may overstate some economic benefits derived from the EB-5 Program. For example, the methodology assumes that all investors approved for the program will invest the required amount of funds, and that these funds will be fully spent on the project. According to IPO officials and our analysis of EB-5 Program data, there are far fewer investors who successfully complete the program than were approved for program participation, and the actual amount invested and spent in these circumstances is unknown. For example, our analysis showed that approximately 26 percent of all EB-5 investors who entered the program from its inception year through fiscal year 2011 may not have completed the process to show funds spent and jobs created with an approved I-829 as of the fiscal year ending in 2014. As we reported in August 2015, USCIS collects more complete information on EB-5 Program forms, but does not track or analyze this information to more accurately report program outcomes. Specifically, immigrant investors are required to report (and USCIS staff are to verify) the amount of their initial investment on the Form I-526, and to report the number of new jobs created by their investment on the Form I-829. However, USCIS officials said that they reported EB-5 Program outcomes using minimum program requirements because these are the required economic benefits stated in law, and that they are not statutorily required to develop a more comprehensive assessment of program benefits. We concluded that tracking and using more comprehensive information it collects on project investments and job creation on the Forms I-526 and I-829 submitted by immigrant investors and verified by USCIS would enable USCIS to more reliably report on EB-5 Program outcomes and economic benefits. We therefore recommended in our August 2015 report that USCIS track and report data that immigrant investors report, and the agency verifies on its program forms for total investments and jobs created through the EB-5 Program. DHS concurred and, as of February 2016, officials anticipated developing a data system that will enable USCIS to track and report data immigrant investors report in fiscal year 2017. We reported in August 2015 that USCIS had commissioned the Economics and Statistics Administration (ESA) of the Department of Commerce (Commerce) to conduct a study of the economic impact of the EB-5 Program. USCIS undertook this action in response to a December 2013 DHS OIG recommendation that USCIS conduct a comprehensive review of the EB-5 Program to demonstrate how investor funds have stimulated the U.S. economy. As of June 2015, USCIS and ESA had not yet finalized the methodology for the new study; however, ESA and USCIS approved a statement of work in November 2014 that outlined a preliminary methodology and study steps that would address some, but not all, shortcomings of prior studies of the overall EB-5 Program benefits. We reported that ESA officials planned to finalize the study methodology once they completed a review of the program data submitted by IPO, and to issue a final report in November 2015. However, the study was not intended to address the program's costs, which are important for assessing a program's net economic impact. Both USCIS and ESA officials confirmed the study would be an economic valuation which, unlike an evaluation, considers only the benefits of economic activity, and does not assess the program costs. USCIS officials said the decision was made not to assess the program costs due to associated challenges and because the information may not justify the investment. Our review of the draft methodology, however, showed some potential to include some cost information. Specifically, ESA officials said that after consulting with USCIS officials, they planned to collect information related to the permanent residence of the immigrant investors and their dependents to estimate the value of household spending. IPO officials said that ESA may also collect information that may help to estimate or disclose some of the costs associated with the program. To help provide Congress and other stakeholders with more comprehensive information on the overall economic benefits of the program, we recommended in our August 2015 report that USCIS include a discussion of the types and reasons any relevant program costs were excluded from the Commerce study. DHS concurred and said that USCIS IPO would recommend to Commerce that a description of potential costs not assessed as a part of the study be included when the study is published. In February 2016, USCIS officials stated that the study had not yet been published and estimated it would be completed by May 2016. Chairman Goodlatte, Ranking Member Conyers, and members of the committee, this completes my prepared statement. I would be happy to respond to any questions you or members of the committee may have. For questions about this statement, please contact Rebecca Gambler 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. Individuals making key contributions to this statement included Seto Bagdoyan, Director; Cindy Ayers; Krista Mantsch; Taylor Matheson; Jan Montgomery; Jon Najmi; Edith Sohna; and Nick Weeks. Other contributors to the report on which this statement is based are listed in the report. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Congress created the EB-5 visa category to promote job creation by immigrant investors in exchange for visas providing lawful permanent residency. Participants are required to invest $1 million in a business that is to create at least 10 jobs--or $500,000 for businesses located in an area that is rural or has experienced unemployment of at least 150 percent of the national average rate. Upon meeting program requirements, immigrant investors are eligible for conditional status to live and work in the United States and can apply to remove the conditions for lawful permanent residency after 2 years. This statement discusses USCIS efforts under the EB-5 Program to (1) work with interagency partners to assess fraud and other related risks and address identified fraud risks, and (2) increase its capacity to verify job creation and use a valid and reliable methodology to report economic benefits. This statement is based on a report GAO issued in August 2015 ( GAO-15-696 ), with selected updates conducted in February 2016 to obtain information from DHS on actions it has taken to address the report's recommendations. In August 2015, GAO reported that the Department of Homeland Security's (DHS) U.S. Citizenship and Immigration Services (USCIS), which administers the Employment-Based Fifth Preference Immigrant Investor Program (EB-5 Program), had collaborated with its interagency partners to assess fraud and national security risks in the program in fiscal years 2012 and 2015. These assessments were onetime efforts; however, USCIS officials noted that fraud risks in the EB-5 Program are constantly evolving, and they continually identify new fraud schemes. USCIS did not have documented plans to conduct regular future risk assessments which could help inform efforts to identify and address evolving program risks. GAO recommended that USCIS plan and conduct regular future fraud risks assessments. DHS agreed, and as of February 2016, USCIS officials stated that they planned to complete an additional risk assessment by September 2016 and a minimum of one annually thereafter. GAO also reported in August 2015 that USCIS had taken steps to address the fraud risks it identified by enhancing its fraud risk management efforts; however, USCIS's information systems and processes limited its ability to collect and use data on EB-5 Program participants to address fraud risks in the program. For example, USCIS did not consistently enter some information it collected on participants in its information systems, such as name and date of birth, and this presented barriers to conducting basic electronic searches that could be analyzed for potential fraud. USCIS planned to collect and maintain more complete data in its new information system; however, the information system improvements with the potential to expand USCIS's fraud mitigation efforts were not to take effect until 2017 at the earliest. Given this time frame and gaps in USCIS's other information collection efforts, GAO recommended that USCIS develop a strategy to expand information collection in order to better position the agency to identify and mitigate potential fraud. DHS concurred, and in February 2016 USCIS officials stated that USCIS plans to develop such a strategy by the end of fiscal year 2016. In August 2015, GAO reported that USCIS had increased its capacity to verify job creation by increasing the size and expertise of its workforce, among other actions. However, USCIS's methodology for reporting program outcomes and overall economic benefits was not valid and reliable because it may understate or overstate program benefits in certain instances as it is based on the minimum program requirements of 10 jobs and a $500,000 investment per investor instead of the number of jobs and investment amounts collected by USCIS on individual EB-5 Program forms. For example, total investment amounts are not adjusted downward to account for investors who do not complete the program or upward for investments of $1 million instead of $500,000. USCIS officials said they are not statutorily required to develop a more comprehensive assessment. However, tracking and analyzing data on jobs and investments reported on program forms would better position USCIS to more reliably assess and report on the EB-5 Program economic benefits. Accordingly, GAO recommended that USCIS track and report data that investors report and the agency verifies on its program forms for total investments and jobs created through the EB-5 Program. DHS agreed and plans to implement this recommendation by the end of fiscal year 2017. In its August 2015 report, GAO recommended that USCIS, among other things, conduct regular future risk assessments, develop a strategy to expand information collection, and analyze data collected on program forms to reliably report on economic benefits. DHS concurred with the recommendations and reported actions underway to address them.
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In fiscal year 2000, VA's Veterans Health Administration (VHA) provided primary and specialty medical care to approximately 3.2 million veterans at a cost of about $18 billion. VA's pharmacy benefit cost approximately $2 billion--about 12 percent of the total VHA budget--and provided approximately 86 million prescriptions. In contrast, 10 years ago VA's pharmacy benefit represented about 6 percent of VA's total health care budget. Health care organizations' efforts to control pharmacy costs and improve quality of care include (1) implementing formularies that limit the number of drug choices available; (2) establishing financial incentives, such as variable copayments, to encourage the use of formulary drugs; (3) using compliance programs, such as prior authorization, that encourage or require physicians to prescribe formulary drugs; and (4) developing clinical guidelines for prescribing drugs. VA does not have authority to use financial incentives to encourage compliance with its formulary. VA provides outpatient pharmacy services free to veterans receiving medications for treatment of service-connected conditions and to low-income veterans whose incomes do not exceed a threshold amount. Other veterans who have prescriptions filled by VA may be charged $2 for each 30-day supply of medication. In 1995, VA began transforming its delivery and management of health care to expand access to care and increase efficiency. As part of this transformation, VA decentralized decision-making and budgeting authority to 22 VISNs, which became responsible for managing all VA health care. VISNs were given substantial operational autonomy. Although VISN and medical center directors are held accountable in annual performance agreements for meeting certain national and local goals, attaining formulary goals has not been part of their performance standards. VA medical centers began using formularies as early as 1955 to manage their pharmacy inventories. Because of the geographic mobility of VA patients, VA officials believed that a national formulary would improve veterans' continuity of care. In September 1995, VA established a centralized group to manage its pharmacy benefit on a nationwide basis. In November 1995, VISNs were established, and the Under Secretary for Health directed each VISN to develop and implement a VISN-wide formulary. To develop their formularies, the VISNs generally combined existing medical center formularies and eliminated rarely prescribed drugs. VISN formularies became effective on April 30, 1996. Also in 1996, the Congress required VA to improve veterans' access to care regardless of the region of the United States in which they live. As part of its response, VA implemented a national drug formulary on June 1, 1997, by combining the core set of drugs common to the newly developed VISN formularies. In addition to the national and VISN formularies, a few medical centers retained their own formularies. VA's Pharmacy Benefits Management Strategic Healthcare Group (PBM) is responsible for managing the national formulary list, maintaining databases that reflect drug use, and monitoring the use of certain drugs. VISN directors are responsible for implementing and monitoring compliance with the national formulary, ensuring that VISN restrictions placed on national formulary products are appropriate, and ensuring that a nonformulary drug approval process is functioning in all of their medical centers. As all formularies do, VA's national formulary limits the number of drug choices available to health care providers. VA's formulary lists more than 1,100 unique drugs that are assigned to 1 of 254 drug classes--groups of drugs similar in chemistry, method of action, or purpose of use. After performing reviews of drug classes representing the highest costs and volume of prescriptions, VA decided that some drugs in 4 of its 254 drug classes were therapeutically interchangeable--that is, essentially equivalent in terms of efficacy, safety, and outcomes--and therefore had the same therapeutic effect. This determination allowed VA to select one or more of these drugs for its formulary to seek better prices through competitively bid committed-use contracts. Other therapeutically equivalent drugs in these classes were then excluded from the formulary. These four classes are known as "closed" classes. VA has not made clinical decisions regarding therapeutic interchange in the remaining 250 drug classes, and it does not limit the number of drugs that can be added to these classes. These are known as "open" classes. In some cases, drugs listed on the national formulary may be restricted. Restrictions are generally placed on the use of drugs if they have the potential to be used inappropriately. For example, restrictions are placed on drugs with potentially serious side effects, such as interferon, which is used to treat such conditions as hepatitis C. VA has also adopted guidelines to assist practitioners in making decisions about the diagnosis, treatment, and management of specific clinical conditions, such as congestive heart failure. In addition, VA has adopted criteria to help standardize treatment, improve the quality of patient care, and promote cost-effective drug prescriptions. Finally, VA limits prescribing privileges for some drugs to specially trained physicians and requires consultation with a specialist before certain drugs can be prescribed. VA has made significant progress in establishing a national formulary, with most drugs being prescribed from the formulary list. Nevertheless, VA's oversight has not been sufficient to ensure that it is fully achieving its national formulary goal of standardizing its drug benefit nationwide. We found that some facilities have omitted required national formulary drugs. In addition, the extent to which VISNs add drugs to supplement the national formulary has the potential for conflicting with VA's ability to achieve standardization if not closely managed. Also, we found that some facilities, contrary to policy, have modified the list of drugs available in closed classes. Almost 3 years after VA facilities were directed to make available locally all national formulary drugs, two of the three medical centers we visited did not list all national formulary drugs in the formularies used by their prescribers. VHA's national formulary policy directive states that items listed on the national formulary shall be made available throughout the VA health care system and must be available in all VA facilities. While a physical supply of all national formulary drugs is not required to be maintained at all facilities, if a clinical need for a particular formulary drug arises in the course of treating a patient, it must be made available to the patient. Many drugs listed on the national formulary were not available as formulary choices in two of the three medical centers we visited. In the first, about 25 percent (286 drugs) of the national formulary drugs were not available as formulary choices. These included drugs used to treat high blood pressure and mental disorders, as well as drugs used to treat the unique medical needs of women. At the second medical center, about 13 percent (147 drugs) of the national formulary drugs were omitted, including drugs used to treat certain types of cancer and others used to treat stomach conditions. Health care providers at these two medical centers were required to seek nonformulary drug approvals for over 22,000 prescriptions of national formulary drugs from October 1999 through March 2000. If the national formulary had been properly implemented at these medical centers, prescribers would not have had to use extra time to request and obtain nonformulary drug approvals for these drugs, and patients could have started treatment earlier. Our analysis showed that over 14,000 prescriptions were filled as nonformulary drugs for 91 of the 286 drugs at the first center. No prescriptions were filled for the remaining 195 drugs. At the other medical center, over 8,000 prescriptions for 23 of the 147 drugs were filled as nonformulary drugs. No prescriptions were filled for the remaining 124 drugs. VA's policy allowing VISNs to supplement the national formulary locally has the potential for conflicting with VA's ability to achieve standardization if not closely managed. From June 1997 through March 2000, VISNs added 244 unique drugs to supplement the list of drugs on the national formulary. The number of drugs added by each VISN varies widely, ranging from as many as 63 by VISN 20 (Portland) to as few as 5 by VISN 8 (Bay Pines). (Fig. 1 shows the number of drugs added by each VISN.) Adding drugs to supplement the national formulary is intended to allow VISNs to be responsive to the unique needs of their patients and to allow quicker formulary designation of new FDA-approved drugs. However, the wide variation in the number of drugs added by the VISNs to supplement the national formulary raises concern that this practice, if not appropriately monitored, could result in unacceptable decreases in formulary standardization. VA officials have acknowledged that this variation affects standardization and told us they plan to address it. For example, the PBM plans to review new drugs when approved by the FDA to determine if they will be added to the national formulary or if VISNs may continue to add them to their formularies to supplement the national formulary. The medical centers we visited also inappropriately modified the national formulary list of drugs in the closed classes. Contrary to VA formulary policy, two of three medical centers added two different drugs to two of the four closed classes, and one facility did not make a drug available (see fig. 2). While our analysis was performed at the medical center level, the IOM found similar nonconformity at the VISN level. Specifically, IOM reported that 16 of the 22 VISNs modified the list of national formulary drugs for the closed classes. From October 1999 through March 2000, 90 percent of VA outpatient prescriptions were written for national formulary drugs. The percentage of national formulary drug prescriptions filled by individual VISNs varied slightly, from 89 percent to 92 percent. We found wider variation among medical centers within VISNs--84 percent to 96 percent (see table 1). The remaining 10 percent of prescriptions filled systemwide were for drugs VISNs and medical centers added to supplement the national formulary or for nonformulary drugs. VA's PBM and IOM estimate that drugs added to supplement the national formulary probably account for about 7 percent of all prescriptions filled and nonformulary drugs account for approximately 3 percent of all prescriptions filled. However, at the time of our review, VA's nationwide data could identify a filled prescription only as either a national formulary drug or not. Without specific information, VA does not know if the additions are resulting in an appropriate balance between local needs and national formulary standardization. VA officials told us that they are modifying the database to enable it to identify which drugs are added to supplement the national formulary and which are nonformulary. Medical center approval processes for nonformulary drugs are not always timely, and the amount of time needed to obtain such approvals varied widely across medical centers. In addition, some VISNs have not established processes to collect and analyze data on nonformulary requests. As a result, VA does not know if approved requests met its established criteria or if denied requests were appropriate. Although the national formulary directive requires certain criteria for approval of nonformulary drugs, it does not dictate a specific nonformulary approval process. As a result, the processes health care providers must follow to obtain nonformulary drugs differ among VA facilities regarding how requests are made, who receives them, who approves them, and how long it takes. In addition, IOM documented wide variations in the nonformulary drug approval process. Figure 3 shows the steps prescribers must generally follow to obtain nonformulary and formulary drugs. The person who first receives a nonformulary drug approval request may not be the person who approves it. For example, 61 percent of prescribers reported that nonformulary drug requests must first be submitted to a facility pharmacist, 14 percent said they must first be submitted to facility pharmacy and therapeutics (P&T) committees, and 8 percent said they must first be sent to service chiefs. In contrast, 31 percent of prescribers reported that it is a facility pharmacist who approves nonformulary drug requests, 26 percent said that the facility P&T committee approves them, and 15 percent told us that the facility chief of staff approves them. The remaining 28 percent reported that various other facility officials or members of the medical staff approve nonformulary drug requests. The time required to obtain approval for use of a nonformulary drug varied greatly depending on the local approval processes. The majority of prescribers (60 percent) we surveyed reported that it took an average of 9 days to obtain approval for use of nonformulary drugs. But many prescribers also reported that it took only a few hours (18 percent) or minutes (22 percent) to obtain such approvals. During our medical center visits, we observed that some medical center approval processes are less convenient than others. For example, to obtain approval to use a nonformulary drug in one facility we visited, prescribers were required to submit a request in writing to the P&T committee for its review and approval. Because the P&T committee met only once a month, the final approval to use the requested drug was sometimes delayed as long as 30 days. The requesting prescriber, however, could write a prescription for an immediate 30-day supply if the medication need was urgent. In contrast, in another medical center we visited, a clinical pharmacist was assigned to work directly with health care providers to help with drug selection, establish dose levels, and facilitate the approval of nonformulary drugs. In that facility, clinical pharmacists were allowed to approve the use of nonformulary drugs. If a health care provider believed that a patient should be prescribed a nonformulary drug, the physician and pharmacist could consult at the point of care and make a final decision with virtually no delay. Prescribers in our survey were almost equally divided on the ease or difficulty of getting nonformulary drug requests approved (see table 2). Regardless of whether the nonformulary drug approval process was perceived as easy or difficult, the vast majority of prescribers told us such requests were generally approved. According to our survey results, 65 percent of prescribers sought approval for a nonformulary drug in 1999. These prescribers reported that they made, on average, 25 such requests (the median was 10 requests). We estimated that 84 percent of all prescribers' nonformulary requests were approved. When a nonformulary drug request was disapproved, 60 percent of prescribers reported that they switched to a formulary drug. However, more than one-quarter of the prescribers who had nonformulary drug requests disapproved resubmitted their requests with additional information. The majority of prescribers we surveyed told us they were more likely to convert VA patients who were on nonformulary drugs obtained at another VA facility to formulary drugs than to request a nonformulary drug (see table 3). Consequently, patients who move from one area of the country to another or temporarily seek care in a different VA facility are likely to be switched from a nonformulary drug to a formulary drug. VA's national formulary policy requires that a request to use a nonformulary drug be based on at least one of six criteria: (1) the formulary agent is contraindicated, (2) the patient has had an adverse reaction to the formulary agent, (3) all formulary alternatives have failed therapeutically, (4) no formulary alternative exists, (5) the patient has previously responded to the nonformulary agent and risk is associated with changing to the formulary agent, and (6) other circumstances involving compelling evidence-based reasons exist. Each VISN is responsible for establishing a process to collect and analyze data concerning nonformulary drug requests. Contrary to the national formulary policy, not all VISNs have established a process to collect and analyze nonformulary request data at the VISN and local levels. Twelve of VA's 22 VISNs reported that they do not collect information on approved and denied nonformulary drug requests. Three VISNs reported that they collect information only on approved nonformulary drug requests, and seven reported that they collect information for both approved and denied requests. Consequently, data that could help VISNs, medical centers, and the PBM offices are not always collected and analyzed for trends in a systematic manner. Such information could help VA at all levels to determine the extent to which nonformulary drugs are being requested and whether medical center processes for approving these requests meet established criteria. In its report, IOM noted that inadequate documentation could diminish confidence in the nonformulary process. Seventy percent of VA prescribers in our survey reported that the formulary they use contains the drugs their patients need either to a "great extent" or to a "very great extent." Twenty-seven percent reported that the formulary meets their patients' needs to a "moderate extent," with 4 percent reporting that it meets their patients' needs to "some extent." No VA prescribers reported that the formulary meets their patients' needs to a "very little or no extent." This is consistent with IOM's conclusion that the VA formulary "is not overly restrictive." Overall, two and one-half times as many prescribers indicated that the formulary they currently use "helps" or "greatly helps" their ability to prescribe drugs as those who said it "hinders" or "greatly hinders" them (see table 4). Some prescribers reported that the formulary they use helps them keep current with new drugs and helps remove some of the pressures created by direct-to-consumer advertising. Other prescribers reported that newly approved drugs are not made available on the national formulary as soon as they would like, and some reported their frustration with delays experienced when certain formulary drugs must be approved by specially trained physicians before they can be prescribed. Prescribers we surveyed reported they were generally satisfied with the national formulary. We asked prescribers who said that they had worked for VA before the national formulary was established whether the current formulary does a better job of keeping the list of drugs in the drug classes from which they most frequently prescribe up to date, as compared with the formulary they used to use. Three-quarters told us that they had worked for VA before the national formulary was implemented in June 1997. Thirty- eight percent of these prescribers reported that the national formulary was "better" or "considerably better" than previous formularies. About half (48 percent) indicated that the current formulary was "about the same" as the one it replaced. Seven percent reported that it was "worse" or "considerably worse" than previous formularies. Few veterans have complained about not being able to obtain the drugs they believe they need. At the VA medical centers we visited, patient advocates told us that veterans made very few complaints concerning their prescriptions. In its analysis of the patient advocates' complaint databases, IOM found that less than one-half of one percent of veterans' complaints were related to drug access. IOM further reported that complaints involving specific identifiable drugs often involved drugs that are marketed directly to consumers, such as sildenafil (Viagra), which is used to treat erectile dysfunction. Fifty-one percent of the prescribers in our survey reported that over the past 3 years, an increasing number of their patients have requested a drug they have seen or heard advertised in the media. Our review also indicated that the few prescription complaints made were often related to veterans' trying to obtain "lifestyle" drugs or refusals by VA physicians and pharmacists to fill prescriptions written by non-VA health care providers. VA officials told us that VA does not fill prescriptions written by non-VA-authorized prescribers, in part to ensure that one practitioner manages a patient's care. Over the past 3 1/2 years, VA has made significant progress in establishing its national formulary, which has generally met with prescriber acceptance. Prescribers reported that veterans are generally receiving the drugs they need and that veterans rarely register complaints concerning prescription drugs. VA has not provided sufficient oversight, however, to ensure that VISNs and medical centers comply with formulary policies and that the flexibility given to them does not unduly compromise VA's goal of formulary standardization. Contrary to VA formulary policy, some facilities omitted national formulary drugs or modified the closed drug classes. While adding a limited number of drugs to supplement the national formulary is permitted, as more drugs are added by VISNs, formulary differences among facilities are likely to become more pronounced, decreasing formulary standardization. While VA recognizes the trade-off between local flexibility and standardization, it lacks criteria for determining the appropriateness of adding drugs to supplement the national formulary. Consequently, VA cannot determine whether the resulting decrease in standardization is acceptable. Not all VISN directors have met their responsibilities for implementing national formulary policy. Inefficiencies that exist in the nonformulary drug approval processes across the system can cause delays in making final treatment decisions. In addition, the processes require health care provider time and energy that might be better used for direct patient care. We believe a more efficient nonformulary drug approval process could enable facilities to benefit from lessons learned in other locations. Finally, VISNs lack the data needed to analyze nonformulary drug requests to determine whether all approved requests met approval criteria and all denied requests were appropriate. In order to ensure more effective management of the national formulary, we recommend that the Secretary of Veterans Affairs direct the Under Secretary for Health to take the following actions: Establish a mechanism to ensure that VISN directors comply with national formulary policy. Establish criteria that VISNs should use to determine the appropriateness of adding drugs to supplement the national formulary and monitor the VISNs' application of these criteria. Establish a nonformulary drug approval process for medical centers that ensures appropriate and timely decisions and provides that veterans for whom a nonformulary drug has been approved will have continued access to that drug, when appropriate, across VA's health care system. Enforce existing requirements that VISNs collect and analyze the data needed to determine that nonformulary drug approval processes are implemented appropriately and effectively in their medical centers, including tracking both approved and denied requests. In commenting on a draft of this report, VA agreed with our findings and concurred with our recommendations. VA highlighted key improvements planned or already in progress that should further enhance the process. VA's actions to address our recommendations are summarized below. VA plans to improve oversight at all organizational levels to help facilitate consistent compliance with national formulary policy. In its comments, VA discussed important components of improving compliance with the national formulary, including examining data to identify outliers. However, VA did not articulate a mechanism for ensuring that its oversight results in consistent compliance, which may reduce the effectiveness of its planned actions. VA plans to establish criteria for VISNs to use to determine the appropriateness of adding drugs to supplement the national formulary. VA plans to establish steps for its nonformulary drug approval process that all medical centers and VISNs must follow. However, in its comments, VA did not specifically address how veterans would have continued access to previously approved nonformulary drugs across VA's health care system. We believe such access is important. VA plans to establish steps for reporting its nonformulary approval activities. In its comments, VA did not explicitly include tracking of denied requests as part of the nonformulary approval activities. We expect that its nonformulary approval activities will include tracking denied requests, as well as approved nonformulary drug requests, to determine the appropriateness of all medical center prescribing decisions. VA plans to implement these corrective actions by June 2001. Its comments are included in appendix II. We are sending copies of this report to the Honorable Anthony J. Principi, Secretary of Veterans Affairs; appropriate congressional committees; and other interested parties. We will also make copies available to others upon request. Please call me at (202) 512-7101 if you or your staff have questions about this report or need additional assistance. Another contact and staff acknowledgments are listed in appendix III. To obtain policies and procedures from the 22 Veterans Integrated Service Networks (VISN), we mailed a questionnaire to each of the 22 VISN formulary leaders--pharmacists or physicians who serve on the Department of Veterans Affairs' (VA) Pharmacy Benefits Management advisory board. To determine the extent to which VA health care providers write prescriptions for national formulary drugs, we analyzed data from VA's national outpatient prescription database. To assess the implementation of the national formulary and obtain firsthand opinions about it, we interviewed medical and administrative staff at three VA medical centers located in three different VISNs. To obtain VA health care providers' views on VA's formulary, including whether or not it is restrictive, we mailed a questionnaire to a nationally representative sample of 2,000 VA health care prescribers. We also used information contained in the Institute of Medicine's Description and Analysis of the VA National Formulary, issued in June 2000. To obtain policies and procedures from the 22 VISNs, we mailed a questionnaire to VISN formulary leaders. We asked if there were VISN- wide policies for several areas, including adding drugs to the VISN formulary, requesting nonformulary drugs, converting patients from one drug to another, and tracking requests for nonformulary drugs. In addition, we sought information on the number of drugs added to and dropped from the VISN formulary, the number of requests for nonformulary drugs, and the number of requests that were approved and denied. All 22 VISN formulary leaders completed and returned questionnaires. VA's national database on outpatient prescriptions contains information for each outpatient prescription filled at each VA medical center, including the drug prescribed, date of the prescription, patient and prescriber identifiers, medical center responsible for filling the prescription, and whether the prescribed drug is a national formulary drug. We used this database to develop a sample of VA health care providers who wrote prescriptions, determine the total number of outpatient prescriptions filled at VISNs and VA medical centers, determine the number of filled outpatient prescriptions written for national formulary drugs within a certain time frame, and determine how many VISN formulary drug prescriptions were filled in the three VISNs where we performed site visits. We interviewed PBM headquarters officials who had either oversight or maintenance responsibility for the database to help assess the validity and reliability of the outpatient prescription data. We also performed our own analytic checks of the data. We found that data critical to our analysis--the data field indicating whether a prescription had been written for a national formulary drug--contained errors. We worked with PBM officials to correct the data, and they implemented a monthly routine to detect and correct these errors in the future. We reran our data checks, verified that the database had been corrected, and concluded that the data were acceptable for the purposes of our work. To assess formulary implementation at the local level, we interviewed medical and administrative staff at three different VA medical centers--one located in Biloxi, Mississippi (VISN 16); one in Gainesville, Florida (VISN 8); and one in Omaha, Nebraska (VISN 14). We selected these VISNs and medical centers on the basis of formulary drug use from October through December 1999, the period for which the most recent and complete data were available at the time we did our work. For example, VISN 8 had the highest percentage of prescriptions for national formulary drugs (93 percent), VISN 16's percentage of national formulary drug prescriptions was at the national average (90 percent), and VISN 14 had the lowest percentage of prescriptions filled using national formulary drugs (88 percent). We mailed questionnaires to a representative sample of 2,000 VA health care prescribers whose prescriptions had been dispensed from October 1 through December 31, 1999, to obtain their opinions and experiential data on various aspects of VA's national formulary. We drew this random sample from VA's most recent national outpatient prescription database--a data file that contains information, including a prescriber identifier, on all outpatient prescriptions filled in the VA health care system. We mailed questionnaires to the entire sample of prescribers on April 17, 2000, with follow-up mailings on May 17 and June 21 to those who had not responded by those dates. We accepted returned questionnaires through September 1, 2000. Some prescribers' responses indicated that they did not write prescriptions for drugs; their prescription privileges were limited to medical and surgical supplies, such as diabetic strips and food supplements. Other returned questionnaires indicated that the addressee had either left or retired from VA. These providers were thus considered ineligible for our purposes and were removed from the sample. Approximately 11 percent of the questionnaires were returned as undeliverable, and we received no response from approximately 16 percent of those to whom we mailed questionnaires. After adjusting the sample accordingly, we determined the number of useable returned questionnaires to be 1,217--a response rate of about 69 percent. (See table 5.) Because this was a simple random sample, we believe that our results are projectable to all of VA's health care providers who have outpatient drug prescribing privileges. Surveys based on a sample are subject to sampling errors. Sampling error represents the extent to which a survey's results differ from what would have been obtained had everyone in the universe of interest received and returned the same questionnaire--in this case, all VA health care providers who have outpatient drug prescribing privileges. Sampling errors have two elements: the width of the confidence interval around the estimate (sometimes referred to as the precision of the estimate) and the confidence level at which the confidence interval is computed. The confidence interval reflects the fact that estimates actually encompass a range of possible values, not just a single value, or a "point estimate." The interval is expressed as a point, plus or minus some value. For example, in our questionnaire, we asked prescribers, "To what extent does your VA formulary contain the drugs you believe your patients need?" The percentage of respondents who reported a "great extent" or "very great extent" was 69.1. This particular question had a confidence interval of plus or minus 2.6 percentage points. Thus, the "true" answer for this question may or may not be 69.1 percent, but it has a high probability of falling between 66.5 and 71.7 percent (69.1-percent point estimate, plus or minus 2.6 percentage points). Confidence intervals vary for individual questions (depending upon how many of the individuals who could have answered a question actually did so), but, unless otherwise noted, all percentages presented in this report are within a range of plus or minus 3.5 percentage points. The confidence level is a measure of how certain we are that the "true" answer lies within a confidence interval. We used a 95-percent confidence level, which means that if we repeatedly took new samples of prescribers from the October through December prescription database and performed the same analysis of their responses each time, 95 percent of these samples would yield estimates that would fall within the confidence interval stated. In the previous example, this means that we are 95-percent certain that between 66.5 and 71.7 percent of prescribers believe that the VA formulary contains to a "great extent" or "very great extent" the drugs they believe their patients need. Surveys can also be subject to other types of systematic error or bias that can affect results, known as nonsampling errors. One potential source of nonsampling error can be the questionnaire itself. To ensure that questions were clear and unbiased, we consulted with subject matter and questionnaire experts within GAO and obtained comments from individuals representing VA's PBM and medical advisory panel, a working group of 11 practicing VA physicians and 1 practicing Department of Defense physician who help manage VA's national formulary, as well as individuals representing the Institute of Medicine. Finally, the questionnaire was tested with 14 VA prescribers in VA medical centers in four locations: Phoenix, Arizona; Washington, D.C.; Hampton, Virginia; and Cincinnati, Ohio. Prescribers were asked to provide demographic and VA employment information as well as opinions about the relevance and usefulness of VA's formulary. On average, VA prescribers in our sample have worked for VA for 11 years, with most of those years at their current medical facility. Physicians and nurses constitute the largest groups of prescribers (65 and 15 percent, respectively), followed by physician assistants (7 percent) and other allied health professionals, such as dentists (14 percent). Most of the prescribers' time working in VA is spent treating patients--on average, 26 hours each week. According to the national prescription file from which we drew our sample, VA prescribers who completed our questionnaire averaged 849 prescription fills from October through December 1999, the 3- month period we chose as the basis of our survey. The median number of filled prescriptions was relatively low--252--because a few prescribers had a large number of prescriptions filled during the period, while many prescribers had only a few prescriptions filled. George Poindexter, Stuart Fleishman, Mike O'Dell, and Kathie Kendrick made key contributions to this report. State Pharmacy Programs: Assistance Designed to Target Coverage and Stretch Budgets (GAO/HEHS-00-162, Sept. 6, 2000). Prescription Drug Benefits: Applying Private Sector Management Methods to Medicare (GAO/T-HEHS-00-84, Mar. 22, 2000). VA Health Care: VA's Management of Drugs on Its National Formulary (GAO/HEHS-00-34, Dec. 14, 1999). Prescription Drug Benefits: Implications for Beneficiaries of Medicare HMO Use of Formularies (GAO/HEHS-99-166, July 20, 1999). Defense Health Care: Fully Integrated Pharmacy System Would Improve Service and Cost-Effectiveness (GAO/HEHS-98-176, June 12, 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 accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. Orders by mail: U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Orders by visiting: Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders by phone: (202) 512-6000 fax: (202) 512-6061 TDD (202) 512-2537 Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. Web site: http://www.gao.gov/fraudnet/fraudnet.htm e-mail: [email protected] 1-800-424-5454 (automated answering system)
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During the last three years, the Department of Veterans Affairs (VA) has made significant progress in establishing its national drug formulary, which has generally met with the prescriber acceptance. Most veterans are receiving the drugs the need and rarely register complaints about prescription drugs. However, VA has not been sufficient to ensure that the Veterans Integrated Service Networks (VISN) and medical centers comply with formulary policies and that the flexibility given to them does not compromise VA's goal of formulary standardization. Contrary to VA formulary policy, some facilities omitted national formulary drugs or modified the closest drug classes. Although a limited number of drugs to supplement the national formulary is permitted, formulary differences among facilities are likely to become more pronounced, as more drugs are added by VISNs, decreasing formulary standardization. VA recognizes the trade-off between local flexibility and standardization, but it lacks criteria for determining the appropriateness of adding drugs to supplement the national formulary and therefore may not be able to determine whether the decrease in standardization is acceptable.
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Medicare covers SNF care for beneficiaries who need daily skilled nursing care or therapy for conditions related to a hospital stay of at least 3 consecutive calendar days, if the hospital discharge occurred within a specific period--generally, no more than 30 days--prior to admission to the SNF. For qualified beneficiaries, Medicare will pay for medically necessary SNF services, including room and board; nursing care; and ancillary services, such as drugs, laboratory tests, and physical therapy, for up to 100 days per spell of illness. In 2002, beneficiaries are responsible for a $101.50 daily copayment after the 20th day of SNF care, regardless of the cost of services received. Eighty-eight percent of SNFs are freestanding--that is, not attached to a hospital. The remainder are hospital-based. SNFs differ by type of ownership: 66 percent of SNFs are for-profit entities, 28 percent of SNFs are not-for-profit, and a small fraction of SNFs--about 5 percent--are government-owned. About three-fifths of SNFs are owned or operated by chains--corporations operating multiple facilities. To be a SNF, a facility must meet federal standards to participate in the Medicare program. SNFs provide skilled care to Medicare patients and usually also provide care to Medicaid and private pay patients. Medicare pays for a relatively small portion of patients cared for in SNFs--about 11 percent. Over 66 percent of SNF patients have their care paid for by Medicaid, and another 23 percent have their care paid for by other sources or pay for the care themselves. In the Balanced Budget Act of 1997 (BBA), the Congress established the PPS for SNFs. Under the PPS, SNFs receive a daily payment that covers almost all services provided to Medicare beneficiaries during a SNF stay, which is adjusted for geographic differences in labor costs and differences in the resource needs of patients. Adjustments for resource needs are based on a patient classification system that assigns each patient to 1 of 44 payment groups, known as resource utilization groups (RUG). For each group, the daily payment rate is the sum of the payments for three components: (1) the nursing component, which includes costs related to nursing as well as to medical social services and nontherapy ancillary services, (2) the therapy component, which includes costs related to occupational, physical, and speech therapy, and (3) the routine cost component, which includes costs for capital, maintenance, and food. The routine cost component is the same for all patient groups, while the nursing and therapy components vary according to the expected needs of each group. Before the 16.66 percent increase provided by BIPA took effect, the nursing component varied from 26 percent to 74 percent of the daily payment rate, depending on the patient's RUG. In 2001, Medicare expenditures on SNF care were $13.3 billion. The 16.66 percent increase in the nursing component raised Medicare payments about $1 billion annually--about 8 percent of Medicare's total annual spending on SNF care. The increase in the nursing component is one of several temporary changes made to the PPS payment rates since the PPS was implemented in 1998. The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 (BBRA) raised the daily payment rates by 20 percent for 15 high-cost RUGs beginning in April 2000. BBRA also increased the daily rate for all RUGs by 4 percent for fiscal years 2001 and 2002. BIPA upped the daily payment rates by 6.7 percent for 14 RUGs, effective April 2001. This increase was budget neutral; that is, it modified BBRA's 20 percent increase for 15 RUGs by taking the funds directed at 3 rehabilitation RUGs and applying those funds to all 14 rehabilitation RUGs. Two of these temporary payment changes, the 20 percent and 6.7 percent increases, will remain in effect until CMS refines the RUG system. CMS has announced that, although it is examining possible refinements, the system will not be changed for the 2003 payment year. In providing care to their patients, SNFs employ over 850,000 licensed nurses and nurse aides nationwide. Licensed nurses include RNs and LPNs. RNs generally manage patients' nursing care and perform more complex procedures, such as starting intravenous fluids. LPNs provide routine bedside care, such as taking vital signs and supervising nurse aides. Aides generally have more contact with patients than other members of the SNF staff. Their responsibilities may include assisting individuals with eating, dressing, bathing, and toileting, under the supervision of licensed nursing and medical staff. Several studies have shown that nursing staff levels are linked to quality of care. The Social Security Act, which established and governs the Medicare program, requires that SNFs have sufficient nursing staff to provide nursing and related services to attain or maintain the highest practicable physical, mental, and psychosocial well-being of each patient, as determined by patient assessments and individual plans of care. More specifically, SNFs must have an RN on duty for at least 8 consecutive hours a day for 7 days per week, and must have 24 hours of licensed nurse coverage per day. SNFs also must designate an RN to serve as the director of nursing on a full-time basis, and must designate a licensed nurse to serve as a charge nurse on each tour of duty. SNF staffing varies by type of facility and by state. Hospital-based SNFs tend to have higher staffing ratios than other SNFs. In 2001, hospital-based SNFs provided 5.5 hours of nursing time per patient day, compared with 3.1 hours among freestanding SNFs. Hospital-based SNFs also rely more heavily on licensed nursing staff than do freestanding facilities, which rely more on nurse aides. Staffing also differs by state--from 2 hours and 54 minutes per patient day in South Dakota in 2000 to 4 hours and 58 minutes per patient day in Alaska. Many states have established their own nursing staff requirements for state licensure, which vary considerably. Some states require a minimum number of nursing hours per patient per day, while others require a minimum number of nursing staff relative to patients. Some states' requirements apply only to licensed nurses, while others apply to nurse aides as well. Some states also require an RN to be present 24 hours per day, 7 days per week. As of 1999, 37 states had nursing staff requirements that differed from federal requirements. Since 1998, many states have raised their minimum staffing requirements or have implemented other changes aimed at increasing staffing in nursing homes, such as increasing workers' wages or raising reimbursement rates for providers whose staffing exceeds minimum requirements. While states have set minimum requirements for nursing staff, there are indications of an emerging shortage of nursing staff, particularly RNs, in a variety of health care settings. The unemployment rate for RNs in 2000 was about 1 percent--very low by historical standards. As a result, SNFs must compete with other providers, such as hospitals, for a limited supply of nursing staff. According to associations representing the industry, nursing homes have had difficulty recruiting and retaining staff. The American Health Care Association (AHCA) reported vacancy rates for nursing staff in nursing homes for 2001 ranging from 11.9 percent for aides to 18.5 percent for staff RNs. Labor shortages are generally expected to result in increased compensation--wages and benefits--as employers seek to recruit new workers and retain existing staff. Our analysis of Bureau of Labor Statistics (BLS) data shows that, from 1999 to 2000, average wages for nurses and aides employed by the nursing home industry increased by 6.3 percent, compared to 2.9 percent among workers in private industry and state and local government. Industry officials, citing a survey they commissioned, told us that wages have risen more rapidly since 2000. In general, SNF staffing changed little after April 1, 2001, when the increase in the nursing component of the PPS payment took effect. There was no substantial change in SNFs' overall staffing ratios, though their mix of nursing hours shifted somewhat: SNFs provided slightly less RN time and slightly more LPN and nurse aide time in 2001. For most categories of SNFs--such as freestanding SNFs and SNFs not owned by chains-- increases in staffing ratios were small. Although SNFs with relatively low staffing ratios in 2000 increased their staffing ratios in 2001, SNFs with relatively high staffing ratios decreased their staffing. Our analysis indicates that the nursing component payment increase was unlikely to have been a factor in these staffing changes. Unlike most facilities nationwide, SNFs in four states increased their staffing by 15 or more minutes per patient day, following payment or policy changes in three of the states aimed at increasing or maintaining SNF nursing staff. No substantial change in SNFs' overall staffing ratios occurred after the nursing component payment was increased. Between 2000 and 2001, SNFs' average amount of nursing time changed little, remaining slightly under 3 and one-half hours per patient day. Although there was an increase of 1.9 minutes per patient day, it was not statistically significant. (See table 1.) According to our calculations, this change was less than the estimated average increase, across all SNF patients, of about 10 minutes per patient day that could have resulted if SNFs had devoted the entire nursing component increase to more nursing time. There was a small shift in the mix of nursing time that SNFs provided. On average, RN time decreased by 1.7 minutes per patient day. This was coupled with slight increases in LPN and nurse aide time, which rose by 0.7 and 2.9 minutes per patient day, respectively. For most categories of SNFs, changes in staffing ratios were small. For example, freestanding facilities, which account for about 90 percent of SNFs nationwide, increased their nursing time by 2.1 minutes per patient day on average. Nonchain SNFs had an increase of 3.9 minutes per patient day. Hospital-based facilities and those owned by chains had nominal changes in nursing time. The changes in staffing for for-profit, not-for- profit, and government-owned facilities also were small. (See app. II.) The share of a SNF's patients who were covered by Medicare was not a factor in whether facilities increased their nursing time. SNFs that relied more on Medicare would have received a larger increase in revenue due to the nursing component change, and might have been better able than others to raise staffing ratios. However, we found that freestanding SNFs in which Medicare paid for a relatively large share of patients increased their nursing time by 1.3 minutes per patient day--less than SNFs with somewhat smaller shares of Medicare patients, and not substantially more than SNFs with the smallest share of Medicare patients. (See table 2.) Similarly, SNFs' financial status was not an important factor affecting changes in nursing time. Although SNFs with higher total margins in 2000--that is, those with revenues substantially in excess of costs--might have been best able to afford increases in nursing staff, those with the highest total margins did not raise their staffing substantially more than others. Changes in nursing time were minimal, regardless of SNFs' financial status in 2000. For SNFs in the three groups with the highest margins, increases were about 3 to 4 minutes per day, compared to 2 minutes per day for those with the lowest margins. (See table 3.) SNFs with relatively low initial staffing ratios--which may have had the greatest need for more staff--increased their staffing ratios substantially, while SNFs that initially were more highly staffed had a comparable decrease in staffing. Among freestanding SNFs that had the lowest staffing ratios in 2000, staffing time increased by 18.9 minutes per patient day. (See table 4.) Nearly all of the increase--over 15 minutes--was due to an increase in nurse aide time. LPN time increased by 3.2 minutes and RN time by 11 seconds on average. Among facilities with the highest staffing ratios in 2000, staffing decreased by 17.7 minutes. For these SNFs, as for those with the lowest staffing ratios, most of the overall change occurred among nurse aides: aide time decreased by over 10 minutes in 2001, while LPN and RN time decreased by 2.7 and 4.6 minutes, respectively. Despite the staffing increases among lower-staffed facilities, our analysis indicates that these staffing changes may not have resulted from the nursing component payment increase. We found that similar staffing changes occurred between 1999 and 2000--prior to the nursing component increase. Low-staffed facilities increased their staffing by 15.2 minutes per patient day in 2000, while high-staffed facilities decreased their staffing by 19.8 minutes. The changes that occurred during the two periods were similar, suggesting that the payment increase probably did not cause the change in the latter period. Unlike most facilities nationwide, SNFs in four states--Arkansas, Nebraska, North Dakota, and Oklahoma--increased their staffing by 15 to 27 minutes per patient day, on average. These increases could be related to state policies: according to state officials, three of the states had made Medicaid payment or policy changes aimed at increasing or maintaining facilities' nursing staff. North Dakota authorized a payment rate increase, effective July 2001, that could be used for staff pay raises or improved benefits. Oklahoma increased its minimum requirements for staffing ratios in both September 2000 and September 2001, provided added funds to offset the costs of those increases, and raised the minimum wage for nursing staff such as RNs, LPNs, and aides. Arkansas switched to a full cost-based reimbursement system for Medicaid services in January 2001, in part to provide facilities with stronger incentives to increase staffing; the state had previously relied on minimum nurse staffing ratios. In Nebraska, no new state policies specific to nursing staff in SNFs were put in place during 2000 or 2001. The change to the nursing component of the SNF PPS payment rate was one of several increases to the rates since the PPS was implemented in 1998. This temporary increase, enacted in the context of payment and workforce uncertainty, was intended to encourage SNFs to increase their nursing staff, although they were not required to spend the added payments on staff. In our analysis of the best available data, we did not find a significant overall increase in nurse staffing ratios following the change in the nursing component of the Medicare payment rate. Although the payment change could have paid for about 10 added minutes of nursing time per patient day for all SNF patients, we found that on average SNFs increased their staffing ratios by less than 2 minutes per patient day. Nurse staffing ratios fell in some SNFs during this period and increased in others by roughly an equal amount--the same pattern that occurred before the payment increase took effect. Our analysis--overall and for different types of SNFs--shows that increasing the nursing component of the Medicare payment rate was not effective in raising nurse staffing. Our analysis of available data on SNF nursing staff indicates that, in the aggregate, SNFs did not have significantly higher nursing staff time after the increase to the nursing component of Medicare's payment. We believe that the Congress should consider our finding that increasing the Medicare payment rate was not effective in raising nurse staffing as it determines whether to reinstate the increase to the nursing component of the Medicare SNF rate. We received written comments on a draft of this report from CMS and oral comments from representatives of the American Association of Homes and Services for the Aging (AAHSA), which represents not-for-profit nursing facilities; AHCA, which represents for-profit and not-for-profit nursing facilities; and the American Hospital Association (AHA), which represents hospitals. CMS said that our findings are consistent with its expectations as well as its understanding of other research in this area. CMS also stated that our report is a useful contribution to the ongoing examination of SNF care under the PPS. CMS's comments appear in appendix III. Representatives from the three associations who reviewed the draft report shared several concerns. First, indicating that our statements were too strong given the limitations of the study, they objected to the report's conclusions and matter for congressional consideration. Second, they noted that the draft should have included information about the context in which SNFs were operating at the time of the Medicare payment increase, specifically, the nursing shortage and SNF staff recruitment and retention difficulties. Finally, they noted that SNFs could have used the increased Medicare payments to raise wages or improve benefits rather than hire additional nursing staff. The industry representatives expressed several concerns about the limitations of our data and analysis. The AAHSA representatives noted that, for individual SNFs, the accuracy of OSCAR is questionable; they agreed, however, that the average staffing ratios we reported for different types of SNFs looked reasonable and were consistent with their expectations. The AHA representatives said that, while OSCAR data are adequate for examining staffing ratios, we should nonetheless have used other sources of nurse staffing data--such as payroll records and Medicaid cost reports--before making such a strong statement to the Congress. The AHCA representatives noted that, due to the limitations of OSCAR data, our analyses of staffing ratios reflect staffing for all SNF patients rather than staffing specifically for SNF patients whose stays are covered by Medicare. They stressed that the small increase in staffing for patients overall could have represented a much larger increase for Medicare- covered SNF patients. In addition, representatives from both AHCA and AHA were concerned that our period of study after the payment increase--May through December 2001--was too short to determine whether SNFs were responding to the added payments. They also cited delays in SNFs being paid under the increased rates as an explanation for our findings. The AHCA representatives further noted that the lack of change in staffing was not surprising, given the short period, and that the payment increase was temporary, applied to only one payer, and affected only about 10 to 12 percent of SNFs' business. AAHSA representatives noted that, to be meaningful, staffing ratios must be adjusted for acuity-- the severity of patients' conditions. Representatives from all three groups also stated that the report lacked sufficient information on contextual factors that could have affected SNF staffing ratios during our period of study. They said that we should have provided information on the nursing shortage as well as on SNF staff recruitment and retention difficulties. They further stated that SNFs' difficulties in recruiting and retaining staff could explain why we found little change in nurse staffing ratios. The AAHSA representatives were concerned that the report omitted information on the economic slowdown's effect on state budgets and Medicaid payment rates, which could have discouraged SNFs from hiring during the period of the increased nursing component. Finally, both AAHSA and AHA representatives commented that the report gave too little attention to state minimum staffing requirements, indicating that SNFs would be more responsive to those requirements than to the Medicare payment increase. The AAHSA representatives noted that facilities may have increased their nursing staff to meet state minimum staffing requirements prior to the Medicare increase. The AHA representatives stated that we may not have found staffing increases because, when states require a minimum level of staff, facilities tend to staff only to that minimum. They also commented that state requirements may have had a greater effect on staffing than the nursing component increase, which was temporary and had only been in effect for a limited time. Representatives from all three groups noted that facilities could have opted to raise wages, improve benefits, or take other steps to recruit or retain staff, rather than hire additional nurses or aides. AHA added that we did not consider whether, prior to the rate increase, nurse staffing was adequate; if it was, SNFs may have chosen to spend the added Medicare payments on retention rather than on hiring. In addition, AASHA and AHCA representatives noted that we did not address what would happen to nursing staff and margins if the payment increase were not in place. The AAHSA representatives stated that, without the increase, staffing might have decreased. AHCA representatives noted that we should have considered the implications for SNF margins of not continuing the payment increase. As noted throughout the draft report, in conducting our study we considered the limitations of the data and the analyses we could perform. We therefore tested whether these limitations affected our results. Taking account of those tests and the consistency of our findings across categories of SNFs, we determined that the available evidence was sufficient to conclude that the increased payment did not result in higher nursing staff time. Our evidence consistently shows that staffing ratios changed little after the nursing component payment increase was implemented. However, we modified our conclusions to reiterate the limitations of our study. Regarding the representatives' specific concerns about the limitations of our data and analysis: In the draft report, we detailed our efforts to correct OSCAR data errors. We have no evidence that OSCAR data are biased in the aggregate or that errors in OSCAR data would have understated the change in nurse staffing ratios. In the draft report we noted that neither payroll records nor Medicaid cost reports were feasible sources of staffing data for this study. We have no reason to think that our results would have been different if we had used those data sources because a HCFA study found that those other sources yielded comparable aggregate staffing levels to those in OSCAR. We believe that the data from OSCAR were appropriate for examining staffing ratio changes because OSCAR is the only nationally uniform data source that allowed us to compare staffing ratios before and after the payment increase. In the draft report, we stated that while nurse staffing ratios apply to all SNF patients and not just Medicare patients, we found no relationship between changes in staffing ratios and the percentage of a SNF's patients paid for by Medicare. Specifically, staffing increases were no larger in SNFs with a greater percentage of Medicare patients than in those with a smaller percentage of Medicare patients. The staffing changes in SNFs surveyed in the months just after the payment increase was implemented differed little from staffing changes of those SNFs surveyed later in 2001. Because we found no relationship between SNFs' staffing ratio changes and the amount of time that had passed since the payment increase (which ranged from 1 to 9 months), we believe that our period of study was sufficiently long to determine whether SNFs were responding to the payment increase. We have added information on this analysis to the report. We agree that adjusting for patients' acuity is particularly important for comparing staffing among different facilities; however, acuity averaged over all facilities varies little over short periods. Moreover, unless patients' acuity declined after the nursing component increase--and we have no evidence that it did--adjusting for acuity would not have affected our finding that nursing staff time changed little. Regarding representatives' concerns that we did not include sufficient information on external factors affecting SNFs: We added information to the report on issues related to the nursing workforce. Hiring difficulties would not have prevented SNFs from expanding the hours of their existing nursing staff or using temporary nurses and aides from staffing agencies--which would have been reflected in staffing ratios. With respect to the possible influence of a weak economy on Medicaid payments and SNF staffing levels, we noted in the draft report that the pattern of nursing staff changes from 2000 to 2001 was similar to the pattern from 1999 to 2000--a period when the economy was considerably stronger. If SNFs increased nursing staff in response to new state requirements during 2001, our study would have attributed these increases to the Medicare payment change. Regarding the representatives' statements about alternate ways SNFs could have used the increased Medicare payments: To the extent that SNFs used the added Medicare payments for higher wages or benefits, they may have reduced staff vacancies, which in turn may have resulted in higher staffing ratios. However, we found little change in nurse staffing ratios after the Medicare payment increase. Regarding the representatives' statements about the adequacy of SNF staffing: Because staffing adequacy was not within the scope of our study, we did not consider whether staffing was adequate prior to the rate increase, or whether this influenced SNFs' hiring decisions. The Congress directed CMS to address this issue, which it did in two reports. The first report, published in 2000, suggested that staffing might not be adequate in a significant number of SNFs. This was reaffirmed in CMS's recent report. CMS, AAHSA, AHCA, and AHA also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Administrator of CMS, interested congressional committees, and other interested parties. We will also provide copies to others upon request. In addition, the report is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions, please call me at (202) 512-7114. Other GAO contacts and staff acknowledgments are listed in appendix IV. This appendix describes the selection of the data source for our analysis, the characteristics of that data source, and procedures used to verify data accuracy and make adjustments. To assess the impact on nurse staffing ratios of the April 1, 2001, increase in the nursing component of the SNF payment, we needed a nationally uniform data source that included the number of patients and the number of nursing staff (full-time equivalents (FTE)) or nursing hours, for two periods--before April 1, 2001, to establish a baseline, and after April 1, 2001. We considered several sources of nursing staff data, including SNF payroll data, Medicaid cost reports, and CMS's OSCAR system. We determined that payroll records could not be used for several reasons. CMS has collected and analyzed nursing home payroll data in several states and has found that it is difficult to ensure that the staffing data refer to hours worked (as required for an analysis of nurse staffing ratios) rather than hours paid, which includes time such as vacation and sick leave. CMS also found that although current nursing home payroll records were usually available, older records were difficult to obtain; consequently, it is unlikely that we would have been able to get records prior to the rate increase. Finally, payroll records do not include information on the number of patients and would have had to be supplemented with other data. Similarly, Medicaid cost reports were not an appropriate source of data. While these reports by SNFs to state Medicaid agencies contain data on both patients and nursing staff, Medicaid cost reports do not permit a comparison of staffing ratios before and after the 16.66 percent increase in the nursing component because these reports cover a 12-month period that cannot be subdivided. Furthermore, these reports do not contain nationally uniform staffing data because the categories and definitions differ from state to state. Finally, the 2001 reports were not available in time for our analysis. OSCAR is the only uniform data source that contains data on both patients and nursing staff. Moreover, OSCAR data are collected at least every 15 months, allowing us to compare staffing ratios before and after the 16.66 percent increase in the nursing component. The states and the federal government share responsibility for monitoring compliance with federal standards in the nation's roughly 15,000 SNFs. To be certified for participation in Medicare, Medicaid, or both, a SNF must have had an initial survey as well as subsequent, periodic surveys to establish compliance. On average, SNFs are surveyed every 12 to 15 months by state agencies under contract to CMS. In a standard survey, a team of state surveyors spends several days at the SNF, conducting a broad review of care and services to ensure that the facility complies with federal standards and meets the assessed needs of the patients. Data on facility characteristics, patient characteristics, and staffing levels are collected on standard forms. These forms are filled out by each facility at the beginning of the survey and are certified by the facility as being accurate. After the survey is completed, the state agency enters the data from these forms into OSCAR, which stores data from the most current and previous three surveys. Although OSCAR was the most suitable data source available for our analysis, it has several limitations. First, OSCAR provides a 2-week snapshot of staffing and a 1 day snapshot of patients at the time of the survey, so it may not accurately depict the facility's staffing and number of patients over a longer period. Second, staffing is reported across the entire facility, while the number of patients are reported only for Medicare- and Medicaid-certified beds. OSCAR, like other data sources, does not distinguish between staffing for Medicare patients and staffing for other patient groups. Finally, the Health Care Financing Administration (HCFA) reported that OSCAR data are unreliable at the individual SNF level. However, the agency's recent analysis has concluded that the OSCAR- based staffing measures appear "reasonably accurate" at the aggregate level (e.g., across states). Neither CMS nor the states attempt to verify the accuracy of the staffing data regularly. In addition to limitations inherent in OSCAR data, our analysis was limited in several ways. First, our sample included only SNFs for which OSCAR data were available both before and after the 16.66 percent increase in the nursing component took effect. Second, our analysis of staffing ratios after the increase took effect was limited to data collected from May through December 2001. As a result, we only reviewed data for 8 months after the payment increase was implemented, although our results do not appear to be affected by any seasonal trends in staffing. We were not able to review data for a later period when facilities might have used the payment increase differently. Finally, due to data entry lags, when we drew our sample in January 2002, OSCAR did not include data from some facilities surveyed from May through December 2001. To determine the change in nurse staffing ratios, we selected all facilities surveyed from May through December 2001 that also had a survey during 2000, which could serve as the comparison. This sample contained OSCAR data for 6,522 facilities. (See table 5.) Although not a statistical sample that can be projected to all SNFs using statistical principles, the sample is unlikely to be biased because it was selected on the basis of survey month. Our sampling procedure, in which selection depended solely on the time of survey, was unlikely to yield a sample with characteristics that differ substantially from those of the entire population of SNFs. We found no significant differences between these 6,522 SNFs and the 13,454 SNFs that were surveyed in calendar year 2000, in terms of various characteristics-- the proportion that are hospital-based, the proportion that are for-profit, the share of a facility's patients that are paid for by Medicare, and the capacity of the facilities. However, our sample was not distributed across states like the population of SNFs. (See table 6.) This may be because state agencies differ in the amount of time required to complete entry of survey data into OSCAR. In addition, we excluded from our sample 449 SNFs that, based on their 2000 Medicare claims data, had received payments from Medicare that were not determined under the PPS. The resulting sample had 6,073 facilities--over one-third of all SNFs. To assess the accuracy of the OSCAR data in our sample, we applied decision rules developed by CMS for its study of minimum nurse staffing ratios to identify facilities with data that appeared to represent data entry or other reporting errors. In addition, we identified facilities in our sample that had changes in their nurse staffing ratios greater than 100 percent, but that did not report 100 percent changes in both total patients and total beds. Using these rules, we identified 570 facilities for review. For 536 of these facilities, we obtained the original forms completed by SNF staff and used for entering data into OSCAR, from the state survey agencies. We compared the data on the forms to the OSCAR entries and identified 159 facilities with data entry errors. For these facilities, we corrected the data, although 12 continued to be outliers and were excluded. For 179 facilities, we telephoned the SNF to verify its data; 65 facilities confirmed that OSCAR correctly reported their data. Based on the information gathered in these calls, we were able to correct the data for an additional 47 facilities. We also excluded 35 facilities for which we could not correct the data. In addition, we excluded 915 SNFs with more total beds than certified beds because they may have inaccurate staffing ratios. Other facilities were excluded because we did not receive their forms, we were unable to call the SNFs, or we did not receive replies from them. After these exclusions, our final sample contained 4,981 SNFs. (See table 7.) We calculated nurse staffing ratios--hours per patient day--for each facility by dividing the total nursing hours by the estimated number of patient days. We calculated nurse staffing ratios for all nursing staff as well as for each category of staff: RNs, LPNs, and aides. We also calculated the change in these ratios for each facility in our sample. We analyzed these changes in nurse staffing ratios overall and for several categories of SNFs, including for-profit, not-for-profit, and government-owned facilities. We also analyzed these changes based on each facility's prior year staffing ratio. Finally, we supplemented the staffing data with cost and payment data from Medicare cost reports for 2000 and related the changes in nurse staffing ratios to each SNF's total margin--a measure of its financial status. We tested whether staffing ratio changes from 2000 to 2001 were statistically significant--that is, statistically distinguishable from zero. In addition, for the analyses of SNFs' prior year staffing and their financial status, we tested whether, between any two groups of SNFs, the difference in their staffing ratio changes was statistically significant. Major contributors to this report were Robin Burke, Jessica Farb, and Dae Park. Skilled Nursing Facilities: Providers Have Responded to New Payment System By Changing Practices. GAO-02-841. Washington, D.C.: August 23, 2002. Nursing Homes: Quality of Care More Related to Staffing than Spending. GAO-02-431R. Washington, D.C.: June 13, 2002. Nursing Homes: Federal Efforts to Monitor Resident Assessment Data Should Complement State Activities. GAO-02-279. Washington, D.C.: February 15, 2002. Nursing Workforce: Emerging Nurse Shortages Due to Multiple Factors. GAO-01-944. Washington, D.C.: July 10, 2001. Nursing Homes: Success of Quality Initiatives Requires Sustained Federal and State Commitment. GAO/T-HEHS-00-209. Washington, D.C.: September 28, 2000. Nursing Homes: Sustained Efforts Are Essential to Realize Potential of the Quality Initiatives. GAO/HEHS-00-197. Washington, D.C.: September 28, 2000.
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The nation's 15,000 skilled nursing facilities (SNF) play an essential role in our health care system, providing Medicare-covered skilled nursing and rehabilitative care each year for 1.4 million Medicare patients who have recently been discharged from acute care hospitals. In recent years, many analysts and other observers, including members of Congress, have expressed concern about the level of nursing staff in SNFs and the impact of inadequate staffing on the quality of care. GAO's analysis of available data shows that, in the aggregate, SNFs' nurse staffing ratios changed little after the increase in the nursing component of the Medicare payment took effect. Overall, SNFs' average nursing time increased by 1.9 minutes per patient day, relative to their average in 2000 of about 3 and one-half hours of nursing time per patient day. For most SNFs, increases in staffing ratios were small. Further, GAO found that the share of SNF patients covered by Medicare was not a factor in whether facilities increased their nursing time. Similarly, SNFs that had a total revenues considerably in excess of costs before the added payments took effect did not increase their staffing substantially more than others.
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Over the last decade, DOD has been managing many challenging space systems acquisitions. A long-standing problem for the department is that program costs have tended to increase significantly from original cost estimates. In recent years, DOD has overcome many of the problems that had been hampering program development, and has begun to launch many of these satellites. However, the large cost growth of these systems continues to affect the department. Figure 1 compares the original cost estimates with current cost estimates for some of the department's major space acquisition programs. The gap between the estimates in figure 1 represents money that the department was not planning to spend on these programs, and did not have available to invest in other efforts. The gap in estimates is fairly stable between fiscal years 2014-2018, a result of the fact that most programs are mature and in a steady production phase. This figure does not include programs that are still in the early stages of planning and development. In past reports, we have identified a number of causes of acquisition problems. For example, in past years, DOD has tended to start more weapon programs than is affordable, creating a competition for funding that focuses on advocacy at the expense of realism and sound management. DOD has also tended to start its space programs before it has the assurance that the capabilities it is pursuing can be achieved within available resources and time constraints. There is no way to accurately estimate how long it would take to design, develop, and build a satellite system when key technologies planned for that system are still in relatively early stages of discovery and invention. Finally, programs have historically attempted to satisfy all requirements in a single step, regardless of the design challenges or the maturity of the technologies necessary to achieve the full capability. DOD's preference to make larger, complex satellites that perform a multitude of missions has stretched technology challenges beyond current capabilities in some cases. Our work has recommended numerous actions that can be taken to address the problems we identified. Generally, we have recommended that DOD separate technology discovery from acquisition, follow an incremental path toward meeting user needs, match resources and requirements at program start, and use quantifiable data and demonstrable knowledge to make decisions to move to next phases. We have also identified practices related to cost estimating, program manager tenure, quality assurance, technology transition, and an array of other aspects of acquisition program management that could benefit space programs. DOD has generally concurred with our recommendations, and has undertaken a number of actions to establish a better foundation for acquisition success. For example, we reported in the past that, among other actions, DOD created a new office within the Undersecretary of Defense for Acquisition, Technology and Logistics to focus attention on oversight for space programs and it eliminated offices considered to perform duplicative oversight functions. We have also reported in the past that the Air Force took actions to strengthen cost estimating and to reinstitute stricter standards for quality. Most of DOD's major satellite programs are in mature phases of acquisition, and some of the significant problems of past years, such as cost and schedule growth, are not currently as prevalent. Table 1 describes the status of the space programs we have been tracking in detail. While many programs have overcome past problems, some of the major space programs have encountered significant challenges in the last year and some delays in development and production. For example: The Air Force's Space Fence program office is developing a large ground-based radar that is expected to improve on the performance of and replace the Air Force Space Surveillance System, which became operational in 1961 and was recently shut down. The Space Fence radar will emit radio frequencies upward to space, from ground-based radar sites, to detect and track more and smaller Earth-orbiting objects than is currently possible, and provide valuable space situational awareness data to military and civilian users. The Air Force had originally planned to award a contract for Space Fence systems development in July 2012, but due to internal program reviews and budget re-prioritizations, this date has been delayed to May 2014. In addition, the number of radar sites planned has been reduced from two to one, though DOD plans to have an option under the system development contract to build a second site if needed. In April 2013, DOD proposed canceling the Missile Defense Agency's Precision Tracking Space System (PTSS) because of concerns with the program's high-risk acquisition strategy and long-term affordability. PTSS was intended to be a satellite system equipped with infrared sensors that would track ballistic missiles through their emitted heat. The planned satellite system would consist of a constellation of nine satellites in orbit around the earth's equator. We reported in July 2013 that the decision to propose canceling the PTSS program was based on an evaluation of the acquisition, technical, and operational risks of the PTSS program. Specifically, DOD's evaluation assessed the PTSS cost, schedule, technical design, and acquisition strategy to identify whether risks could challenge the program's ability to acquire, field, and sustain the system within planned cost and schedule constraints. The evaluation also determined that the PTSS program had significant technical, programmatic, and affordability risks. The program officially ceased operations in October 2013. The Air Force has nearly completed its analysis of alternatives to determine the direction for space based environmental monitoring, which will be a follow-on program for the Defense Meteorological Satellite Program (DMSP). Through this analysis, the Air Force analyzed various options that included, but were not limited to, a traditional procurement of a weather satellite similar to the existing DMSP satellites, or a disaggregated approach using small satellites and hosted payload opportunities. According to the Air Force, the study was completed in the fall of 2013 and is awaiting final approval. The MUOS program plans to launch a third satellite in January 2015, which represents a delay of 6 months due to a production issue on the third satellite. Specifically, the third satellite failed system- and subsequent unit-level testing after rework last year and the program determined the root cause to be a manufacturing deficiency on a component critical for the operation of the satellite's ultra-high- frequency legacy communications payload. The program is replacing the component. According to the MUOS program office, the program is on track to meet the launch schedule of subsequent satellites, which is important because most of the communications satellites that MUOS is replacing are past their design lives. Synchronizing deliveries of MUOS satellites with compatible Army Handheld, Manpack, Small Form Fit (HMS) terminals remains a challenge. Currently over 90 percent of the first satellite's on-orbit capabilities are being underutilized because of terminal program delays. Consequently, military forces are relying on legacy communication terminals and are not able to take advantage of the superior capabilities offered by the MUOS satellites. Operational testing and initial fielding of MUOS-capable HMS terminals is planned for fiscal year 2014, with a production decision expected in September 2015. We have reported in the past that DOD and Congress are taking steps to reform and improve the defense acquisition system, and in the past year additional actions have been taken towards these goals. In November 2013, DOD published an update to its instruction 5000.02, which provides acquisition guidance for DOD programs. With this update, DOD hoped to create an acquisition policy environment that will achieve greater efficiency and productivity in defense spending. Air Force officials noted that, for satellite programs, there are two major changes that they believe will improve the acquisition process. First, the instruction was changed to formally allow satellite programs to combine two major program milestones, B and C, which mark the beginning of the development and production phases, respectively.Force, satellite programs have typically seen a great deal of overlap in the development and production phases, mainly because they are buying small quantities of items. They are often not able to produce a prototype to be fully tested because of the high costs of each article, so the first satellite in a production is often used both for testing and operations. Air Force officials believe that this change to the acquisition guidance will allow for streamlining of satellite development and production processes, and provide more efficient oversight without sacrificing program requirements. GAO has not assessed the potential effects of this change. In the past, we have reported that committing a program to production According to the Air without a substantive development phase may increase program cost and schedule risks, and we plan to look at the impacts of this change as it begins to be implemented. A second change made this year, according to Air Force officials, is the requirement that DOD programs, including space programs, undergo independent development testing. While development testing for DOD programs is not new to this policy revision, now the testing organization will be an independent organization outside the program office. For space programs, this organization will be under the Program Executive Officer for Space, and will report their findings directly to that office, providing what the Air Force believes will be an independent voice on a program's development status. The Air Force is confident that these changes will provide benefits to program oversight, although because these are recent changes, we have not yet assessed their potential for process improvements. In addition, DOD is adopting new practices to reduce fragmentation of its satellite ground control systems, which adds oversight to a major development decision. Last year we reported that DOD's satellite ground control systems were potentially fragmented, and that standalone systems were being developed for new satellite programs without a formal analysis of whether or not the satellite control needs could be met with existing systems. In the National Defense Authorization Act for Fiscal Year 2014, Congress placed more oversight onto this process by requiring a cost-benefit analysis for all new or follow-on satellite systems using a dedicated ground control system instead of a shared ground This new requirement should improve oversight into control system.these systems' development, and may reduce some unnecessary duplication of satellite control systems. According to Air Force officials, the first program to go through this process was the Enhanced Polar System, and all future satellite programs will include this cost-benefit analysis in their ground system planning. In addition, the Act directed DOD to develop a DOD-wide long-term plan for satellite ground control systems. Additionally, the Defense Space Council continues with its architecture reviews in key space mission areas. According to Air Force officials, the Council is the principal DOD forum for discussing space issues, and brings together senior-level leaders to discuss these issues. These architecture reviews are to inform DOD's programming, budgeting, and prioritization for the space mission area. The Council has five reviews underway or completed in areas such as overhead persistent infrared, satellite communications, space situational awareness, and national security space launches. They are also initiating a study of how DOD can assess the resilience of its space systems. DOD also recently held a forum on resiliency that included participation from senior leaders from several groups within DOD and the Intelligence Community to create a work plan towards resolution of critical gaps in resiliency. Many of the reforms that are being initiated may not be fully proven for some years, because they apply mainly to programs in early acquisition stages, and most DOD space systems are currently either in the production phase or late in the development phase. We have not assessed the impact of actions taken this year, but we have observed that the totality of improvements made in recent years has contributed to better foundations for program execution. While DOD has taken steps to address acquisition problems of the past, significant issues above the program level will still present challenges to even the best run programs. One key oversight issue is fragmented leadership of the space community. We have reported in the past that fragmented leadership and lack of a single authority in overseeing the acquisition of space programs have created challenges for optimally Past studies acquiring, developing, and deploying new space systems.and reviews have found that responsibilities for acquiring space systems are diffused across various DOD organizations, even though many of the larger programs, such as the Global Positioning System and those to acquire imagery and environmental satellites, are integral to the execution of multiple agencies' missions. This fragmentation is problematic because the lack of coordination has led to delays in fielding systems, and also because no one person or organization is held accountable for balancing governmentwide needs against wants, resolving conflicts and ensuring coordination among the many organizations involved with space systems acquisitions, and ensuring that resources are directed where they are most needed. Though changes to organizations and the creation of the Defense Space Council have helped to improve oversight, our work continues to find that DOD would benefit from increased coordination and a single authority overseeing these programs. A program management challenge that GAO has identified, which stems from a lack of oversight, is that DOD has not optimally aligned the development of its satellites with associated components, including ground control system and user terminal acquisitions. Satellites require ground control systems to receive and process information from the satellites, and user terminals to deliver that satellite's information to users. All three elements are important for utilizing space-based data, but development of satellites often outpaces the ground control systems and the user terminals. Delays in these ground control systems and user terminals lead to underutilized on-orbit satellite resources, and thus delays in getting the new capabilities to the warfighters or other end- users. In addition, there are limits to satellites' operational life spans once launched. When satellites are launched before their associated ground and user segments are ready, they use up time in their operational lives without their capabilities being utilized. Synchronization of space system components will be an important issue for DOD in considering disaggregating space architectures, as the potential for larger numbers and novel configurations of satellites and ground systems will likely require the components to be synchronized to allow them to work together in the most effective way possible. As mentioned earlier, DOD is taking steps in response to improvements mandated by the Congress. But it will likely be difficult to better synchronize delivery of satellite components without more focused leadership at a level above the acquisitions' program offices. For example, budget authority for user terminals, ground systems, and satellites is spread throughout the military services, and no one is in charge of synchronizing all of the system components, making it difficult to optimally line up programs' deliveries. Fiscal pressures, past development problems, and concerns about the resiliency of satellites have spurred DOD to consider significant changes in the way it acquires and launches national security satellites. Significant fiscal constraints, coupled with growing threats to DOD space systems--including adversary attacks such as anti-satellite weapons and communications jamming, and environmental hazards such as orbital debris--have called into question whether the complex and expensive satellites DOD is fielding and operating are affordable and will meet future needs. For example, a single launch failure, on-orbit anomaly, or adversary attack on a large multi-mission satellite could result in the loss of billions of dollars of investment and a significant loss of capability. Additionally, some satellites, which have taken more than a decade to develop, contain technologies that are already considered obsolete by the time they are launched. To address these challenges, DOD is considering alternative approaches to provide space-based capabilities, particularly for missile warning, protected satellite communications, and environmental monitoring. According to DOD, the primary considerations for studying these approaches and making decisions on the best way forward relate to finding the right balance of affordability, resiliency, and capability. These decisions, to be made over the next 2 to 3 years, have the potential for making sweeping changes to DOD's space architectures of the future. For example, DOD could decide to build more disaggregated architectures, including dispersing sensors onto separate platforms; using multiple domains, including space, air, and ground, to provide full mission capabilities; hosting payloads on other government or commercial spacecraft; or some combination of these. Our past work has indicated that some of the approaches being considered have the potential to reduce acquisition cost and time on a single program. For instance, we have found that DOD's initial preference to make fewer large and complex satellites that perform a multitude of missions has stretched technology challenges beyond existing capabilities, and in some cases vastly increased the complexities of related software. In addition, developing extensive new designs and custom-made spacecraft and payloads to meet the needs of multiple users limits DOD's ability to provide capabilities sooner and contributes to higher costs. Last year, we reported that one potential new approach, hosted payload arrangements in which government instruments are placed on commercial satellites, may provide opportunities for government agencies to save money, especially in terms of launch and operation costs, and gain access to space. As new approaches, such as disaggregation, are considered, the existing management environment could pose barriers to success, including fragmented leadership for space programs, the culture of the DOD space community, fragmentation in satellite control stations, and disconnects between the delivery of satellites and their corresponding user terminals. For instance, disaggregation may well require substantial changes to acquisition processes and requirements setting. But without a central authority to implement these changes, there is likely to be resistance to adopting new ways of doing business, particularly since responsibilities for space acquisitions stretch across the military services and other government agencies. Moreover, under a disaggregated approach, DOD may need to effectively network and integrate a larger collection of satellites--some of which may even belong to commercial providers. We have reported that ground systems generally only receive and process data from the satellites for which they were developed. They generally do not control and operate more than one type of satellite or share their data with other ground systems. To date, however, DOD has had difficulty adopting modern practices and technologies for controlling satellites as well as difficulty in coordinating the delivery of satellites with the user terminals that must be installed on thousands of ships, planes, and ground-based assets. These are conditions that are difficult to change without strong leadership to break down organizational stove-pipes and to introduce technologies or techniques that could enable DOD to better integrate and fuse data from a wider, potentially more disparate, collection of satellites. In light of suggestions that disaggregation could potentially reduce cost and increase survivability, the Senate Committee on Armed Services mandated that we assess the potential benefits and limitations of disaggregating key military space systems, including potential impacts on total costs. To date, we have found that the potential effects of disaggregation are conceptual and not yet quantified. DOD has taken initial steps to assess alternative approaches, but it does not yet have the knowledge it needs to quantify benefits and limitations and determine a course of action. DOD officials we spoke with acknowledge the department has not yet established sufficient knowledge on which to base a decision. While DOD has conducted some studies that assessed alternative approaches to the current programs of record, some within the department do not consider these studies to be conclusive because they were either not conducted with sufficient analytical rigor or did not consider the capabilities, risks, and trades in a holistic manner. For example, according to the Office of the Secretary of Defense's Office of Cost Assessment and Program Evaluation, a recent Air Force study that assessed future satellite communications architectures contained insufficient data to support the conclusion that one architectural approach was more resilient than others, and the cost estimates it contained did not consider important factors, such as ground control and terminal costs, in calculating the implications of changing architectures. To build consensus in the department, and to conduct a more rigorous analysis of options, DOD is currently in the process of conducting additional studies that will consider future architectures. Included in these studies are Analyses of Alternatives for future missile warning, protected satellite communications, and space based environmental monitoring capabilities.considering are approaches that keep the current system, evolve the current system, and disaggregate the current system into more numerous, but smaller and less complex, satellites. DOD has nearly finished the space-based environmental monitoring study and expects to finish the other two in either this fiscal year or next. Among the range of alternatives these analyses are Moreover, as DOD continues to build knowledge about different acquisition approaches, it will be essential to develop an understanding of key factors for decisions on future approaches that could impact the costs, schedules, and performance of providing mission capabilities. Some considerations for moving to a new or evolved architecture may include the following: Common definitions of key terms, such as resiliency and disaggregation, across all stakeholders, and a common measurement of these terms in order to compare architectural alternatives. The true costs of moving to a new architecture, including transition costs for funding overlapping operations and compatibility between new and legacy systems and non-recurring engineering costs for new- start programs, among others. Potential technical and logistical challenges. For example, with hosted payloads, our past work has found that ensuring compatibility between sensors and host satellites may be difficult because of variable interfaces on different companies' satellites. In addition, scheduling and funding hosted payload arrangements may be difficult because the timeline for developing sensors may be much longer than that of commercial satellites. Impacts to supporting capabilities, such as ground control and operations and launch availability, and long-standing challenges we have identified regarding how these have been managed. Readiness of the acquisition workforce and industrial base to support a new architecture. Given that DOD is in the early stages of assessing alternatives, our ongoing work is continuing to identify potential benefits and limitations of disaggregation and examine the extent to which these issues are being factored into DOD's ongoing studies. We look forward to reporting on the results of this analysis this summer. DOD has made some changes to the way it buys launch services from its sole-source provider, and plans to allow other companies to compete with that provider for launch services in the near future. DOD's Evolved Expendable Launch Vehicle (EELV) program is the primary provider of launch vehicles for U.S. military and intelligence satellites. Since 2006, the United Launch Alliance (ULA) has been the sole-source launch provider for this program, with a record of 50 successful consecutive government missions. From 2006 through 2013, DOD had two types of contracts with ULA through which ULA provided launch services for national security space launches. DOD utilized this dual-contract structure to achieve flexibility in launch schedules and to avoid additional costs associated with frequent launch delays. In the last few years, though the dual contract structure met DOD's needs for unprecedented mission success and flexible launch capability, predicted costs continued to rise for launch services. In response to these cost predictions, DOD revised its acquisition strategy to allow for a "block buy" of launch vehicles, where DOD would commit to multiple years of launch purchases from ULA, with the goal of stabilizing production and decreasing prices. In addition, and partially in response to GAO recommendations, DOD gathered large amounts of information on ULA's cost drivers to allow DOD to negotiate significantly lower prices under the contracting structure. In December 2013, DOD signed a contract modification with ULA to purchase 35 launch vehicle booster cores over a 5-year period, 2013-2017, and the associated capability to launch them. According to the Air Force, this contracting strategy saved $4.4 billion over the predicted program cost in the fiscal year 2012 budget. We recently reported on some of the changes included in this new contract from the prior contracts. In addition to this change in the way DOD buys launch vehicles, DOD is also in the process of introducing a method for other launch services companies to compete with ULA for EELV launches. Since 2006, when ULA began as a joint venture between then-competitors Boeing and Lockheed Martin, the EELV program has been managed as a sole source procurement, because there were no other domestic launch companies that could meet the program's requirements. With the recent development of new domestic launch vehicles that can meet at least some EELV mission requirements, DOD plans to make available for competition up to 14 launches in fiscal years 2015-2017. Any launch company that has been certified by DOD to launch national security space payloads will be able to compete with ULA to launch these missions. DOD is currently finalizing their plan for this competition, including what requirements will be placed on the contractors and how they will compare proposals from the contractors. Based on our discussions with DOD officials, they plan to use a best value approach for this competition, in which price is not the only consideration. DOD will likely consider several factors when comparing proposals for launch services for the 14 booster core competition between ULA and new entrants, including price, mission risk, and satellite vehicle integration risks. DOD could require competitive proposals to be structured in several ways. If DOD requires proposals to contain both fixed-price and cost reimbursement features for launch services and capability, respectively, similar to the way it currently contracts with ULA, there could be benefits to DOD and ULA, but potential burdens to new entrants. For example, DOD is familiar with this approach and has experience negotiating under these terms, and ULA is familiar with DOD's requirements given ULA's role as the EELV's sole launch provider. But use of a cost type contract may negate efficient contractor business practices and cost savings due to government data requirements under this type of approach, and it may give ULA a price advantage because DOD already funds launch capability for ULA. Alternatively, if DOD implements a fixed-price commercial approach to launch proposals with fewer data reporting requirements, DOD could lose insight into contractor cost or pricing, but may receive lower prices from new entrants due to these fewer data reporting requirements. DOD could also require a combination of elements from each of these approaches, or develop new contract requirements for this competition. We examined some of the benefits and challenges of the first two approaches, either of which can DOD facilitate competitive launch contract awards, in a recent report.expects to issue a draft request for proposal for the first of the competitive missions, where the method for evaluating and comparing proposals will be explained, in the spring of 2014. The planned competition for launch services may have helped DOD negotiate the lower prices it achieved in its December 2013 contract modification, and DOD could see further savings if a robust domestic launch market materializes. DOD noted in its 2014 President's Budget submission for EELV that after the current contract with ULA has ended, it plans to have a full and open competition for national security space launches. Cost savings on launches, as long as they do not come with a reduction in mission successes, would greatly benefit DOD, and allow the department to put funding previously needed for launches into programs in the development phases to ensure they are adequately resourced. In conclusion, DOD has made significant progress in solving past space systems acquisition problems, and is seeing systems begin to launch after years of development struggles. However, systemic problems remain that need to be addressed as DOD considers changes to the way it acquires new systems. This is particularly important if DOD decides to pursue new approaches that could require changes in longstanding processes, practices, and organizational structures. Even if DOD decides not to pursue new approaches, these problems must still be tackled. In addition, challenging budget situations will continue to require tradeoffs and prioritization decisions across programs, though limited funds may also provide the impetus for rethinking architectures. We look forward to working with Congress and DOD in identifying the most effective and efficient ways to sustain and develop space capabilities in this challenging environment. Chairman Udall, Ranking Member Sessions, this completes my prepared statement. I would be happy to respond to any questions you and Members of the Subcommittee may have at this time. For further information about this statement, please contact Cristina Chaplain at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this statement and related work include Art Gallegos, Assistant Director; Pete Anderson; Virginia Chanley; Erin Cohen; Desiree Cunningham; Brenna Guarneros; Kristine Hassinger; Laura Hook; Rich Horiuchi; Jeff Sanders; and Roxanna Sun. Introducing Competition into National Security Space Launch Acquisitions. GAO-14-259T. (Washington, D.C.: March 5, 2014). The Air Force's Evolved Expendable Launch Vehicle Competitive Procurement. GAO-14-377R. (Washington, D.C.: March 4, 2014). Global Positioning System: A Comprehensive Assessment of Potential Options and Related Costs is Needed. GAO-13-729. (Washington, D.C.: September 9, 2013). Space: Defense and Civilian Agencies Request Significant Funding for Launch-Related Activities. GAO-13-802R. (Washington, D.C.: September 9, 2013). Missile Defense: Precision Tracking Space System Evaluation of Alternatives, GAO-13-747T. (Washington, D.C.: July 25, 2013). Satellite Control: Long-Term Planning and Adoption of Commercial Practices Could Improve DOD's Operations. GAO-13-315. (Washington, D.C.: April 18, 2013). Space Acquisitions: DOD Is Overcoming Long-Standing Problems, but Faces Challenges to Ensuring Its Investments Are Optimized. GAO-13-508T. (Washington, D.C.: April 24, 2013). 2013 Annual Report: Actions Needed to Reduce Fragmentation, Overlap, and Duplication and Achieve Other Financial Benefits. GAO-13-279SP. (Washington, D.C.: April 9, 2013). Defense Acquisitions: Assessments of Selected Weapon Programs. GAO-13-294SP. (Washington, D.C.: March 28, 2013). Launch Services New Entrant Certification Guide. GAO-13-317R. (Washington, D.C.: February 7, 2013). Space Acquisitions: DOD Faces Challenges in Fully Realizing Benefits of Satellite Acquisition Improvements. GAO-12-563T. (Washington, D.C.: March 21, 2012). Evolved Expendable Launch Vehicle: DOD Is Addressing Knowledge Gaps in Its New Acquisition Strategy. GAO-12-822. (Washington, D.C.: July 26, 2012). 2012 Annual Report: Opportunities to Reduce Duplication, Overlap, and Fragmentation, Achieve Savings, and Enhance Revenue. GAO-12-342SP. (Washington, D.C.: February 28, 2012). Space Research: Content and Coordination of Space Science and Technology Strategy Need to Be More Robust. GAO-11-722. (Washington, D.C.: July 1, 2011). Space and Missile Defense Acquisitions: Periodic Assessment Needed to Correct Parts Quality Problems in Major Programs. GAO-11-404. (Washington, D.C.: June 24, 2011). Space Acquisitions: Development and Oversight Challenges in Delivering Improved Space Situational Awareness Capabilities. GAO-11-545. (Washington, D.C.: May 27, 2011). Space Acquisitions: DOD Delivering New Generations of Satellites, but Space System Acquisition Challenges Remain. GAO-11-590T. (Washington, D.C.: May 11, 2011). Evolved Expendable Launch Vehicle: DOD Needs to Ensure New Acquisition Strategy Is Based on Sufficient Information. GAO-11-641. (Washington, D.C.: September 15, 2011). Space Acquisitions: Challenges in Commercializing Technologies Developed under the Small Business Innovation Research Program. GAO-11-21. (Washington, D.C.: November 10, 2010). Global Positioning System: Challenges in Sustaining and Upgrading Capabilities Persist. GAO-10-636. (Washington, D.C.: September 15, 2010). Briefing on Commercial and Department of Defense Space System Requirements and Acquisition Practices. GAO-10-315R. (Washington, D.C.: January 14, 2010). Defense Acquisitions: Challenges in Aligning Space System Components. GAO-10-55. (Washington, D.C.: October 29, 2009). Space Acquisitions: Uncertainties in the Evolved Expendable Launch Vehicle Program Pose Management and Oversight Challenges. GAO-08-1039. (Washington, D.C.: September 26, 2008). Space Acquisitions: DOD Needs to Take More Action to Address Unrealistic Initial Cost Estimates of Space Systems. GAO-07-96. (Washington, D.C.: November 17, 2006). 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.
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Each year, DOD spends billions of dollars to acquire space-based capabilities that support military and other government operations. The majority of DOD's space programs were beset by significant cost and schedule growth problems during their development. Most programs are now in production, however, and acquisition problems are not as widespread and significant as they were several years ago. In prior years, GAO has identified a number of actions DOD is taking to improve management and oversight of space program acquisitions. Facing constrained budgets and concerns about the resiliency of its satellites, DOD is considering potential changes to how it acquires space systems. This testimony focuses on (1) the current status and cost of major DOD space systems acquisitions, (2) recent actions taken to further improve space systems acquisitions, and (3) potential impacts of the direction DOD is taking on upcoming changes to the acquisition of DOD space systems. This testimony is based on previously issued GAO products, ongoing GAO work on disaggregated architectures, interviews with DOD officials, and an analysis of DOD funding estimates from fiscal years 2013 through 2018. Most of the Department of Defense's (DOD) major satellite acquisition programs are in later stages of acquisition, with the initial satellites having been designed, produced, and launched into orbit while additional satellites of the same design are being produced. A few other major space programs, however, have recently experienced setbacks. For example: the Missile Defense Agency's Precision Tracking Space System, which was intended to be a satellite system to track ballistic missiles, has been cancelled due to technical, programmatic and affordability concerns; the Air Force's Space Fence program, which is developing a ground-based radar to track Earth-orbiting objects, continues to experience delays in entering development; and the first launch of the new Global Positioning System satellites has been delayed by 21 months. Congress and DOD continue to take steps they believe will improve oversight and management of space systems acquisitions. In the past year, for example, DOD has updated its major acquisition policy with the goal of improving efficiency and productivity in defense spending. Among other things, the policy change adds a requirement for independent development testing for DOD acquisition programs, which officials believe will provide an independent voice on programs' development. However, DOD still faces significant oversight and management challenges, including (1) leadership of a space community that is comprised of a wide variety of users and stakeholders with diverse interests and (2) alignment of the delivery of satellites with corresponding ground systems and user terminals. For instance, in some cases, gaps in delivery can add up to years, meaning that a satellite is launched but not effectively used for years until ground systems become available. One reason DOD has been unable to align the delivery of space system components is because budgeting authority for the components is spread across the military services. While most DOD major space system acquisitions have overcome development challenges and are currently being produced and launched, past problems involving large, complicated systems, coupled with the recent fiscal climate of reduced funds, has led DOD to consider efforts that could signal significant changes to the way it acquires and conducts space activities. DOD is considering moving away from its current approach in satellite development--building small numbers of large satellites over a decade or more that meet the needs of many missions and users--toward a more disaggregated architecture involving less complex, smaller, and more numerous satellites. GAO has found that DOD does not yet have sufficient information to make decisions on whether to disaggregate, but it is in the process of gathering that information. In addition, in response to predictions of dramatic increases to the price of launching its satellites, coupled with restrained budgets, DOD has made changes to the way it procures launch vehicles, and is moving forward with plans to allow competition for launch services--a significant shift from past ways of doing business. According to the Air Force, other recent steps in launch acquisitions, including gaining significant insight into launch services cost drivers, have enabled it to achieve significant savings. GAO is not making recommendations in this testimony. However, in previous reports, GAO has generally recommended that DOD adopt best practices for developing space systems. DOD has agreed and is in the process of implementing such practices.
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VA operates the largest integrated health care system in the United States providing care to nearly 5 million veterans per year. The VA health care system consists of hospitals, ambulatory clinics, nursing homes, residential rehabilitation treatment programs, and readjustment counseling centers. In addition to providing medical care, VA is the largest educator of health care professionals, training more than 28,000 medical residents annually as well as other types of trainees. State licenses are issued by state licensing boards, which generally establish licensing requirements, and licensed practitioners may be licensed in more than one state. "Current and unrestricted licenses" are licenses that are in good standing in the state where they are issued. To keep a license current, practitioners must renew their licenses before they expire and meet renewal requirements established by state licensing boards. Renewal requirements include criteria, such as continuing education, but renewal procedures and requirements vary by state and occupation. When a licensing board discovers a licensee is in violation of licensing requirements or established law, for example, abusing prescription drugs or intentionally or negligently providing poor quality care that results in adverse health effects, it may place restrictions on or revoke a license. Restrictions imposed by a state licensing board can limit or prohibit a practitioner from practicing in that particular state. Some, but not all, state licenses are marked to indicate that the licenses have had restrictions placed on them. Generally, state licensing boards maintain a database of information on restrictions, which employers can obtain at no cost either by accessing the information on a board's Web site or by contacting the board directly. National certificates are issued by national certifying organizations, which are separate and independent from state licensing boards. These organizations establish professional standards that are national in scope for certain occupations, such as respiratory and occupational therapists. Practitioners who are required to have national certificates to work at VA must have current and unrestricted certificates. Practitioners may renew these credentials periodically by paying a fee and verifying that they obtained required educational credit hours. A national certifying organization can restrict or revoke a certificate for violations of the organization's professional standards. Like state licensing boards, national certifying organizations maintain databases of information on disciplinary actions taken against practitioners with national certificates, and many can be accessed at no cost. We identified key VA screening requirements and found mixed compliance with these requirements in the four facilities we visited. The key screening requirements are those that are intended to ensure that VA facilities employ health care practitioners who have valid professional credentials and personal backgrounds to deliver safe health care to veterans. None of the four VA facilities complied with all of the screening requirements. In addition, VA does not currently conduct oversight of its facilities to determine if they comply with the key screening requirements. Key VA screening requirements include: verifying the professional credentials of practitioners VA intends to hire; verifying periodically the professional credentials of practitioners currently employed in VA facilities; querying, prior to hiring, the Department of Health and Human Services' Office of Inspector General's List of Excluded Individuals and Entities (LEIE) to identify practitioners who have been excluded from participation in all federal health care programs; ensuring that background investigations are requested or completed for practitioners currently employed in VA facilities; ensuring that the Declaration for Federal Employment form (Form 306) is completed by practitioners currently employed in VA facilities; and verifying that the educational institutions listed by a practitioner VA intends to hire are checked against lists of diploma mills that sell fictitious college degrees and other fraudulent professional credentials. To show the variability in the level of compliance among the four VA facilities we visited, we measured their performance in five of the six screening requirements, against a compliance rate of at least 90 percent for each requirement, even though VA policy allows no deviation from these requirements. Table 1 summarizes the compliance results we found for the five requirements among the four VA facilities we visited. For the sixth requirement to match the educational institutions listed by a practitioner against lists of diploma mills, we asked facility officials if they did this check and then asked them to produce the lists of diploma mills they use. All four facilities generally complied with VA's existing policies for verifying the professional credentials of practitioners currently employed in VA facilities, either by contacting the state licensing boards for practitioners such as physicians or physically inspecting the licenses or national certificates for practitioners such as nurses and respiratory therapists. They also generally ensured that practitioners VA intended to hire had completed the Declaration for Federal Employment form, which requires the practitioner to disclose, among others things, criminal convictions, employment terminations, and delinquencies on federal loans. However, three of the facilities did not follow VA's policies for verifying the professional credentials of practitioners VA intends to hire, and three did not compare practitioners' names to LEIE prior to hiring them. Two of the four facilities conducted background investigations on practitioners currently employed in their facilities at least 90 percent of the time, but the other two facilities did not. We also asked officials whether their facilities checked the educational institutions listed by a practitioner VA intended to hire against a list of diploma mills to verify that the practitioner's degree was not obtained from a fraudulent institution. An official at one of the four facilities told us he consistently performed this check. Officials at the other three facilities stated that they did not perform the check because they did not have lists of diploma mills. In addition to assessing the rate of compliance with the key screening requirements, we found that VA facilities varied in how quickly they took action to deal with background investigations that returned questionable results, such as discrepancies in work or criminal histories. The Office of Personnel Management (OPM) gives a VA facility up to 90 days to take action after the facility receives investigation results with questionable findings. We reviewed the timeliness of actions taken by facility officials from August 1, 2002, through August 23, 2003, at the 4 facilities we visited and 6 additional facilities geographically spread across the VA health care system. We found that officials at 5 of the 10 facilities took action within the 90-day time frame, with the number of days ranging on average from 13 to 68. Officials at 3 facilities exceeded the 90-day time frame on average by 36 to 290 days. One facility took action on its cases prior to OPM closing the investigation, and another facility did not have the information available to report. One of the cases that exceeded the 90-day time frame involved a nursing assistant who was hired to work in a VA nursing home in June 2002. In August 2002, OPM sent the results of its background investigation to the VA facility, reporting that the nursing assistant had been fired from a non- VA nursing home for patient abuse. During our review, we found this case among stacks of OPM results of background investigations that were stored in a clerk's office on a cart and in piles on the desk and on other workspaces. After we brought this case to the attention of facility officials in December 2003, they reviewed the report and then terminated the nursing assistant, who had worked at the VA facility for more than 1 year, for not disclosing this information on the Declaration for Federal Employment form. VA has not conducted oversight of its facilities' compliance with the key screening requirements. Instead, VA has relied on OPM to do limited reviews of whether facilities were meeting certain human resources requirements, such as completion of background investigations. These reviews did not include determining whether the facilities were verifying professional credentials. Although VA established the Office of Human Resources Oversight and Effectiveness in January 2003 to conduct such oversight, the office has not conducted any facility compliance evaluations. In addition, VA has not implemented a policy for the human resources program evaluation to be performed by this office and has not provided the resources necessary to support this office. Gaps in VA's requirements for screening the professional credentials and personal backgrounds of practitioners create vulnerabilities in its screening processes that could place patients at risk by allowing health care practitioners who might harm patients to work in VA facilities. For certain VA practitioners, screening requirements include the verification of all state licenses by contacting the state licensing boards to verify that licenses are current and unrestricted. For example, all state licenses for physicians and dentists are verified by contacting state licensing boards to ensure the licenses are in good standing when VA intends to hire them and periodically during employment. Similarly, all licenses for nurses and pharmacists VA intends to hire are verified by contacting the state licensing boards. However, once hired, periodic screening for nurses and pharmacists simply involves a VA official's physical inspection of one state license, even if the practitioner has multiple state licenses, creating a gap in the verification process. VA's requirements allow a practitioner to select the license under which he or she will work in VA, and this license can be from any state, not necessarily the one in which the VA facility is located. A practitioner may have a restricted state license as a result of a disciplinary action, yet show a facility official a license from another state that is unrestricted. VA facility officials informed us that checking one state license was sufficient because state licensing boards share information on disciplinary actions and licenses are marked when restricted. However, according to state licensing board officials, one cannot determine with certainty that a license is valid and unrestricted unless the licensing board is contacted directly. These officials explained that state licensing boards do not always exchange information about disciplinary actions taken against a practitioners and not all states mark licenses that are restricted. Moreover, licenses can be forged, even though state licensing boards have taken steps to minimize this problem. Therefore, physical inspection of a license alone can be misleading. To supplement the screening of the state licenses of physicians and dentists, VA requires facilities to query two national databasesthe National Practitioner Data Bank (NPDB) and the Federation of State Medical Boards (FSMB) databasewhich contain information about disciplinary actions taken against practitioners. Another available national database, the Healthcare Integrity and Protection Data Bank (HIPDB), contains information on professional disciplinary actions and criminal convictions involving all licensed health care practitioners, not just physicians and dentists. VA is currently accessing HIPDB automatically when it queries NPDB for physicians and dentists because the databases share information. However, VA does not require its facilities to do so for all licensed practitioners even though it is authorized to query HIPDB without a fee. VA also requires that practitioners it intends to hire and who must have national certificates to work in VA facilities, such as respiratory therapists, disclose the national certificates and any state licenses they have ever held. However, VA facility officials are not required to check state licenses disclosed by these practitioners and are only required to physically inspect the national certificates. As with physical inspection of state licenses, physical inspection of national certificates alone can be misleading; not all certificates are marked if restricted, and they can be forged. The only way to know with certainty if a national certificate is current and unrestricted is to contact the issuing national certifying organization. In addition to gaps in VA's verification of professional credentials, VA has not implemented consistent background screening requirements, which would include fingerprint checks, for all practitioners. Although VA requires background investigations for some practitioners currently employed in VA, it does not require these investigations for all types of practitioners. VA requested and received OPM's permission to exempt certain categories of health care practitioners from background investigations based on VA's assessment that these types of practitioners do not need to be investigated. Table 2 lists the practitioners that VA exempts from background investigations. OPM began to offer a fingerprint-only checka new screening optionfor use by federal agencies in 2001. Compared to background investigations, which typically take several months to complete, fingerprint-only check results can be obtained within 3 weeks at a cost of less than $25. In commenting on a draft of our report, VA said that it planned to implement fingerprint-only checks for all contract health care practitioners, medical residents, medical consultants, and practitioners who work without direct compensation from VA, as well as certain volunteers. However, VA has not issued guidance to its facilities instructing them to implement fingerprint- only checks on all these practitioners. VA did issue guidance to its facilities to implement fingerprint-only checks for volunteers who have access to patients, patient information, or pharmaceuticals. Implementing fingerprint-only checks for practitioners who are currently exempt from background investigations would detect practitioners with criminal histories. According to the lead VA Office of Inspector General investigator in the Dr. Swango case, if Dr. Swango had undergone a fingerprint check at the VA facility where he trained, VA facility officials would have identified his criminal history and could have taken appropriate action. Additionally, one of the facilities we visited had implemented fingerprint-only checks of medical residents training in the facility and contract health care practitioners. An official at this facility stated that fingerprint-only checks of medical residents and contract practitioners were a necessary component of ensuring the safety of veterans in the facility. FSMB in 1996 recommended that states perform background investigations, including criminal history checks, on medical residents to better protect patients because residents have varying levels of unsupervised patient care. VA's screening requirements are intended to ensure the safety of veterans by identifying practitioners with restricted or fraudulent credentials, criminal backgrounds, or questionable work histories. However, compliance with the existing key screening requirements was mixed at the four facilities we visited. None of the four facilities complied with all of the key VA screening requirements. However, all four facilities generally complied with VA's requirement to periodically verify the credentials of practitioners for their continued employment. Although VA created the Office of Human Resources Oversight and Effectiveness in January 2003 expressly to provide oversight of VA's human resources practices at its facilities, it has not provided resources for this office to carry out its oversight function. Without such oversight, VA cannot provide reasonable assurance that its facilities comply with requirements intended to ensure the safety of veterans receiving health care in VA facilities. Even if VA facilities had complied with all key screening requirements, gaps in VA's existing screening requirements allow some practitioners access to patients without a thorough screening of their professional credentials and personal backgrounds. For example, although the screening requirements for verifying professional credentials for some occupations, such as physicians, are adequate, VA does not apply the same screening requirements for all occupations with direct patient care access. Specifically, VA does not require that all licenses be verified, or that licenses and national certificates be verified by contacting state licensing boards or national certifying organizations. Similarly, while VA relies on two national databases to identify physicians and dentists who have disciplinary actions taken against them, VA does not require facility officials to query HIPDB. This national database provides information on reports of professional disciplinary actions and criminal convictions that may involve currently employed licensed practitioners and those VA intends to hire. As part of its query of another database, VA accesses HIPDB automatically for physicians and dentists, but practitioners such as nurses, pharmacists, and physical therapists do not have their state licenses checked against this national database. In addition, VA does not require all practitioners with direct patient care access, such as medical residents, to have their fingerprints checked against a criminal history database. These gaps create vulnerabilities that could allow incompetent practitioners or practitioners with the intent to harm patients into VA's health care system. In light of the gaps we found and mixed compliance with the key screening requirements by VA facilities, we believe effective oversight could reduce the potential risks to the safety of veterans receiving health care in VA facilities. In our report, we recommend that VA take the following four actions: expand the verification requirement that facility officials contact state licensing boards and national certifying organizations to include all state licenses and national certificates held by practitioners VA intends to hire and currently employed practitioners, expand the query of the Healthcare Integrity and Protection Data Bank to include all licensed practitioners that VA intends to hire and periodically query this database for practitioners currently employed in VA, require fingerprint checks for all health care practitioners who were previously exempted from background investigations and who have direct patient care access, and conduct oversight to help ensure that facilities comply with all key screening requirements for practitioners VA intends to hire and practitioners currently employed by VA. Mr. Chairman, this concludes my prepared remarks. I will be pleased to answer any questions you or other Members of the Subcommittee may have. For further information regarding this testimony, please contact Cynthia A. Bascetta at (202) 512-7101. Mary Ann Curran and Marcia Mann also contributed to this statement.
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The Department of Veterans Affairs (VA) employs about 190,000 individuals including physicians, nurses, and therapists at its facilities. It supplements these practitioners with contract staff and medical residents. Cases of practitioners causing intentional harm to patients have raised concerns about VA's screening of practitioners' professional credentials and personal backgrounds. This testimony is based on GAO's report VA Health Care: Improved Screening of Practitioners Would Reduce Risk to Veterans, GAO-04-566 (Mar. 31, 2004). GAO was asked to (1) identify and assess the extent to which selected VA facilities comply with existing key VA screening requirements and (2) determine the adequacy of these requirements for its practitioners. GAO identified key VA screening requirements that include verifying state licenses and national certificates; completing background investigations, including fingerprinting to check for criminal histories; and checking national databases for reports of practitioners who have been professionally disciplined or excluded from federal health care programs. GAO reviewed 100 practitioners' personnel files at each of four facilities it visited and found mixed compliance with the existing key VA screening requirements. GAO also found that VA has not conducted oversight of its facilities' compliance with the key screening requirements. GAO found adequate screening requirements for certain practitioners, such as physicians and dentists, for whom all licenses are verified by contacting state licensing boards. However, existing screening requirements for others, such as nurses and respiratory therapists currently employed in VA, are less stringent because they do not require verifying all state licenses and national certificates. Moreover, they require only physical inspection of these credentials rather than contacting licensing boards or certifying organizations. Physical inspection alone can be misleading; not all credentials indicate whether they are restricted, and credentials can be forged. VA also does not require facility officials to query, for other than physicians and dentists, a national database that includes reports of disciplinary actions and criminal convictions involving all licensed practitioners. In addition, many practitioners with direct patient care access, such as medical residents, are not required to undergo background investigations, including fingerprinting to check for criminal histories. This pattern of gaps and mixed compliance with key VA key screening requirements create vulnerabilities to the extent that VA remains unaware of practitioners who could place patients at risk.
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The acquisition process at federal agencies generally consists of three phases: (1) acquisition planning; (2) contract award; and (3) contract monitoring. Each phase involves a number of key activities, as shown in figure 1: In the acquisition planning phase, agencies establish their requirements and develop a plan to meet those requirements. Both program and contracting officials participate in acquisition planning activities. During this phase, agencies conduct market research to determine what products or services are available and on what terms. They select a contracting approach best suited to the nature of the acquisition, addressing among other things, the availability of existing contracts, extent of competition required, and the most appropriate contract type, such as cost-reimbursable or fixed-price. In the award phase, agencies solicit bids, quotes, or proposals from prospective vendors, depending on the contracting method selected. In negotiated acquisitions, they evaluate the submissions from vendors under established evaluation criteria in the solicitation and award a contract to the vendor representing the best value to the government, based on a combination of technical and cost factors. Agencies follow a similar process when ordering from the Federal Supply Schedule, where quotes from contractors are evaluated using stated evaluation criteria and orders are awarded to the contractor that would provide the best value and offers the lowest overall cost alternative. In the contract monitoring phase, agencies engage in a range of activities intended to ensure that the contractor delivers according to the terms of the contract. These activities often are described in detail in a contract surveillance plan, sometimes called a quality assurance surveillance plan. For cost-reimbursement contracts, agencies may arrange for an audit of costs incurred by the contractor. These audits may be performed by entities such as the agency inspector general or the Defense Contract Audit Agency (DCAA). NSF spends most of its annual budget of about $7 billion to fund grants to universities and other research entities, but the agency also spent more than $446 million in fiscal year 2011 acquiring goods and services in support of its mission. The largest of these acquisitions involved contracts for logistics support of scientific missions in the Arctic and Antarctica, as well as ocean-drilling projects in various locations. For these types of large-scale projects, NSF uses the negotiated contracting procedures of Part 15 of the FAR. NSF uses negotiated contracting methods for about 66 percent of its contract spending, as shown in figure 2. For another 32 percent of its contract spending, NSF uses a variety of more streamlined contracting methods allowed under the FAR. These include placing orders under Federal Supply Schedule contracts awarded by the General Services Administration or other pre-existing contracts. Placing orders under existing contracts is often a more simplified approach than awarding a new contract. The remaining 1 percent or so of NSF contract spending is through various other methods, such as interagency agreements with the U.S. Navy for deep sea research vessel certification. The Division of Acquisition and Cooperative Support (DACS) at NSF is responsible for the solicitation, negotiation, award, and administration of the agency's contracts for NSF's research facilities and major programs. DACS oversees NSF procurement systems, contracts policy, processes and guidance. This Division is under the Office of Budget, Finance, and Award Management which reports to the Office of the Director. The Office of Inspector General provides independent oversight of the agency's programs and operations, including contracts. The NSF-OIG is responsible for promoting efficiency and effectiveness in agency programs and for preventing and detecting fraud, waste, and abuse. By statute, the NSF-OIG is under the general supervision of the National Science Board and reports to the Board and Congress. Much of NSF's contracting activity is for recurring needs, such as logistics support for its facilities in the polar regions, data collection, or surveys. For example, the National Survey of Recent College Graduates began in 1973 and continues today. In our prior work on acquisition planning practices, we found that documenting decisions, particularly when there is frequent staff turnover, is key to providing insight for subsequent contracts. Specifically, we found that documenting cost estimates is particularly important to help ensure the information is available when planning for follow-on contracts. Incorporating lessons learned from prior acquisitions can help further refine requirements and strategies when planning for future acquisitions. NSF officials must decide on a contract pricing arrangement for every contract or order. The major categories of pricing arrangements NSF uses are fixed-price, time-and-materials, and cost-reimbursement. Under a fixed-price contract, the government generally pays a firm price and may also pay an award or incentive fee related to performance. In a time- and-materials contract or order, the government pays a set amount for every hour of service the contractor provides, plus the cost of any materials used. Because the number of hours to be provided is dependent on a number of factors, this type of contract requires an enhanced level of government oversight. When using a cost- reimbursement contract, the government agrees to reimburse all the allowable costs incurred by the contractor as prescribed in the contract. These types of contracts can be risky because the government agrees to pay for costs incurred regardless of the outcome achieved. Cost-type contracts that exceed certain dollar thresholds generally are subject to the cost allocation rules of the government's Cost Accounting Standards (CAS), and in these cases the contractor generally is required to disclose its cost accounting practices in a CAS Disclosure Statement. We previously reported on the use of cost-reimbursement contracts at several agencies, including NSF, finding that agencies frequently did not document why they selected this type of contract. Financial statement audits performed by an independent accounting firm on behalf of the NSF-OIG for fiscal years 2009 and 2010 identified significant deficiencies related to the use and monitoring of cost- reimbursement contracts at NSF. Specifically, the audits found that NSF did not ensure the adequacy of contractor accounting systems prior to award or the validity of costs incurred on the contract. In 2011, however, the same firm concluded that the concern had been addressed through the adoption of new policies and procedures. While we were conducting our audit work, NSF was in the process of conducting a self-assessment of its acquisition function in accordance with the Office of Management and Budget (OMB) Circular A-123. The agency also retained a consulting firm to review its self-assessment. In July 2012, the firm issued a report summarizing its findings. We did not assess the methodology, findings, or conclusions of either the NSF self-assessment or the consulting firm's review. In October 2012, NSF updated its contracting manual to incorporate a number of changes. For example, NSF reorganized the manual to align it with the FAR and added additional guidance to address the deficiencies identified in the financial audits. All of the contract activities in our review were subject to prior versions of the contracting manual. The NSF contract files we reviewed reflected the use of selected key acquisition planning practices to varying degrees, but the agency has not provided guidance on the time needed to complete early planning phase activities. Allowing sufficient time to plan procurements may facilitate an increased use of lower risk contracting vehicles by providing time for the contracting officer to consider including more fixed-priced elements. Our observations of the use of some of the key practices for acquisition planning activities are summarized in table 1, and explained in more detail below. The acquisitions we reviewed all involved some degree of acquisition planning, but the time spent planning and the content of planning documents varied. Planning for the negotiated acquisitions ranged from a few months to more than 6 years, while many of the streamlined acquisitions in our sample had more abbreviated planning periods. Contracting and program officials responsible for one program office told us they often copy planning documents from predecessor orders to compensate for abbreviated planning periods. This practice, however, does not allow for incorporation of new guidance or changing contract requirements. In addition, some of the individual contract acquisition plans for the earlier contracts in our sample did not include details on how the agency planned to evaluate the proposals from competing vendors. Documenting a decision regarding the plan for proposal evaluation is an important component of the acquisition planning phase. Contracting guidance at NSF does not identify the range of time needed to conduct acquisition planning activities for the types of acquisitions methods it employs. Currently, the guidance states that the process of acquisition planning should begin as soon as a program need is identified and it is determined that the need must be met through the use of resources from outside the government. The guidance does not provide any detail, however, on the expected range of time needed to conduct planning activities in the earliest stages of an acquisition when key documents are prepared, such as the statement of work and a cost estimate. Acquisition planning usually occurs in three phases, and while NSF has established expected time frames for the latter stages of acquisition planning, the agency has not established such expectations for the earliest planning phase. Figure 3 depicts what we found at NSF. Allowing sufficient time to plan procurements may provide agencies a better opportunity to clearly define contract requirements, outline source selection procedures, conduct market research to support competition, estimate costs, and consider opportunities for increased use of lower-risk contracting vehicles containing more fixed-priced elements. Conversely, the lack of sufficient time for planning may have adverse effects, such as unplanned delays. For example, NSF had to extend one streamlined order in our review on a non-competitive basis for more than a year and a half in order to complete planning tasks for the follow-on order. The contracting officer used the additional planning time to conduct the analysis needed to incorporate more fixed-priced elements into the new order. Planning for the earlier order did not include documentation of a price history analysis, which, according to contracting officials, may have helped expedite the follow-on planning and was likely due to short planning time frames for the earlier order. In another case, the delayed award of one of the orders in our review caused a compressed period for data collection for a report with firm deadlines. The schedule risk from these delays could lead to higher overall costs. Further, officials from two program offices told us that they would benefit from knowing an expected time range to complete early planning activities. For example, in the absence of guidance on the time needed to complete early planning activities, program and contracting officials responsible for NSF's largest contract told us they had difficulty convincing their colleagues of the appropriate time to initiate contract planning. They added that this acquisition required a number of changes before a follow-on contract could be awarded--some based on updates to the FAR and some based on internal decisions, including the use of a different source selection strategy. Market research is a key element in the acquisition planning phase that provides insight into available sources for the acquisition and may provide information on estimated costs. We found evidence of market research in each of the acquisition plans we reviewed, though the link between the research conducted and the impact on the acquisition strategy was not always clear. For example, the acquisition plan for one streamlined acquisition noted concerns about the lack of offerors for past solicitations. The acquisition plan stated that NSF would use the Federal Supply Schedule and release the request for quotations to six potential offerors, but it did not address how market research impacted this decision. By contrast, NSF engaged in extensive planning for its Integrated Ocean- Drilling Program, including requirements development and market research to identify potential sources to support its mission. According to officials, this planning, which occurred over about a 5-year period, consisted of soliciting interest from more than 30 international institutions using various techniques such as market surveys and sources sought notices. NSF used this multi-year planning period to set up the funding and organizational infrastructure requirements of this complex international program. All of the files we reviewed showed that during the planning phase agency officials had addressed how the contract would be priced. However, the planning documentation for the cost-reimbursable acquisitions in our review did not consistently include assessments of the additional risk and burden these high-risk contracts place on the agency or an assessment of the potential for firmer pricing in future acquisitions. Knowing the risk of using a cost-reimbursable contract and identifying opportunities to use a less risky contract type after experience provides a basis for firmer pricing is a sound practice identified by our prior work, by the Department of Defense, and, more recently, in federal regulation. Despite the risk associated with cost-type contracts, NSF contracting officials did not document their acknowledgment of this risk for an early contract for the ocean drilling program or whether they would attempt to minimize the future use of a cost-type contracts. Further, in a prior report we noted that NSF's procurements of data collection and analysis services for mandated surveys did not consider pricing history and whether there was a basis to transition to firmer pricing. According to NSF officials, when re-awarding these types of survey procurements, staff will make an effort to identify tasks to convert to firmer pricing. In fact, a contracting officer responsible for the survey-related orders in our sample told us he has been conducting analysis to determine what tasks could be transitioned to a fixed-price contract type rather than a time-and-materials contract type. He stressed that some tasks are less suitable for fixed- pricing due to the unknowns and "what ifs" inherent in the work, but his goal is to incorporate fixed-pricing into 70 to 80 percent of each survey order. We identified examples of this transition to firm fixed-price elements in some of NSF's more recently awarded streamlined acquisitions. Contract documentation for negotiated and streamlined acquisitions showed that NSF generally followed key practices in the award phase. Table 2 summarizes our findings based on the contracts and orders we reviewed. Most of the contracts in our sample included price reasonableness determinations, as outlined in both federal regulation and NSF guidance current at the time of our review. For most of the streamlined acquisitions we reviewed, NSF documented reasonable price determinations, including an analysis of the contractor's proposed labor hours and the level of effort. In one case, contracting staff worked with an offeror to obtain lower labor rates that were more in line with the government cost estimate. These actions decreased the cost of the order by approximately 8 percent ($1.2 million). In recent years, NSF has taken steps to address deficiencies related to accounting system and disclosure statement reviews identified in its fiscal year 2009 financial statement audits. Specifically, NSF clarified its CAS disclosure statement and accounting system review procedures to better align with sound practices identified by the NSF-OIG and in federal regulation. Contract file documentation indicates that NSF has improved in this area, with most of the negotiated contracts we reviewed having documentation of more recent accounting system and CAS disclosure statement reviews, and the most recent contract having documentation of pre-award audits of all contractors in the competitive range. One of the earlier contracts did not have pre-award audits on file or an accounting system review prior to award. NSF officials told us that they did not think this requirement applied. In another earlier case, the contracting officer waived the requirement for a CAS disclosure statement adequacy determination prior to award with the expectation that the determination would be made shortly after award. However, NSF did not have documentation of the final disclosure statement adequacy determination. NSF updated its guidance and took steps to incorporate sound practices related to contract monitoring, but the agency has not made arrangements for audits of some of the larger contracts we sampled. Our findings are summarized in table 3. Most of the contracts we reviewed included documentation of surveillance plans outlining how NSF would monitor contractor performance and costs, although one of the streamlined acquisitions did not have the surveillance documents called for in the acquisition plan. Further, we found evidence that at least some monitoring activities occurred for all the procurements we reviewed, though not always as specified in the monitoring plans or using deliverables described in the contract or order. For example, the acquisition plan for a large, information technology (IT) order states that the contractor shall provide "daily, weekly, and monthly progress reports" as well as an IT Management Plan and other ad hoc reports as required, with similar requirements reflected in the order. The contracting officer for this order was not aware of any daily progress reports for this order, and added that the monitoring process for these types of acquisitions depends on the quality of the contractor, noting that for some contracts with few performance issues, the monitoring is less rigorous. In another case, the contracting officer noted that despite the statement of work calling for a Quality Assurance Plan, such a plan would be too restrictive for an IT support contract due to the frequent changes in IT systems. Our prior reports state that without consistent cost surveillance, such as through incurred cost audits, an agency may be exposed to the unnecessary risk of overpaying the contractor. Further, NSF-OIG's fiscal year 2009 financial statement audits recommended that NSF obtain incurred cost submissions and audits for its largest cost-reimbursable contracts, depending on materiality and risk, to assure the validity of costs billed to NSF. In response, NSF updated its guidance on incurred cost audits and took the necessary steps to obtain incurred cost audits for its largest contract. Around the same time, in August 2009, NSF-OIG and the NSF Office of the Director signed a memorandum of understanding (MOU) that provides procedures to ensure appropriate coordination between the NSF-OIG and NSF for the performance and funding of contract audits. The MOU indicates that the NSF-OIG will provide, within its resources, appropriated funds necessary to perform contract audits selected for its annual audit plan. The NSF-OIG solicits recommendations from NSF per the MOU and prioritizes its annual audit plan based on this input, its own needs, and a variety of risk factors. The MOU identifies the following factors the NSF- OIG uses to prioritize contract audits: type of contract, materiality, whether NSF is the cognizant agency responsible for contractor oversight, known prior audit concerns, contract administration at other federal agencies, and whether NSF expects to continue to have a relationship with the contractor. For audits that NSF determines necessary that are not in the NSF-OIG audit plan, the MOU states that "NSF will obtain and fund the services of an outside auditor." The contracts branch officials told us that their first option is to ask the NSF- OIG to obtain an audit, and if the NSF-OIG does not complete the contract audit, the branch tries to obtain alternative funding. NSF officials told us, however, that alternate funding requires approval at senior management levels, and contracting staff continue relying on the NSF- OIG as the primary means for obtaining contract audits. The NSF Director and NSF-OIG identified the need for incurred costs audits of an ocean drilling contract in our sample. Despite the MOU, the agency has not made arrangements for these audits of the contract. Officials stated for earlier years of this contract, the Contracts Branch identified and provided funds for the contracting officer to initiate audits for this contract through DCAA. According to officials, an audit of a prime subcontractor for this contract resulted in $1.5 million in recovered funds. But at the time of our review, despite agreement on the importance of additional audits, the findings from the prior year's audits, and NSF's continued relationship with the contractor, the agency had yet to make arrangements to plan and fund incurred cost audits for more recent fiscal years for this contract, according to officials. Similarly, despite the contracting officer requesting incurred cost audits for another major contract in our review, the audit did not meet the NSF-OIG priorities. According to officials, NSF has not conducted or planned for audits on this contract. In addition, audits for another major contract we reviewed are not scheduled to be completed until fiscal year 2015, which is about two years after the contract expires. In a recent report, we pointed out that timely closing of contracts, including completing any necessary incurred cost audits, can help the government limit its financial risk and possibly recover improper payments. Sound acquisition planning, including cost estimation and identification of the most cost-effective contract type, is important to establishing a strong foundation for successful outcomes for the millions of dollars NSF spends annually on acquisitions. Without sufficient planning time frames to develop acquisition plans that align with sound acquisition practices NSF may have a limited ability to develop a strong foundation for its acquisitions. How long the early acquisition planning activities should take is not covered in existing NSF guidance and will vary based on the complexity of the acquisition. However, without a clear understanding of the time frames needed for the early acquisition planning process, program officials may not know when to start planning or how long the planning will take, potentially increasing the likelihood of poorly prepared documents and contract delays. Better insights into when acquisition planning should begin would help ensure sufficient time to carry out the important acquisition planning activities that are designed to facilitate more successful outcomes. When an acquisition involves substantial uncertainties and the agency deems a cost-type contract as the most appropriate vehicle, contract and program staff need to provide additional oversight to protect the government's interests. NSF has taken steps to address NSF-OIG recommendations to increase contract oversight. NSF has a management responsibility to ensure that adequate resources are available to enable contracting officers to determine that costs billed by contractors are allowable, through incurred cost audits or similar assessments. The process in place to ensure the necessary audits occur requires coordination between the NSF-OIG and the NSF Office of the Director; however, the process has not worked for some of the contracts we reviewed. Further, the Contracts Branch continues to place a strong reliance on the NSF-OIG to provide the resources to obtain the audits. Without a process to ensure audits are conducted in cases when NSF- OIG resources are not available, NSF exposes itself to unnecessary risk and cannot assure the validity of costs billed. We recommend that the Director of NSF take the following two actions: To help ensure good acquisition outcomes through comprehensive acquisition planning, direct DACS to supplement existing guidance on the time frames for acquisition planning to include a focus on the early stages. Consistent with the terms of the existing MOU with the Office of the Inspector General, take steps to arrange, and fund as necessary, timely audits of major contracts. We provided a draft of this report to NSF for review and comment. In written comments, NSF agreed with our recommendations. NSF also provided technical comments, which we incorporated as appropriate. NSF comments are reprinted in appendix II. We are sending a copy of this report to the Director of the National Science Foundation. In addition, the report is also 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) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. As requested by the Subcommittee on Commerce, Justice, Science, and Related Agencies, House Committee on Appropriations, we reviewed the National Science Foundation's (NSF) contracting practices. Specifically, we assessed the extent to which the NSF incorporates key contracting practices in the three major phases of the contracting process: (a) acquisition planning, (b) contract award, and (c) post-award contract monitoring. Within each contracting phase, we focused our work on selected elements: Acquisition planning. We focused on the completeness and review of written acquisition plans, market research, contract type determinations, and time frames for planning. We selected these elements because they are critical to the successful planning of a contract and, in one case, had been identified in the past by the NSF Office of the Inspector General (NSF-OIG) as a potential concern. Contract award. We focused on cost and price analyses, cost accounting system reviews and pre-award audits, and Cost Accounting Standards (CAS) Statement reviews. We selected these elements because they were identified by the NSF-OIG as deficiencies in the past and are essential to determining that the contractor has the ability to complete the contract cost requirements. Contract monitoring. We focused on the development of monitoring or surveillance plans, monitoring activities, and incurred cost audits. These activities were previously identified by the NSF-OIG as deficiencies and are key to determining if the contractor is performing as expected and within allowable costs. To determine key practices in each of these areas, we relied on prior reports and findings from the GAO, NSF-OIG, and other agencies. Below is the list of GAO reports we relied on: GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999); GAO, Contract Management: Trends and Challenges in Acquiring Services, GAO-01-753T (Washington, D.C. May 22, 2001); GAO, Defense Contracting: Improved Insight and Controls needed Over DOD's Time-and-Materials Contracts, GAO-07-273 (Washington, D.C.: June 29, 2007); GAO, Contract Management: Extent of Federal Spending under Cost- Reimbursement Contracts Unclear and Key Controls Not Always Used, GAO-09-921(Washington, D.C.: Sept. 30, 2009); and GAO, Acquisition Planning: Opportunities to Build Strong Foundations for Better Services Contracts, GAO-11-672 (Washington, D.C.: Aug. 9, 2011). We also reviewed internal NSF guidance and the Federal Acquisition Regulation (FAR) for additional key practices. To determine the extent to which NSF's contracting practices incorporate key practices and address prior NSF-OIG recommendations, we reviewed a nongeneralizable sample of 11 contracts and orders with funding obligations over $3 million in fiscal year 2011, the latest year for which data were available when we began our work. We used a risk-based approach to select our sample to ensure it included NSF acquisitions with the highest obligation dollar amount. The 11 contracts and orders selected for review represent 70 percent of total contract obligations in fiscal year 2011 and reflect a mix of program offices, a range of obligation amounts, and a variety of contract types, such as fixed-price and cost- reimbursement. We selected four contracts for which NSF used the negotiation process set forth in Part 15 of the Federal Acquisition Regulation and seven orders on existing contracts for which NSF used streamlined procedures described in other parts of the FAR. The four negotiated acquisitions in our sample are cost-reimbursement contracts and represent about 56 percent of NSF's total fiscal year 2011 contract obligations and about 80 percent of the obligations in our sample. The seven streamlined acquisitions represent about 14 percent of NSF's fiscal year 2011 contract obligations and 20 percent of the obligations in our sample. One of the seven streamlined orders is a hybrid contract type using fixed-price and time-and-materials (T&M) elements; one is a cost- reimbursable order; and the other five are T&M orders. Although the 11 contracts were active during the time of our review , some of the selected contracts were awarded more than 7 years ago--before NSF updated its contracting manual to provide more procedural guidance-- and some more recently. We reviewed the files for the selected contracts and used practices identified in the FAR, NSF internal guidance, and prior GAO reports to assess NSF's use of key practices and procedures for the acquisition planning, award, and contract monitoring phases. In addition to contract file review, we met with contract and program officials to confirm our understanding of information in the contract files and of NSF's practices and procedures as evidenced by the contract files. We also reviewed and considered additional documentations provided by the program and contract officials that were not maintained in the contract files. To assess progress NSF made in response to prior NSF-OIG findings, we reviewed prior NSF-OIG recommendations and corrective action plans. We met with NSF-OIG officials to better understand their recommendations related to our review and used this information to provide assessments of progress made in response to these findings. NSF was in the process of a full acquisition system assessment when we initiated our review. While we were completing our audit work, NSF issued a review of its acquisition function in July 2012. While we met with the internal controls officials involved in this review to understand their process, we did not assess the NSF review as part of this review. We conducted this performance audit from February 2012 to March 2013 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Penny Berrier, Assistant Director, Caryn Kuebler, Margaret Childs, Danielle Greene, Jeffrey Hartnett, Julia Kennon, Jean McSween, Emily Owens, Ken Patton, Erin Schoening, Roxanna Sun, and Alyssa Weir also made key contributions to this report.
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The NSF spends more than $400 million of its $7 billion annual budget acquiring goods and services in support of its mission to promote science and engineering. Much of this spending involves exploration activities in remote locations throughout the world, such as the Arctic and Antarctic. GAO examined the extent to which NSF uses key contracting practices in three phases of the acquisition process: (a) acquisition planning, (b) contract award, and (c) post-award contract monitoring. GAO selected and reviewed a nongeneralizable sample of 11 contracts or orders with at least $3 million in funding obligations for fiscal year 2011, which accounted for about 70 percent of NSF's total contract obligations for that year. Although all 11 contracts and orders received funding during fiscal year 2011, some were awarded more than 7 years ago. Some were awarded more recently. We reviewed each of the 11 contracts to determine the extent to which they reflected the use of key contracting practices based on the Federal Acquisition Regulation, our prior work, and NSF-OIG findings. GAO also reviewed NSF contracting policies and met with NSF contracting and program officials. For the contracts GAO reviewed, the National Science Foundation (NSF) generally used key contracting practices in each of the three phases of the acquisition process, but the agency needs additional guidance on early acquisition planning as well as arrangements for contract audits. The contracts GAO reviewed all involved some degree of acquisition planning, but NSF's guidance does not address appropriate time frames for early planning activities. Without such guidance, NSF contract and program officials said they could not convince their colleagues of the need to initiate early planning activities. Delays in these activities can lead to further delays later. For example, NSF had to extend one order on a non-competitive basis for more than a year to complete planning tasks for the follow-on order. In another case, the delayed award of an order compressed the data collection period for a report with firm deadlines, which could lead to higher overall costs. Further, having sufficient time for early planning may facilitate an increased use of lower risk contracting approaches. Contract documentation showed that NSF generally followed key practices in the award phase. An NSF corrective action plan, in response to NSF's Office of Inspector General's (NSF-OIG) 2009 financial statement audits, clarifies the agency's procedures for reviewing contractors' accounting practices and financial disclosure statements to better align with key practices. Contract file documentation shows NSF improved in this area, with most of the negotiated contracts having documentation of accounting system reviews. Further, NSF generally documents price reasonableness determinations. NSF updated its guidance and took steps to incorporate key contract monitoring practices. NSF-OIG's 2009 financial statement audits recommended that NSF obtain incurred cost submissions and audits for its largest cost-reimbursable contracts to ensure the validity of costs billed to NSF. Around the same time, the NSF-OIG and the NSF Office of the Director signed a memorandum of understanding (MOU) that provides a process for arranging for contract audits. Audits for one of the ocean drilling contracts completed in 2012 resulted in $1.5 million in recovered funds. The NSF Director and NSF-OIG have both identified additional audits of this contract as a top priority. However, despite the terms of the MOU, and the agreement between NSF and the NSF-OIG on the need for further audits, arrangements have not been made to conduct additional audits of this contract for more recent fiscal years, according to officials. Similarly, despite requests from the contracting officer, NSF has not made arrangements for incurred cost audits for another large contract GAO reviewed. GAO recommends that the Director of NSF (1) supplement existing guidance on acquisition planning to address the time needed for the early stages of the process, and (2) arrange for audits to be performed on major contracts, consistent with the terms of the memorandum of understanding with NSF-OIG. NSF agreed with the recommendations.
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African American children were more likely to be placed in foster care than White or Hispanic children in 2006, and at each decision point in the child welfare process the disproportionality of African American children grows. Nationally, although African American children made up less than 15 percent of the overall child population in the 2000 Census, they represented 26 percent of the children who entered foster care during fiscal year 2006 and 32 percent of the children remaining in foster care at the end of that year (see fig. 1). There are various options for placing children in temporary and permanent homes through the child welfare system. Temporary options include foster care with relatives or nonrelatives--whether licensed or unlicensed--and group residential settings. According to HHS, approximately one-fourth of the children in out-of-home care are living with relatives, and this proportion is higher for Hispanic and African American families. For permanent placements, children can be reunified with their parents, or if reunification is not considered possible, children can be adopted or live with a legal guardian. Although both adoption and guardianship are considered permanent placement options under federal law, an important difference is that adoption entails terminating parental rights, while guardianship does not. Another difference is that some adoptions may be subsidized with federal funds. Federal funds account for approximately half of states' total reported spending for child welfare services, with the rest of funding coming from states and localities. In fiscal year 2004, total federal spending on child welfare was estimated to be $11.7 billion based on analysis of data from more than 40 states. Titles IV-E and IV-B of the Social Security Act are the principal sources of federal funds dedicated for child welfare activities. Title IV-E supports payments to foster families, subsidies for families who provide adoptive homes to children who states identify as having special needs that make placement difficult, and related administrative costs on behalf of children who meet federal eligibility criteria. Title IV-E payments for foster care maintenance are open-ended entitlements. Title IV-B authorizes funds to states for broad child welfare purposes, including child protection, family preservation, and adoption services; these funds are appropriated annually. Federal block grants, such as the Temporary Assistance for Needy Families (TANF) and the Social Services Block Grant (SSBG), provide additional sources of funds that states can use for child welfare purposes. States have discretion to provide direct social services for various populations, including child welfare families, the elderly, and people with disabilities. In 1994, the Congress authorized the use of demonstration waivers to encourage innovative and effective child welfare practices. These waivers, typically authorized for 5 years, allowed states to use Title IV-E funds to provide services and supports other than foster care maintenance payments. For example, four states had completed demonstrations that involved subsidized guardianships, and, as of May 2007, seven states had active guardianship demonstrations and one state had not yet implemented its guardianship demonstration. Demonstration waivers must remain cost-neutral to the federal government, and they must undergo rigorous program evaluation to determine their effectiveness. A complex set of interrelated factors influence the disproportionate number of African American children who enter foster care, as well as their longer lengths of stay. Major factors affecting children's entry into foster care included African American families' higher rates of poverty, difficulties in accessing support services, and racial bias or cultural misunderstanding among child welfare decision makers, as well as families' distrust of the child welfare system. Factors often cited as affecting African American children's length of stay in foster care included the lack of appropriate adoptive homes for children, parents' lack of access to support services needed for reunification with their children, and a greater use of kinship care among African American families. (See fig. 2.) In our survey, 33 of the 48 states from which we received responses reported that high rates of poverty in African American communities and issues related to living in poverty may increase the proportion of African American children entering foster care compared to that of children of other races and ethnicities. Across the nation, African American families were nearly four times more likely to live in poverty than White families, according to U.S. Census data. Since foster care programs primarily serve children from low-income families, this could account for some of the disproportionate number of African American children in the foster care system. In addition, child welfare directors in 25 states reported that the greater number of African American single-parent households contributed to African American children's entry into foster care. According to the most recent National Incidence Study, children of single parents, who are also more likely than married couples to be poor, had a 77 to 87 percent greater risk of harm than children from two-parent families. Across the nation, 34 percent of African American family households with children under 18 years of age were headed by single females compared to 9 percent for Whites and 19 percent for Hispanics, according to U.S. Census data. Moreover, families living in impoverished neighborhoods often do not have access to the kinds of supports and services that can prevent problems in the home from leading to abuse or neglect, according to states we surveyed and other research. Such supports and services include affordable and adequate housing; substance abuse treatment; access to family services such as parenting skills workshops and counseling; and adequate legal representation. Also, there is some evidence that African American families, in particular, are not offered the same amount of support services when they are brought to the attention of the child welfare system. Coupled with African American parents' greater distrust of the child welfare system, racial bias or cultural misunderstanding among decision makers also emerged in our survey as major factors contributing to the disproportionate number of African American children entering foster care. According to state child welfare officials and some researchers we interviewed, African American families' distrust of the child welfare system stems from their perception that the system is unresponsive to their needs and racially biased against them. This perception can shape the families' dynamics in their initial contacts with mandated reporters, caseworkers, and judges, which can increase the risk the child will be removed from the home. In our survey, state child welfare directors also reported that they considered racial bias or cultural misunderstanding on the part of those reporting abuse or neglect---such as teachers, medical professionals, or police officers, as well as among caseworkers---as factors in the disproportionate representation of African American children entering foster care. In support of this view, some studies have found that medical professionals are more likely to report low-income or minority children to child protective services. Although research on racial bias or race as a predictor for entry into foster care is not always consistent, a recent review of the current research concluded that race is an important factor that affects the decision to place children into foster care. Among factors cited as affecting African American children's longer lengths of stay in foster care, officials from 29 states cited an insufficient number of appropriate adoptive homes as a key factor. African American children constituted nearly half of the children legally available for adoption in 2004, and they waited significantly longer than other children for an adoptive placement. Factors that make finding adoptive families for African American children challenging include the difficulty many states have in recruiting adoptive families of the same race and ethnicity as the children waiting for adoption and the unwillingness of some families to adopt a child of another race. In addition, states we surveyed reported that African American children waiting to be adopted were older, and prospective adoptive parents are more inclined to adopt younger children. (See fig. 3.) Additionally, the belief that African American children are more likely to be diagnosed as having medical and other special needs, which may contribute to their longer lengths of stay in foster care, was reported by state officials. In fact, African American children in foster care in 2004 were only slightly more likely to have been diagnosed as having medical conditions or other disabilities (28 percent) than White children in foster care (26 percent), according to HHS data. However, 23 percent of African American children who were adopted out of foster care had a medical condition or disability, compared to 31 percent of White children in the same category. Some of the same factors that states view as contributing to African American children's entry also contribute to their difficulties in exiting foster care and being reunified with their families. In our survey, nearly half of the states considered the lack of affordable housing, distrust of the child welfare system, and lack of substance abuse treatment as factors contributing to African American children's longer lengths of stay. The lack of such supports and other services in many poor African American neighborhoods contributes to children's longer stays in foster care because services can influence a parent's ability to reunify with their child in a timely manner, according to our survey, interviews, and research. States also reported that the use of kinship care was a factor contributing to longer lengths of stay in foster care for African American children. African American children are more likely than White and Asian children to enter into the care of relatives, which is associated with longer lengths of stay. Relatives may be unwilling to adopt the child because it would require termination of their relative's parental rights or because they might lose needed financial support they receive as foster parents. However, despite the longer lengths of stay, child welfare researchers and officials we interviewed consider these placements to be positive options for African American children because they are less stressful to the child and maintain familial ties. Researchers and child welfare administrators we interviewed stressed that no single strategy could fully address disproportionality in foster care, partly because so many interrelated factors contribute to it. According to our survey, the strategies that states implemented tended to focus on addressing racial and cultural bias in decision making, families' problems in accessing support services, and agencies' challenges in finding permanent homes so that children can exit foster care more quickly. In addition, data collection and analysis were considered essential for identifying problems and devising strategies to address them, but states reported needing additional assistance in this area. To help mitigate bias and cultural misunderstanding among decision makers, states reported implementing a range of strategies, such as including family members in case planning; providing training to strengthen caseworkers' competency in working with families from various cultures; reaching out to ensure that public officials are not inappropriately referring families for abuse and neglect through mandated reporting; and implementing the use of certain tools to help caseworkers make more systematic decisions regarding the level of a child's risk. (See fig. 4.) According to an evaluation in Texas, for example, for African American families who participated in case planning that included family group decision making, 32 percent of the children returned home--more than twice as many as in families who received traditional services. To improve families' access to services, states reported collaborating with neighborhood-based support organizations, establishing interagency agreements to improve access to these services, and implementing an alternative approach to the assessment process that emphasizes helping families obtain needed supports and services, instead of removing children from their families. For example, in Los Angeles County, child welfare officials went door to door in minority neighborhoods to find service providers beyond those with whom they historically contracted. This collaboration helped build trust between the community and the child welfare agency and increased families' use of the services provided. For African American children who cannot ultimately be reunified with their parents, states also reported devising strategies to increase the number of permanent homes available to them. To increase the options for African American children, 46 states reported making diligent searches for fathers and other paternal kin who can care for these children--not a routine practice until recently. Additionally, a federal law passed in 1994 and amended in 1996 require states to diligently recruit potential foster and adoptive families that reflect the ethnic and racial diversity of children in the state who need foster and adoptive homes. Likely in response to these laws, states have adopted various strategies to recruit greater numbers of African American adoptive parents, such as contracting with faith-based organizations and convening adoption support teams. However, despite these efforts, the number of African American children adopted by African American parents has not increased in recent years. In addition, HHS's 2001 to 2004 review found that only 21 of 52 states were sufficiently recruiting minority families, and one report found that the recruitment of minority families was one of the greatest challenges for nearly all states. Using subsidized guardianship as an alternative to adoption may hold particular promise for reducing disproportionality, and more than half of the states surveyed reported using this strategy. African American children are more likely than White children to be placed with relatives for foster care, which is generally a longer-term placement, and these relative caregivers are also more likely than nonrelative foster parents to be low- income. They may be unwilling to adopt because they may find it difficult financially to forego foster care payments or because adoption entails terminating the parental rights of their kin. However, subsidized guardianship programs provide financial support for foster parents (often relatives) who agree to become legally responsible for children but are unable or willing to adopt. When Illinois and California implemented two of the largest of such programs, they subsequently saw an increase in permanent placements for all children. After instituting their subsidized guardianship programs, more than 40 percent of children who were in long-term relative foster care in both states found permanency. In Illinois, this decrease also coincided with a reduction in disproportionate numbers of African American children in foster care. In addition to these types of strategies, child welfare administrators and researchers told us that data collection, analysis, and dissemination are needed to inform attempts to address disproportionality. These data can include not only disproportionality rates but also information that identifies the extent to which disproportionality occurs among different age groups, at different stages in the child welfare process, and in different locations. For example, a California researcher used state data to show that African American infants enter foster care at a much higher rate than infants of other races or ethnicities and that this disproportionality grows as children get older because African American children are also less likely to exit foster care. Such data analyses help states and localities devise strategies to address the issue and can also be useful for building consensus among community leaders and policymakers for action. However, some state and local agencies have limited capacity to do this. In responding to our survey, 25 states reported that receiving technical assistance from HHS in calculating disproportionality rates and tracking it over time would be useful. California state child welfare officials told us that without the aid of a university researcher, they would not have the ability to help counties that lack the capacity to collect and analyze their data. Despite the importance of data analysis, 18 states reported that they were not regularly analyzing or using data in their efforts to address disproportionality. HHS has made technical assistance and information on disproportionality available to states at conferences and through various HHS Web sites. In addition, the agency is compiling an inventory of tools and best practices for addressing disproportionality. Despite these efforts, states report that they need further information and technical assistance to strengthen their current efforts in addressing disproportionality. Accordingly, in our July 2007 report, we recommended that HHS take certain actions to further assist states in understanding and addressing the nature and extent of racial disproportionality in their child welfare systems. In its comments, HHS noted that our recommendation was consistent with its efforts to provide technical assistance to states for addressing disproportionality, but the department did not address the specific actions we recommended. We continue to believe that it is important for HHS to take these actions to help states address this complex issue. While states viewed some federal policies as helpful for reducing the proportion of African American children in foster care, they also expressed concerns regarding policies that limit the use of federal funds to provide preventive services and support legal guardianship arrangements. As an alternative to adoption, states considered subsidized guardianship as particularly helpful in enabling African American children to exit foster care but noted that while they can use federal child welfare funds to pay subsidies to adoptive parents, they cannot do so for guardians. At least half the states we surveyed noted that the structure of federal child welfare funding may contribute to disproportionality by favoring foster care placements over services to prevent the removal of children from their homes in the first place. Of particular concern to 28 states in our survey were the caps on funding for preventive and family support services under Title IV-B, and 25 states expressed concern about their inability to use foster care funds under Title IV-E for purposes other than making payments to foster care families. A recent GAO report similarly found that preventive and family support services were the services most in need of greater federal, state, or local resources. According to California and Minnesota officials, because the majority of federal child welfare funds are used for foster care payments instead of preventive services, federal funding policies did not align with states' efforts to reduce the number of children entering foster care by serving at-risk children safely in their homes. However, states do have the freedom to use other federal funds, particularly TANF block grants, to provide preventive and supportive services to families, and 23 states reported that the ability to use these funds contributes to a reduction in the proportion of African American children in foster care. States face competing priorities for the use of their TANF block grant funds, and not all states use them for child welfare activities. Once children are removed, states reported that federal policies promoting adoption were generally helpful; however, states' views were mixed on certain requirements specifically intended to eliminate race-related barriers to adoption. Policies that promote adoption of African American children were generally viewed as helpful, such as allowing states to classify African American children as having "special needs," which allows them to provide subsidies to adoptive parents, according to our survey results. However, views of other requirements were mixed. Although 22 states reported that the federal policies requiring states to diligently recruit ethnically and racially diverse adoptive families would help reduce disproportionality, 9 states reported the federal requirements had no effect, and 15 states reported that they were unable to tell. States continue to face challenges in recruiting adoptive families---such as a shortage of willing and qualified parents, especially for older African American children, or a lack of resources for recruiting initiatives---and more than half of states are not meeting HHS performance goals in this area. Over the last 5 years, African American children and Native American children have consistently experienced lower rates of adoption than children of other races and ethnicities, and since 2000, adoption rates have reached a plateau, according to HHS data and other research. As an alternative to adoption, many child welfare officials and researchers we interviewed considered subsidizing legal guardianship a particularly important way to help African American children exit foster care. However, there are no federal subsidies for guardianship similar to those available for adoption, which constrains states' ability to place children in these arrangements. Seven states have a federal demonstration waiver, which allows them to use Title IV-E funds for subsidized guardianship. All states did so in a cost-neutral manner, as required by the waivers. In California and Illinois, subsidizing these legal guardianships has been found to reduce the number of children in foster care, including African American children. In addition, guardianship and adoption both have been found to provide comparable levels of stability for children and show similar outcomes in terms of emotional and physical health, according to an evaluation of Illinois's guardianship program. Because of the challenges states face finding adoptive homes for many African American children and because legal guardianship may offer a more suitable alternative for families who want to permanently care for related children without necessarily adopting them, we recommended, in our 2007 draft report, that HHS pursue specific measures to allow adoption assistance payments to be used for subsidizing legal guardianship. In its comments, HHS disagreed with our recommendation, stating that its proposal for restructuring child welfare funding, known as the Child Welfare Program Option, would give states the option to do this. However, HHS has presented this option in its budget proposal each year since 2004, but no legislation has been offered to date to authorize it. Moreover, even if enacted, it is unknown how many states would choose to implement this funding structure. Because the viability of HHS's proposal is uncertain, in our final July 2007 report, we suggested that Congress consider amending current law to allow adoption assistance payments to be used for legal guardianship. To date, the House of Representatives has passed a bill with a provision to allow states to use federal funds to subsidize legal guardianship for relatives, and the Senate has introduced a bill with a similar provision. Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions you or other Members of the Subcommittee may have. For further information about this testimony, please contact me at (202) 512-7215 or [email protected]. Individuals making key contributions to this testimony include Kim Siegal, Theresa Lo, Deborah A. Signer, Gale Harris, and Charlie Willson. Disconnected Youth: Federal Action Could Address Some of the Challenges Faced by Local Programs That Reconnect Youth to Education and Employment. GAO-08-313. Washington, D.C.: February 28, 2008. African American Children in Foster Care: Additional HHS Assistance Needed to Help States Reduce the Proportion in Care. GAO-07-816. Washington, D.C.: July 11, 2007. Child Welfare: Improving Social Service program, Training, and Technical Assistance Information Would Help Address Long-standing Service-level and Workforce Challenges. GAO-07-75. Washington, D.C.: October 6, 2006. Child and Family Services Reviews: Better Use of Data and Improved Guidance Could Enhance HHS's Oversight of State Performance. GAO- 04-333. Washington, D.C.: April 20, 2004. HHS Actions Could Improve Coordination of Services and Monitoring of States' Independent Living Programs. GAO-05-25. Washington, D.C.: November 18, 2004. Child Welfare: Enhanced Federal Oversight of Title IV-B Could Provide States Additional Information to Improve Services. GAO-03-956. Washington, D.C.: September 12, 2003. Child Welfare and Juvenile Justice: Federal Agencies Could Play a Stronger Role in Helping States Reduce the Number of Children Placed Solely to Obtain Mental Health Service. GAO-03-397. Washington, D.C.: April 23, 2003 (reissued on August 11, 2003). Foster Care: Recent Legislation Helps States Focus on Finding Permanent Homes for Children, but Long-Standing Barriers Remain. GAO-02-585. Washington, D.C.: June 28, 2002. Foster Care: Kinship Care Quality and Permanency Issues. GAO-99-32. Washington, D.C.: May 6, 1999. Foster Care Implementation of the Multiethnic Placement Act Poses Difficult Challenges. GAO-98-204. Washington, D.C.: September 14, 1998. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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A significantly greater proportion of African American children are in foster care than children of other races and ethnicities relative to their share of the general population. Given this situation, GAO was asked to analyze the (1) major factors influencing their proportion in foster care, (2) strategies states and localities have implemented that appear promising, and (3) ways in which federal policies may have influenced the proportion of African American children in foster care. This testimony is based on a GAO report issued in July 2007 (GAO-07-816), which included a nationwide survey; a review of research and policies; state site visits; analyses of child welfare data; and interviews with researchers, HHS officials, and other experts. It includes updates where possible. According to our survey results, key factors contributing to the proportion of African American children in foster care included a higher rate of poverty, challenges in accessing support services, racial bias and distrust, and difficulties in finding appropriate adoptive homes. Families living in poverty have greater difficulty accessing housing, mental health, and other support services needed to keep families stable and children safely at home. Bias or cultural misunderstandings and distrust between child welfare decision makers and the families they serve also contribute to children's removal from their homes into foster care. African American children also stay in foster care longer because of difficulties in recruiting adoptive parents, the lack of services for parents trying to reunify with their children, and a greater reliance on relatives to provide foster care who may be unwilling to terminate the parental rights of the child's parent--as required in adoption--or who need the financial subsidy they receive while the child is in foster care. Most states we surveyed reported using various strategies intended to address these issues, such as building community supports, providing cultural competency training for caseworkers, and broadening the search for relatives to care for children. Researchers and officials also stressed the importance of analyzing data to address the proportion of African American children in care in order to better understand the issue and devise strategies to address it. HHS provides information and technical assistance, but states reported that they had limited capacity to analyze their own data and formulate strategies to address disproportionality. According to our survey, states viewed some federal policies, such as those that promote adoption, as helpful for reducing the proportion of African American children in foster care. However, they also expressed concerns regarding policies that limit the use of federal funds to provide preventive services and support legal guardianship arrangements. As an alternative to adoption, subsidized guardianship is considered particularly promising for helping African American children exit from foster care.
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PPACA established minimum MLR standards for insurers offering group or individual health insurance coverage using a new MLR formula that differs from the way MLRs have traditionally been calculated. To implement the PPACA MLR provisions, HHS issued an interim final rule that provided specific definitions and methodologies to be used in calculating the new MLRs, and that addressed other areas, including adjustments to the MLRs to address the circumstances of certain types of plans, and oversight and enforcement. Insurers will begin reporting PPACA MLRs to HHS in June 2012. In the private health insurance industry, the MLR is a commonly used indicator, measuring the proportion of premium dollars an insurer used for medical claims, as opposed to other functions, such as marketing, actuarial activities, or profit. While many states have minimum MLR standards or MLR reporting requirements, PPACA established federally required minimum MLRs for insurers operating in the individual and group insurance markets. The MLR formula specified in PPACA differs from the way MLRs have traditionally been defined. The traditional MLR is generally calculated by dividing an insurer's medical care claims by premiums. In the PPACA MLR formula, the numerator includes insurers' expenses for activities that improve health care quality--such as patient-centered education and counseling, care coordination, and wellness assessments--in addition to claims. Further, the denominator of the PPACA MLR subtracts from insurers' premiums all federal taxes and state taxes and licensing or regulatory fees (see fig. 1). In addition to establishing the new MLR formula, PPACA directed NAIC to establish recommended definitions and methodologies for calculating MLRs, subject to certification by the Secretary of HHS. NAIC submitted its recommendations to HHS on October 27, 2010, and HHS issued its interim final rule implementing the PPACA MLR requirements in PPACA on December 1, 2010, with an effective date of January 1, 2011. According to HHS, the interim final rule adopted NAIC's recommendations in full, and included the following key areas. Activities that improve health care quality. These include activities designed to increase the likelihood of desired health outcomes in ways that can be objectively measured. The activities must be primarily designed to: (1) improve health outcomes; (2) prevent hospital readmissions; (3) improve patient safety; (4) implement, promote, and increase wellness and health activities; and (5) enhance the use of health care data to improve quality, transparency, and outcomes. Insurers are also allowed to include health information technology (IT) expenses needed to accomplish activities that improve health care quality. Also specified were certain activities that do not qualify as those that improve health care quality, such as provider credentialing. Federal and state taxes and licensing or regulatory fees. These include all federal taxes and assessments, excluding taxes on investment income and capital gains. Levels of aggregation for MLR reporting. Insurance companies are required to report MLRs separately for their individual, small group, and large group markets for each state in which they are licensed to operate. Credibility adjustments. All insurers experience some random variability in their claims, where actual claims experience varies from expected experience. The impact of these deviations is less for health plans with a larger customer base. To help address the disproportionate impact of claims variability on small health plans, adjustments to MLRs are permitted for these plans. Specifically, MLRs for plans with less than 1,000 life years will be considered "noncredible" and will be presumed to meet the MLR requirements; 1,000 to less than 75,000 life years will be considered "partially credible" and may receive an upward adjustment ranging from 1.2 to 8.3 percentage points, depending on size, and a further adjustment if they have high deductibles; and 75,000 life years or more will be considered "fully credible" and will not receive an adjustment. HHS estimates show that for 2011 a small fraction of insurers that offer plans in the individual, small group, or large group markets would be considered fully credible, but these insurers account for the majority of the total life years covered by these types of plans. About half of insurers that offer plans in the small and large group markets and a little less than a third of insurers that offer plans in the individual market would be partially credible and could apply a credibility adjustment. Years of data to include in calculating the MLR. Beginning in 2013, insurers' MLRs will be calculated based on a 3-year period of the accumulated experience for the current reporting year and the 2 preceding years. Because insurers will not have 3 years of MLR data for 2011 and 2012, MLRs for these years will be calculated as follows: (1) MLRs for 2011 will be calculated on their experience for 2011, (2) MLRs for plans that are fully credible in 2012 will be calculated based on their experience for 2012, and (3) MLRs for plans that are partially or noncredible in 2012 will be calculated based on accumulated experience from 2011 and 2012. HHS's interim final rule also addressed areas that NAIC did not specifically include in its recommendations, which focused primarily on the definitions and methodologies used for calculating the MLR. Some key areas are summarized below. Treatment of agents' and brokers' commissions and fees. HHS explicitly listed agents' and brokers' commissions and fees as nonclaims expenses. NAIC did not include any special treatment of these expenses in its recommendation to HHS, but raised concerns about the potential impact of the MLR requirements on the ability of these professionals to continue assisting consumers. HHS officials have continued to discuss this issue with NAIC. Legislation has also since been introduced to deduct agents' and brokers' fees from premiums in the MLR calculation. Adjustment to the standard for a state's individual market. In addition to providing for credibility adjustments, PPACA provided HHS with the authority to adjust the MLR standard for the individual market in a state if it determines that the application of the standard may destabilize the individual market in that state. Although NAIC's recommendations to HHS did not specifically address adjustments to the MLR standard for the individual market, NAIC did raise concerns about the ability of many insurers to readily achieve an MLR of 80 percent. In the interim final rule, HHS established a process for states to apply for an adjustment to the MLR standard for the individual market in that state that included the information states must provide in their applications and the criteria HHS would use to assess the applications. As of July 25, 2011, 12 states and 1 territory had applied to HHS for an adjustment; HHS had granted an adjustment of the MLR in 5 states, did not grant an adjustment in 1 state, and was in the process of reviewing the remaining applications. Oversight. HHS is responsible for direct enforcement of the reporting and rebate provisions of the MLR requirements, including that the reports are submitted timely, that the data comply with the definitions in the regulations, and that rebates are paid timely and accurately. The interim final rule provides a framework through which HHS may conduct audits to determine insurers' compliance with the provisions and provides that HHS may, in its discretion, accept the findings of audits that state regulators may conduct of an insurer's MLR reporting and rebate obligations, as long as specified conditions are met. The interim final rule also provides for the imposition of civil monetary penalties if insurers fail to comply with the requirements. HHS received public comments on the interim final rule from representatives of the insurance industry, consumers, state regulators, and others, covering a wide range of topics, such as the treatment of agents' and brokers' fees, the methodology for determining credibility adjustments, and the treatment of taxes. According to HHS officials, HHS has not determined when it will issue a final rule. PPACA MLRs will be reported to HHS every June and will reflect insurers' experiences from the previous calendar year. The first set of these data will be submitted to HHS in June 2012, reflecting insurers' experiences from 2011. In April 2011, insurers reported MLRs to NAIC using the PPACA MLR definition based on their 2010 experience. These data are not subject to the PPACA MLR provisions and will not be adjusted to account for credibility or other issues addressed in the provisions. Traditional MLR averages generally exceeded the PPACA MLR standards in each market, even without the changes in the new PPACA MLR formula that will generally further increase MLRs. However, traditional MLRs also varied among insurers, particularly among those in the individual market and smaller insurers. Since traditional MLRs were calculated differently than they will be under the PPACA requirements, it is difficult to predict, based on these data, what insurers' MLRs would have been using the PPACA formula, or to predict the MLRs that insurers' will report in the future. From 2006 through 2009, insurers' traditional MLR averages generally exceeded the PPACA MLR standards--80 percent for the individual and small group markets and 85 percent for the large group market. This is even without the new PPACA MLR formula definitions or credibility adjustments that will generally further increase MLRs reported under the PPACA requirements. The average traditional MLRs reported for 2006 through 2009 were also relatively stable for all markets (see table 1). Since traditional MLRs were calculated differently than they will be under the PPACA requirements, it is difficult to predict, based on these data, what insurers' MLRs would have been using the PPACA formula, or to predict the MLRs that insurers' will report in the future. While traditional MLRs on average generally exceeded the PPACA MLR standards from 2006 through 2009, they varied, particularly in the individual market. For example, figure 2 shows that in 2009 traditional MLRs in the individual market were more widely distributed than those in the small and large group markets. Within this variation in the individual market, a larger proportion of insurers generally had lower MLRs; that is, they spent a lower percentage of their premiums on medical claims, as compared to insurers in the small and large group markets. Under PPACA, states may request adjustments to the MLR standard for the individual market if application of the standard may destabilize that market, for example, by causing insurers to exit the market, such that insurance options are limited in the state. Annual fluctuations in insurers' traditional MLRs were also greater for insurers in the individual market. For example, 70 percent of insurers in the individual market experienced an average annual change in their traditional MLRs of more than 5 percentage points from 2006 through 2009, compared to 46 percent in the small group market and 39 percent in the large group market. Almost 12 percent of insurers in the individual market averaged annual changes greater than 20 percentage points, compared with about 4 percent of insurers in both the small group and large group markets. Beginning in 2013, insurers will calculate their PPACA MLRs based on 3 years of data, which could partially mitigate the impact of variations often experienced by insurers from year to year. Traditional MLRs were also more varied for smaller insurers in all three markets from 2006 through 2009. For example, figure 3 shows that in 2009 traditional MLRs for smaller insurers were more widely distributed than those for larger insurers, with a higher percentage of smaller insurers generally reporting lower MLRs. The credibility adjustments in PPACA allow smaller insurers to upwardly adjust their MLRs. Data for figure 3 are aggregated across all states that an insurer operates in. However, since insurers are required to report their PPACA MLRs at the state level, it is likely that in 2011 and beyond, more insurers will have less than 75,000 life years in a market at the state level and will be eligible for a credibility adjustment. The insurers we interviewed said their PPACA MLRs will be affected by changes in the MLR formula, primarily due to the deduction of taxes and fees in the denominator, and to a lesser extent, the addition of expenses for activities to improve health care quality in the numerator. Insurers also said that the PPACA MLR requirement to report MLRs by state will affect their PPACA MLRs. Insurers said they expect the precision of their PPACA MLR data to improve in 2011 and beyond, in part because their 2010 MLRs were based on best estimates. Most of the insurers we interviewed reported that the deduction of taxes and fees in the denominator of the PPACA MLR formula would contribute to the largest change in 2010 MLRs compared to the traditional MLR formula, but some insurers said the effect of the deductions vary by state and may vary in 2011 and beyond. One insurer told us that the effect of deducting taxes and fees for their 2010 MLRs was more than double the effect of including their expenses for activities to improve health care quality in the numerator. Another insurer told us that the effect of taxes and fees would vary by state because state taxes, such as premium taxes and other state assessments, can vary. Further, one insurer said that while the deduction of taxes and fees was the largest component that affected their 2010 MLRs, and resulted in increased MLRs, if the insurer were to experience a loss in profits in a future year, and therefore a reduction in its income taxes, the effect of this deduction could result in a decrease in MLRs. Regulators from several state insurance commissioners' offices also told us that they believed the deduction of taxes and fees in the PPACA MLR formula would likely have the largest impact on MLRs reported by insurers in 2010. Most of the insurers we interviewed also said including expenses in the numerator of the PPACA formula for activities to improve health care quality contributed to changes in the 2010 MLRs compared to what they would have been under the traditional formula. However, including these expenses had less of an effect on their MLRs than the deduction of taxes and fees. One insurer estimated that the inclusion of these expenses in the PPACA MLR formula would increase their MLRs by 0.5 percentage points, but this was a fraction of the total estimated 2.0-2.5 percentage point increase in their MLR overall, which the insurer said was primarily due to the deduction of taxes and fees. Another insurer estimated that the impact of including their expenses for quality improvement activities would be less than 2 percentage points, but the deduction of taxes represented the largest component driving the increase in their 2010 MLRs. In addition, two insurers said that including quality improvement expenses would have very little impact on their PPACA MLRs. Examples of activities that improve health care quality that insurers included in their PPACA MLR were disease management programs, wellness activities, 24-hour nurse phone lines, and care coordination. Insurers that issue insurance plans in more than one state said that disaggregating MLRs by state will likely result in some variation in their MLRs across states. For example, one insurer said that a higher proportion of their premium dollars are spent on administrative expenses in one of their states because they tend to sell lower benefit plans, which they said have high administrative costs relative to premiums, in this state. While this insurer historically reported a single MLR combining data across two states, they said the disaggregation by state required for the PPACA MLR resulted in lower MLRs in the state with lower benefit plans compared to the other state. For example, MLRs in this state were 1.5 percentage points lower in the individual market and 4.5 percentage points lower in the small group market than the MLRs in the other state. Another insurer said that prior to the PPACA MLR requirements they priced insurance plans for the small group market to employers located in two states as a single market. When they calculated the PPACA MLRs separately for each state they noted variations between the two MLRs because medical costs were different in each state. All of the insurers we spoke with said that their PPACA MLRs for 2011 and beyond will be more precise than the 2010 MLRs reported to NAIC for several reasons. Because HHS's interim final rule on PPACA MLRs was published in late 2010, insurers told us that they used their best estimates to apply the PPACA definition to experiences incurred earlier in the year. They said their PPACA MLRs for 2011 and beyond will be more precise because they will not be based on estimates and they will have a full year of data that they collected according to the new PPACA MLR categories. A regulator from one state insurance commissioner's office described 2010 as a "test" year and said it will help insurers better prepare to report their 2011 MLRs. The regulators also agreed that the 2010 MLR data would not be a clear indicator of insurers' expenses for quality improvement activities because insurers' may vary in how precisely they report these expenses. In addition, some insurers told us they had never reported MLRs both by state and by insurance market prior to the PPACA MLR requirements, and were having challenges developing reasonable bases for allocating expenses across states and insurance markets for their 2010 reporting. However, they expected these issues to be resolved for 2011. For example, one insurer told us that their medical quality activities are centralized and apply to all markets, but they must now apportion their expenses for these activities by market, then to each of their insurance companies, and then by state. This insurer said that they implemented a new timekeeping system late in 2010 to better account for the time that their staff spend on these activities to address these allocation issues and expect to produce more precise data for their 2011 MLRs and beyond. Most of the insurers we interviewed also told us that their 2010 MLR data may be less precise than data reported in future years because of challenges they had in identifying and allocating health IT expenses. For example, one insurer told us that their health IT is a centralized function that is also used for other lines of insurance business, such as Medicare and Medicaid, which they said are not subject to PPACA MLR requirements. Another insurer said that determining their health IT expenses was less clear relative to the other subcategories of activities to improve health care quality in that it was hard to identify how much of their internal IT system infrastructure uniquely supported the other eligible quality activities. In addition, one insurer that only operates in a single state said that identifying expenses for health IT was challenging when factors such as facilities and employees' salaries had to be considered. However, all of these insurers anticipated that these issues would be largely resolved when they report their 2011 PPACA MLRs. Almost all of the insurers we interviewed were reducing brokers' commissions and making adjustments to premiums in response to the PPACA MLR requirements. These insurers said that they have decreased or plan to decrease commissions to brokers in an effort to increase their MLRs. One insurer said they started making reductions to their brokers' commissions in the fourth quarter of 2010 for their individual and small group plans to increase their 2011 PPACA MLRs in these markets and, as a result, premiums were not as high as they otherwise would have been. This insurer said these reductions will take effect gradually because they are only being applied to new sales or when groups renew annually. Another insurer lowered commissions to their brokers in the individual market in the first quarter of 2011, such that premiums were increased less than they otherwise would have been, which they expect to result in an increase in their PPACA MLRs for 2011. In addition, one insurer said they are considering reducing premiums in 2012 partly in response to the PPACA MLR requirements and also in conjunction with a reduction in the number of in-network physicians--the combined strategy would help to lower enrollee premiums and increase their MLRs. A regulator from one state insurance commissioner's office said that some insurers in that state have not applied for premium increases and are making adjustments to lower premiums as a strategy to increase their MLRs, and commented that reducing premiums is the best strategy for insurers to improve value for consumers. Insurers we interviewed varied on how the PPACA MLR requirements might affect their decisions on activities to improve health care quality. One insurer said that they may reduce their expenses on activities that HHS does not consider quality improvement activities in the PPACA MLR formula, such as retrospective utilization review (a review of a patient's records after the medical treatment has occurred) and increase expenses for activities that qualify, such as prospective utilization review. Another insurer said that they are no longer focusing as much on preauthorization for inpatient admissions because this is not an eligible quality improvement activity in the PPACA MLR formula. This insurer also said the PPACA MLR requirements provide an incentive to spend more money on quality improvement activities, which will affect their decisions on implementing new activities in the future. Conversely, five other insurers told us that the PPACA MLR requirements are not a factor in decisions about their activities to improve health care quality. Insurers we interviewed also varied on how the PPACA MLR requirements may affect where they do business. For example, one large insurer that operates in multiple states said that they have exited the individual market in one state where they did not have a large market share, in part, because of the MLR requirements, and they are evaluating whether to exit this market in other states where it might be difficult to meet the PPACA MLR requirements. One for-profit insurer told us that they plan to exit or stop issuing new business in the individual market in multiple states as well as consolidating some of their insurance companies in some states in which they did not think they would meet PPACA MLR requirements. Several other insurers said that the PPACA MLR requirements will not affect decisions on where they do business. For example, one not-for-profit insurer said that serving the communities where they operate is part of their mission and, therefore, they will not be exiting any markets in the states they serve. Another insurer is considering eliminating some of their high and mid-level deductible plans, but not exiting any markets. We obtained written comments from HHS which are reprinted in appendix I. HHS commented that the PPACA MLR provision will increase transparency in the health insurance marketplace and the value consumers receive for their premium dollar. HHS also provided technical comments, which we incorporated as appropriate. Additionally, we provided a draft of this report to NAIC for comment. NAIC responded that the report was fair, factual, and helpful and provided technical comments, which we incorporated as appropriate. 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 to the Secretary of Health and Human Services, the Administrator of the Centers for Medicare & Medicaid Services, and appropriate congressional committees. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II. In addition to the contact named above, Gerardine Brennan, Assistant Director; George Bogart; Julianne Flowers; Drew Long; Lisa A. Lusk; Linda McIver; Jessica C. Smith; and Janet L. Sparks made key contributions to this report.
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To help ensure that Americans receive value for their premium dollars, the Patient Protection and Affordable Care Act (PPACA) established minimum "medical loss ratio" (MLR) standards for health insurers. The MLR is a basic financial indicator, traditionally referring to the percentage of premiums spent on medical claims. The PPACA MLR is defined differently from the traditional MLR. Beginning in 2011, insurers must meet minimum MLR requirements or pay rebates to enrollees. While insurers' first set of data subject to the MLR requirements will be for 2011, and is not due until June 2012, insurers prepared preliminary PPACA MLR data for 2010. GAO examined: (1) what can be learned from the traditional MLR data reported by health insurers prior to PPACA; (2) what factors might affect the MLRs that insurers will report under PPACA; and (3) what changes in business practices, if any, have insurers made or planned to make in response to the PPACA MLR requirements. GAO analyzed premiums, claims, and traditional MLR data for nearly all insurers for 2006- 2009 and interviewed a judgmental sample of seven insurers--selected to provide a range based on their size, profit status, and the number of states in which they operated--about their experiences using the PPACA MLR definition. From 2006 through 2009, traditional MLRs on average generally exceeded PPACA MLR standards. This is even without the additional components in the new PPACA MLR that will generally increase MLRs. However, traditional MLRs also varied among insurers. Traditional MLRs within the individual market varied more than those within the small and large group markets, and a larger proportion of individual market insurers generally had lower MLRs. Additionally, traditional MLRs varied more among smaller insurers than among larger insurers in all three markets. Some components of the PPACA MLR requirements may mitigate the implications of some of these variations. The insurers GAO interviewed said their PPACA MLRs will be affected by changes in the MLR formula and their ability to provide more precise data in 2011 and beyond. Most of these insurers reported that the deduction of taxes and fees in the PPACA MLR formula would contribute to the largest change in their 2010 MLRs. Including expenses for activities to improve health care quality was also cited as a factor affecting insurers' MLRs but to a lesser extent. In addition, because insurers had limited time to respond to HHS's interim final rule on PPACA MLRs, which was published in late 2010, they said that their 2010 MLRs were based in part on best estimates. Insurers said they expect their ability to provide more precise PPACA MLR data will improve in 2011 and beyond. Most of the insurers GAO interviewed were reducing brokers' commissions and making adjustments to premiums, as well as making changes to other business practices, in response to the PPACA MLR requirements. Almost all of the insurers said they had decreased or planned to decrease commissions to brokers in an effort to increase their MLRs. Insurers varied on how the PPACA MLR requirements might affect their decisions to implement activities to improve health care quality. While one insurer said that their decision to implement new activities would be affected by whether or not an activity could be included as a quality improvement activity in the PPACA MLR formula, other insurers said that the PPACA MLR requirements are not a factor in such decisions. Insurers also differed on how the PPACA MLR requirement may affect where they do business. One insurer said that they have considered exiting the individual market in some states in which they did not expect to meet the PPACA MLR requirements, while several other insurers said that the PPACA MLR requirements will not affect where they do business. In commenting on a draft of this report, the Department of Health and Human Services (HHS) said that the MLR provision will increase transparency in the insurance market and value for consumers' premiums.
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The Occupational Safety and Health Act of 1970 covers more than 100 million working men and women and about 6.5 million employers.Excluded from coverage are the self-employed; state and local government employees in some states; and some transportation workers, miners, and others covered by other federal laws. OSHA regulations require most employers covered by the act to keep records at each establishment, including a log and summary of occupational injuries and illnesses (OSHA form 200 or an equivalent form) and a supplementary record of occupational injuries and illnesses (OSHA form 101 or an equivalent form). On the log, employers must briefly describe all occupational injuries and illnesses that occur at the establishment and summarize that information yearly. Employers must make the log accessible to authorized federal and state officials and to employees upon request and post an annual summary of occupational injuries and illnesses for the previous calendar year at each establishment. The supplementary record is to provide information about each injury and illness on the log, such as the affected employee's name and the circumstances of the injury or illness. Authorized government officials must have access to these records also. The records employers must keep provide useful information for (1) employers and employees, raising their awareness of injuries and illnesses and helping them in their efforts to address establishment hazards; (2) OSHA staff for carrying out enforcement and outreach programs; and (3) statistical purposes, by measuring the magnitude of injury and illness problems nationwide. The information also helps OSHA develop safety and health standards and conduct research on the causes and prevention of such injuries and illnesses. In addition, BLS collects injury and illness data from employers for its annual survey of occupational injuries and illnesses. OSHA's compliance officers review and collect data from the records during on-site inspections. In February 1996, as part of its initiative to enhance safety, reduce paperwork, and reinvent the agency, OSHA proposed comprehensively revising the current rule for record-keeping requirements. The overall rule addressed certifying the records' accuracy and completeness, requiring employers to provide increased access to the records, defining key terms, and updating records to reflect changes in previously recorded data. The proposed rule would also create a system for OSHA to collect injury and illness data at the establishment level. Under the proposed data collection system, OSHA would (1) identify industries among the most hazardous based on their injury and illness rates as reported by the BLS annual survey of occupational injuries and illnesses and (2) survey establishments in these industries to collect establishment-specific injury and illness data. Establishment-specific data would help identify individual establishments with high rates of occupational injuries and illnesses. OSHA said it would focus its enforcement and outreach efforts on establishments with the highest injury and illness rates. Its inspection priority system would remain unchanged--highest priority would still be given to unscheduled inspections--but its process for scheduling programmed inspections would be based on these establishment-specific data. In addition, OSHA said the data collection system would enhance the agency's ability to measure its performance in achieving established goals for reducing injuries, illnesses, and fatalities. Although the proposed overall rule to revise the record-keeping and reporting requirements had not been completed, in February 1996, OSHA initiated its survey of employers to collect injury and illness data for calendar year 1995. In March 1996, the American Trucking Associations and others filed a lawsuit challenging OSHA's authority to compel employers to participate in this survey in the absence of a final rule. A federal district court ruled that OSHA did not have the authority to issue citations to employers who did not complete and return the survey. In February 1997, OSHA issued a final rule implementing its authority to survey employers and cite them for failing to respond. Also in February 1997, OSHA and the parties involved in the lawsuit agreed that OSHA would not use the survey data collected in 1996 for enforcement purposes, but it could use the data for other purposes. OSHA used a two-stage process for selecting industries and establishments to include in its data collection surveys. First, OSHA selected the industries for its surveys using mainly industrywide data on injuries and illnesses. Second, within the industries selected, OSHA chose individual establishments to survey on the basis of establishment size. OSHA's objective was to survey all establishments of a specific size in the industries with the highest injury and illness rates. OSHA said a major determinant of the number of establishments it could survey in a year, however, was the amount of funds available for conducting the survey. With about $2.6 million available annually to fund the surveys in 1996, 1997, and 1998, OSHA determined it could survey up to 80,000 establishments each year. To select the industries among the most hazardous, OSHA used data obtained from BLS' annual surveys together with other factors such as work-related fatalities and the number of establishments most likely to be included in the survey in each industry. Because data and documentation supporting these decisions were not available, however, we could not assess the extent to which each factor contributed to OSHA's selecting--or excluding--an industry. According to OSHA officials, the agency decided to include in its first three surveys all manufacturing and nonmanufacturing industries considered most likely to be hazardous for which it has responsibility. OSHA officials said it included all manufacturing industries because (1) manufacturing industries are required to maintain OSHA injury and illness records, (2) OSHA compliance standards to a large extent focus on manufacturing industries, (3) some manufacturing industries have injury and illness rates that are among the highest in all the SIC codes, and (4) the large number of manufacturing SIC codes (and the large number of establishments in each manufacturing group) made it impractical to separate high-hazard manufacturing industries from low-hazard manufacturing industries for the surveys. According to OSHA, the main factor it used to identify nonmanufacturing industries most likely to be hazardous was the industry three-digit SIC code LWDII rate as reported by BLS. OSHA also considered work-related fatalities when selecting industries to survey. Other factors OSHA considered in its selection process for those years included whether the injuries reported by establishments occurred at a fixed facility or at an off-site location and the number of establishments in each industry that would most likely be included in the surveys. For the 1996 and 1997 surveys, OSHA chose all manufacturing industries, six industry groups (three-digit SIC codes), and eight specific industries (four-digit SIC codes) in nonmanufacturing SIC codes. The nonmanufacturing industries selected had high LWDII and injury and illness incidence rates at the three-digit SIC code level, according to calendar year 1993 BLS data. Four of the specific industries and one industry group that OSHA selected, according to the agency, also had high numbers of fatalities during the previous 10 years. (See fig. 1.) As shown in figure 1, all 14 nonmanufacturing industry groups and specific industries OSHA selected in 1996 and 1997 had LWDII rates and injury and illness incidence rates that exceeded the national averages for all industries. Furthermore, most industries selected were among those with the highest LWDII rates. Because data were not available, however, we could not assess the extent to which each factor contributed to OSHA's selecting or excluding industries. OSHA expanded the 1998 survey to include additional industries in the survey database. According to OSHA, it included all manufacturing industries and the 14 nonmanufacturing industry groups or specific industries in the previous surveys again. It replaced four specific industries on the survey list with the three industry groups of which the specific industries are a part. OSHA also included three industry groups in 1998 that were not in the previous surveys. As a result, for 1998, OSHA selected a total of 16 nonmanufacturing industry groups or specific industries for the survey. According to OSHA, it based selections for the 1998 survey exclusively on calendar year 1995 injury and illness data obtained from BLS; fatalities and other safety and health factors were not considered. Each of the newly selected industry groups included in OSHA's 1998 survey had LWDII and injury and illness incidence rates that exceeded the national averages for all industries. (See fig. 1.) OSHA selected establishments to survey for all 3 years from within each of the chosen industries on the basis of establishment size. OSHA officials said they did this to include in the surveys all establishments of certain sizes in each of the industries selected, rather than survey a sample of establishments in these industries. For the 1996 and 1997 surveys, OSHA mailed surveys to all establishments with 60 or more employees in manufacturing industries and in each of the 14 selected nonmanufacturing industries. For the 1998 survey, OSHA mailed survey forms in March 1998 to all establishments in the newly selected industries with 50 or more employees. It also mailed forms to some of the establishments included in the 1997 survey: (1) those that did not return their forms, (2) the largest establishments in each state, and (3) those that had reported an LWDII rate of 7.0 or higher. For its 1996, 1997, and 1998 surveys, OSHA asked employers to provide summary information on their employees' injuries and illnesses during the previous calendar year. Because OSHA already requires the establishments to compile this information, employers are not required to develop new data sets. OSHA also asked employers to provide certain employment information for the establishments. Although OSHA and BLS collect the same injury and illness and employment data from establishments that participate in their respective programs, BLS collects the data from a small sample (less than 3 percent) of all private- sector industry establishments and uses the information to generate aggregate statistics on occupational injuries and illnesses at the state and national levels. Because BLS pledges confidentiality of the data to employers, it does not share these data with OSHA. OSHA, on the other hand, needs establishment-specific data to identify individual establishments' LWDII rates and injury and illness incidence rates to more effectively and efficiently carry out its regulatory and enforcement activities. Because it cannot obtain these data from BLS and they are otherwise unavailable, OSHA collects injury and illness data from all establishments of a certain size within selected industries. The OSHA data collection survey form is identical to a portion of the BLS annual survey of occupational injuries and illnesses form. The wording of the instructions, examples, and questions on the OSHA survey form is identical to that on the BLS survey form. In addition to the injury and illness and employment data, both data collection forms ask for the name, telephone number, date, and signature of the person to contact if any questions arise about the information provided. This contact information also allows OSHA and BLS to verify the data provided. BLS also collects information that OSHA does not on the demographics of injured and ill workers and the circumstances of the injuries and illnesses for a sample of cases that required recuperation away from work. To minimize employers' burden, OSHA and BLS instruct employers responding to their surveys to copy on their survey forms the requested injury and illness data from the log and summary of occupational injuries and illnesses they are required to maintain. In addition, because some establishments from which OSHA collects data may be included in the BLS sample in a given year, OSHA has coordinated its data collection effort with BLS'. (BLS estimated that less than 10 percent of the establishments selected for the OSHA data collection effort would be included in the BLS sample in any year.) Establishments required to report to OSHA and BLS may use a single form and send a copy to each agency. The data collection form includes a section in which the respondent can provide summary information specific to the selected establishment. The first part of the summary section requests the average annual number of employees and the total number of hours that employees worked during the previous calendar year. It also requests information on conditions during the year, such as a strike or a shutdown, that might have affected the number of employees or the hours they worked. The second part of the form requests the following information from the total line of the log and summary of occupational injuries and illnesses maintained by each establishment: total injuries, including the number of deaths as a result of injury, injuries with days away from work or restricted workdays or both, total days away from work, total days of restricted work activity, and injuries without lost workdays; total illnesses, including deaths as a result of illness, illnesses with days away from work or restricted workdays or both, total days away from work, total days of restricted work activity, and illnesses without lost workdays; and types of illnesses experienced by the workers, including skin diseases or disorders, diseases of the lungs due to dust, respiratory conditions due to toxic agents, poisonings, disorders due to physical agents, disorders associated with repeated trauma, and other occupational illnesses. The information collected enables OSHA to compute each establishment's LWDII rate and injury and illness incidence rate. See the appendix for a copy of the OSHA data collection form. OSHA, in announcing its plans to collect establishment-specific injury and illness data by mail, indicated that such information would be used in a variety of ways to help OSHA carry out its responsibilities more efficiently and effectively. The intended uses were (1) directing OSHA's program activities, including the scheduling of establishment inspections under its enforcement program and the targeting of mailings of safety and health information to employers under its nonenforcement programs; (2) monitoring and tracking injury and illness incidents; (3) developing information for promulgating, revising, and evaluating OSHA's safety and health standards; (4) evaluating the effectiveness of OSHA's enforcement, training, and voluntary programs; and (5) providing pertinent information to the public. In addition, OSHA stated that the establishment-specific data were necessary for it to meet GPRA requirements, which direct federal agencies to implement a program of strategic planning, develop systematic measures of performance to assess the impact of individual government programs, and produce annual performance reports. Although OSHA collected establishment-specific injury and illness data during 1996 and 1997, as of April 1998, it had made only limited use of the data. None of the intended purposes has been fully implemented, and the data have not been used for other purposes. About 70,000 establishments responded to both the 1996 and 1997 surveys--about 88 percent of the establishments surveyed. According to OSHA officials, firm plans for using the data involve enforcement activities and meeting performance goals it established under GPRA. The data will be used as part of Labor's performance measurement system to track the impact of OSHA's enforcement and compliance assistance interventions. For example, to measure the extent to which OSHA achieves its goal of reducing injuries and illnesses by 15 percent in high-hazard industries, such as food processing and logging, the agency will track survey data from employers in these industries. According to OSHA's directive (CPL 2-0.119), the agency also plans to use survey data to schedule enforcement activities for establishments with the highest LWDII rates. OSHA will use the data to identify the 500 establishments with the highest rates and schedule them for on-site inspections. In addition, OSHA wants to use the establishment-specific injury and illness data to identify employers for participation in its new Cooperative Compliance Program (CCP). Under this program, OSHA would invite employers who report high LWDII rates on the survey to work cooperatively with OSHA to eliminate the hazardous working conditions. These employers would be put on a list of those most likely to be inspected; however, if these employers agree to participate, they must agree to establish an effective safety and health program. They must also agree to (1) find and remove hazards, (2) work toward reducing injuries and illnesses, (3) fully involve employees in their safety and health program, (4) share injury and illness data, and (5) provide OSHA with information from their annual injury and illness records. Under CCP, employers with 100 or fewer employees who choose to participate and agree to seek free assistance from their state OSHA consultation program to establish effective safety and health programs reduce their likelihood of being inspected by OSHA to 10 percent. CCP participants with more than 100 employees and smaller employers not using consultation services face a 30-percent chance of being inspected. If identified employers do not agree to participate in the program, they will remain on OSHA's list for on-site inspection. According to OSHA officials, inspections of CCP participants will most likely be shorter than regular inspections and result in lower penalties than normal because of these employers' commitment to finding and eliminating hazardous working conditions in their establishments. OSHA believes that those who successfully fulfill the requirements of the program should reduce injuries, illnesses, and fatalities, leading to lower workers' compensation costs and reduced insurance costs. In addition, workers whose employers join the program will be more involved in establishment safety and health issues and should experience fewer injuries and illnesses and have an improved quality of work life. OSHA will also benefit by extending its resources and expanding the base of employers with safety and health programs, which OSHA believes is a major difference between employers with low injury rates and those with high rates. OSHA used the information it collected in 1997 to develop a list of about 12,500 establishments with the highest LWDII rates--that is, LWDII rates of 7.0 or higher. OSHA scheduled the 500 establishments with the highest LWDII rates for inspection and began these inspections in December 1997. In November 1997, OSHA invited about 12,000 of these establishments--less than 20 percent of those that responded--to participate in the CCP. According to OSHA officials, more than 89 percent of the employers invited by OSHA agreed to participate in the program. In response to a lawsuit filed by the U.S. Chamber of Commerce and others claiming that OSHA had not followed proper procedures in implementing the CCP, however, a federal court of appeals ordered OSHA in February 1998 to halt the enforcement program that includes CCP until the court decides whether the program is valid. According to OSHA officials, oral argument is scheduled for December 1998, and a decision is unlikely to be issued until some time in 1999. The order also required OSHA to stop conducting its inspections of the 500 establishments with the highest LWDII rates; 89 of these inspections had been completed when OSHA was told to stop conducting them. OSHA officials stated that this delay in implementing the CCP will adversely affect many of its enforcement and nonenforcement activities. In April 1998, OSHA began implementing an interim inspection scheduling plan. Under the plan, OSHA will schedule for inspection establishments in 99 industries with LWDII rates of 6.4 or higher, according to calendar year 1996 BLS data. Establishments in these industries for which OSHA collected data in 1997 with LWDII rates at or above the national average of the industry of which they are a part will be randomly selected for inspection. The interim inspection plan has no CCP component. In our 1994 report, we noted that one problem with relying on employer- provided data is the risk that employers may underreport injuries and illnesses if they know OSHA is collecting data about their establishments that could be used to target them for on-site compliance inspections. To reduce the risk of employers underreporting injury and illness data, OSHA needs to have a successful combination of enforcement and education. Therefore, we recommended in that report that OSHA implement procedures for ensuring that employers accurately record occupational injuries and illnesses. Because of its concerns about the quality of the data provided by employers responding to its surveys, OSHA is conducting on-site audits of employers' injury and illness records to assess these records' accuracy. OSHA has completed all of the 250 records audits it had planned to conduct. OSHA gave no assurances about privacy rights or confidentiality associated with the data collected from employers selected to participate in the data collection survey. Privacy rights of individual employees did not present a problem because the only information about workers that OSHA collected was summary information on injuries and illnesses, which does not identify individual workers. OSHA said it took steps to protect employers' privacy rights and to maintain confidentiality of the information. OSHA did not pledge to employers that the data it collected in its surveys would be kept confidential, however, because the data could be subject to disclosure under FOIA. According to OSHA, this information would be made available to the public only in response to specific FOIA requests. The injury and illness data OSHA collected, however, are the same data that employers are required to post in their establishments each year. In contrast with OSHA, BLS pledges confidentiality to the full extent permitted by law to all participating establishments and informs the respondents that the data will be used for statistical purposes only. BLS tabulates and publishes data aggregated at the national and state levels by various characteristics, such as industry group, occupation, and age. BLS does not tabulate or publish injury and illness data on individual establishments. Over the years, BLS has received FOIA requests for the data, including requests for establishment-specific injury and illness data but has refused to disclose the data, relying on the FOIA exemption for confidential commercial or financial information. A federal district court has upheld BLS' right to withhold from disclosure commercial or financial information that has been voluntarily provided to BLS under a pledge of confidentiality in large part because disclosure would impair the government's ability to obtain the data in the future. Whether OSHA would have a valid basis to rely on the same exemption has not been determined. Under FOIA, a federal department or agency is required to disclose information to anyone who requests it, unless the information is covered by one of the law's exemptions. Examples of such exemptions include trade secrets and individuals' medical files. The medical files exemption excludes from disclosure any data from establishments that identify individual employees' injuries and illnesses. Another exemption excludes information compiled for law enforcement purposes that would disclose techniques, procedures, or guidelines for law enforcement investigations. This exemption excludes from mandatory disclosure any data that might provide advance notice of an inspection. According to OSHA, it does not disclose collected establishment-specific data while such data are being used for scheduling inspections that might disclose the scheduling criteria. After the inspection is completed, however, the exemption no longer applies and the data may be subject to disclosure, OSHA officials said. From 1996 to 1998, OSHA received many FOIA requests about the data collection initiative. Many of these requests specifically related to requests about the CCP. The only establishments asked to participate in the CCP were those that responded to the data collection initiative, but, as already noted, implementation of the CCP has been postponed because of a lawsuit. Labor agencies handle all FOIA requests on a case-by-case basis. Most of the requests OSHA has received and responded to about the data initiative asked for the names and addresses of establishments identified as having LWDII rates high enough to be invited to participate in the CCP. OSHA has provided these requesters with the names and addresses of the establishments only. OSHA has also provided its field offices with the names and addresses of establishments in their regions to enable staff there to respond to similar requests. OSHA received one FOIA request for injury and illness data collected in the 1996 survey. As of April 1998, however, the agency had not released the requested information. OSHA does not know the number of FOIA requests received by its headquarters and field offices about the data collection initiative. Labor is not required to and does not collect data on the specific subjects of FOIA requests. In addition, although federal agencies and departments must annually report to the Department of Justice on the number and cost of FOIA requests and responses, detailed information on the subjects of FOIA requests is not required. Moreover, although Labor has a national FOIA coordinator, it does not centrally track all FOIA requests received. FOIA requests concerning establishments identified by the data collection initiative are decentralized: they may be responded to by OSHA headquarters, regional, or area office staff. OSHA headquarters officials told us that generally they neither oversee nor approve FOIA responses handled by OSHA regional and area staff; nor are they informed of all FOIA requests received in the field. According to OSHA officials, however, area, regional, and national staff responsible for FOIA activities may coordinate efforts when preparing FOIA responses. We provided a draft of this report to the Department of Labor for its review and comment. Although Labor did not provide written comments on the draft report, officials from OSHA and other offices provided technical comments, which we have incorporated as appropriate. As arranged with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 7 days after its issue date. At that time, we will send copies of this report to the Secretary of Labor and other interested parties. We will make copies available to others upon request. If you or your staff have any questions about this report, please call me at (202) 512-7014 or Larry Horinko, Assistant Director, at (202) 512-7001. Other major contributors to this report are John T. Carney, Evaluator- in-Charge; Ronni Schwartz, Senior Evaluator; and Robert G. Crystal, Assistant General Counsel. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. 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Pursuant to a congressional request, GAO reviewed the Occupational Safety and Health Administration's (OSHA) efforts to collect establishment-specific data on injuries and illnesses. GAO noted that: (1) with about $2.6 million available annually in 1996, 1997, and 1998 for its data collection surveys, OSHA determined it could survey about 80,000 establishments each year; (2) within that constraint, OSHA used mainly Bureau of Labor Statistics data to select industries with high rates of injuries and illnesses; (3) OSHA used size of establishment as a determining factor for the number of establishments to survey; (4) in addition, OSHA knew some of the industries had high numbers of work-related fatalities; (5) OSHA surveyed establishments in these industries with 60 or more employees in both years; (6) employers surveyed were not required to develop new sets of injury and illness data to respond to OSHA surveys; (7) instead, these employers were already required by OSHA to keep at their establishments records of specific information on work-related injuries and illnesses; (8) OSHA also required surveyed establishments to provide information on employees' total hours worked and on the average number of employees who worked during the year; (9) OSHA planned to use the data collected to better identify establishments with the highest injury and illness rates so that it could more accurately target on-site compliance inspections to establishments with safety and health problems; (10) in addition, OSHA planned to use the data to better target its technical assistance and consultation efforts and to measure its performance under the Government Performance and Results Act of 1993 in meeting its goals of reducing establishment injuries and illnesses; (11) as of April 1998, however, OSHA had made only limited use of the data collected in its 1996 and 1997 surveys mainly because of two lawsuits; (12) a federal court ordered OSHA to halt implementation of a new program that, using the 1997 survey data, identified specific establishments with the highest lost workday injury and illness rates; (13) employers who declined to participate in this new program would remain on OSHA's list of employers most likely to be inspected; (14) the program has been suspended until the court issues a decision; (15) as a part of its data collection effort, OSHA gave no assurances about privacy or confidentiality when it requested establishment information from employers; and (16) OSHA has received many Freedom of Information Act requests for the names and addresses of the 12,000 establishments with high injury and illness rates that it invited to participate in the new program.
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Our investigator was easily able to obtain four genuine U.S. passports using counterfeit or fraudulently obtained documents. In the most egregious case, our investigator obtained a U.S. passport using counterfeit documents and the SSN of a man who died in 1965. In another case, our undercover investigator obtained a U.S. passport using counterfeit documents and the genuine SSN of a fictitious 5-year-old child--even though his counterfeit documents and application indicated he was 53 years old. State and USPS employees did not identify our documents as counterfeit in any of our four tests. Although we do not know what checks, if any, State performed when approving our fraudulent applications, it issued a genuine U.S. passport in each case. All four passports were issued to the same GAO investigator, under four different names. Our tests show a variety of ways that malicious individuals with even minimal counterfeiting capabilities and access to another person's identity could obtain genuine U.S. passports using counterfeit or fraudulently obtained documents. Table 1 below shows the month of passport application, type of counterfeit or fraudulently obtained documents used, and the number of days that passed between passport application and passport issuance for each of our four tests. Our investigator used a genuine U.S. passport obtained by using counterfeit or fraudulently obtained documents to pass through airport security. In January 2009, our investigator purchased an airline ticket for a domestic flight using the fictitious name from one of our test scenarios. He then used the fraudulently obtained passport from that test as proof of identity to check in to his flight, get a boarding pass, and pass through the security checkpoint at a major metropolitan-area airport. Figure 1 below shows the boarding pass. After our investigator successfully passed through the checkpoint, he left the airport and cancelled his airline ticket. Our first test found that USPS did not detect the counterfeit West Virginia driver's license our undercover investigator presented as proof of his identity during the passport application process. Further, State issued our investigator a genuine U.S. passport despite the counterfeit New York birth certificate he used as proof of his U.S. citizenship. In July 2008, our investigator entered a USPS office in Virginia and approached a USPS employee to apply for a passport. The USPS employee greeted the investigator and took his application form, counterfeit New York birth certificate, and counterfeit West Virginia driver's license. On these documents, we used a fictitious identity and a SSN that we had previously obtained from SSA for the purpose of conducting undercover tests. The USPS employee reviewed the application materials line by line to make sure that the information on the application form matched the information on the birth certificate and driver's license. After she completed her review of the application materials, the USPS employee took the investigator's birth certificate and funds to pay for the application fee. She administered an oath, and then told the investigator that he should receive the passport within 1 to 4 weeks. State issued a genuine U.S. passport to our undercover investigator 8 days after he submitted his application. About a week after State issued the passport, it arrived at the mailing address indicated on the application materials. Our second test found that State did not detect a counterfeit New York birth certificate our undercover investigator presented to prove his U.S. citizenship in support of a passport application. In July 2008, our investigator--the same investigator as in the first test above--obtained a genuine identification card from the Washington, D.C., Department of Motor Vehicles using counterfeit documents, which he then used to apply for a U.S. passport. In August 2008, the same investigator entered State's regional Washington, D.C., passport-issuing office with a completed passport application form, a counterfeit New York birth certificate, the genuine D.C. identification card, two passport photographs, sufficient funds to pay for the application fee, and an electronic ticket (e-ticket) confirming that he had a flight to Germany. For this test, we used a fictitious identity and SSN that we had previously obtained from SSA for the purpose of conducting undercover investigations. The investigator presented his application form and materials to a State employee, who went line by line through the application form matching the information to the accompanying documents. The State employee provided the investigator with a number and instructed him to wait until his number was called. After his number was called, the investigator proceeded to a window to speak with another State employee. The second employee looked over his materials to make sure that he had all of the necessary documentation, took his birth certificate and money, and administered an oath. A few days later, the investigator returned to the same passport facility and picked up his passport. State issued the passport on the same day that the investigator submitted his application, in the fictitious name presented on the fraudulently obtained and counterfeit documents. As with our first test, our third test found that USPS did not detect the counterfeit West Virginia driver's license our undercover investigator presented as proof of his identity during the passport application process. Further, State issued our investigator a genuine U.S. passport based on a counterfeit New York birth certificate as proof of U.S. citizenship. In October 2008, our investigator--the same investigator as in the first two tests mentioned above--entered a USPS office in Maryland to apply for a U.S. passport. A USPS employee greeted the investigator and took his application form, as well as his counterfeit New York birth certificate and counterfeit West Virginia driver's license. The application materials used the name and genuine SSN of a fictitious 5-year-old child, which we obtained from a previous investigation. However, our investigator listed his age as 53 on the application materials, which clearly did not match the date of birth associated with the SSN used in this test. The USPS employee reviewed the application materials, including meticulously matching the information on the application form to the birth certificate and driver's license. After she completed her review of the application materials, the USPS employee took the investigator's birth certificate and payment for the application fee, administered an oath, and told the investigator that he should receive the passport within 2 to 4 weeks. State issued a genuine U.S. passport to our investigator, in the fictitious name based on the counterfeit documents, 7 days after he submitted his application. The passport arrived at the mailing address indicated by our investigator on the application materials a few days after its issuance. As with our first and third tests, our fourth test found that USPS did not detect the counterfeit identification document--a bogus Florida driver's license--our undercover investigator presented to support his passport application. Further, State issued our investigator a genuine U.S. passport based on a counterfeit New York birth certificate as proof of U.S. citizenship. In December 2008, our investigator--the same investigator as in the three tests mentioned above--entered a USPS office in Maryland to apply for a U.S. passport. A USPS employee greeted the investigator and took his application form, as well as his counterfeit New York birth certificate and counterfeit Florida driver's license. His application materials used a name and SSN that was issued to a person who died in 1965, and who would have been 59 years old at the time of our test had he still been alive. The USPS employee reviewed the application materials, matching the information on the application form to the birth certificate and driver's license. After completing the review of application materials, the USPS employee took the investigator's birth certificate and funds to pay for the application fee. The USPS employee administered an oath then told the investigator that he should receive the passport within 4 to 6 weeks. Four days after our investigator submitted his application, State issued a genuine U.S. passport in the fictitious name presented on the counterfeit documents. The passport arrived at the mailing address indicated by our investigator on the application materials. We briefed State officials on the results of our investigation. They agreed that our findings expose a major vulnerability in State's passport issuance process. According to State officials, the department's ability to verify the information submitted as part of a passport application is hampered by limitations to its information sharing and data access with other agencies at the federal and state levels. They said that some federal agencies limit State's access to their records due to privacy concerns or the fact that State is not a law enforcement agency. In addition, they said that State does not currently have the ability to conduct real-time verification of the authenticity of birth certificates presented by passport applicants. They added that birth certificates present an exceptional challenge to fraud detection efforts, as there are currently thousands of different acceptable formats for birth certificates. Further, they indicated that there are difficulties with verifying the authenticity of drivers' licenses. Moreover, they said that although State attempts to verify SSN information submitted on passport applications on a daily basis with SSA, the results of this data- sharing process are imperfect. For example, State officials said that many of the mismatches identified through this verification process are actually due to typos or other common errors. However, they said that while these data checks may not identify all cases in which an applicant's data do not match the information in SSA's records, in some instances--such as cases in which an SSN is tied to a deceased individual--investigators from the Passport Fraud Branch of State's Bureau of Diplomatic Security will attempt to check publicly available databases to resolve the mismatch. State officials acknowledged that they have issued other fraudulently obtained passports but did not offer an estimate of the magnitude of the problem. In order to improve State's current passport fraud detection capabilities, officials said that State would need greater cooperation from other agencies at both the federal and state levels, and the ability to access other agencies' records in real time. Subsequent to our briefing, State officials informed us that they identified and revoked our four fraudulently obtained U.S. passports, and that they would study the matter further to determine what steps would be appropriate to improve passport issuance procedures. We did not verify the accuracy of these State officials' statements. We also briefed a representative of USPS on the results of our investigation, who did not offer any comments at the time of our briefing. We are sending copies of this report to the Secretary of State and other interested parties. The report will also 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) 512-6722 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report.
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A genuine U.S. passport is a vital document, permitting its owner to travel freely in and out of the United States, prove U.S. citizenship, obtain further identification documents, and set up bank accounts, among other things. Unfortunately, a terrorist or other criminal could take advantage of these benefits by fraudulently obtaining a genuine U.S. passport from the Department of State (State). There are many ways that malicious individuals could fraudulently obtain a genuine U.S. passport, including stealing an American citizen's identity and counterfeiting or fraudulently obtaining identification or citizenship documents to meet State requirements. GAO was asked to proactively test the effectiveness of State's passport issuance process to determine whether the process is vulnerable to fraud. To do so, GAO designed four test scenarios that simulated the actions of a malicious individual who had access to an American citizen's personal identity information. GAO created counterfeit documents for four fictitious or deceased individuals using off-the-shelf, commercially available hardware, software, and materials. An undercover GAO investigator then applied for passports at three United States Postal Service (USPS) locations and a State-run passport office. GAO's investigation shows that terrorists or criminals could steal an American citizen's identity, use basic counterfeiting skills to create fraudulent documentation for that identity, and obtain a genuine U.S. passport from State. GAO conducted four tests simulating this approach and was successful in obtaining a genuine U.S. passport in each case. In the most egregious case, an undercover GAO investigator obtained a passport using counterfeit documents and the Social Security Number (SSN) of a man who died in 1965. In another case, the investigator obtained a passport using counterfeit documents and the genuine SSN of a fictitious 5-year-old child GAO created for a previous investigation--even though the investigator's counterfeit documents and application indicated he was 53 years old. All four passports were issued to the same GAO investigator, under four different names. In all four tests, GAO used counterfeit and/or fraudulently obtained documents. State and USPS employees did not identify GAO's documents as counterfeit. GAO's investigator later purchased an airline ticket under the name used on one of the four fraudulently obtained U.S. passports, and then used that passport as proof of identity to check in to his flight, get a boarding pass, and pass through the security checkpoint at a major metropolitan-area airport. At a briefing on the results of GAO's investigation, State officials agreed with GAO that the investigation exposes a major vulnerability in State's passport issuance process. According to State officials, State's fraud detection efforts are hampered by limitations to its information sharing and data access with other federal and state agencies. After GAO's briefing, State officials notified GAO that they identified and revoked GAO's four fraudulently obtained U.S. passports, and were studying the matter to determine the appropriate steps for improving State's passport issuance process.
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BIE's Indian education programs derive from the federal government's trust responsibility to Indian tribes, a responsibility established in federal statutes, treaties, court decisions, and executive actions. It is the policy of the United States to fulfill this trust responsibility for educating Indian children by working with tribes to ensure that education programs are of the highest quality, among other things. In accordance with this trust responsibility, Interior is responsible for providing a safe and healthy environment for students to learn. BIE's mission is to provide Indian students with quality education opportunities. Students attending BIE schools generally must be members of federally recognized Indian tribes, or descendants of members of such tribes, and reside on or near federal Indian reservations. All BIE schools--both tribally-operated and BIE-operated--receive almost all of their funding to operate from federal sources, namely, Interior and Education. Specifically, these elementary and secondary schools received approximately $830 million in fiscal year 2014--including about 75 percent, or about $622 million, from Interior and about 24 percent, or approximately $197 million, from Education. BIE schools also received small amounts of funding from other federal agencies (about 1 percent), mainly the Department of Agriculture, which provides reduced-price or free school meals for eligible low-income children. (See fig. 1). While BIE schools are primarily funded through Interior, they receive annual formula grants from Education, similar to public schools. Specifically, schools receive Education funds under Title I, Part A of the Elementary and Secondary Education Act (ESEA) of 1965, as amended, and the Individuals with Disabilities Education Act. Title I--the largest funding source for kindergarten through grade 12 under ESEA--provides funding to expand and improve educational programs in schools with students from low-income families and may be used for supplemental services to improve student achievement, such as instruction in reading and mathematics. An Education study published in 2012 found that all BIE schools were eligible for Title I funding on a school-wide basis because they all had at least 40 percent of children from low-income households in school year 2009-10. Further, BIE schools receive Individuals with Disabilities Education Act funding for special education and related services, such as physical therapy or speech therapy. BIE schools tend to have a higher percent of students with special needs than students in public schools nationally. BIE schools' educational functions are primarily the responsibility of BIE, while their administrative functions are divided mainly between two other Interior offices. The Bureau of Indian Education develops educational policies and procedures, supervises program activities, and approves schools' expenditures. Three Associate Deputy Directors are responsible for overseeing multiple BIE local education offices that work directly with schools to provide technical assistance. Some BIE local offices also have their own facility managers that serve schools overseen by the office. The Office of the Deputy Assistant Secretary of Management oversees many of BIE's administrative functions, including acquisitions and contract services, financial management, budget formulation, and property management. This office is also responsible for developing policies and procedures and providing technical assistance and funding to Bureau of Indian Affairs (BIA) regions and BIE schools to address their facility needs. Professional staff in this division--including engineers, architects, facility managers, and support personnel--are tasked with providing expertise in all facets of the facility management process. The Bureau of Indian Affairs administers a broad array of social services and other supports to tribes at the regional level. Regarding school facility management, BIA oversees the day-to-day implementation and administration of school facility construction and repair projects through its regional field offices. Currently there are 12 regional offices, and 9 of them have facility management responsibilities.health and safety inspections to ensure compliance with relevant requirements and providing technical assistance to BIE schools on facility issues. To determine how student performance at BIE schools compares to that of public school students, we reviewed data on student performance for 4th and 8th grades at BIE and public schools for 2005 to 2011 using data from the National Assessment of Educational Progress, a project of Education. Since 1969, these assessments have been conducted periodically in various subjects, including reading and mathematics. Further, these assessments are administered uniformly across the nation, and the results serve as a common metric for all states and selected urban districts. Indian Affairs' administration of BIE schools--which has undergone multiple realignments over the past 10 years--is fragmented. In addition to BIE, multiple offices within BIA and the Office of the Deputy Assistant Secretary of Management have responsibilities for educational and administrative functions for BIE schools. Notably, when the Assistant Secretary for Indian Affairs was asked at a February 2015 hearing to clarify the responsibilities that various offices have over BIE schools, he responded that the current structure is "a big part of the problem" and that the agency is currently in the process of realigning the responsibilities various entities have with regard to Indian education, adding that it is a challenging and evolving process. Indian Affairs provided us with a chart on offices with a role in supporting and overseeing just BIE school facilities that shows numerous offices across three organizational divisions. (See fig. 4.) The administration of BIE schools has undergone several reorganizations over the years to address persistent concerns with operational effectiveness and efficiency. In our 2013 report, we noted that for a brief period from 2002 to 2003, BIE was responsible for its own administrative functions, according to BIE officials. However, in 2004 its administrative functions were centralized under the Office of the Deputy Assistant Secretary for Management. More recently, in 2013 Indian Affairs implemented a plan to decentralize some administrative responsibilities for schools, delegating certain functions to BIA regions. Further, in June 2014, the Secretary of the Interior issued an order to restructure BIE by the start of school year 2014-15 to centralize the administration of schools, decentralize services to schools, and increase the capacity of tribes to directly operate them, among other goals. Currently, Indian Affairs' restructuring of BIE is ongoing. In our 2013 report, we found that the challenges associated with the fragmented administration of BIE schools were compounded by repeated turnover in leadership over the years, including frequent changes in the tenure of acting and permanent assistant secretaries of Indian Affairs from 2000 through 2013. We also noted that frequent leadership changes may complicate efforts to improve student achievement and negatively affect an agency's ability to sustain focus on key initiatives. Indian Affairs' administration of BIE schools has also been undermined by the lack of a strategic plan for guiding its restructuring of BIE's administrative functions and carrying out BIE's mission to improve education for Indian students. We previously found that key practices for organizational change suggest that effective implementation of a results- oriented framework, such as a strategic plan, requires agencies to clearly establish and communicate performance goals, measure progress toward those goals, determine strategies and resources to effectively accomplish the goals, and use performance information to make the decisions necessary to improve performance.BIE officials said that developing a strategic plan would help its leadership and staff pursue goals and collaborate effectively to achieve them. Indian Affairs agreed with our recommendation to develop such a plan and We noted in our 2013 report that recently reported it had taken steps to do so. However, the plan has yet to be finalized. Fragmented administration of schools may also contribute to delays in providing materials and services to schools. For example, our previous work found that the Office of the Deputy Assistant Secretary for Management's lack of knowledge about the schools' needs and expertise in relevant education laws and regulations resulted in critical delays in procuring and delivering school materials and supplies, such as textbooks. In another instance, we found that the Office of the Deputy Assistant Secretary for Management's processes led to an experienced speech therapist's contract being terminated at a BIE school in favor of a less expensive contract with another therapist. However, because the new therapist was located in a different state and could not travel to the school, the school was unable to fully implement students' individualized education programs in the timeframe required by the Individuals with Disabilities Education Act. In addition, although BIE accounted for approximately 34 percent of Indian Affairs' budget, several BIE officials reported that improving student performance was often overshadowed by other agency priorities. This hindered Indian Affairs' staff from seeking and acquiring expertise in education issues. In our 2013 report, we also found that poor communication among Indian Affairs offices and with schools about educational services and facilities undermines administration of BIE schools. According to school officials we interviewed, communication between Indian Affairs' leadership and BIE is weak, resulting in confusion about policies and procedures. We have reported that working relations between BIE and the Office of the Deputy Assistant Secretary for Management's leadership are informal and sporadic, and BIE officials noted having difficulty obtaining timely updates from the Office of the Deputy Assistant Secretary for Management on its responses to requests for services from schools. In addition, there is a lack of communication between Indian Affairs' leadership and schools. BIE and school officials in all four states we visited reported that they were unable to obtain definitive answers to policy or administrative questions from BIE's leadership in Washington, For example, school officials in one state D.C. and Albuquerque, NM.we visited reported that they requested information from BIE's Albuquerque office in the 2012-13 school year about the amount of Individuals with Disabilities Education Act funds they were to receive. The Albuquerque office subsequently provided them three different dollar amounts. The school officials were eventually able to obtain the correct amount of funding from their local BIE office. Similarly, BIE and school officials in three states reported that they often do not receive responses from BIE's Washington, D.C. and Albuquerque offices to questions they pose via e-mail or phone. Further, one BIE official stated that meetings with BIE leadership are venues for conveying information from management to the field, rather than opportunities for a two-way dialogue. We testified recently that poor communication has also led to confusion among some BIE schools about the roles and responsibilities of the various Indian Affairs' offices responsible for facility issues. For example, the offices involved in facility matters continue to change, due partly to two re-organizations of BIE, BIA, and the Office of the Deputy Assistant Secretary for Management over the past 2 years. BIE and tribal officials at some schools we visited said they were unclear about what office they should contact about facility problems or to elevate problems that are not addressed. At one school we visited, a BIE school facility manager submitted a request in February 2014 to replace a water heater so that students and staff would have hot water in the elementary school. However, the school did not designate this repair as an emergency. Therefore, BIA facility officials told us that they were not aware of this request until we brought it to their attention during our site visit in December 2014. Even after we did so, it took BIE and BIA officials over a month to approve the purchase of a new water heater, which cost about $7,500. As a result, students and staff at the elementary school went without hot water for about a year. We have observed difficulties in providing support for the most basic communications, such as the availability of up-to-date contact information for BIE and its schools. For example, BIE schools and BIA regions use an outdated national directory with contact information for BIE and school officials, which was last published in 2011. This may impair communications, especially given significant turnover of BIE and school staff. It may also hamper the ability of schools and BIA officials to share timely information with one another about funding and repair priorities. In one BIA region we visited, officials have experienced difficulty reaching certain schools by email and sometimes rely on sending messages by fax to obtain schools' priorities for repairs. This situation is inconsistent with federal internal control standards that call for effective internal communication throughout an agency. In 2013, we recommended that Interior develop a communication strategy for BIE to update its schools and key stakeholders of critical developments. We also recommended that Interior include a communication strategy--as part of an overall strategic plan for BIE--to improve communication within Indian Affairs and between Indian Affairs and BIE staff. Indian Affairs agreed to these two recommendations and recently reported taking some steps to address them. However, it did not provide us with documentation that shows it has fully implemented the recommendations. Limited staff capacity poses another challenge to addressing BIE school needs. According to key principles of strategic workforce planning, the appropriate geographic and organizational deployment of employees can further support organizational goals and strategies and enable an organization to have the right people with the right skills in the right place. In 2013 we reported that staffing levels at BIA regional offices were not adjusted to meet the needs of BIE schools in regions with varying numbers of schools, ranging from 2 to 65. Therefore, we noted that it is important to ensure that each BIA regional office has an appropriate number of staff who are familiar with education laws and regulations and school-related needs to support the BIE schools in its region. Consequently, in 2013 we recommended that Indian Affairs revise its strategic workforce plan to ensure that its employees providing administrative support to BIE have the requisite knowledge and skills to help BIE achieve its mission and are placed in the appropriate offices to ensure that regions with a large number of schools have sufficient support. Indian Affairs agreed to implement the recommendation but has not yet done so. BIA regional offices also have limited staff capacity for addressing BIE school facility needs due to steady declines in staffing levels for over a decade, gaps in technical expertise, and limited institutional knowledge. For example, our preliminary analysis of Indian Affairs data shows that about 40 percent of BIA regional facility positions are currently vacant, including regional facility managers, architects, and engineers who typically serve as project managers for school construction and provide technical expertise. Our work and other studies have cited the lack of capacity of Indian Affairs' facility staff as a longstanding agency challenge. Further, officials at several schools we visited said they face similar staff capacity challenges. For example, at one elementary school we visited, the number of maintenance employees has decreased over the past decade from six employees to one full-time employee and a part- time assistant, according to school officials. As a result of the staffing declines, school officials said that facility maintenance staff may sometimes defer needed maintenance. Within BIE, we also found limited staff capacity in another area of school operations--oversight of school expenditures. As we reported in November 2014, the number of key local BIE officials monitoring these expenditures had decreased from 22 in 2011 to 13, due partly to budget cuts. These officials had many additional responsibilities for BIE schools similar to school district superintendents of public schools, such as providing academic guidance. As a result, the remaining 13 officials had an increased workload, making it challenging for them to effectively oversee schools. For example, we found that one BIE official in North Dakota was also serving in an acting capacity for an office in Tennessee and was responsible for overseeing and providing technical assistance to schools in five other states--Florida, Louisiana, Maine, Mississippi, and North Carolina. Further, we reported that the challenges BIE officials confront in overseeing school expenditures are exacerbated by a lack of financial expertise and training. For example, although key local BIE officials are responsible for making important decisions about annual audit findings, such as whether school funds are being spent appropriately, they are not auditors or accountants. Additionally, as we reported in November 2014, some of these BIE officials had not received recent training on financial oversight. Without adequate staff and training, we reported that BIE will continue struggling to adequately monitor school expenses. Consequently, we recommended in 2014 that Indian Affairs develop a comprehensive workforce plan to ensure that BIE has an adequate number of staff with the requisite knowledge and skills to effectively oversee BIE school expenditures. Indian Affairs agreed with our recommendation but has not yet taken any action. Our work has shown that another management challenge, inconsistent accountability, hinders Indian Affairs in the areas of (1) managing school construction and (2) monitoring overall school expenditures. Specifically, this challenge hinders its ability to ensure that Indian students receive a quality education in a safe environment that is conducive to learning. In our February 2015 testimony on BIE school facilities, we reported that Indian Affairs had not provided consistent accountability on some recent school construction projects. According to agency and school officials we interviewed, some recent construction projects, including new roofs and buildings, went relatively well, while others faced numerous problems. The problems we found with construction projects at some schools suggest that Indian Affairs is not fully or consistently using management practices to ensure contractors perform as intended. For example, officials at three schools said they encountered leaks with roofs installed within the past 11 years. At one BIE-operated school we visited, Indian Affairs managed a project in which a contractor completed a $3.5 million project to replace roofs in 2010, but the roofs have leaked since their installation, according to agency documents. These leaks have led to mold in some classrooms and numerous ceiling tiles having to be removed throughout the school. (See fig. 5.) In 2011 this issue was elevated to a senior official within Indian Affairs, who was responsible for facilities and construction. He stated that the situation was unacceptable and called for more forceful action by the agency. Despite numerous subsequent repairs of these roofs, school officials and regional Indian Affairs officials told us in late 2014 that the leaks and damage to the structure continue. They also said that they were not sure what further steps, if any, Indian Affairs would take to resolve the leaks or hold the contractors or suppliers accountable, such as filing legal claims against the contractor or supplier if appropriate. In South Dakota, a school we visited recently encountered problems constructing a $1.5 million building for bus maintenance and storage using federal funds. According to Indian Affairs and school officials, although the project was nearly finished at the time of our visit in December 2014, Indian Affairs, the school, and the contractor still had not resolved various issues, including drainage and heating problems. Further, part of the new building for bus maintenance has one hydraulic lift, but the size of the building does not allow a large school bus to fit on the lift when the exterior door is closed because the building is not long enough. Thus, staff using the lift would need to maintain or repair a large bus with the door open, which is not practical in the cold South Dakota winters. (See fig. 6.) According to Indian Affairs officials, part of the difficulty with this federally- funded project resulted from the school's use of a contractor responsible for both the design and construction of the project, which limited Indian Affairs' ability to oversee it. Indian Affairs officials said that this arrangement, known as "design-build," may sometimes have advantages, such as faster project completion times, but may also give greater discretion to the contractor responsible for both the design and construction of the building. For example, Indian Affairs initially raised questions about the size of the building to store and maintain buses. However, agency officials noted that the contractor was not required to incorporate Indian Affairs' comments on the building's design or obtain its approval for the project's design, partly because Indian Affairs' policy does not appear to address approval of the design in a "design-build" project. Further, neither the school nor Indian Affairs used particular financial incentives to ensure satisfactory performance by the contractor. Specifically, the school already paid the firm nearly the full amount of the project before final completion, according to school officials, leaving it little financial leverage over the contractor. We will continue to monitor such issues as we complete our ongoing work on BIE school facilities and consider any recommendations that may be needed to address these issues. In our 2014 report on BIE school spending, we found that BIE's oversight did not ensure that school funds were spent appropriately on educational services, although external auditors had determined that there were serious financial management issues at some schools. Specifically, auditors identified $13.8 million in unallowable spending by 24 BIE schools as of July 2014. Additionally, in one case, an annual audit found that a school lost about $1.2 million in federal funds that were illegally transferred to an offshore bank account.accumulated at least another $6 million in federal funds in a U.S. bank account. As of June 2014, BIE had not determined how the school accrued that much in unspent federal funds. Further, instead of using a risk-based approach to its monitoring efforts, BIE indicated that it relies primarily on ad hoc suggestions by staff regarding which schools to target for greater oversight. For example, BIE failed to increase its oversight of expenditures at one school where auditors found that the school's financial statements had to be adjusted by about $1.9 million. The same auditors also found unreliable accounting of federal funds during a 3-year period we reviewed. We recommended that Indian Affairs develop a risk-based approach to oversee school expenditures to focus BIE's monitoring activities on schools that auditors have found to be at the greatest risk of misusing federal funds. While Indian Affairs agreed, it has not yet implemented this recommendation. In addition, we found that BIE did not use written procedures to monitor schools' use of Indian School Equalization Program funds, which accounted for almost half of their total operating funding in fiscal year 2014. In 2014 we recommended that Indian Affairs develop written procedures, including for Interior's Indian School Equalization Program, to consistently document their monitoring activities and actions they have taken to resolve financial weaknesses identified at schools. While Indian Affairs generally agreed, it has not yet taken this action. Without a risk- based approach and written procedures to overseeing school spending-- both integral to federal internal control standards--there is little assurance that federal funds are being used for their intended purpose to provide BIE students with needed instructional and other educational services. In conclusion, Indian Affairs has been hampered by systemic management challenges related to BIE's programs and operations that undermine its mission to provide Indian students with quality education opportunities and safe environments that are conducive to learning. In light of these management challenges, we have recommended several improvements to Indian Affairs on its management of BIE schools. While Indian Affairs has generally agreed with these recommendations and reported taking some steps to address them, it has not yet fully implemented them. Unless steps are promptly taken to address these challenges to Indian education, it will be difficult for Indian Affairs to ensure the long-term success of a generation of students. We will continue to monitor these issues as we complete our ongoing work and consider any additional recommendations that may be needed to address these issues. Chairman Barrasso, Vice Chairman Tester, and Members of the Committee, this concludes my prepared statement. I will be pleased to answer any questions that you may have. For future contact regarding this testimony, please contact Melissa Emrey-Arras at (617) 788-0534 or [email protected]. Key contributors to this testimony were Elizabeth Sirois (Assistant Director), Edward Bodine, Matthew Saradjian, and Ashanta Williams. Also, providing legal or technical assistance were James Bennett, David Chrisinger, Jean McSween, Jon Melhus, Sheila McCoy, and James Rebbe. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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BIE is responsible for providing quality education opportunities to Indian students. It currently oversees 185 schools, serving about 41,000 students on or near Indian reservations. Poor student outcomes raise questions about how well BIE is achieving its mission. In September 2013, GAO reported that BIE student performance has been consistently below that of Indian students in public schools. This testimony discusses Indian Affairs' management challenges in improving Indian education, including (1) its administration of schools, (2) staff capacity to address schools' needs, and (3) accountability for managing school construction and monitoring school spending. This testimony is based on GAO reports issued in September 2013 and November 2014, as well as GAO's February 2015 testimony, which presents preliminary results from its ongoing review of BIE school facilities. A full report on school facilities will be issued later this year. GAO reviewed relevant federal laws and regulations; analyzed agency data; and conducted site visits to schools, which were selected based on their geographic diversity and other factors. GAO has made several recommendations in its earlier reports; it is not making any new recommendations in this statement. GAO has reported for several years on how systemic management challenges within the Department of the Interior's Office of the Assistant Secretary-Indian Affairs (Indian Affairs) continue to hamper efforts to improve Bureau of Indian Education (BIE) schools. Over the past 10 years, Indian Affairs has undergone several organizational realignments, resulting in multiple offices across different units being responsible for BIE schools' education and administrative functions. Indian Affairs' fragmented organization has been compounded by frequent turnover in its leadership over a 13-year period and its lack of a strategic plan for BIE. Further, fragmentation and poor communication among Indian Affairs offices has led to confusion among schools about whom to contact about problems, as well as delays in the delivery of key educational services and supplies, such as textbooks. Key practices for organizational change suggest that agencies develop a results-oriented framework, such as a strategic plan, to clearly establish and communicate performance goals and measure their progress toward them. In 2013, GAO recommended that Interior develop a strategic plan for BIE and a strategy for communicating with schools, among other recommendations. Indian Affairs agreed with and reported taking some steps to address the two recommendations. However, it has not fully implemented them. Limited staff capacity poses another challenge to addressing BIE school needs. According to key principles for effective workforce planning, the appropriate deployment of employees enables organizations to have the right people, with the right skills, in the right places. However, Indian Affairs data indicate that about 40 percent of its regional facility positions, such as architects and engineers, are vacant. Similarly, in 2014 GAO reported that BIE had many vacancies in positions to oversee school spending. Further, remaining staff had limited financial expertise and training. Without adequate staff and training, Indian Affairs will continue to struggle in monitoring and supporting schools. GAO recommended that Interior revise its workforce plan so that employees are placed in the appropriate offices and have the requisite knowledge and skills to better support schools. Although Indian Affairs agreed with this recommendation, it has not yet implemented it. Inconsistent accountability hampers management of BIE school construction and monitoring of school spending. Specifically, GAO has found that Indian Affairs did not consistently oversee some construction projects. For example, at one school GAO visited, Indian Affairs spent $3.5 million to replace multiple roofs in 2010. The new roofs have leaked since their installation, causing mold and ceiling damage, and Indian Affairs has not yet adequately addressed the problems, resulting in continued leaks and damage to the structure. Inconsistent accountability also impairs BIE's monitoring of school spending. In 2014 GAO found that BIE does not adequately monitor school expenditures using written procedures or a risk-based monitoring approach, contrary to federal internal control standards. As a result, BIE failed to provide effective oversight of schools when they misspent millions of dollars in federal funds. GAO recommended that the agency develop written procedures and a risk-based approach to improve its monitoring. Indian Affairs agreed but has yet to implement these recommendations.
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The U.S. government maintains more than 250 diplomatic posts overseas (embassies, consulates, and other diplomatic offices) with approximately 60,000 personnel representing more than 50 government agencies and subagencies. The departments of Defense and State together comprise more than two-thirds of American personnel overseas under chiefs of mission authority--36 percent and 35 percent, respectively. The costs of maintaining staff overseas vary by agency but in general, as OMB has reported, they are high. The Deputy Director of OMB recently testified that the average annual cost of having one full-time direct-hire American family of four in a U.S. embassy is $339,100. Following the 1998 embassy bombings, two high-level independent groups called for the reassessment of overseas staffing levels. The Accountability Review Boards that sent two teams to the region to investigate the bombings concluded that the United States should consider adjusting the size of its overseas presence to reduce security vulnerabilities. Following the Accountability Review Boards' report, OPAP concluded that some embassies were disproportionately sized and needed staff adjustments to adapt to new foreign policy priorities and reduce security vulnerabilities. The panel recommended creating a permanent interagency committee to develop a methodology to determine the appropriate size and locations of the U.S. overseas presence. OPAP also suggested a series of actions to adjust overseas presence, including relocating some functions to the United States and to regional centers where feasible. However, the State- led interagency committee that was established to respond to OPAP's recommendations did not produce a standard rightsizing methodology. As we previously reported, the committee did not spend sufficient time at overseas locations to fully assess workload issues or consider alternative ways of doing business. To move the issue forward, in August 2001, the President's Management Agenda identified rightsizing as one of the administration's priorities. In addition, the President's fiscal year 2003 international affairs budget (1) highlighted the importance of making staffing decisions on the basis of mission priorities and costs and (2) directed OMB to analyze agencies' overseas staffing and operating costs (see app. I for a summary of previous rightsizing initiatives). Although there is general agreement on the need for rightsizing the U.S. overseas presence, there is no consensus on how to do it. As a first step, we developed a framework that includes a set of questions to guide decisions on overseas staffing (see app. II for the set of questions). We identified three critical elements that should be systematically evaluated as part of this framework: (1) physical/technical security of facilities and employees, (2) mission priorities and requirements, and (3) cost of operations. If the evaluation shows problems, such as security risks, decision makers should then consider the feasibility of rightsizing options, including relocating staff or downsizing. On the other hand, evaluations of agencies' priorities may indicate a need for additional staff at embassies or greater external support from other locations. Figure 1 illustrates the framework's elements and options. State and other agencies in Washington, D.C., including OMB, could use this framework as a guide for making overseas staffing decisions. For example, ambassadors could use this framework to ensure that embassy staffing is in line with security concerns, mission priorities and requirements, and cost of operations. At the governmentwide level, State and other agencies could apply the framework to free up resources at oversized posts, reallocate limited staffing resources worldwide, and introduce greater accountability into the staffing process. The following sections describe in more detail the three elements of our framework, examples of key questions to consider for each element, and potential rightsizing options. We also include examples of how the questions in the framework were useful for examining rightsizing issues at the U.S. embassy in Paris. The substantial loss of life caused by the bombings of the U.S. embassies in Africa and the ongoing threats against U.S. diplomatic buildings have heightened concern about the safety of our overseas personnel. State has determined that about 80 percent of embassy and consulate buildings do not fully meet security standards. Although State has a multibillion-dollar plan under way to address security deficiencies around the world, security enhancements cannot bring most existing facilities in line with the desired setback--the distance from public thoroughfares--and related blast protection requirements. Recurring threats to embassies and consulates highlight the importance of rightsizing as a tool to minimize the number of embassy employees at risk. The Accountability Review Boards recommended that the Secretary of State review the security of embassies and consider security in making staffing decisions. We agree that the ability to protect personnel should be a key factor in determining embassy staffing levels. State has prepared a threat assessment and security profile for each embassy, which can be used when assessing staff levels. While chiefs of mission and State have primary responsibility for assessing overseas security needs and allocating security resources, all agencies should consider the risks associated with maintaining staff overseas. The Paris embassy, our case study, illustrates the importance of facility security in determining staffing levels. As at many posts, the facilities in Paris predate current security standards. The Department of State continues to mitigate security limitations by using a variety of physical and technical security countermeasures. That said, none of the embassy's office buildings meets current standards. The placement and composition of staff overseas must reflect the highest priority goals of U.S. foreign policy. Moreover, the President's Management Agenda states that U.S. interests are best served by ensuring that the federal government has the right number of people at the right locations overseas. Currently, there is no clear basis on which to evaluate an embassy's mission and priorities relative to U.S. foreign policy goals. State's fiscal year 2000-2002 Mission Performance Plan (MPP) process does not require embassies to differentiate among the relative importance of U.S. strategic goals. The Chairman of OPAP testified in May 2002 that no adequate system exists to match the size and composition of the U.S. presence in a given country to the embassy's priorities. Currently it is difficult to assess whether 700 people are needed at the Paris embassy. For example, the fiscal year 2000-2002 MPP includes 15 of State's 16 strategic goals, and overall priorities are neither identified nor systematically linked to resources. In recent months, State has revised the MPP process to require each embassy to set five top priorities and link staffing and budgetary requirements to fulfilling these priorities. A successful delineation of mission priorities will complement our rightsizing framework and support future rightsizing efforts to adjust the composition of embassy staff. Embassy workload requirements include influencing policy of other governments, assisting Americans abroad, articulating U.S. policy, handling official visitors, and providing input for various reports and requests from Washington. In 2000, on the basis of a review of six different U.S. embassies, the State-led interagency committee found the perception that Washington's requirements for reports and other information requests were not prioritized and placed unrealistic demands on staff. We also found this same perception among some offices in Paris. Scrutiny of workload requirements could potentially identify work of low priority such as reporting that has outlived its usefulness. Currently, State monitors and sends incoming requests for reports and inquiries to embassies and consulates, but it rarely refuses requests and leaves the prioritization of workload to the respective embassies and consulates. Washington's demands on an embassy need to be evaluated in light of how they affect other work requirements and the number of staff needed to meet these requirements. For example, the economics section in Paris reported that Washington-generated requests resulted in missed opportunities for assessing how U.S. private and government interests are affected by the many ongoing changes in the European banking system. The President's Management Agenda states that there is no mechanism to assess the overall rationale for and effectiveness of where and how many U.S. employees are deployed overseas. Each agency in Washington has its own criteria for assigning staff to U.S. embassies. Some agencies have more flexibility than others in placing staff overseas, and Congress mandates the presence of others. Thorough staffing criteria are useful for determining and reassessing staffing levels and would allow agencies to better justify the number of overseas staff. We found that the criteria to locate staff in Paris vary significantly by agency. Some agencies use detailed staffing models, but most do not. Furthermore, they do not fully consider embassy priorities or the overall workload requirements on the embassy in determining where and how many staff are necessary. Some agencies are entirely focused on the host country, while others have regional responsibilities or function almost entirely outside the country in which they are located. Some agencies have constant interaction with the public, while others require interaction with their government counterparts. Some agencies collaborate with other agencies to support the embassy's mission, while others act more independently and report directly to Washington. Analyzing where and how agencies conduct their business overseas may lead to possible rightsizing options. For example, the mission of the National Science Foundation involves interaction with persons throughout Europe and Eurasia and therefore raises the question of whether it needs Paris-based staff. The President's Management Agenda noted that the full costs of sending staff overseas are unknown. The Deputy Director of OMB testified that there is a wide disparity among agencies' reported costs for a new position overseas. Without comprehensive cost data, decision makers cannot determine the correlation between costs and the work being performed, nor can they assess the short- and long-term costs associated with feasible business alternatives. We agree with the President's Management Agenda that staffing decisions need to include a full range of factors affecting the value of U.S. presence in a particular country, including the costs of operating the embassy. However, we found no mechanism to provide the ambassador and other decision makers with comprehensive data on all agencies' costs of operations at an embassy. This lack of consolidated cost data for individual embassies makes linking costs to staffing levels, embassy priorities, and desired outcomes impossible. This is a long-standing management weakness that, according to the President, needs to be corrected. Our work in Paris demonstrates that this embassy is operating without fundamental knowledge and use of comprehensive cost data. State officials concurred that it is difficult to fully record the cost of all agencies overseas because of inconsistent accounting and budgeting systems. Nevertheless, we were able to document an estimated total cost for all agencies operating in France in fiscal year 2001 at more than $100 million. To do this, we developed a template in consultation with State and OMB to capture different categories of operating costs, such as salaries and benefits, and applied the template to each agency at the embassy. Once costs are known, it is important to relate them to the embassy's performance. This will allow decision makers to (1) assess the relative cost-effectiveness of various program and support functions and (2) make cost-based decisions when setting mission priorities and staffing levels and determining the feasibility of alternative business approaches. With comprehensive data, State and other agencies could make cost-based decisions at the embassy level as well as on a global basis. Analyses of security, mission, and cost may suggest the need for more or fewer staff at an embassy or an adjustment to the overall staff mix. Independent analysis of each element can lead to changes. However, all three elements of the framework need to be considered together to make reasonable decisions regarding staff size. For example, if the security element is considered in isolation and existing facilities are deemed highly vulnerable, managers may first consider adding security enhancements to existing buildings; working with host country law enforcement agencies to increase embassy protection; reconfiguring existing space to accommodate more people in secure space; and leasing, purchasing, or constructing new buildings. However, consideration of all elements of the framework may suggest additional means for reducing security vulnerabilities, such as reducing the total number of staff. Our framework encourages consideration of a full range of options along with the security, mission, and cost trade-offs. Our framework is consistent with the views of rightsizing experts who have recommended that embassies consider alternative means of fulfilling mission requirements. For example, OPAP concluded that staff reductions should be considered as a means of improving security, and the Chairman of OPAP, in May 2002 testimony, supported elimination of some functions or performing functions from regional centers or the United States.Moreover, President Bush has told U.S. ambassadors that "functions that can be performed by personnel in the U.S. or at regional offices overseas should not be performed at a post." Our analysis highlights five possible rightsizing options to carry out these goals, but this list is not exhaustive. These suggested options include 1. relocating functions to the United States, 2. relocating functions to regional centers, 3. relocating functions to other locations under chief of mission authority where relocation back to the United States or to regional centers is not practical, 4. purchasing services from the private sector, and 5. changing business practices. Our case study at the Paris embassy illustrates the applicability of these options, which have the potential to reduce the number of vulnerable staff in the embassy buildings. These options may be applicable to as many as 210 positions in Paris. The work of about 120 staff could be relocated to the United States--State already plans to relocate the work of more than 100 of these employees. In addition, the work of about 40 other positions could be handled from other locations in Europe, while more than 50 other positions are commercial in nature and provide services that are available in the private sector. For example: Some functions at the Paris embassy could be relocated to the United States. State is planning to relocate more than 100 budget and finance positions from the Financial Services Center in Paris to State's financial center in Charleston, South Carolina, by September 2003. In addition, we identified other agencies that perform similar financial functions and could probably be relocated. For example, four Voice of America staff provide payroll services to correspondent bureaus and freelance reporters around the world and would benefit from collocation with State's Financial Services Center. The Paris embassy could potentially relocate some functions to the regional logistics center in Antwerp, Belgium, and the planned 23-acre secure regional facility in Frankfurt, Germany, which has the capacity for approximately 1,000 people. The Antwerp facility could handle part of the embassy's extensive warehouse operation, which is currently supported by about 25 people. In addition, some administrative operations at the embassy, such as procurement, could potentially be handled out of the Frankfurt facility. Furthermore, staff at agencies with regional missions could also be moved to Frankfurt. These staff include a National Science Foundation representative who spent approximately 40 percent of his time in 2001 outside of France; four staff who provide budget and finance support to embassies in Africa; and some Secret Service agents who cover eastern Europe, central Asia, and parts of Africa. There are additional positions in Paris that may not need to be in the primary embassy buildings where secure space is at a premium. The primary function of the National Aeronautics and Space Administration representative is to act as a liaison to European space partners. Accomplishing this work may not require retaining office space at the embassy. In fact, the American Battle Monuments Commission has already established a precedent for this, housing about 25 staff in separate office space in a suburb of Paris. In addition, a Department of Justice official works in an office at the French Ministry of Justice. However, dispersing staff raises additional security issues that need to be considered. Given Paris's modern transportation and communication links and large private-sector service industry, the embassy may be able to purchase services from the private sector, which would reduce the number of full- time staff at risk at the embassy if the services can be performed from another location. We identified as many as 50 positions at the embassy that officials in Washington and Paris agreed are commercial in nature, including painters, electricians, plumbers, and supply clerks. Reengineering business functions could help reduce the size of the Paris embassy. Consolidating inventories at the warehouse could decrease staff workload. For instance, household appliances and furniture are maintained separately by agency with different warehouse staff responsible for different inventories. Purchasing furniture locally for embassies such as Paris could also reduce staffing and other support requirements. Advances in technology, increased use of the Internet, and more flights from the United States may reduce the need for certain full-time permanent staff overseas. Moreover, we have identified opportunities to streamline or reengineer embassy functions to improve State's operations and reduce administrative staffing requirements, particularly in western Europe, through measures that would reduce residential housing and furniture costs. We reported in March 2001 that State has a number of outmoded and inefficient business processes. Our cost analyses of the U.S. embassy's housing office in Brussels and the housing support function at the U.S. embassy in London illustrated how reengineering could potentially result in significant savings. To implement the President's Management Agenda, OMB and State have indicated that they plan to assess staffing requirements, costs, and options at embassies in Europe and Eurasia. As part of this effort, they are attempting to identify staff who could be relocated to the planned regional facility in Frankfurt. Applying our framework in this effort would provide a systematic means of assessing staff levels and considering embassy costs and relocation and other rightsizing options. Furthermore, OMB and State have other initiatives under way that will make it easier to use the framework in the future. For example, to make it easier to consider the costs of the U.S. overseas presence, OMB is gathering data on overseas costs for each agency and the costs of establishing new positions, and is assessing the process by which agencies request funding to assign additional staff overseas. To help assess mission priorities and workload, OMB and State are reviewing how embassies have implemented the revised MPPs, which are designed to more clearly set priorities, and how these plans could be used to determine allocation of embassy resources. We plan to monitor OMB's progress in implementing the rightsizing initiative and work with it to incorporate comprehensive cost data into the overseas staffing process. Our rightsizing framework was designed to allow decision makers to systematically link embassy staffing levels and requirements to three critical elements of embassy operations--physical security, mission priorities and requirements, and cost. Using our framework's common set of criteria for making staffing assessments and adjustments would be an important step toward establishing greater accountability and transparency in the overseas staffing process. The key questions of the framework will help decision makers identify the most important factors affecting an embassy's staffing levels and consider rightsizing options to either add or reduce staff or adjust the staff mix. Rightsizing experts told us that the framework appears applicable to all embassies. Although we have tested it only at the U.S. embassy in Paris and are in the process of refining it, we too believe that the framework can provide guidance for executive branch rightsizing exercises at other embassies. To facilitate the use of a common set of criteria for making staff assessments and adjustments at overseas posts and encourage decision makers to consider security, mission priorities and requirements, and costs, we recommend that the Director of the Office of Management and Budget ensure that our framework is used as a basis for assessing staffing levels in the administration's rightsizing initiative, starting with its assessments of staffing levels and rightsizing options at U.S. embassies in Europe and Eurasia. OMB and State provided written comments on a draft of this report (see apps. III and IV). OMB said that it appreciated our efforts to develop a rightsizing framework. OMB agreed with the framework's key elements and options and plans to build upon the framework in examining staffing at all posts within the European and Eurasia Bureau. However, OMB expressed concern regarding whether the GAO methodology can be uniformly applied at all posts worldwide. Nonetheless, OMB noted that it looks forward to working with us and the State Department in using the framework as a starting point to develop a broader methodology that can be applied worldwide. State said that it welcomed our work in developing a framework for rightsizing. State noted the difficulties of previous efforts to develop a methodology, including attempts by the Overseas Presence Advisory Panel and a State-led interagency rightsizing committee. It stated that it has taken steps to regionalize responsibilities in the United States and overseas where appropriate. In addition, State provided technical comments that we have incorporated into this report, as appropriate. To develop the elements of the rightsizing framework and corresponding checklist of suggested questions, we analyzed previous reports on overseas staffing issues, including those of the Accountability Review Boards, OPAP, and the State-led interagency rightsizing committee. We interviewed officials from OMB to discuss the administration's current rightsizing initiatives in relation to the President's Management Agenda. We discussed embassy staffing with rightsizing experts, including the Chairman of OPAP and the current and former Undersecretary of State for Management. We also interviewed officials from the Departments of State, Defense, the Treasury, Commerce, Justice, and Agriculture as well as officials from other agencies with personnel in France. To further develop and test the framework, we conducted a case study at the U.S. embassy in Paris. To assess embassy security, we reviewed security reports, interviewed security experts, and made direct observations. To assess missions' priorities and requirements, we interviewed and collected data from the U.S. Ambassador to France, the Deputy Chief of Mission, and other high-ranking embassy officials as well as officials from more than 35 sections at the Paris embassy. We also interviewed agency officials in Washington, D.C., and in Paris to determine the criteria used by agencies to set staffing levels at the Paris embassy. To assess costs, we interviewed budget and financial management officials from State and collected data on the different categories of operating costs, such as salaries and benefits, from each agency with staff assigned to the Paris embassy. To determine the feasibility of rightsizing actions, we collected and analyzed data associated with (1) relocating certain functions to the United States, regional centers in Europe, or other locations in France and (2) outsourcing or streamlining some functions. We visited State's regional logistics and procurement offices in Antwerp, Belgium, and Frankfurt, Germany, which have been considered as options for expanded regional operations in Europe. To determine if opportunities exist to outsource functions, we collected and analyzed data on the business and staffing practices of Paris-based businesses, other U.S. embassies in western Europe, and other bilateral diplomatic missions in Paris. We conducted our work between September 2001 and May 2002 in accordance with generally accepted government auditing standards. We are sending copies of this report to other interested Members of Congress. We are also sending copies of this report to the Director of OMB and the Secretary of State. Copies will be made available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me on (202) 512-4128. Another GAO contact and staff acknowledgments are listed in appendix V. Physical/technical security of facilities and employees What is the threat and security profile of the embassy? Has the ability to protect personnel been a factor in determining staffing levels at the embassy? To what extent are existing office buildings secure? Is existing space being optimally utilized? Have all practical options for improving the security of facilities been considered? Do issues involving facility security put the staff at an unacceptable level of risk or limit mission accomplishment? Do security vulnerabilities suggest the need to reduce or relocate staff? What are the staffing levels and mission of each agency? How do agencies determine embassy staffing levels? Is there an adequate justification for the number of employees at each agency compared with the agency's mission? Is there adequate justification for the number of direct hire personnel devoted to support and administrative operations? What are the priorities of the embassy?Does each agency's mission reinforce embassy priorities? To what extent are mission priorities not being sufficiently addressed due to staffing limitations or other impediments? To what extent are workload requirements validated and prioritized and is the embassy able to balance them with core functions? Do the activities of any agencies overlap? Given embassy priorities and the staffing profile, are increases in the number of existing staff or additional agency representation needed? To what extent is it necessary for each agency to maintain its current presence in country, given the scope of its responsibilities and its mission? - Could an agency's mission be pursued in other ways? - Does an agency have regional responsibilities or is its mission entirely focused on the host country? What is the embassy's total annual operating cost? What are the operating costs for each agency at the embassy? To what extent are agencies considering the full cost of operations in making staffing decisions? To what extent are costs commensurate with overall embassy strategic importance, with agency programs, and with specific products and services? What are the security, mission, and cost implications of relocating certain functions to the United States, regional centers, or to other locations, such as commercial space or host country counterpart agencies? To what extent could agency program and/or routine administrative functions (procurement, logistics, and financial management functions) be handled from a regional center or other locations? Do new technologies and transportation links offer greater opportunities for operational support from other locations? Do the host country and regional environments suggest there are options for doing business differently, that is, are there adequate transportation and communications links and a vibrant private sector? To what extent is it practical to purchase embassy services from the private sector? Does the ratio of support staff to program staff at the embassy suggest opportunities for streamlining? Can functions be reengineered to provide greater efficiencies and reduce requirements for personnel? Are there best practices of other bilateral embassies or private corporations that could be adapted by the U.S. embassy? To what extent are there U.S. or host country legal, policy, or procedural obstacles that may impact the feasibility of rightsizing options? The following are GAO's comments on the Department of State's letter dated July 9, 2002. 1. We did not set priorities for the elements in the framework that appear in this report. As we state on page 9, decision makers need to consider all three elements of the framework together to make reasonable decisions regarding staff size. 2. In the mission priorities and requirements section, the framework includes the question, "To what extent is it necessary for each agency to maintain its current presence in country?" The amount of time that officials spend in country is a key factor needed to answer the question and in this case the location of the National Science Foundation's representative in Paris warranted further analysis as a possible candidate for rightsizing. The mandate of the National Science Foundation representative is to communicate with bilateral and multilateral counterpart agencies in more than 35 countries in Europe and Eurasia. The representative stated that he could do his job from any location in Europe, as long as he has high-speed internet connectivity. Given security limitations at facilities in Paris and the availability, in the near future, of secure space in Frankfurt, Germany, decision makers should consider these types of positions for relocation. In addition to the person named above, David G. Bernet, Janey Cohen, Chris Hall, Katie Hartsburg, Lynn Moore, and Melissa Pickworth made key contributions to this report.
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There have been recurring calls to evaluate and realign, or "rightsize," the number and location of staff at U.S. embassies and consulates and to consider staff reductions to reduce security vulnerabilities. The Office of Management and Budget is implementing this rightsizing initiative by analyzing the U.S. overseas presence and reviewing the staffing allocation process. This report uses a systematic approach to assess overseas workforce size and identifying options for rightsizing, both at the embassy level and for making related decisions worldwide. GAO's framework links staffing levels to the following three critical elements of overseas diplomatic operations: (1) physical/technical security of facilities and employees, (2) mission priorities and requirements, and (3) cost of operations. Unlike an analysis that considers the elements in isolation, GAO's rightsizing framework encourages consideration of a full range of options, along with the security, mission, and cost trade-offs. Policy makers could use this information to decide whether to add, reduce, or change the staff mix at an embassy.
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The Organization for the Prohibition of Chemical Weapons consists of three entities: the Conference of the States Parties, the Executive Council, and the Technical Secretariat. The Conference of the States Parties currently comprises 147 representatives, one from each member state, and oversees the implementation of the convention. The Executive Council, consisting of 41 representatives from regionally distributed member states, meets in sessions throughout the year to supervise the Secretariat's activities. The Secretariat, headed by the Director-General, manages the organization's daily operations, including implementing the inspection measures of the convention and preparing the organization's annual budgets and reports. About 60 percent of the Secretariat's authorized staff level of 507 employees engages in the inspection-related activities mandated under Articles IV, V, and VI of the convention. Specifically, to verify compliance with Article IV, the Secretariat inspects declared chemical weapons stocks and destruction facilities. To verify compliance with Article V, it inspects and monitors the destruction and conversion of chemical weapons production facilities. Under Article VI of the convention, the Secretariat inspects commercial production facilities. As of July 2002, the organization had conducted 1,210 inspections at the 5,066 declared chemical weapons sites and facilities that fall under the convention's purview. The Secretariat supports member states in their efforts to implement the convention. It also encourages international cooperation and assistance among the member states as mandated by Articles X and XI of the convention. Under these provisions, the Secretariat is authorized to coordinate the provision of assistance to member states that are the victims of chemical attacks. The Secretariat also encourages economic and technological developments in the field of chemistry by encouraging trade and exchange of information among the member states. The organization's budget for calendar year 2002 is about $54 million. Funding for OPCW operations comes primarily from the 147 member states' annual contributions, which are based on the United Nations scale of assessments. The other large source of funding is reimbursement payments for inspections conducted under Articles IV and V of the convention. As required by the convention, members states with chemical weapons related-facilities must reimburse the organization for its inspection costs related to the destruction of chemical weapons (Article IV) and the destruction of chemical weapons production facilities (Article V). The State Department reports annually to Congress on U.S. contributions to international organizations, including the OPCW. In early 2002, the United States and other member states to the convention raised concerns that the organization was not fulfilling its mandate because of a number of management weaknesses. According to the United States, such weaknesses included mismanagement by the organization's then Director-General, as well as his advocacy of inappropriate roles for the organization--such as attempting to interfere with United Nations weapons inspections in Iraq. To address these management concerns, the Conference of the States Parties voted to remove the former Director- General in April 2002. In July 2002, the Conference appointed a new Director-General. In its budgets, the Secretariat has not accurately projected income and expenses. The Secretariat has overestimated its income for two reasons. First, the budgets include as income the assessed contributions of member states that are in arrears, some of which have not paid their contributions since before 1997. Second, the Secretariat has difficulty predicting and collecting income from inspections conducted at chemical weapons- related facilities. The budgets also include inaccurate expense projections. OPCW's inaccurate income and expense estimates contributed to a budget deficit in 2000, and a potential deficit for 2002, despite plans to achieve balanced budgets in those years. In developing its budget plans for the past 6 calendar years, the Secretariat has overestimated the amount of income it would receive from member states' assessed contributions and from reimbursable expenses paid by member states for inspections at chemical weapons-related facilities. When preparing its annual budgets, the Secretariat overestimates the income that it realistically expects to receive from member states' annual assessments. The Chemical Weapons Convention requires all member states to pay their annual assessments or lose their voting privileges. The Secretariat's annual budgets, however, included as income the contributions due from 30 member states, even though these members had not paid their annual assessments for at least the 2 previous years. The cumulative total of arrearages over the past several years amounted to almost $1 million as of August 2002. (See app. II for more details.) This includes $781,883 from 16 member states that had not paid any of their assessed or other contributions since before the organization's inception in 1997. An OPCW official stated that budgeting for arrearages presents a politically sensitive problem for the organization because excluding member states' assessed contributions from the annual budgets would require approval from the Conference of the States Parties. In response to these budgeting problems, the organization's Advisory Body on Administrative and Financial Matters and its External Auditor recommended that the Secretariat improve its budgeting practices by developing more accurate and realistic budgets. For example, in 1998, the Advisory Body and the External Auditor stated that the Secretariat's future budgets should be more realistic and accurate and based on the experience gained in the organization's first year of operation. In 2000, the External Auditor recommended that income projections, which are used to establish expenditure targets, should be more realistic and based on reasonable and sound assumptions using past trends in the budget. The Secretariat has yet to act on these recommendations. As shown in table 1, every year since 1997, the budgets have overestimated the amount of money that the organization will invoice and receive each year for inspections conducted at chemical weapons-related facilities. As indicated by OPCW documents, the Secretariat often receives its reimbursements from those member states possessing chemical weapons- related facilities late because these states usually do not pay the OPCW during the year that they receive the inspection invoices. Frequently, the organization does not receive payments until several years after issuing the invoices. According to State Department officials, the United States and Russia have not made payments, in many cases, until several years after receiving OPCW invoices, because both governments experienced difficulties in identifying a funding source and obtaining appropriations. These officials added that both governments are working to improve their reimbursement records during 2002. As of June 2002, those states possessing chemical weapons-related facilities, including the United States, owed OPCW more than $2 million in reimbursable inspection expenses from the previous 2 years. The United States accounts for $1.4 million of the $2 million owed. It is difficult, however, for the Secretariat to estimate the number of inspections that will be conducted and therefore the amount of inspection reimbursement payments that can be collected from those states possessing chemical weapons-related facilities. According to State Department and OPCW officials, the Secretariat relies on states' destruction plans to calculate the number of inspections the organization may conduct during the year. Chemical weapons possessor states cannot always accurately predict when their destruction facilities will become operational and what problems may arise once they do. Any change to the schedule of a destruction facility's operations can affect the timing of OPCW inspections and thus affect the organization's reimbursement estimates. In commenting on our draft report, the State Department stated that possessor states' destruction plans have collectively overstated destruction activity, and consequently monitoring activity, by 30 percent or more. While it may be difficult for the Secretariat to estimate income from inspection reimbursements, the Secretariat does not issue the reimbursement invoices in a timely manner, according to State Department and OPCW officials. Recent OPCW analysis indicates, however, that the organization is working to improve the timeliness of its invoices. In addition, sometimes the invoices are inaccurate, causing those states possessing chemical weapons-related facilities to withhold payment until corrections are made. The organization's External Auditor recommended in 2001 that the Secretariat take concrete steps to pursue and recover outstanding invoices and develop realistic estimates of its income from Articles IV and V (reimbursable) inspections. In its April 2002 report, the organization's Advisory Body also recommended that the Secretariat avoid optimistic income forecasts regarding Articles IV and V inspections, as well as expedite and improve its billing procedures. As the result of a staff reclassification and upgrade undertaken in 1999 and mandatory United Nations salary increases, the Secretariat's personnel costs increased, affecting the 2000, 2001, and 2002 budgets. However, the budgets underestimated this increase. The Secretariat's budget for 2002 underestimated staff cost increases by about 6 percent ($1.8 million) and may contribute to a potential budget deficit for 2002. The audited financial statement for 1999 and the Advisory Body's January 2001 report stated that increases in personnel costs were inevitable as a result of the staff reclassification and upgrade. The OPCW's salary system further complicates the budget projections for staff costs. OPCW uses the United Nations compensation system, which budgets salaries and staff wages in U.S. dollars. The OPCW, however, pays its staff in euros. According to State Department and OPCW officials, the organization has had difficulty in covering the currency risks associated with fluctuations in the dollar-to-euro exchange rate. The organization can experience significant personnel cost increases, depending upon the exchange rate; staff costs represent about 75 percent of OPCW's 2002 budget. Furthermore, OPCW and State Department officials stated that it is difficult to manage staff costs given the organization's current tenure policy, which does not clearly establish a start date for OPCW employees. During the creation of the organization, a 7 year tenure policy was established to reduce the number of career employees in the organization. Currently, staff members are hired on a 3 year contract that can be renewed yearly thereafter. However, the Conference of the States Parties has yet to agree on a date for the commencement of the tenure policy. In 2000, the organization experienced a budget deficit of more than $2.8 million when expenditures exceeded the income for the year. In 2001, the Advisory Body reported that the Secretariat was aware of the income shortfall of 2000 and should have managed the budget more carefully to avoid a deficit. It also recommended that, to avoid a recurrence of overspending, the Secretariat should maintain budgetary discipline by matching expenditures to anticipated income in developing the 2001 budget. However, for 2002, the organization may again experience a budget deficit. According to an OPCW briefing document, the organization will experience a potential $5.2 million deficit because of unrealistic income projections in the budget and underbudgeted personnel expenditures. Because of its budget problems, the Secretariat has reduced inspections and international cooperation and assistance efforts and has implemented a hiring freeze. Unless the organization can obtain additional funding, it will have to further reduce its inspections in 2002. The problem will intensify as the number of inspectable facilities increases during the next few years. The Secretariat has curtailed its inspection activities in response to its budget problems. As a result the Secretariat conducted only 200 of the 293 inspections planned for 2001. The Secretariat plans to reduce the number of inspections for 2002 to compensate for the potential deficit of $5.2 million. As of June 2002, OPCW inspectors had conducted only 90 of the 264 inspections planned for the year. Figure 1 depicts the number of inspections planned and conducted from 1997 through June 2002. Since 1997, most OPCW inspection activities have taken place at chemical weapons-related facilities. The Secretariat receives reimbursements from member states for inspections conducted under Articles IV and V of the convention. However, the Secretariat is not reimbursed for inspections carried out at commercial chemical facilities under Article VI. According to OPCW documents, when funding is limited, the Secretariat reduces the number of inspections at commercial chemical facilities that it conducts during the year. Because of its budget problems, OPCW conducted only 75, or 57 percent, of the 132 chemical industry inspections planned for 2001. As of June 2002, the organization had conducted only 47, or 36 percent, of the 132 industry inspections planned for 2002. According to an OPCW document, if additional funding becomes available, a maximum of 11 chemical industry inspections per month can be conducted between the time additional monies are received and the end of 2002. At the same time, the Secretariat cut funding for international cooperation and assistance efforts in 2001 by about one-third, from $3 million to $2 million, and has made further reductions in funding for 2002. The Secretariat also imposed a hiring freeze on OPCW personnel for 2000 through 2002. According to the OPCW's latest budget proposal, the Secretariat plans to leave 33 positions vacant for 2003. Of these 33 positions, 22 are related to inspection and verification activities. According to OPCW officials, unless it receives additional funding, the OPCW will not be able to completely fulfill its primary inspection functions this year. As of June 2002, six member states have provided about $397,000 in voluntary contributions to help offset the OPCW budget deficit for 2002. According to a State Department official, the United States, France, Germany, and the United Kingdom are considering contributing additional funding to support the organization. The Secretariat's inspection resources will be further affected by expected increases in the numbers of chemical weapons destruction facilities and commercial chemical facilities requiring OPCW inspections. Specifically, by 2006, the number of continuously operating chemical weapons destruction facilities is expected to increase from 6 to 12. An OPCW planning document also indicates that additional member states may declare more industry facilities. According to the Deputy Director-General, preliminary OPCW estimates indicate that the funding level needed to support inspection activities may increase by 50 percent. The organization has taken some preliminary steps to address its budgeting problems, but it lacks a comprehensive strategy to overcome the inherent weaknesses in its budgeting process. Also, limited oversight resources have affected the organization's efforts to improve its budgeting process. The State Department has taken some steps to assist the OPCW, but budgeting problems remain. The Secretariat is taking some preliminary steps to improve its budgeting practices. The new Director-General has stated his commitment to ensure that the organization receives the financial resources needed to implement its mandate and that these resources are used exclusively for the objectives and missions outlined in the convention. According to a State Department official, when developing its internal spending plans to implement the budget, the Secretariat has begun to exclude the assessments of member states in arrears. The OPCW is also reducing its estimates of income derived from inspection activities, based on the chemical weapons possessor states' destruction plans, by 30 percent, to better reflect the historical level of activity. State Department officials also indicated that the Secretariat is working to improve the invoicing and payments process for Articles IV and V reimbursements by providing more accurate bills on a more timely basis. Invoices sent out during the last two months of the calendar year will be applied to the following year's income projections. State Department officials added that OPCW member states are considering changing the current financial regulations to provide the Secretariat flexibility in using the organization's Working Capital Fund to cover inspection-related expenses. In commenting on our draft report, the State Department also stated that the Secretariat has begun using actual staff costs to develop more accurate budget forecasts of salary costs. Although the Secretariat's efforts to collect income from member states is a positive first step in addressing its budget difficulties, it has not directed sufficient attention to improving projections of future expenses. According to State and OPCW officials, the Secretariat does not budget for currency fluctuations in calculating its staff expenses. These officials also stated that current personnel regulations contain a vague employee tenure policy, making it difficult to predict employee turnover and reduce the number of employees. Accordingly, the Secretariat's recent efforts do not reflect a comprehensive approach to addressing its continuing budget problems. OPCW's Office of Internal Oversight may play an important role in helping reform the Secretariat's budget process. In March 2002, the organization's Advisory Body questioned the role of the oversight office, stating that the office may not be focusing on key internal auditing, monitoring, evaluation, and investigation activities that could detect budgeting problems. In providing its advice and consent to the ratification of the Chemical Weapons Convention, the U.S. Senate required the President to certify that the OPCW had established an independent internal oversight office that would conduct audits, inspections, and investigations relating to the programs and operations of the OPCW. In December 1997, the President certified that the office was in compliance with the Senate's requirement. However, the OPCW's 2000 annual report states that only one auditor within the oversight office was responsible for internal audit activities. The 2002 Advisory Body report states that the oversight office was devoting only one-third of its staff resources to conducting audits, while the remaining two-thirds was focused on other functions, such as the implementation of the organization's confidentiality regime and the establishment of a quality assurance system. In that same report, the Advisory Body reemphasized that the principal and overriding functions of the oversight office should be internal audit, monitoring, evaluation, and investigation. Given the current financial and budgetary crisis, the Advisory Body recommended that the Secretariat redefine the office's role to ensure a clear and sustained focus on proper management of the budget. The State Department funded a budget consultant to assist the Secretariat in reviewing its budget processes. However, it is difficult to assess the consultant's impact in improving the budget processes of the organization. According to the State Department, although it reimbursed the Secretariat for the consultant's salary (including per diem) of $170,000, the consultant was not required to provide the Department with a statement of work or a written analysis of the Secretariat's budgetary practices and efforts to improve its processes, because he was considered an employee of the Technical Secretariat. According to State Department officials, the United States is also attempting to pay its Articles IV and V inspection reimbursements in a timelier manner and is considering paying in advance the chemical weapons-inspection costs that cover inspector salaries. To assist the organization in meeting its 2002 budget, the State Department is providing $2 million in supplemental funding to restore, to the extent feasible, budgeted levels of inspection activity and to strengthen management and planning functions, among other purposes. Funds will be deposited in a trust fund and will remain available until expended by the OPCW on activities agreed to by the United States. OPCW's Deputy Director-General and representatives from member states commented that the United States needs to continue in its leadership role by providing financial, managerial, and political support to the organization. According to these officials, the U.S. government's recent efforts focused primarily on the removal of the former Director-General. The officials added that the United States should now focus on addressing the organization's budgetary and financial problems. The OPCW has consistently overestimated its income and underestimated its expenses, and thus has planned more inspections than it is financially able to conduct. Unless the Secretariat corrects its weak estimating practices, the Secretariat may continue to plan more inspections than it can undertake. The problem may grow worse in future years as the number of new chemical weapon's destruction facilities increases and additional states ratify the convention. The organization's newly appointed Director- General has an opportunity to correct these budgeting weaknesses and improve the organization's finances. To improve the current budget problems of the Organization for the Prohibition of Chemical Weapons, we recommend that the Secretary of State work with the representatives of other member states and the new Director-General to develop a comprehensive plan to improve the organization's budgetary practices. The plan should outline specific strategies to (1) improve the projection and collection of income, (2) accurately project expenses, and (3) strengthen the role of the Office of Internal Oversight in helping the organization improve its budgeting process. Such a plan would be consistent with the budget recommendations of the Secretariat's oversight bodies. To ensure that Congress is informed about the status of efforts to improve the OPCW's budgeting practices, we recommend that the Secretary of State annually report to Congress on the extent to which the OPCW is correcting its budgeting weaknesses and implementing the recommendations made by the organization's oversight bodies. We received written comments on a draft of this report from the State Department that are reprinted in appendix III. We also received technical comments from the State Department and have incorporated them where appropriate. The State Department generally concurred with our findings that budgetary and financial problems have plagued the OPCW, and that unless corrected, these problems could have even more dramatic effects in coming years. The Department, however, raised several issues with the report. First, the Department asserted that our analysis of OPCW budgetary and financial difficulties presented an incomplete picture of the OPCW's budgeting practices. Second, the State Department disputed our assertion that we had to limit the scope of our review because of the access restrictions we encountered during our May 2002 visit to the OPCW in The Hague. Third, it stated that our report did not fully reflect the changes that the OPCW has recently begun taking to address its budget weaknesses. Finally, the Department disagreed with our recommendation that the Secretary of State be required to report annually to Congress on how the OPCW is correcting its budget weaknesses, asserting that such a requirement would impose an administrative burden. In response to the State Department's comments on our draft report, we added information on the reasons why the OPCW experienced budget problems. Regarding our access to OPCW records and staff, although the State Department provided us with some access to OPCW budget and finance documents through the Department's offices in Washington, D.C., we were denied the opportunity to review related budget documentation and meet with numerous OPCW officials during our visit to The Hague in May 2002. Although we provided the State Department with an extensive list of OPCW officials with whom we wanted to meet prior to our visit, we were allowed to meet only with the Deputy Director-General and selected representatives from the budget office and the inspection equipment laboratory. We were not allowed to meet with representatives from key OPCW offices, including the Special Projects Division, the Office of Internal Oversight, the Office of the Legal Advisor, the Administration Division, the Verification Division, the Inspection Division, the International Cooperation and Assistance Division, and the Advisory Body on Administrative and Financial Matters. Furthermore, the State Department failed to notify us of any potential access difficulties with the OPCW prior to our trip to The Hague, and did not actively seek to provide us with access to these officials on our arrival. Consequently, we had to limit the scope of our review to budget-related issues. In response to the State Department's comments about recent budgetary initiatives, we have updated the report to reflect the most current initiatives being undertaken by the OPCW to address its budgeting problems. Regarding our recommendation for an annual reporting requirement, we do not believe that such a requirement would impose an administrative burden on the Department, since it already provides various reports to Congress on international organizations. This reporting requirement is necessary to improve congressional oversight of the OPCW. We are providing copies of this report to other interested congressional committees and to the Secretary of State. We will make copies available to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Please contact me at (202) 512-8979 if you or your staff have any questions concerning this report. Another GAO contact and staff acknowledgments are listed in appendix IV. We could not conduct a comprehensive management review of the organization as requested, because the Organization for the Prohibition of Chemical Weapons (OPCW) and State Department officials limited our access during our visit to The Hague in May 2002. As a result of our lack of access to OPCW officials and limited access to OPCW documents, we could not determine how the reduction in chemical weapons and industry inspections has affected the implementation of the Chemical Weapons Convention. In addition, we could not assess the organization's personnel management, administrative, and internal audit functions. Specifically, we were not permitted to meet with or obtain information from OPCW officials from the following offices: the Special Projects Division, the Office of Internal Oversight, the Office of the Legal Advisor, the Administration Division, the Verification Division, the Inspection Division, the International Cooperation and Assistance Division, and the Advisory Body on Administrative and Financial Matters. However, we met with OPCW's Deputy Director-General. We also received a budget briefing from the Director of the Administrative Division and the budget consultant being funded by the State Department. In addition, we visited the inspection laboratory and equipment store at Rijswijk, the Netherlands. To determine the accuracy of the Secretariat's budgets, we compared OPCW's program and budget documents for 1997-2003 with the data in the audited financial statements for 1997-2001. To compare budget and program data, figures were converted from Netherlands guilders and euros to 2001 dollars, using appropriate exchange and inflation rates. We also reviewed other OPCW documents, including the organization's financial regulations and annual reports. We analyzed reports prepared by the organization's External Auditor, the Advisory Body on Administrative and Financial Matters, and the Office of Internal Oversight. In addition, we obtained information from officials in the State Department's Bureau of Arms Control and Office of International Organization Affairs, as well as from member states' representatives to OPCW. To determine the impact of budget shortfalls on the organization's inspection and international cooperation activities, we analyzed the data contained in the organization's program and budget documents and in annual implementation reports for calendar years 1997-2001. To confirm our understanding of the data obtained, we met with an official from the State Department's Bureau of Arms Control. In addition, we reviewed other OPCW documents and statements provided by the State Department. To assess OPCW and State Department efforts to improve the organization's budget-planning practices, we met with State Department officials in Washington, D.C., and The Hague. We also obtained information from OPCW member states' representatives. We reviewed and analyzed OPCW and State Department documents, including OPCW's draft Medium- Term Plan for 2004-2006; speeches given by the Director-General to the Executive Council and Conference of the States Parties; and reports of the Advisory Board on Administrative and Financial Matters, the External Auditor, and the Office of Internal Oversight. We could not independently verify the accuracy of the budget and other financial data obtained from OPCW and the State Department. Although we met with, and obtained documents from, officials at the Departments of Commerce and Defense, the information they provided was not relevant to the reduced scope of our work. We performed our work from January 2002 through October 2002 in accordance with generally accepted government auditing standards. $60,127 $163,958 $253,143 $71,155 The Preparatory Commission for the Organization for the Prohibition of Chemical Weapons preceded the OPCW and carried out the initial implementation of the Chemical Weapons Convention. Under the Preparatory Commission, member states were assessed contributions to fund the commission's expenses. The following are GAO's comments on the Department of State's letter, dated October 16, 2002. 1. We agree that monitoring activities at chemical weapons-destruction facilities account for most of OPCW's workload, and that to project this workload, the organization has depended on plans submitted by chemical weapons-possessor states. Our report states that since 1997, most OPCW inspection activities have taken place at chemical weapons facilities. Our report also states that the Secretariat relies on possessor states' destruction plans to calculate the number of inspections the organization may conduct during the year. Chemical weapons- possessor states cannot accurately predict when their destruction facilities will become operational and what problems may arise when they do. However, in response to the State Department's comments, we have included additional information in the report to clarify this point. 2. We identified the key reasons why OPCW underestimated staff costs for calendar years 2000-2002, and included this information in the report. For example, our report states that as the result of a staff reclassification and upgrade undertaken in 1999 and mandatory United Nations salary increases, the Secretariat's personnel costs increased, affecting the 2000, 2001, and 2002 budgets. 3. We agree that the OPCW encounters the same difficulties as other international organizations with regard to the late payment of annual dues, and that the United States and Russia have experienced difficulties in paying their Articles IV and V inspection bills. We included this additional information in the report. 4. We agree that the OPCW has lacked adequate liquidity to deal with its cash shortages, and this has resulted in a curtailment of inspection activity. We have made no change to the report, however, because this is its major theme. We reported that weak budgeting practices and budget deficits have affected the organization's ability to perform its primary inspection and international cooperation activities, as outlined in the Chemical Weapons Convention. 5. As explained in our report, the OPCW spent against budgeted income based on inflated estimates of inspection activity. This budget shortfall resulted in reduced inspections and international cooperation activities. We do not believe that a change in our report is needed. 6. Our report clearly states that since 1997, most OPCW inspection activities have taken place at chemical weapons facilities. Because of its budget problems, the OPCW conducted only 57 percent of the chemical industry inspections planned for 2001. As of June 2002, it had conducted only 36 percent of these inspections planned for 2002. We do not believe that a change in our report is needed. 7. We disagree that the State Department made every reasonable effort to accommodate our requests for information and access to OPCW staff. We were not allowed to hold meetings with representatives from several key OPCW offices. The State Department failed to notify us of any impending scheduling difficulties prior to our trip to The Hague in May 2002. On our arrival, the Department made no effort to facilitate meetings with the following offices: the Special Projects Division, the Office of Internal Oversight, the Office of the Legal Advisor, the Administration Division, the Verification Division, the Inspection Division, the International Cooperation and Assistance Division, and the Advisory Body on Administrative and Financial Matters. 8. This comment confirms that we were able to meet with only a few select OPCW staff. It is unclear how the State Department concluded that we were unable to identify specific questions to which answers were not provided. Prior to our departure for The Hague in May 2002, we provided State Department officials in Washington and at the U.S. Delegation to the OPCW with five pages of detailed questions that we planned to raise with OPCW officials. Many of these questions remain unanswered. We also provided the State Department with a detailed set of questions we planned to raise with representatives from other member states. 9. We have updated our report to provide the most recent information on OPCW initiatives currently under way. However, the State Department's mosaic of measures does not represent an overall strategy or plan for improving the organization's budgeting weaknesses. At best, it represents only the first steps in addressing systemic weaknesses in the OPCW's budgeting process. 10. We believe that our recommendation for an annual reporting requirement to Congress is appropriate. Such reporting will help establish a baseline for judging OPCW progress in achieving needed reforms. In addition, this requirement will not impose an undue administrative burden on the Department, since it already provides various reports to Congress on international organizations, including the OPCW. In addition to the individual named above, Beth Hoffman Leon, Richard K. Geiger, and Reid Lelong Lowe made key contributions to this report. Bruce Kutnick, Christine Bonham, and Geoffrey Frank provided additional assistance. The General Accounting Office, the 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 daily E-mail alert for newly released products" under the GAO Reports heading.
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The Organization for the Prohibition of Chemical Weapons is responsible for implementing the Chemical Weapons Convention, which bans the use of chemical weapons and requires their elimination. The United States and other member states have raised concerns that a number of management weaknesses may prevent the organization from fulfilling its mandate. As requested, GAO assessed the accuracy of the organization's budget and the impact of budget shortfalls on program activities. GAO also reviewed efforts to improve the organization's budget planning. Since its establishment in 1997, the ability of the Organization for the Prohibition of Chemical Weapons (OPCW) to carry out key inspection functions has been hindered by inaccurate budget projections and, more recently, budget deficits. The organization has consistently overestimated its income and underestimated its expenses. Its budgets have recorded as income nearly $1 million in unpaid assessments owed by 30 member states. The budgets have also overestimated reimbursement payments for inspections conducted in member states with chemical weapons-related facilities. As of June, 2002, these states owed the organization more than $2 million. Furthermore, the budgets for 2000 through 2002 underestimated personnel expenses. The organization's inaccurate income and spending estimates contributed to a $2.8 million deficit in 2000 and a potential deficit of $5.2 million in 2002. Weak budgeting practices and budget deficits have affected the organization's ability to perform inspection activities as mandated by the Chemical Weapons Convention. The organization had to reduce the number of inspections it conducted in 2001 and plans to reduce the number it conducts in 2002. Although the organization and the State Department have taken some steps to address the budget problems, the organization has not developed a comprehensive plan to overcome its inherent weaknesses. Unless the organization improves its planning, budget shortfalls will continue to affect its ability to conduct inspections.
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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 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, a tidal basin of some 640 square miles, is connected with the Gulf of Mexico through Lake Borgne and the Mississippi Sound. The greatest natural threat posed to the New Orleans area is from hurricane-induced storm surges, waves, and rainfalls. Because of this threat, a series of control structures, concrete flood walls, and levees was proposed for the area along Lake Pontchartrain in the 1960s. Congress first authorized the 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 Orleans, Jefferson, St. Bernard, and St. Charles Parishes. Although federally authorized, the project was a joint federal, state, and local effort. The Corps was responsible for project design and construction of the approximately 125 miles of levees, with the federal government paying 70 percent of the costs, and state and local interests paying 30 percent. Each of the four parishes protected by the project is associated with a local levee district that is generally composed of state-appointed officials and is considered a state entity. Specifically, Orleans Parish is associated with the Orleans Levee District, Jefferson Parish is associated with the East Jefferson Levee District, St. Bernard Parish is associated with the Lake Borgne Levee District, and St. Charles Parish is associated with the Pontchartrain Levee District. These levee districts are the local sponsors of the project, and their responsibilities include ensuring the integrity of the levee system in their districts throughout the year. Congress authorized the Lake Pontchartrain project in 1965, substantially in accordance with a Chief of Engineers report, to protect the areas around the lake from flooding caused by storm surge or rainfall associated with a standard project hurricane. For the coastal region of Louisiana, a standard project hurricane was expected to have a frequency of occurrence of once in about 200 years, and represented the most severe combination of meteorological conditions considered reasonably characteristic for the region. According to the Chief of Engineers report, a standard project hurricane was selected as the design hurricane because of the urban nature of the area. When Congress authorized the Lake Pontchartrain project, the 1 through 5 scale--known as the Saffir-Simpson Scale--that is currently used by the National Weather Service to categorize hurricanes from lowest to highest intensity did not yet exist. According to the Corps, the standard project hurricane used for the Lake Pontchartrain project would roughly equal a fast-moving category 3 hurricane on the Saffir-Simpson Scale. In fact, the standard project hurricane for coastal Louisiana approximates the storm surge of a category 3 hurricane, the wind speed of a category 2 hurricane, and the barometric pressure at the center of a category 4 hurricane. Table 1 compares the coastal Louisiana standard project hurricane parameters to which the Lake Pontchartrain project was designed with the parameters for category 2, 3, and 4 hurricanes on the Saffir-Simpson Scale. At landfall, which was approximately 60 miles southeast of New Orleans, Hurricane Katrina had a central pressure of 27.17 Hg and a wind speed of 140 mph. Wind speeds in New Orleans, which was west of the eye of Hurricane Katrina, reached just over 100 mph. According to the National Oceanic and Atmospheric Administration's National Climatic Data Center, data on other Hurricane Katrina parameters are not readily available for several reasons, including the destruction of certain buildings and monitoring equipment and would have been used to measure storm surge. Consistent with federal law, agreements between the Corps and local sponsors of the Lake Pontchartrain project specify that local sponsors are responsible for operation, maintenance, repair, replacement, and rehabilitation of the levees when the construction of the project, or a project unit, is complete. However, the Corps has authority to (1) repair the project if deficiencies are the result of the original construction and (2) rehabilitate the project, if damage resulted from a flood and the project is active in the Corps' Rehabilitation Inspection Program. Corps district and division employees are to oversee OMRR&R activities performed by the local sponsors on an annual basis. Once construction of Lake Pontchartrain project units were completed, the Corps was to transfer these project units to the local sponsors for OMRR&R. These sponsors include the Orleans, East Jefferson, Lake Borgne, and Pontchartrain levee districts. Although the Corps has not yet provided us with dates on when the project units for the Lake Pontchartrain project were completed, after Hurricane Katrina, the Corps' New Orleans District and the Department of Defense's Task Force Guardian determined, based on three criteria, that almost the entire Lake Pontchartrain hurricane project had been turned over to local sponsors for ongoing OMRR&R responsibilities. The criteria used to make this determination were (1) if the project unit was completed in accordance with the designed level of protection specified in the project decision document, (2) if the project unit was being operated and maintained by the local sponsor, and (3) if the project unit had passed the annual Inspection of Completed Works in accordance with Corps regulations. Based on this evaluation, the task force determined that only three project units--a bridge over the 17th Street canal, a project unit in Jefferson Parish, and a project unit in St. Charles Parish--had not yet been completed and turned over to the local sponsors. Figure 1 shows the three project units that have not been completed and turned over to the local sponsors. While the assurances signed by local sponsors do not define project completion, internal Corps regulations provide that completed projects or completed project units will normally be turned over when all construction, cleanup work, and testing of mechanical, electrical, and other equipment are complete and the project is in proper condition for the assumption of operation and maintenance by the local sponsors. Transfer is to be accomplished through a formal notice from the Corps to the local sponsor that includes a transfer date determined by the Corps' district engineers. According to Corps officials, the formal notice generally is in the form of a letter to the local sponsor. According to internal Corps regulations, upon transfer of a completed project to the local sponsors, the Corps may no longer expend federal funds on construction or project improvements. If the Corps determines that unsatisfactory conditions have developed as a result of the original levee construction, the Corps may undertake corrective action. For example, a Corps district official responsible for operations and maintenance oversight told us that if settlement of a completed levee occurs, this is not considered a design or construction flaw. Instead, this is considered a condition that should be addressed by the local sponsors as part of their normal operations and maintenance responsibilities. Local sponsors' responsibilities for OMRR&R of the completed portions of the Lake Pontchartrain project were established through local assurances signed by the levee districts and the Corps. For the Lake Pontchartrain hurricane project as constructed, these assurances were signed, and subsequently accepted by the federal government for the Orleans Levee District on June 21, 1985; the Pontchartrain Levee District on August 7, 1987; the East Jefferson Levee District on December 21, 1987; and the Lake Borgne Basin Levee District on December 7, 1977. The formal assurances commit the local sponsors to, among other things, operate and maintain all features of the project in accordance with Corps regulations. Also, in accordance with internal Corps regulations, the Corps is required to provide local sponsors with an operations and maintenance manual at the time of, or at the earliest practicable date after, the transfer of OMRR&R responsibilities from the Corps to local sponsors for a completed project or project unit. The manual is intended to assist the responsible local authorities in carrying out their operation and maintenance obligations. According to Corps officials, the OMRR&R responsibilities for levees are straightforward, and the manual that the Corps provides local sponsors is a one-page document that outlines the requirements as described by federal regulations. Specifically, federal regulations require local sponsors to ensure that the structure is operating as intended and to continuously patrol the structure during flood periods to ensure that no conditions exist that might endanger the structure and to take immediate steps to control any condition that might endanger it. For maintenance, the regulations require local sponsors to ensure at all times that the structure is serviceable in times of flood. The regulations also require periodic inspections and maintenance measures, including the following: promoting the growth of sod, including routine mowing of the grass and removing drift material or wild growth from the levee (such as brush and trees); and repairing any damage to the levee caused by erosion. Repair, replacement, and rehabilitation are also considered part of the local sponsors' maintenance responsibilities, as outlined in internal Corps regulations. Repair refers to routine activities that maintain the project in well-kept condition; replacement refers to replacing worn-out elements; and rehabilitation refers to activities necessary to bring a deteriorated project back to its original condition. According to internal Corps' regulations, local sponsors' maintenance is considered to be deficient when these requirements have not fulfilled. Corps employees are to oversee local sponsors' OMRR&R activities to ensure compliance and project integrity. Corps employees are required to work directly with local sponsors to conduct annual compliance inspections; review local sponsors' semiannual compliance reports; and respond to engineering concerns, maintenance questions, and reports of problems. A Corps district official responsible for operations and maintenance oversight told us that generally the Lake Pontchartrain project's local sponsors have performed their operations and maintenance responsibilities as required and have been responsive to the Corps' concerns. Because the New Orleans district is part of the Mississippi Valley Division of the Corps, the division also has responsibility for managing and overseeing the periodic inspections conducted by district engineers; reviewing and approving district engineers' inspection reports; maintaining a database of information on inspections and remedial measures taken; and receiving annual OMRR&R summary reports from the districts under its command, aggregating these reports, and sending them to Corps headquarters. Federally authorized flood control projects, such as the Lake Pontchartrain project, are eligible for 100 percent federal rehabilitation if damaged by a flood as long as these projects are active in the Corps' Rehabilitation Inspection Program (rehabilitation program). To maintain active status in this program, the Lake Pontchartrain project's levees are required to pass an annual OMRR&R inspection conducted jointly by the Corps, the local sponsor, the state Department of Transportation and Development, and other stakeholders, as appropriate. According to the Corps' inspection reports from 2001 through 2004, all completed project units of the Lake Pontchartrain project were inspected each year and had received an acceptable rating. Both local sponsors and the Corps are required to conduct oversight activities to ensure that levees are properly maintained. If, in the course of these oversight activities, the Corps finds that the local sponsors are not properly maintaining the levees, internal Corps regulations outline a series of steps that the Corps can take until the local sponsor comes into compliance. Federal regulations require that local levee districts are to appoint a permanent committee, headed by a superintendent, that will be responsible for all levee operation and maintenance activities and inspections of federally constructed flood control projects. The superintendent of the levee district is responsible for performing periodic inspections of the levee to ensure that routine maintenance responsibilities have been effectively completed and that no hazards to the levee exist. Typically, these inspections take place prior to the flood or hurricane season, immediately following a high-water period, and at other intermediate periods throughout the year. During an inspection, the superintendent is required to examine and be certain, among other things, that drainage systems are in good working condition and not becoming no unusual settlement or material loss of grade or levee cross section has cattle guards and gates are in good condition; the protective walls surrounding the levee have not been washed out or removed; the levee crown is shaped to drain readily; no unauthorized vehicular traffic or cattle grazing has occurred; no water seepage or saturated areas are occurring; and levee access roads are being properly maintained. If, during these inspections, the superintendent discovers any levee portion to be in substandard condition, it is the levee district's responsibility to take immediate actions to correct the inadequacy. The superintendent is required to submit a report twice a year to the Corps District Engineer covering inspection, maintenance, and operation activities of the levee district. At this time, we have not examined the extent to which these steps were taken by the local sponsors, and the Corps has not provided us any documentation of such activities. The Corps is responsible for overseeing the OMRR&R activities of the Lake Pontchartrain project's local sponsors through an annual compliance inspection program--known as the Inspection of Completed Works program--and reviewing the local sponsors' semiannual reports on OMRR&R activities submitted to the district office. According to internal Corps regulations, the primary purposes of the Inspection of Completed Works program are to prevent loss of life and catastrophic damages, preserve the value of the federal investment, and encourage local sponsors to bear responsibility for their own protection. According to Corps officials, for the Lake Pontchartrain project, the New Orleans District typically completes this annual compliance inspection prior to the hurricane season, in mid-May to early-June of each year. Our review of Corps inspection reports for 2001 through 2004 indicate that while inspections of the Lake Pontchartrain hurricane protection levees in the Orleans and St. Bernard Parishes were generally conducted in May of each year, the inspections of the levees in Jefferson and St. Charles Parishes were generally conducted in the September to November timeframe. According to the Corps, these inspections are to cover the following items: structural foundations. Based on the results of these inspections, the district and division are to characterize the inspected units on a scale from 1 to 3, where 1 means that the project units have been maintained in accordance with the agreement between the Corps and the local sponsors and are expected to perform as designed, and 3 means that the project units have maintenance deficiencies such that the project would probably fail during floods of project design or lesser magnitudes. Within 120 days of an inspection, the district is expected to prepare an inspection report and provide it to its commanding unit. For example, the New Orleans District should prepare an inspection report for the Lake Pontchartrain project and forward it to the Mississippi Valley Division for review and approval. Reports that indicate maintenance deficiencies are also to be submitted annually to headquarters. All of the completed units of the Lake Pontchartrain hurricane levees passed with an acceptable rating for the period 2001 through 2004. If a project receives a rating of 3 as a result of an inspection, internal Corps regulations outline a progression of steps that the Corps can take to ensure that local sponsors fulfill their OMRR&R responsibilities and bring the levees back up to the designed level of protection. The steps are as follows: Notify the sponsor orally of the deficiencies. Notify the sponsor in writing. Write a letter to the governor and the appropriate state agencies--which, in the case of the Lake Pontchartrain project, is the Department of Transportation and Development in Louisiana--to enlist state participation to resolve the problem. Notify the Federal Emergency Management Agency (FEMA) of the condition of the project. If acceptable actions are not taken by the nonfederal sponsor, take actions to remove the project from eligibility for federal emergency rehabilitation. Initiate legal action against the local sponsor to enforce OMRR&R obligations as outlined in local assurances. Transmit a report to the Congress recommending authorization of a new sponsor or reauthorization of the project along with measures to eliminate hazards. Although not documented in the annual inspection reports, according to Corps officials, almost all past Lake Pontchartrain project deficiencies have been resolved upon oral notification of the local levee district. The official responsible for the Inspection of Completed Works program in New Orleans only could recall one or two instances when the Corps wrote a letter to a local sponsor requesting that the sponsor commit resources to repair a deficiency, which resulted in full compliance by the local sponsor. Internal Corps regulations specifically prohibit the use of federal funds to correct problems caused by a lack of adequate local maintenance. The Corps has authority to provide a variety of emergency response actions when levees fail or are damaged. Section 5 of the Flood Control Act of 1941, as amended, commonly referred to as Public Law 84-99, authorizes the Corps to conduct emergency operations and rehabilitation activities when levees fail or are damaged. In addition, under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act), as amended, the Corps and other federal agencies may be tasked by FEMA to provide disaster response, recovery, and mitigation assistance to state and local governments. Furthermore, a Department of Defense Manual for Civil Emergencies assigns responsibilities, prescribes procedures, and provides guidance by which the Department of Defense responds to all hazards in accordance with the Stafford Act. Although we have not evaluated the Corps' efforts, Corps officials told us that after the levees were breached the Corps used its response and rehabilitation authorities to provide flood-fighting assistance and to begin the repair and restoration of the levees. State and local roles and responsibilities when levees fail are similar to the Corps' responsibilities and are also described in federal regulations. Public Law 84-99 authorizes the Corps to conduct emergency operations and rehabilitation activities when levees fail or are damaged during storms or other events. Federal regulations specify that assistance is limited to providing emergency assistance to save lives and protect property, such as public facilities/services and residential, commercial, or industrial developments. This emergency assistance may be provided during and following a flood or coastal storm. However, under federal regulations, nonfederal interests must fully utilize their own resources, including manpower, supplies, equipment, and funds before Corps assistance may be provided. The National Guard, as part of the state's resources when it is under state control, must be fully utilized as part of the nonfederal response. According to federal regulations, the Corps is not to use funds to reimburse local authorities for the costs of these emergency activities. To implement flood response operation authorities under Public Law 84- 99, internal Corps regulations specify that Corps district commanders must issue a Declaration of Emergency. The Declaration of Emergency may initially be verbal, but must be made in writing and reported in the district's situation report within 24 hours. Authority to issue a Declaration of Emergency has been delegated to deputy district engineers and includes all supervisors in the chain of command, from the district commander to the chief of emergency management. Emergency operations include flood response and postflood response activities. Flood response includes activities such as flood fighting and rescue operations. These activities include providing technical assistance, such as review and recommendations in support of state and local efforts and help determining feasible solutions to uncommon situations, and direct assistance by directing flood-fighting operations; and contingency contracting for emergency operations. Corps assistance during flood-fighting operations is to be temporary to meet the immediate threat and to supplement state and local efforts. This assistance is not intended to provide permanent solutions to flood problems and should be terminated when the emergency is over--for example, when flood waters have receded sufficiently. Postflood response includes emergency debris removal, temporary restoration of critical transportation routes and public services and utilities, and after action review and reporting. Rehabilitation activities include the repair and restoration of eligible flood control projects and federally constructed hurricane or shore protection projects. Rehabilitation assistance is limited to federal and nonfederal flood control works that are in active status--those found to be properly maintained during inspections--in the Corps' Rehabilitation Inspection Program at the time of the hurricane, storm, or flood event. Rehabilitation assistance is limited to repair or restoration of a flood control work to its predisaster condition and level of protection (e.g., the actual elevation of the levee, allowing for normal settlement). Any damage to federally constructed levees are repaired with 100 percent of the cost borne by the federal government; and damage to nonfederally constructed levees are repaired with 80 percent of the cost borne by the federal government and 20 percent by the local sponsor. Because the Lake Pontchartrain project is federally constructed and was active in the Corps' Rehabilitation Inspection Program, the Corps is authorized to rehabilitate any levees that failed or were damaged as a result of Hurricane Katrina, using this authority. Additionally, in the aftermath of Hurricane Katrina, the Assistant Secretary of the Army for Civil Works agreed to rehabilitate all of the damaged Lake Pontchartrain and other hurricane and flood control structures in the New Orleans area without any local cost share, under emergency authority provided in statute. Further, the federal government will fund the acquisition of lands, easements, rights-of- way, and disposal or borrow areas not owned or under control of the nonfederal sponsor, as well as the performance of relocations, that are needed for the rehabilitation and that are normally local responsibilities. The Corps estimates that funding these activities for the Lake Pontchartrain project will cost the federal government an additional $10 million and over $248 million in total for all damaged levee systems in the New Orleans area. The Stafford Act, as amended, authorizes federal agencies, including the Corps, to take emergency response actions when the President has issued a major disaster declaration. Under the act, a presidential declaration may be made after receiving a request from the governor of the affected state. FEMA, within the Department of Homeland Security, is responsible for administering the major provisions of the Stafford Act. Actions taken under this authority include disaster response, recovery, and mitigation assistance to supplement state and local efforts. To meet its obligations for emergency response, the Department of Homeland Security developed a National Response Plan, which describes the roles and responsibilities of various federal agencies. Within the National Response Plan, the Department of Defense has responsibility for Emergency Support Function #3--Public Works and Engineering. The plan designates the Corps as the operating agent for this function, to include planning, preparedness, and response, with assistance to be provided by other branches of the Department of Defense, as needed. The National Response Plan lists the following activities for the Corps: coordination and support of infrastructure risk and vulnerability participation in preincident activities, such as prepositioning assessment participation in postincident assessments of public works and infrastructure to help determine critical needs and potential work loads; implementation of structural and nonstructural mitigation measures to minimize adverse effects or fully protect resources prior to an incident; execution of emergency contracting support for life-saving and life- sustaining services, to include providing potable water, ice, emergency power, and other emergency commodities and services; providing assistance in monitoring and stabilizing damaged structures, and demolishing structures designated as immediate hazards to public health and safety, and providing structural specialist expertise to support inspection of mass care facilities and urban search and rescue operations; providing emergency repair of damaged infrastructure and critical public facilities, and supporting the restoration of critical navigation, flood control, and other water infrastructure systems; managing, monitoring, and providing technical advice in the clearance, removal, and disposal of debris from public property and the re- establishment of ground and water routes into impacted areas; and implementing and managing FEMA's Public Assistance Program and other recovery programs involving federal, state, and tribal officials, including efforts to permanently repair, replace, or relocate damaged or destroyed public facilities and infrastructure. A Department of Defense Manual For Civil Emergencies assigns responsibilities, prescribes procedures, and provides guidance by which the Department of Defense responds to all hazards in accordance with the Stafford Act. The policy states that commanders may conduct disaster relief operations when a serious emergency or disaster is so imminent that waiting for instructions from higher authority would preclude effective response. According to the policy, commanders may do what is required and justified to save human life, prevent immediate human suffering, or lessen major property damage or destruction. Action taken in accordance with the policy is limited to 10 days. A Corps commander providing assistance to civil authorities under this guidance is not required to obtain an agreement for reimbursement from the requesting agency before providing assistance. The Corps is authorized by Public Law 84-99 to prepare for emergency response when levees fail by undertaking disaster preparedness, advance measures, and hazard mitigation activities. Although we have not evaluated the Corps' efforts, Corps officials told us that they took action in advance of Hurricane Katrina to prepare for the potential flooding that was predicted. As part of this effort, according to Corps officials, the Corps' New Orleans district used a draft hurricane preparedness plan for the New Orleans area. Corps division and district commanders are responsible for providing immediate and effective response and assistance prior to, during, and after emergencies and disasters. Although we have not reviewed the extent to which the Corps undertook these initiatives during the Katrina disaster, the Corps is responsible for the following: 1. Creating an emergency management organization. Division and district commanders are expected to provide adequate staffing for a readiness/emergency management organization to accomplish the preparedness mission. In addition, divisions and districts should have teams readily available to provide assistance under the Corps' authorities for flood emergencies and other natural disasters; execute responsibilities and missions under the Stafford Act and the National Response Plan; staff a Crisis Management Team, consisting of an Emergency Manager and senior representatives from technical and functional areas to provide guidance and direction during emergency situations; and staff a Crisis Action Team, consisting of the personnel necessary to operate an emergency operations center. 2. Establishing and maintaining plans and procedures. Corps headquarters, divisions, and districts are expected to prepare and maintain plans for emergencies and disasters, establishing an alternate emergency operations center, and reconstituting the district. These operation plans should cover emergency/disaster assistance procedures under all applicable authorities and potential mission assignments. Each division and district should have, at a minimum, an operation plan that provides procedures for generic disasters within the division and district. The plan should include general topics, such as activating, staffing, and operating the emergency operations center; reporting requirements; notification and alert rosters; and organizing for response to disasters. The plan should also have one or more appendixes that specifically address the disasters most likely to impact the division and district. Operation plans are reviewed and updated annually to reflect administrative changes. The division/district's generic or principal disaster operation plan is supposed to be reviewed, revised, and republished biennially. 3. Training personnel for response. Divisions and districts are expected to ensure that personnel who are assigned emergency assistance responsibilities have been properly trained. 4. Conducting exercises. Exercises are to be conducted at least once every two years, consistent with available funding. This requirement may be waived if an actual emergency response was conducted during the two-year period that was of sufficient magnitude to have adequately trained emergency team members and other personnel. 5. Establishing adequate command and control facilities. Divisions, districts, and other Corps groups should provide a dedicated facility for an emergency operations center that will be able to provide command and control for emergency/disaster response and recovery activities. 6. Maintaining supplies, tools, and equipment. Divisions and districts are expected to maintain equipment and supplies that can be readily available for use by the emergency operations center, disaster field offices, disaster field teams, planning response teams, and similar entities. Equipment should be stockpiled for use during emergency operations and exercises. 7. Managing inspections of flood control projects. The Corps is responsible for ensuring that the levees are properly maintained to perform as designed during flood events. The Corps may take advance measures prior to a flooding event to protect against loss of life and significant damages to urban areas and public facilities. In the case of imminent danger of levee failure or overtopping, the Corps can also take corrective actions to ensure the stability, integrity, and safety of the levee. Advance measures include the following: 1. Technical assistance: providing technical review, advice, and recommendations to state and local agencies before an anticipated flood event. For example, the Corps may provide personnel to inspect existing flood control works to identify potential problems and solutions, evaluate conditions to determine the requirements for additional flood control protection, and recommend the most expedient construction methods; provide hydraulic, hydrologic, and geotechnical analysis; and provide information readily available at Corps districts to local entities for use in the preparation of local evacuation and contingency flood plans. 2. Direct assistance: providing supplies, equipment, and contracting for the construction of temporary and permanent flood control projects. Examples of emergency contracting work include the construction of temporary levees; the repair, strengthening, or temporary raising of levees or other flood control works; shore protection projects; and removal of stream obstructions, including channel dredging of federal projects to restore the design flow. Advance measures taken by the Corps are intended to supplement ongoing or planned state and local efforts, and are designed to deal with a specific threat. To implement advanced measures, the governor should make a written request to the Corps. The local sponsor for the advance measure assistance must agree to execute a cooperative agreement and, at no cost to the Corps, when the operation is over, remove all temporary work constructed by the Corps or agree to upgrade the work to standards acceptable to the Corps. In addition, the local sponsor is responsible for providing traditional items of local cooperation, such as lands, easements, rights-of-way, and disposal areas necessary for the work. Advance measures assistance is temporary and must be terminated no later than when the flood threat ends. Hazard mitigation activities are intended to help prevent or reduce the possibility of a disaster or reduce its damaging effects. The Corps is required to participate on a FEMA-led hazard mitigation team to identify postdisaster mitigation opportunities and establish a framework for recovery. According to the Corps' hazard mitigation policy, division commanders are to appoint primary and alternate representatives to serve on the hazard mitigation team; establish procedures for quick and effective response to the requirements of the team; ensure essential information and data necessary to assess mitigation opportunities are available or capable of being obtained quickly; ensure division hazard mitigation team representatives are trained in flood hazard mitigation concepts and techniques; and provide reports to FEMA and Corps headquarters. Recommendations of the hazard mitigation team are intended to reduce or avoid federal expenditures resulting from flood situations. The Corps' New Orleans District has a draft hurricane preparedness plan that defines the district's role and responsibilities in the event of an emergency due to a hurricane. The plan outlines the essential functions of the district before, during, and after a hurricane. These functions include pre-event planning, organization, response, and recovery in order to minimize the potential hazards to life and property. As part of this plan, the district defines emergency organizational staffing to support emergency operations. Selected personnel are assigned to specific teams or offices that, in the event of a disaster, are to provide the necessary liaison with federal, state, or local emergency management agencies; make decisions relative to Corps' capabilities and assignments; perform preliminary damage assessments; or accomplish specific missions. According to the plan, a New Orleans District Emergency Operations Center should be staffed to respond to an emergency, and the center is to become the focal point for collecting data, analyzing situations, allocating resources, furnishing reports to higher headquarters, and providing overall management and control of all district activities. With the activation of the emergency operations center, a crisis management team becomes responsible for coordinating and directing district activities in the crisis situation. A crisis action team is responsible for executing the activities as directed by the crisis management team. According to the plan, if a slow- moving category 3 or higher hurricane is approaching the area, the team should be activated and deployed at the direction of the commander. The plan does not contain any specific guidance on how the district would respond to a levee failure. In closing, Madam Chairman, the legislative and regulatory framework guiding the operations and maintenance of the levees divides this responsibility among a number of partners, depending upon specific circumstances. Similarly, the responsibilities for emergency preparedness and response are dependent on a variety of laws and regulations. As a result, the regulatory framework for these activities is complex and oftentimes unclear. Whether these responsibilities were appropriately fulfilled or played a role in the flooding of New Orleans in the wake of Hurricane Katrina in August 2005 is still to be determined. For further information on this testimony, please contact Anu Mittal at (202) 512-3841 or [email protected]. Individuals making contributions to this testimony included Ed Zadjura, Assistant Director; Allison Bawden; Kevin Bray; Kisha Clark; John Delicath; Doreen Feldman; Jessica Marfurt; Barbara Patterson; and Barbara Timmerman. 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.
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The greatest natural threat posed to the New Orleans area is from hurricane-induced storm surges, waves, and rainfalls. To protect the area from this threat, the U.S. Army Corps of Engineers (Corps) was authorized by Congress in 1965 to design and construct a system of levees as part of the Lake Pontchartrain and Vicinity, Louisiana Hurricane Protection Project. Although federally authorized, the project was a joint federal, state, and local effort. For the levees in the project, the Corps was responsible for design and construction, with the federal government paying 70 percent of the costs and state and local interests paying 30 percent. As requested, GAO is providing information on the (1) level of protection authorized by Congress for the Lake Pontchartrain project; (2) authorities, roles, and responsibilities of the Corps and local sponsors with respect to the operation, maintenance, repair, replacement, and rehabilitation of the levees; (3) procedures in place to ensure that responsible parties maintain the levees in accordance with the authorized protection level; (4) authorities, roles, and responsibilities of the Corps and local parties when levees fail or are damaged; and (5) plans, capabilities, and activities that have been developed by the Corps to ensure an adequate emergency response when levees fail. GAO is not making any recommendations at this time. The Corps is authorized to prepare for emergency response when levees fail by undertaking disaster preparedness, advance measures, and hazard mitigation activities. The Corps' New Orleans district has developed an all hazards emergency response plan for the New Orleans area. Congress authorized the Lake Pontchartrain project to protect the New Orleans area from flooding caused by storm surge or rainfall associated with a hurricane that had the chance of occurring once in 200 years. This was termed as the "standard project hurricane" and represented the most severe combination of meteorological conditions considered reasonable for the region. As hurricanes are currently characterized, the Corps" standard project hurricane approximately equals a fast-moving category 3 hurricane, according to the Corps. Agreements between the Corps and four New Orleans levee districts--the local sponsors for the Lake Pontchartrain project--specify that the local sponsors are responsible for operation, maintenance, repair, replacement, and rehabilitation of the levees after construction of the project, or a project unit, is complete. Pre-Katrina, according to the Corps, most of the levees included in the Lake Pontchartrain project had been completed and turned over to the local sponsors for operations and maintenance. The Corps has authority to repair or rehabilitate completed flood control projects if (1) deficiencies are related to the original construction or (2) damage is caused by a flood and the project is active in the Corps' Rehabilitation Inspection Program. According to internal Corps regulations, federal funds cannot be used for regular operations and maintenance activities. Both local sponsors and the Corps are required to conduct regular inspections to ensure that levees are properly maintained. If the Corps finds that local sponsors are not properly maintaining the levees, internal Corps regulations outline a series of steps, such as notifying the governor or taking legal action, that the Corps can take to bring the local sponsor in to compliance. Corps inspection reports for 2001-2004 indicate that the completed portions of the Lake Pontchartrain project were maintained at an acceptable level. When levees fail or are damaged, the Corps has authority to provide a variety of emergency response actions. Specifically, the Corps is authorized to undertake emergency operations and rehabilitation activities and, if tasked by the Federal Emergency Management Agency, to provide disaster response, recovery, and mitigation assistance to state and local governments, as needed. In addition, a Department of Defense manual assigns responsibilities, prescribes procedures, and provides guidance for responding to hazards. State and local roles and responsibilities when levees fail are similar to the Corps' responsibilities and are described in federal regulations. The Corps is authorized to prepare for emergency response when levees fail by undertaking disaster preparedness, advance measures, and hazard mitigation activities. The Corps' New Orleans district has developed an all hazards emergency response plan for the New Orleans area.
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In 1998, following a Presidential call for VA and DOD to start developing a "comprehensive, life-long medical record for each service member," the two departments began a joint course of action toward achieving the capability to share patient health information for active duty military personnel and veterans. As their first initiative, undertaken in that year, the Government Computer- Based Patient Record (GCPR) project was envisioned as an electronic interface that would allow physicians and other authorized users at VA and DOD health facilities to access data from any of the other agencies' health information systems. The interface was expected to compile requested patient information in a virtual record that could be displayed on a user's computer screen. Our prior reviews of the GCPR project determined that the lack of a lead entity, clear mission, and detailed planning to achieve that mission made it difficult to monitor progress, identify project risks, and develop appropriate contingency plans. Accordingly, reporting on this project in April 2001 and again in June 2002, we made several recommendations to help strengthen the management and oversight of GCPR. Specifically, in 2001 we recommended that the participating agencies (1) designate a lead entity with final decision- making authority and establish a clear line of authority for the GCPR project, and (2) create comprehensive and coordinated plans that included an agreed-upon mission and clear goals, objectives, and performance measures, to ensure that the agencies could share comprehensive, meaningful, accurate, and secure patient health care data. In 2002 we recommended that the participating agencies revise the original goals and objectives of the project to align with their current strategy, commit the executive support necessary to adequately manage the project, and ensure that it followed sound project management principles. VA and DOD took specific measures in response to our recommendations for enhancing overall management and accountability of the project. By July 2002, VA and DOD had revised their strategy and had made progress toward electronically sharing patient health data. The two departments had renamed the project the Federal Health Information Exchange (FHIE) program and, consistent with our prior recommendation, had finalized a memorandum of agreement designating VA as the lead entity for implementing the program. This agreement also established FHIE as a joint activity that would allow the exchange of health care information in two phases. The first phase, completed in mid-July 2002, enabled the one-way transfer of data from DOD's existing health information system (the Composite Health Care System) to a separate database that VA clinicians could access. A second phase, finalized this past March, completed VA's and DOD's efforts to add to the base of patient health information available to VA clinicians via this one-way sharing capability. According to program officials, FHIE is now fully operational and is showing positive results by providing a wide range of health care information to enable clinicians to make more informed decisions regarding the care of veterans and to facilitate processing disability claims. The officials stated that the departments have now begun leveraging the FHIE infrastructure to achieve interim exchanges of health information on a limited basis, using existing health systems at joint VA/DOD facilities. The departments reported total GCPR/FHIE costs of about $85 million through fiscal year 2003. The revised strategy also envisioned achieving a longer term, two- way exchange of health information between DOD and VA. Known as HealthePeople (Federal), this initiative is premised upon the departments' development of a common health information architecture comprising standardized data, communications, security, and high-performance health information systems. The joint effort is expected to result in the secured sharing of health data required by VA's and DOD's health care providers between systems that each department is currently developing--DOD's Composite Health Care System (CHCS) II and VA's HealtheVet VistA. DOD began developing CHCS II in 1997 and has completed its associated clinical data repository--a key component for the planned electronic interface. The department expects to complete deployment of all of its major system capabilities by September 2008. It reported expenditures of about $464 million for the system through fiscal year 2003. VA began work on HealtheVet VistA and its associated health data repository in 2001, and expects to complete all six initiatives comprising this system in 2012. VA reported spending about $120 million on HealtheVet VistA through fiscal year 2003. Under the HealthePeople (Federal) initiative, VA and DOD envision that, upon entering military service, a health record for the service member will be created and stored in DOD's CHCS II clinical data repository. The record will be updated as the service member receives medical care. When the individual separates from active duty and, if eligible, seeks medical care at a VA facility, VA will then create a medical record for the individual, which will be stored in its health data repository. Upon viewing the medical record, the VA clinician would be alerted and provided with access to the individual's clinical information residing in DOD's repository. In the same manner, when a veteran seeks medical care at a military treatment facility, the attending DOD clinician would be alerted and provided with access to the health information in VA's repository. According to the departments, this planned approach would make virtual medical records displaying all available patient health information from the two repositories accessible to both departments' clinicians. VA officials anticipated being able to exchange some degree of health information through an interface of their health data repository with DOD's clinical data repository by the end of 2005. As we have noted, achieving the longer term capability to exchange health data in a secure, two-way electronic format between new health information systems that VA and DOD are developing is a challenging and complex undertaking, in which success depends on having a clearly articulated architecture, or blueprint, defining how specific technologies will be used to deliver the capability. Developing, maintaining, and using an architecture is a best practice in engineering information systems and other technological solutions, articulating, for example, the systems and interface requirements, design specifications, and database descriptions for the manner in which the departments will electronically store, update, and transmit their data. Successfully carrying out the initiative also depends on the departments' instituting a highly disciplined approach to the project's management. Industry best practices and information technology project management principles stress the importance of accountability and sound planning for any project, particularly an interagency effort of the magnitude and complexity of this one. Such planning involves developing and using a project management plan that describes, among other factors, the project's scope, implementation strategy, lines of responsibility, resources, and estimated schedules for development and implementation. Currently, VA and DOD are proceeding with the development of their new health information systems and with the identification of standards that are essential to sharing common health data. DOD is deploying its first release of CHCS II functionality (a capability for integrating DOD clinical outpatient processes into a single patient record), with scheduled completion in June 2006. For its part, VA continues to work toward completing a prototype for the department's health data repository, scheduled for completion at the end of next month. In addition, as we reported in March, the departments have continued essential steps toward standardizing clinical data, having adopted data and message standards that are important for exchanging health information between disparate systems. Department officials also stated that they were proceeding with a pharmacy data prototype initiative, begun in March to satisfy a mandate of the Bob Stump National Defense Authorization Act for Fiscal Year 2003, as an initial step toward achieving HealthePeople (Federal). The officials maintain that they expect to be positioned to begin exchanging patient health information between their new systems on a limited basis in the fall of 2005, identifying four categories of data that they expect to be able to exchange: outpatient pharmacy data, laboratory results, allergies, and patient demographics. However, VA's and DOD's approach to meeting this HealthePeople (Federal) goal is fraught with uncertainty and lacks a solid foundation for ensuring that this mission can be successfully accomplished. As we reported in March, the departments continue to lack an architecture detailing how they intend to use technology to achieve the two-way electronic data exchange capability. In discussing their intentions for developing such an architecture, VA's Deputy Chief Information Officer for Health stated last week that the departments do not expect to have an established architecture until a future unspecified date. He added that VA and DOD planned to take an incremental approach to determining the architecture and technological solution for the data exchange capability. He explained, for example, that they hope to gain from the pharmacy data prototype project an understanding of what technology is necessary and how it should be deployed to enable the two-way exchange of patient health records between their data repositories. VA and DOD reported approval of the contractor's technical requirements for the prototype last month and have a draft architecture for the prototype. They expect to complete the prototype in mid-September of this year. Although department officials consider the pharmacy data prototype to be an initial step toward achieving HealthePeople (Federal), how and to what extent the prototype will contribute to defining the electronic interface for a two-way data exchange between VA's and DOD's new health information systems are unclear. Such prototypes, if accomplished successfully, can offer valuable contributions to the process of determining the technological solution for larger, more encompassing initiatives. However, ensuring the effective application of lessons learned from the prototype requires that VA and DOD have a well-defined strategy to show how this project will be integrated with the HealthePeople (Federal) initiative. Yet VA and DOD have not developed a strategy to articulate the integration approach, time frames, and resource requirements associated with implementing the prototype results to define the technological features of the two-way data exchange capability under HealthePeople (Federal). Until VA and DOD are able to determine the architecture and technological solution for achieving a secure electronic systems interface, they will lack assurance that the capability to begin electronically exchanging patient health information between their new systems in 2005 can be successfully accomplished. In addition to lacking an explicit architecture and technological solution to guide the development of the electronic data exchange capability, VA and DOD continue to be challenged in ensuring that this undertaking will be managed in a sound, disciplined manner. As was the situation in March, VA and DOD continue to lack a fully established project management structure for the HealthePeople (Federal) initiative. The relationships among the management entities involved with the initiative have not been clearly established, and no one entity has authority to make final project decisions binding on the other. As we noted during the March hearing, the departments' implementation of our recommendation that it establish a lead entity for the Government Computer-Based Patient Record project helped strengthen the overall accountability and management of that project and contributed to its successful accomplishment. Further, although the departments have designated a project manager and established a project plan defining the work tasks and management structure for the pharmacy prototype, they continue to lack a comprehensive and coordinated project plan for HealthePeople (Federal), to explain the technical and managerial processes that have been instituted to satisfy project requirements for this broader initiative. Such a plan would include, among other information, details on the authority and responsibility of each organizational unit; the work breakdown structure and schedule for all of the tasks to be performed in developing, testing, and deploying the electronic interface; as well as a security plan. The departments also have not instituted necessary project review milestones and measures to provide a basis for comprehensive management of the project at critical intervals, progressive decision making, or authorization of funding for each step in the development process. As a result, current plans for the development of the electronic data exchange capability between VA's and DOD's new health information systems do not offer a clear vision for the project or demonstrate sufficient attention to the effective day-to-day guidance of and accountability for the investments in and implementation of this capability. In discussing their management of HealthePeople (Federal), VA and DOD program officials stated this week that the departments had begun actions to develop a project plan and define the management structure for this initiative. Given the significance of readily accessible health data for improving the quality of health care and disability claims processing for military members and veterans, we currently have a draft report at the departments for comment, in which we are recommending to the Secretaries of Veterans Affairs and Defense, a number of actions for addressing the challenges to, and improving the likelihood of, successfully achieving the electronic two-way exchange of patient health information. In summary, VA's and DOD's pursuit of various initiatives to achieve the electronic sharing of patient health data represents an important step toward providing more high-quality health care for active duty military personnel and veterans. Moreover, in undertaking HealthePeople (Federal), the departments have an opportunity to help lead the nation to a new frontier of health care delivery. However, the continued absence of an architecture and defined technological solution for an electronic interface for their new health information systems, coupled with the need for more comprehensive and coordinated management of the projects supporting the development of this capability, elevates the uncertainty about how VA and DOD intend to achieve this capability and in what time frame. Until these critical components have been put into place, the departments will continue to lack a convincing position regarding their approach to and progress toward achieving the HealthePeople (Federal) goals and, ultimately, risk jeopardizing the initiative's overall success. Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions that you or other members of the Subcommittee may have at this time. For information about this testimony, please contact Linda D. Koontz, Director, Information Management Issues, at (202) 512-6240 or at [email protected], or Valerie C. Melvin, Assistant Director, at (202) 512-6304 or at [email protected]. Other individuals making key contributions to this testimony include Barbara S. Oliver, J. Michael Resser, and Eric L. Trout. 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.
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Providing readily accessible health information on veterans and active duty military personnel is highly essential to ensuring that these individuals are given quality health care and assistance in adjudicating disability claims. Moreover, ready access to health information is consistent with the President's recently announced intention to provide electronic health records for most Americans within 10 years. In an attempt to improve the sharing of health information, the Departments of Veterans Affairs (VA) and Defense (DOD) have been working, since 1998, toward the ability to exchange electronic health records for use by veterans, military personnel, and their health care providers. In testimony before Congress last November and again this past March, GAO discussed the progress being made by the departments in this endeavor. While a measure of success has been achieved--the one-way transfer of health data from DOD to VA health care facilities--identifying the technical solution for a two-way exchange, as part of a longer term HealthePeople (Federal) initiative, has proven elusive. At Congress's request, GAO reported on its continuing review of the departments' progress toward this goal of an electronic two-way exchange of patient health records. VA and DOD are continuing with activities to support the sharing of health data; nonetheless, achieving the two-way electronic exchange of patient health information, as envisioned in the HealthePeople (Federal) strategy, remains far from being realized. Each department is proceeding with the development of its own health information system--VA's HealtheVet VistA and DOD's Composite Health Care System (CHCS) II; these are critical components for the eventual electronic data exchange capability. The departments are also proceeding with the essential task of defining data and message standards that are important for exchanging health information between their disparate systems. In addition, a pharmacy data prototype initiative begun this past March, which the departments stated is an initial step to defining the technology for the two-way data exchange, is ongoing. However, VA and DOD have not yet defined an architecture to guide the development of the electronic data exchange capability, and lack a strategy to explain how the pharmacy prototype will contribute toward determining the technical solution for achieving HealthePeople (Federal). As such, there continues to be no clear vision of how this capability will be achieved, and in what time period. Compounding the challenge faced by the departments is that they continue to lack a fully established project management structure for the HealthePeople (Federal) initiative. As a result, the relationships between the departments' managers is not clearly defined, a lead entity with final decision-making authority has not been designated, and a coordinated, comprehensive project plan that articulates the joint initiative's resource requirements, time frames, and respective roles and responsibilities of each department has not yet been established. In discussing the need for these components, VA and DOD program officials stated this week that the departments had begun actions to develop a project plan and define the management structure for HealthePeople (Federal). In the absence of such components, the progress that VA and DOD have achieved is at risk of compromise, as is assurance that the ultimate goal of a common, exchangeable two-way health record will be reached. Given the importance of readily accessible health data for improving the quality of health care and disability claims processing for military members and veterans, we currently have a draft report at the departments for comment, in which we are making recommendations to the Secretaries of Veterans Affairs and Defense for addressing the challenges to, and improving the likelihood of successfully achieving the electronic two-way exchange of patient health information.
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Hurricanes Katrina and Rita caused catastrophic destruction to the Gulf Coast region, with an estimated combined total of $160 billion in damage. Estimates indicate that Hurricanes Gustav and Ike also caused billions of dollars in damage along the Gulf Coast region. FEMA assists disaster victims in part through its Individuals and Households Program (IHP), a component of the federal disaster-response efforts established under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. FEMA determines whether individuals or households meet eligibility requirements for IHP assistance after they apply for registration either online or over the telephone. Applicants must submit identification information, including name, Social Security Number (SSN), and date of birth. Applicants must also provide a legitimate address affected by the hurricane; FEMA guidelines specify that eligibility for housing assistance is predicated on the registrant being displaced from his or her primary residence. IHP assistance can include temporary housing, home repair and personal property replacement, and other necessary expenses related to a disaster. For Hurricanes Katrina and Rita, FEMA also activated expedited assistance to provide immediate cash--in the form of $2,000 payments--to eligible disaster victims to help with emergency needs for food, shelter, clothing, and personal necessities. Activating expedited assistance allowed FEMA to provide aid to disaster victims without requiring proof of property damage or other losses. FEMA did not activate expedited assistance for Hurricanes Gustav and Ike, although it did offer limited fast- track payments for individuals with critical needs as a result of Hurricane Gustav. As of March 2009, FEMA states that it has distributed approximately $665 million in IHP assistance to victims of Hurricanes Gustav and Ike, as compared to almost $8 billion for Hurricanes Katrina and Rita. This amount includes rental assistance, lodging, repairs, replacement, and other needs assistance. Since Hurricanes Katrina and Rita, FEMA has improved its controls over identity and address verification and inspections, housing assistance in FEMA-paid-for hotels, and duplicate registrations. Improvements in these three key areas have reduced FEMA's risk of making payments based on fraudulent disaster assistance registrations. For example, for Hurricanes Ike and Gustav, FEMA conducted identity and address verification on all applications and required inspections prior to approving rental assistance. In addition, FEMA required individuals in need of housing assistance to provide valid registration numbers before checking into FEMA-paid-for hotels. FEMA has also taken steps to flag duplicate registrations submitted for the same disaster. Although these improvements are significant, our work shows that an identity thief or a persistent fraudster with basic counterfeiting skills could still obtain rental or hotel assistance by exploiting existing weaknesses in the registration and approval processes. In particular, we were able to bypass verification controls by submitting more sophisticated bogus identities and by providing FEMA with fictitious documentation to validate our registration information. For one of our registrations, these weaknesses allowed us to obtain thousands of dollars in rental assistance, approval for transitional housing, and duplicate reimbursements for fictitious hotel expenses. We were successful on this application not only because we submitted fictitious documentation, but also because FEMA's inspector failed to properly inspect our bogus damaged address. For other applications, falsified supporting documentation allowed us to obtain approval for transitional housing, and in one case we subsequently checked into two different hotels. Finally, we found that FEMA was unable to prevent duplicate registrations submitted for more than one disaster. The following information describes (1) the control weaknesses related to identity and address verification and inspections that we identified during our work on Hurricanes Katrina and Rita, (2) the improvements we found as a result of our undercover tests during Hurricanes Gustav and Ike, and (3) flaws that still exist in the identity and address verification and inspection processes. Weaknesses in Address and Identity Verification and Inspections Identified after Hurricanes Katrina and Rita: As we reported previously, we found significant flaws in the process that FEMA used to approve individuals for disaster assistance payments after Hurricanes Katrina and Rita. For example, although FEMA subjected Internet applications to an identification verification process, it did not use this verification process for phone applications. Specifically, for Internet applications, a FEMA contractor used credit and other information to confirm that (1) the applicant's SSN matched with an SSN in public records and (2) that the SSN did not belong to a deceased individual. Applicants who were rejected through the Internet were advised to apply over the phone. However, phone applications were exempt from any identity verification. In addition, prior to providing assistance payments, FEMA did not use public records or inspections to verify the physical location of damaged addresses, nor did it confirm that applicants actually occupied a damaged address at the time of the disasters. As a result of these weaknesses, we were able to receive disaster assistance by using fictitious names and nonexistent addresses. For example, for one of our Hurricane Katrina applications, we used an empty lot in Louisiana as our damaged address. Although this damaged property address was clearly bogus, FEMA notified us that an inspector had confirmed that the property was damaged and subsequently sent us thousands of dollars in rental assistance. Through data mining, we identified cases where other applicants received assistance by using SSNs belonging to deceased individuals and by using storefronts, post office boxes, cemeteries, and nonexistent apartments as damaged addresses. Other cases we identified involved applicants that claimed to live at valid damaged addresses, even though they were actually incarcerated or living in states not affected by the Hurricanes. Improvements Identified during the Response to Hurricanes Gustav and Ike: FEMA made several improvements to the verification and inspection processes. For example, FEMA told us that the same identity-verification process is now automatically performed when an applicant applies through the Internet and over the phone. In addition, both Internet and phone applications are now subject to automatic address and occupancy verification. Address verification includes checks to confirm that an address is deliverable; is not a post office box or a business address; and is not a "high-risk," address such as a tattoo parlor, or a pawn shop. Occupancy/ownership verification confirms that an applicant occupies or owns the property through a check of property records. Applicants who register over the telephone and fail any of these verification tests still receive registration numbers, but FEMA requests additional documentation prior to any payments being made. According to FEMA, applicants can verify their identities by submitting tax forms, marriage licenses, or government-issued identification. Address and occupancy can be verified by submitting documents such as drivers' licenses, utility bills, and property-tax records. An applicant can fax the supporting documentation to FEMA or wait and provide them to an inspector. FEMA also told us that even if an applicant passed both identity and address verification, an inspector must meet with an applicant to further verify occupancy and to confirm that a property was damaged in order to be eligible for rental assistance. Our undercover applications for Hurricanes Gustav and Ike confirm these improvements, as described in the following examples: Five of our 10 applications initially failed identity verification. For these 5 applications, we used falsified identification information similar to what we used for Hurricanes Katrina and Rita. Specifically, for these applications, we used either completely fabricated names and SSNs, or names with valid dates of birth and SSNs but without any credit history, such as credit card or bank activity. We could not successfully register some identities by using the Internet and were instructed to apply by phone. At the end of the phone application process, FEMA call center operators provided us with registration numbers but also told us that there were "verification errors" associated with our registrations. Although the operators told us that inspectors would be contacting us to schedule an inspection of our property, we were instructed to provide additional documentation to validate our identities. All 10 of our applications initially failed address and occupancy verification. For all 10, we used fabricated address information, including street addresses that did not exist and the addresses of local municipal buildings. When we later reviewed our applications with FEMA, we found that all 10 were flagged as having errors, in part because the addresses we used were not deliverable or because the names we used did not match property records associated with the addresses. The inspection process prevented us from receiving rental assistance for 9 of our 10 applications. Specifically, the 9 addresses we selected for these applications were either not private residences or they were not actually damaged by the hurricanes. Therefore, although FEMA inspectors left messages requesting that we schedule inspections, we did not meet with them. For example, for 1 of our applications we used the address of a Texas elementary school in an area affected by Hurricane Ike. Prior to scheduling an inspection, the inspector called us from the school requesting clarification as to where we resided. We discontinued the application as a result of this call. Continued Weaknesses in Address and Identity Verification and Inspections: We were able to circumvent FEMA's initial controls by using valid identities with credit histories and by submitting fabricated identification and address information. For one of our registrations, these weaknesses, coupled with FEMA's failure to correctly inspect our fictitious address, allowed us to obtain rental assistance and duplicate reimbursements for fictitious hotel expenses. Six of our 10 applications passed identity-verification controls on the first try through the Internet and over the phone, in part because we simulated the actions of an identity thief by using identities with legitimate dates of birth, SSNs, and credit histories. Because some of these identities were valid, FEMA appropriately did not find any verification errors. However, FEMA also did not identify the fact that one of the identities with a credit history showed that we lived outside the areas affected by the hurricanes. For 1 of our applications, we used a name and SSN that were linked to credit records in Virginia, with no record of activity in Texas or the surrounding area. In this way, a fraudster could steal an identity from anyone in the country and use it to pass FEMA's identity tests. Five of our 10 applications eventually passed either identity or address verification or both because FEMA accepted fabricated supporting documents we submitted as legitimate. For example, for 1 of the applications, we registered by phone using a completely fake name, date of birth, and "999-XX-XXXX" as our SSN. FEMA requested that we provide additional documentation to prove our identity, so we faxed in a bogus college transcript. When we subsequently reviewed our applications with FEMA, we found that this bogus transcript was deemed sufficient proof of identification. Similarly, we were able to submit fabricated tax forms and utility bills to prove address and occupancy. When we asked FEMA officials about the process for handling supporting documentation, they told us they do not take any steps to verify the documents. The officials said that they only check to see whether the document appears to be tampered with. If it does, FEMA case workers or contractors will verify the document by calling any phone numbers listed on the document or performing Internet research. If the document appears to be valid, then no additional checks are performed. According to FEMA, our fabricated documents did not appear to be tampered with and therefore were immediately accepted as legitimate. One of our applications received thousands of dollars in rental assistance because FEMA accepted our fabricated supporting documents and because FEMA approved the application without the inspector correctly inspecting the property or meeting with us in person. This application was also approved for a free hotel room and received duplicate payments for previously incurred hotel expenses. For this application, we used a name with a valid date of birth and SSN, but without any credit history. For our damaged address, we used a nonexistent street number on a real street in an area of Texas affected by Hurricane Ike. In response to FEMA's request for identity verification, we submitted an IRS form 1099, which can easily be found on the Internet, claiming that we worked for a bogus landscaping company on a nonexistent street. We also submitted a fabricated utility bill to verify our occupancy. A FEMA inspector attempted to contact us to schedule a date for an inspection, but we never set up a meeting. Ultimately, we were notified that we were eligible for rental assistance and housing assistance in a FEMA-paid-for hotel. However, because the approved dates for obtaining a hotel room were about to expire, we subsequently asked FEMA to reimburse us for previously incurred hotel expenses. As proof of our stay in the hotel, we submitted a bogus bill we created by changing the name and address on a letterhead from a hotel in the Washington, D.C., area. In total, we received just over $6,600 in assistance from FEMA for this application, including $4,465 for rental assistance and $2,197 for hotel- expense reimbursements. The $2,197 in hotel-expense reimbursements we received included duplicate reimbursements for our hotel expenses: one check for $1,098.50 from FEMA and another check in the same amount from FEMA's hotel contractor. Figure 1 depicts one of the rental assistance checks. In reviewing this application with FEMA officials, we asked why we received rental assistance without an inspection. FEMA told us that the inspector had performed an inspection and noted that the entire street where our fictitious address was supposed to be was destroyed. Although FEMA initially blocked us from receiving assistance because we were not present during the inspection, the case worker chose to override this decision because the case worker believed that the destruction of the entire street indicated that we had an immediate need for assistance. FEMA officials emphasized that the case worker should not have taken this action and we should not have received rental assistance. Finally, with regard to the duplicate payments we received for hotel expenses, FEMA told us that we may have received these payments because of a breakdown in the reimbursement process. Specifically, both FEMA and its lodging contractor made payments for expenses incurred at hotels by approved disaster applicants. FEMA typically sends a list of payments it has already made to the contractor. Using a manual process, the contractor reviews this list to determine what payments need to be made. With regard to the duplicate payment we received, the FEMA officials we spoke with speculated that the contractor simply missed the payment by FEMA during its review. After we brought this issue to their attention, FEMA officials told us that they were already conducting a review of the process to if the duplicate payment problem was widespread. As a result of this review, FEMA found that the lodging contractor made four additional duplicate payments. FEMA has flagged these payments for recoupment. The following information describes (1) the control weaknesses related to FEMA's hotel housing program that we identified d Hurricanes Katrina and Rita, (2) the improvements we found as a result of our undercover tests during Hurricanes Gustav and Ike, and (3) flaws tha t still exist in the hotel-assistance approval process. Weaknesses in the Hotel-Assistance Approval Process Iden after Hurricanes Katrina and Rita: Following Hurricane Katrina, FEMA provided displaced individuals with free hotel accommodations. However, FEMA did not require the hotels to collect registration information (such as FEMA registration numbers or SSNs) on individu staying in the free rooms. Without this information, FEMA was not abl ensure that only valid disaster victims were receiving free hotel accommodation s. As a result, we found that individuals stayed in free hotel rooms even though they were not eligible to receive any type of disaster assistance because they had never lived in residences dama the hurricanes. Improvements Identified during the Response to Hurricanes Gustav and Ike: According to FEMA, it strengthened controls over hotel assistance by requiring applicants seeking free lodging to (1) obtain a registration number from FEMA and (2) pass both identity and address verification. Once registrants received approval to check in to a h had to provide the hotel with a valid registration number, picture ID, the last four digits of an SSN so that the hotel could check this inform against a database maintained by FEMA's hotel contractor. Our undercover work confirmed that these controls were effective. For example, without applying for assistance and obtaining registration numbers, our investigators tried seven times to obtain hotel rooms just by claiming that they were victims of Hurricane Ike and showing bogus Tex drivers' licenses . They were denied rooms every time. In addition, when we tried to obtain hotel rooms with FEMA registration numbers that had not passed the identity and address-verification process, we were again denied rooms. cess: Continued Weaknesses in the Hotel Assistance Approval Pro Despite the improvements we identified, we were still approved for hotel assistance on 4 of our 10 applications after we obtained registration numbers and passed identity and address verification using bogus supporting documentation. For one of these applications, we still rec approval for transitional housing even though FEMA noted that the utility ill we submitted to prove our address was illegible. Ultimately, we b checked into two different hotels using one of our bogus identities. The following information describes (1) the control weaknesses related to duplicate payments and registrations we identified during our work on Hurricanes Katrina and Rita, (2) the improvements we found as a result of our undercover tests during Hurricanes Gustav and Ike, and (3) flaws thatstill exist in the process FEMA uses to detect duplicate registrati ons. Weaknesses in Detecting Duplicate Registrations Identified after Hurricanes Katrina and Rita: FEMA did not detect duplicate registrations or prevent duplicate payments after Hurricanes Katrina and Rita. We identified instances where FEMA made more than one payment to the same household that shared the same last name and damaged an d current addresses. FEMA also made millions of dollars in duplicate payments to thousands of individuals who submitted claims for damages to the same primary residences for both Hurricanes Katrina and Rita. FEMA officials explained that victims of both disasters are allowed only one set of IHP payments for the same damaged address and therefore on entitled to payments based on a single registration. Improvements Identified during the Response to Hurricanes Gustav and Ike: Improved data checks enabled FEMA to successfully prevent us from applying twice for Hurricane Gustav using the same identity. For example, we used the same damaged and current address information for two of our applications. When we subsequently revie our applications with FEMA officials, we saw that one of the applica had been flagged as being a duplicate and was about to be cancelled. ded We observed several deficiencies in the customer service FEMA provito disaster victims. Specifically, had we been real disaster victims without e Internet access, we would probably have been unable to obtain assistanc in the immediate aftermath of the hurricanes. We also called actual disaster victims, many of whom told us that they experienced similar problems. According to FEMA, these problems occurred in part because the initial call center staffing model it developed for the 2008 hurricane season was overwhelmed by members of the media and high-level government officials encouraging the public to contact FEMA. However, data we received from FEMA show that these call centers were actually staffed well below FEMA's own estimates of peak staffing needs fo the hurricanes. FEMA told us that this staffing deficiency was caused, in part, by difficulties associated with one of its co that it had not planned to staff call centers up to levels necessary to handle peak call-volume needs. Despite problems we noted with FEMA's ntractors, but also stated customer service following the hurricanes, it intends to rely on the operational plan for the 2009 hurricane season. Although we encountered little or no difficulty when applying for assistance over the Internet, we observed several problems with FEMA's customer service when we made applications by phone. The following examples describe some of the problems we encountered: Busy phone lines and long wait times. We could not immediatel get through to the call centers when applying by phone. For one of o Hurricane Ike applications, an investigator had to call nine times over the course of 3 days before being able to speak to a call center staf member. During these calls, the investigator either got a recording saying "all agents are busy; try later" or was put on hold for 15 to 20 minutes before hanging up. On another Hurricane Ike application, the investigator called five times over the course of three days before getting through to a call center, experiencing similar busy messages and wait times. On a Hurricane Gustav application, the investigator had to call after 1:00 a.m. in order to speak with an operator. We identified similar problems when calling FEMA's help line to check on the s tatus of our applications. For example, one investigator called the help line 13 times over the course of 8 days but never got through to an operator. Incorrect information. Call center staff did not always give us accurate information. For example, although some of our fictitious applicants were told that inspectors would call to schedule inspection even though the applicant did not know the extent of damage to his property, one of our inv for an inspection unless he provided a more precise account of his property damages. For another application, we had to fax supp documentation in multiple times because we were initially given an incorrect fax number. estigators was told he would not be scheduled Delayed notification for hotel assistance. For two of our registrations that were approved for temporary housing, FEMA did no notify us in a timely manner, which prevented us from obtaining a hot room. s, In an effort to understand the experiences of actual disaster victim we contacted registrants chosen from a database provided by FEMA About half of the individuals we spoke with told us that they did not experience any problems with FEMA's application process; the other half confirmed that they encountered delays in getting through to . FEMA operators, problems scheduling inspections, and difficulties obtaining hotel rooms once they had been approved. FEMA permits registration for assistance over the Internet, but power outages may have forced many victims to seek assistance over the telephone. Table 1 highlights 10 of our conversations with disaster victims. FEMA cited several factors that contributed to poor customer service in the aftermath of Hurricanes Ike and Gustav: a higher-than-expected call volume, unmet staffing needs, contractor failure, and problems with its automatic call system. FEMA told us that although it intends to use a different contractor for the 2009 hurricane season, the agency will make no other changes to its call center operational plan. Higher-than-Expected Call Volume: FEMA told us that they received what they described as an overwhelming number of calls, especially from individuals that may not have otherwise asked for assistance, because the media and high-level government officials strongly encouraged the public to contact FEMA. For example, FEMA estimated that it would receive approximately 530,291 calls requesting assistance for Hurricanes Gustav and Ike, but it actually received a total of 1,195,213 calls--125 percent more than expected. FEMA officials also stated that many individuals who called FEMA had unrealistic expectations as a result of the widespread coverage of hurricane Katrina. In particular, many applicants called because they expected to receive an immediate $2,000 expedited assistance payment. Projected Call Center Needs Unmet: Data provided by FEMA show that FEMA fell short of its anticipated peak staffing needs. According to FEMA, call centers are typically staffed with a baseline number of personnel before a disaster takes place. To determine staffing, FEMA primarily relies on historical models, and the type and the size of a disaster. If FEMA determines that additional staff are needed after a disaster occurs, it relies on an interagency agreement with the Internal Revenue Service (IRS) and on contractors. According to FEMA, its four call centers were staffed with a baseline of 684 staff before Hurricanes Gustav and Ike hit. In preparation for Hurricane Gustav, FEMA determined that peak staffing levels at the call centers could be as high as 6,300 staff by September 4, 2008, 3 days after the hurricane would make landfall. However, FEMA data show that actual staffing levels were just below 1,100. In addition, FEMA determined that peak staffing levels at the call centers could be nearly 11,000 staff by September 15 in order to handle calls for both Hurricanes Ike and Gustav. However, once Hurricane Ike made landfall on September 13, FEMA data show there were only 1,378 personnel staffed at the call centers--75 percent below staffing estimates for that day. When asked about the significant difference between staff on hand and anticipated staffing requirements, FEMA officials stated staffing to meet short-term peaks is inefficient as it would require substantial resources to hire and train staff to peak levels, only to release them shortly thereafter due to decreased call volume. Contractor Failures: FEMA said that one contractor was not able to supply a sufficient number of staff in a short period of time, resulting in a lack of staff available at call centers. Specifically, FEMA told us that it entered into a temporary service contract awarded through the General Services Administration (GSA) to augment its call center staff. This contract limited the proposals to only those companies on the GSA schedule that were small businesses--businesses that FEMA believes were not equipped to handle its staffing issues. FEMA said that by the time it learned that only small businesses were under consideration, it could not afford to consider alternative routes. In addition, FEMA said that one of the small businesses it chose to work with indicated that it intended to team up with a large national staffing services company with greater resources, which initially gave FEMA confidence that the contractor could meet its staffing needs. However, FEMA said that it took over 2 weeks for the contractor to supply the numbers of temporary workers required to address the large call volume. In addition, as a change after Hurricane Katrina, call center operators had to undergo security screening prior to being able to work at the call centers. Before Katrina, operators could start work while the security check was in progress. FEMA said that this heightened security check prevented the contractor from providing additional staff in a timely fashion. FEMA officials told us they will not be using the same contractor for the upcoming hurricane season. Automatic Call System Issues: With regard to the issues we identified related to obtaining timely hotel approval, FEMA officials said that they received a large number of requests for free lodging. As a result, they established (1) a separate fax line to accept verification documentation and (2) an auto-dial system to inform people they were approved to check into a hotel. However, according to FEMA, there were problems with the auto-dial system, and therefore some individuals were not promptly informed that they were eligible for housing assistance. This investigation shows that FEMA has made significant progress in addressing the challenge of providing urgent disaster relief to individuals and communities in need of assistance, while simultaneously safeguarding its programs from fraud and abuse. By improving controls over IHP, FEMA has taken steps to provide reasonable assurance that fraud and abuse in this program is minimized. Given that the current hurricane season has begun, FEMA should incorporate lessons learned from our investigation to continue to improve its fraud-prevention program and address all of the customer-service issues we identified. We recommend that the Secretary of Homeland Security direct the Administrator of FEMA to take the following two actions: Establish random checks to assess the validity of supporting documentation submitted by applicants to verify identity and address. Assess the customer-service findings from this investigation and make improvements for future hurricane seasons in areas such as contractor readiness. In written comments on a draft of this report, the Department of Homeland Security concurred with and agreed to implement both of our recommendations. We are sending copies of this report to the Secretary of Homeland Security, the FEMA Administrator, and interested committees. In addition, the report will be available at no charge on GAO's Web site at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-6722 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report.
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GAO's previous work on Hurricanes Katrina and Rita identified fraud, waste, and abuse resulting from a lack of fraud-prevention controls within the Federal Emergency Management Agency's (FEMA) assistance programs. For example, FEMA did not verify the identities or addresses of individuals applying for aid under its Individuals and Households Program (IHP). FEMA also did not verify the eligibility of individuals seeking shelter in FEMA-paid-for hotels and made duplicate payments to individuals who applied multiple times. GAO made numerous recommendations designed to improve these controls. To follow up on this work, GAO conducted undercover tests of the IHP process during the response to Hurricanes Gustav and Ike. This report discusses (1) whether FEMA's controls have improved since Katrina and Rita and (2) issues GAO identified related to the customer service that FEMA provided. GAO submitted bogus applications for disaster assistance, met with FEMA officials, and contacted actual disaster victims to determine their experiences applying for aid. FEMA has significantly improved its fraud prevention controls over disaster assistance. For example, FEMA now conducts identity and address verification on all applications and requires inspections prior to approving rental assistance. In addition, FEMA requires individuals in need of housing assistance to provide valid registration numbers before checking into FEMA-paid-for hotels. FEMA has also taken steps to flag and cancel duplicate registrations for the same disaster. These improvements made it more difficult for GAO to penetrate IHP controls for Hurricanes Gustav and Ike--only 1 of 10 fraudulent applications submitted by GAO received cash payments. However, GAO found flaws in FEMA's controls that still leave the government vulnerable to fraud, waste, and abuse. GAO's undercover tests show that a persistent fraudster can bypass many of these controls by submitting fabricated documents to prove identity or address and, as a result, obtain housing assistance. GAO also received duplicate payments for bogus hotel expenses. In addition, FEMA failed to properly inspect a bogus address GAO used to apply for assistance, ultimately sending GAO multiple checks for thousands of dollars in rental assistance. GAO observed several problems with FEMA's customer service, which made it difficult for many real victims to apply for assistance or obtain shelter in a timely fashion. For example, one of GAO's investigators called nine times over the course of 3 days--several times being put on hold for 20 minutes----before being connected to an operator. Other investigators received incorrect information about the application process. Actual disaster victims confirmed these problems. One applicant reported having to call FEMA at 4 a.m. in order to reach an operator. FEMA cited several factors that contributed to this poor service, including a higher-than-expected call volume and an inability to meet projected call center staffing needs because a contractor failed to provide adequate staffing. Despite these issues, FEMA told GAO that it has made few changes in preparation for the 2009 hurricane season.
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The United States has a long history of military research and development. To help conduct and manage this research, DOD has a diverse network of 80 in-house laboratories and 26 test centers. Their missions range from basic scientific research to direct technical support to operational commands. The management, operations, and funding for these disparate laboratories and test centers also vary among the services. Over the past decade, several organizations, panels, and commissions have identified significant personnel and resource problems facing the laboratories and test centers. For example, several studies found that the laboratories needed more flexibility in personnel rules governing the scientific workforce in order to attract and retain staff. Similarly, several recent studies identified problems with declines in investment and infrastructure, resulting in outdated facilities and technical equipment. To help the laboratories and test centers with these problems, the Congress enacted legislation in fiscal years 1999 and 2000 establishing pilot programs for laboratories and test centers to propose innovative partnerships, business-like practices, and human capital initiatives. The 1999 pilot program focused on partnerships and business-like practices, while the 2000 program focused more on human capital initiatives. Together, the two pilot programs authorized the Secretary of Defense to provide one laboratory and one test center in each service the authority to explore innovative methods for partnering with universities and private sector entities to conduct defense research and development; attract a workforce balance between permanent and temporary personnel and with an appropriate skill and experience level; develop or expand innovative methods of operation that provide more defense research for the dollar; and waive any restrictions on these methods that are not required by law. A total of 10 laboratories and test centers from all 3 services participated in the pilot programs. They are listed in appendix I. Both programs were authorized for 3 years. The 1999 pilot expired in March 2002; the 2000 pilot, in March 2003. For both programs, DOD was required to submit preliminary and final reports to the Congress on program activities. The preliminary report for the 1999 program was submitted in July 1999. However, as of the date of this report, the three other reports have not been submitted. In fiscal year 2003, the Congress authorized another 3-year pilot program and extended the 1999 and 2000 pilot programs until 2005. Under the new 2003 pilot program, the Secretary of Defense is to provide one laboratory and one test center in each service the authority to use innovative personnel management methods to ensure that the participants can employ and retain an appropriately balanced workforce, and effectively shape the workforce to fulfill the organization mission; develop or expand innovative methods of using cooperative agreements with private sector and educational organizations to promote the technological industrial base for critical defense technologies and facilitate the training of a future scientific and technical workforce; and waive any restrictions not required by law. As of May 2003, DOD had not identified any participants for the 2003 pilot program. The 2003 legislation also requires DOD to issue three reports, including a January 2003 report on its experience with the 1999 and 2000 pilot programs, barriers to implementation of these programs, and proposed solutions to overcome these barriers. According to DOD officials, this report has been drafted, but as of May 2003, it had not been submitted to the Congress. Since the inception of the pilot programs in 1999, 178 initiatives have been proposed, but only 4--or 2 percent--have been implemented under the pilot programs. Participating laboratories and test centers proposed initiatives covering a variety of areas, including business-like practices, partnerships with industry and academia, and human capital innovations. We found that laboratories focused many of their proposals on human capital innovations, while test centers tended to concentrate on business-like practices and partnerships. Over the course of the 1999 and 2000 pilot programs, the laboratories and test centers proposed 178 human capital, business, and partnership initiatives. As shown in table 1, slightly over half of the initiatives dealt with human capital and the remainder dealt with business-like practices and partnerships. Overall, the laboratories proposed substantially more initiatives than did the test centers. Furthermore, the laboratories and test centers focused on different types of initiatives. The laboratories more often proposed human capital initiatives, while the test centers overwhelmingly focused on business and partnership initiatives. Laboratory officials told us that they are especially concerned about attracting top-quality scientists to replace a retiring workforce. Test center officials told us that they are focused on modernizing their infrastructure and developing new methods of sharing the cost of operations. Proposals for business-like practices included many initiatives to streamline or improve local operations. Some initiatives focused on expanding the use of innovative techniques such as other transactions or cooperative agreements. Several other proposals sought the authority to reinvest fees or revenues into facilities revitalization. For example, one Navy laboratory proposed imposing a surcharge for its services and using that revenue to fund capital investments, and an Air Force laboratory proposed using facility construction as a valid in-kind contribution under cooperative agreements. Partnership proposals included initiatives such as collaborative research agreements with Arnold Engineering Development Center and the University of Tennessee Space Institute to create a formal business bond to pursue research in laser-induced surface improvement technology and university flight research. The Army's Aberdeen Test Center proposed a limited liability company. Under this concept, industry, academia, and government would form a profit-making company to conduct research and testing at the installation. The test center proposed using its share of the profits to reinvest in the infrastructure at Aberdeen. Several human capital initiatives focused on recruiting and retention flexibilities as well as additional voluntary separation incentives. These proposals included initiatives to streamline hiring of experts and consultants; accelerate promotions for scientists and engineers; provide retention bonuses for key scientists; and hire students directly after graduation. Several participants submitted proposals for direct hire authority to allow faster hiring of scientists, and several submitted proposals for voluntary retirement incentives as a mechanism for reshaping the workforce. Almost none of the 178 proposed initiatives were approved and implemented using the pilot programs' authorities. As figure 1 shows, only 2 percent--or 4 proposals--were implemented under the pilot programs. In contrast, 74 percent were blocked or dropped during the review process or remain on hold awaiting resolution. The four implemented initiatives were donating laboratory equipment directly to local schools, waiving top-level certification of certain service agreements with streamlining cooperative agreements to facilitate collaborative work agreements with outside activities, and granting temporary relief from some mandatory personnel placement reviews. Officials at the laboratories that proposed these initiatives told us that they were considered minor changes with little impact on the larger problems facing the laboratories. Twelve times as many initiatives--24 percent--were implemented using different authorities than the pilot programs. For example, several laboratories requested the authority to appoint retired military members to civilian positions without having to wait the required 180 days. This requirement was waived using a different authority than the pilot programs. Another human capital initiative--to appoint senior scientists from private industry--was authorized by subsequent legislation. In the business/partnership category, the 46th Test Group at Holloman Air Force Base used other authorities to negotiate a complex leasing arrangement with industry to install a radar test facility at White Sands Missile Range. This effort took several years and overcame many contractual and regulatory barriers. In addition, a Navy laboratory streamlined foreign license applications using another authority. The low level of implementation of the proposed initiatives occurred for two primary reasons. First, DOD did not develop an effective process for implementing the pilot programs. Second, DOD determined that proposed human capital initiatives--for example, requests for the authority to hire directly or offer voluntary retirement incentives--were in conflict with statutory provisions. DOD did not provide standardized guidance on proposal requirements or feedback for improving proposals; coordinate or prioritize proposals; or clarify decision-making authority for proposal review and approval. DOD also did not designate a strong focal point to coordinate the pilot programs, advocate process improvements, and provide assistance and advice to participants. The lack of a strong focal point exacerbated other process gaps. According to officials at DOD laboratories, test centers, and headquarters, DOD did not provide standardized guidance on proposal requirements or feedback for improving proposals (or, in many cases, information on the status of proposals submitted for approval). Proposals often lacked specificity and detail. Many were broadly conceptual or generic in nature and lacked a detailed business case that linked their contribution to overall objectives for the pilot programs. For example, a proposal to permit scientists to serve in a leadership role in professional societies failed to include details of the problems encountered, and the potential to improve operations. Similarly, several proposals for direct hire authority failed to include a business case to explain what specific needs this authority would address or how it would address them. Lack of specificity and business case detail led to the failure of many initiatives to win approval. DOD attorneys told us that many proposals were so vague that it was impossible to determine whether or not the proposed initiatives could meet legal requirements. At a department level, DOD also did not coordinate or prioritize proposals, thereby precluding decisions on how best to pursue common interests and issues such as direct hiring authority or forming partnerships with universities. Instead, each participant submitted proposals individually, and thus multiple independent proposals were often submitted for the same or similar issues. DOD attorneys pointed out that it would have been more effective to group proposals by common theme and prioritize them. They believed a unified approach and prioritized proposals with clearly written, specific plans for solving well-defined problems would have enabled them to more effectively assist participants with resolving legal issues. DOD did not clarify decision-making authority for proposal review and approval. Many organizations and individuals were stakeholders in proposal review and approval, and they often had differing management structures, concerns, and interests. Stakeholders included military and civilian leaders, attorneys, and human capital and personnel staff at several levels: the local installation where participating laboratories and test centers were housed; the individual service; and OSD. The roles and decision-making authority of the various stakeholders were never negotiated and clarified. As a result, many players at multiple organizational levels had--and took--an opportunity to say "no" to a particular proposal, but it remained unclear who had the authority to say "yes." For example, some participants believed that the pilot program legislation gave the director of a participating laboratory or test center the authority to approve a proposed initiative. OSD officials, however, believed that the proposed initiatives had to be approved at higher levels. The role of the services was also unclear. Some laboratory and test center directors initially sent proposals directly to OSD's Directorate of Defense Research and Engineering (DDR&E), bypassing their service headquarters. Others sent proposals to their service headquarters for approval before submitting the proposals to DDR&E. Eventually, however, each of the service headquarters decided to become more heavily involved in the approval process and provide service-level responses to proposals. These service-level responses often came into play after proposals had been sent directly to DDR&E for approval, further complicating the approval process. Within OSD, both DDR&E and Personnel and Readiness (P&R) had substantial stakes in the human capital proposals--DDR&E because it is charged with oversight and management of defense laboratories and P&R because it has the authority within DOD for human capital issues. However, DDR&E and P&R never agreed on a process for approving proposals. In addition, for the past year P&R's attention has been focused primarily on developing DOD's proposed new civilian human capital management system, the National Security Personnel System (NSPS), which the Secretary of Defense recently submitted to the Congress. DOD officials believe that, if enacted, NSPS will provide flexibility to make necessary human capital changes. The Undersecretary of Defense P&R directed that implementation of new personnel initiatives be placed on hold during the development of NSPS so that the existing system could be studied to identify needs and best practices. Consequently, P&R officials believed it would be premature for DOD to implement new personnel initiatives during this time. DOD did not designate a strong focal point to coordinate the pilot programs, advocate process improvements, and provide assistance and advice to participants. This exacerbated the other process gaps. Without such a focal point, participants found their own individual ways to develop proposals and get them reviewed. Several officials agreed that a strong focal point would be helpful. For example, DOD attorneys stated that the laboratories or someone acting as their focal point needed to define the issues they wanted to resolve. The attorneys noted that a focal point could have more successfully drawn upon their expertise and experience with addressing legal challenges in other innovative programs (e.g., demonstration projects). Some pilot program participants also agreed a strong focal point was needed, but they had some concerns regarding the amount of influence and authority he or she should have. According to officials at DOD laboratories, test centers, and headquarters, human capital initiatives were generally in conflict with title 5 of the United States Code. Title 5 provides the framework for standard and equitable personnel practices across the federal government and is the current foundation for management of the DOD civilian workforce. Over time, the Office of Personnel Management has added implementing rules and regulations to the framework. Proposed human capital initiatives often sought relief from these provisions, for example, requests for the authority to hire directly or offer voluntary retirement incentives. However, after reviewing the legislation, the DOD Office of General Counsel advised that the 1999 and 2000 legislation did not provide the authority to waive personnel rules based on title 5 provisions. Rather, the office advised that the pilot programs' authorities allow only for changes that could already be accomplished under existing DOD regulations. In other words, the pilot programs did not provide any new or additional authority to waive existing personnel rules and regulations grounded in title 5. Consequently, absent statutory authority beyond that provided by the pilot programs, human capital proposals in conflict with title 5 and its implementing rules and regulations could not be implemented. Many initiatives fell into this category. The 2003 pilot program faces several implementation challenges. First, as of May 2003, DOD had not addressed implementation problems. Thus, proposals made via the 2003 pilot program will face the same obstacles as previous proposals. Second, human capital initiatives will continue to face title 5 challenges. Like the earlier legislation, the 2003 legislation does not provide DOD any new authority. Hence, initiatives proposed under the 2003 pilot program will encounter the same statutory restrictions as previous initiatives. P&R officials believe that, if implemented, NSPS will provide the flexibility to make necessary human capital changes, thereby eliminating the need for the pilot programs in this area. However, NSPS has not yet been enacted, and if enacted, it will still require an implementation process. Finally, laboratories and test centers may be reluctant to participate in the new pilot program. Many participants in the earlier pilots told us they were discouraged by their experience and consequently unwilling to repeat it. Some expressed frustration with the lack of guidance and feedback on their proposals; others questioned whether management was really committed to the pilot program. Even those few participants that had proposals approved were wary of expending additional resources on another pilot program. While DOD appears to recognize a need to address human capital and business operations issues specific to laboratories and test centers, it has not effectively managed the pilot programs. If DOD intends to use the pilot programs to address laboratory and test center issues, it will have to address the factors--both process and statutory--that blunted previous proposals made through the pilot programs. The small volume of approved proposals, coupled with DOD's not providing status reports required by the Congress, has left the Congress uninformed about what objectives DOD would like to achieve with the laboratories and test centers, how it plans to achieve those objectives, and what vehicles it plans to use. This information will be important to the success of any future actions. We recommend that by March 31, 2004, the Secretary of Defense inform the Congress of DOD's objectives regarding human capital and business operations in the laboratories and test centers, how it plans to meet these objectives, and what vehicles it will use to meet them. We also recommend that by March 31, 2004, the Secretary of Defense develop a process for proposing, evaluating, and implementing human capital, business, and partnership initiatives for the laboratories and test centers, regardless whether by the pilot authority or by some other vehicle. Such a process should include instructions for proposal requirements such as linking to overall goals and measurable objectives and the need for a business case, and specification of procedures for proposal submission and review and providing feedback on proposal quality and scope. Finally, we recommend that the Secretary of Defense designate a strong focal point to receive, evaluate, and prioritize all proposals and work with laboratory and test center directors, legal counsel, personnel and other specialists to develop sound and well-developed business cases and strategies to obtain needed changes. In written comments on a draft of this report, DOD states that it does not concur with our recommendations because it has already taken actions that in effect implement them. While the actions DOD cites that it has taken are important to implementing our recommendations, they are not sufficiently specific to address the problems identified in our report. DOD's written comments are contained in appendix II. Regarding our first recommendation--that DOD inform the Congress of its human capital and business objectives for the laboratories and test centers and the strategies it will employ to meet them--DOD did not concur. DOD discusses various high-level, agencywide initiatives it has taken to address human capital and business issues in general and stated that the Congress has been made aware of these initiatives, obviating the need for additional reporting. We continue to believe that additional reporting is necessary. We recognize that the general initiatives DOD discusses may provide ways of helping the laboratories and test centers; however, to be effective, they must be made specific, that is, developed into targeted strategies and plans that address the particular problems the laboratories and test centers face. DOD has not provided the Congress sufficient details on how the general initiatives will be used to address laboratories' and test centers' objectives and problems. Regarding our second recommendation--that DOD develop a process for proposing, evaluating, and implementing human capital and business-like practices initiatives for the laboratories and test centers--DOD did not concur. DOD states that it has already introduced new agencywide management processes--the Business Initiative Council and the submission of the NSPS proposal to the Congress--to address human capital and business issues in general. However, DOD has not detailed how these general initiatives will apply to the laboratories and test centers or address our process concerns. For example, while the Business Initiative Council may have an effective process for proposing, evaluating, and implementing laboratory and test center business-like practices initiatives, DOD has not provided sufficient information for us to make such a determination. We also recognize that NSPS may address some of the human capital problems faced by the laboratories and test centers, but this system is still under consideration by the Congress. Until it becomes law, we believe it is premature to cite it as an effective management tool. With regard to our third recommendation--that DOD designate a strong focal point to work with the laboratories and test centers to develop, evaluate, prioritize, and coordinate proposed initiatives--DOD did not concur. DOD states that the recently created position of Undersecretary for Laboratories and Basic Sciences has oversight responsibility for all laboratory initiatives and that it is establishing a new Defense Test Resources Management Center that will oversee the test centers. DOD asserts that these two organizations will perform as focal points. However, DOD has not detailed how these organizations will fulfill this role and work with the laboratories and test centers to overcome the many barriers noted in our report. During our review, we met with officials from the following organizations in the Office of the Secretary of Defense: the Director, Defense Research and Engineering; the Director, Operational Test and Evaluation; the General Counsel, and the Deputy Undersecretary of Defense for Personnel and Readiness. We also met with officials from the Army Research Laboratory, Aberdeen Test Center, Army Medical Research and Materiel Command, Naval Research Laboratory, Naval Undersea Warfare Center, Air Force Research Laboratory, Air Force Research Laboratory's Space Vehicles Directorate, and 46th Test Wing. We also discussed pilot program issues with each participating laboratory or center. To determine the initiatives proposed to date and their status, we obtained records from OSD and service officials. From these records and from discussions with each participant, we compiled a listing of initiatives proposed by each participating laboratory and test center. We verified the listing and the current status of each initiative with cognizant service officials. To determine what obstacles inhibited DOD's implementation of the pilot programs, we obtained documentation and data from pilot program participants as well as from OSD officials. We also discussed statutory obstacles with the officials from DOD's Office of General Counsel and Undersecretary of Defense for Personnel and Readiness. We discussed management and procedural obstacles with officials from the Director, Operational Test and Evaluation and Defense Research and Engineering. In addition, we discussed all obstacles with the participating laboratories and test centers. The problems facing the laboratories and test centers have been documented by many organizations, panels, and commissions. We did not independently verify these problems or the findings and conclusions of these entities. We conducted our review from July 2002 to April 2003 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretary of Defense; the Secretaries of the Army, Navy, and Air Force; and interested congressional committees. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Major contributors to this report were Catherine Baltzell, Arthur Cobb, Christopher Durbin, Rae Ann Sapp, Sylvia Schatz, and Katrina Taylor. If you have any questions regarding this report, please call me at (202) 512-4841.
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In fiscal years 1999, 2000, and 2003, the Congress authorized pilot programs to help the Department of Defense (DOD) laboratories and test centers explore innovative business partnerships and human capital strategies. Congressional concerns about DOD's implementation of the pilot programs have been growing. The Congress mandated that GAO review pilot program implementation. GAO (1) identified the pilot initiatives proposed and their current status, (2) examined factors that affected implementation, and (3) assessed implementation challenges the 2003 pilot program faces. The 1999 and 2000 pilot programs have not worked as intended. Since their inception, 178 initiatives have been proposed by the participating laboratories and test centers but only 4--or 2 percent--were implemented under the pilot programs. Participants proposed initiatives covering a variety of areas, including business-like practices, partnerships, and human capital innovations. The pilot programs were not effective because DOD lacked an effective implementation process and proposed human capital initiatives were not consistent with statutory provisions. First, DOD did not provide standardized guidance on proposal requirements, coordinate proposals, or clarify decision-making authority for proposal review and approval. Furthermore, DOD did not designate a strong focal point to provide assistance and advice to participants and advocate process improvements. The lack of a strong focal point exacerbated other process gaps. Second, DOD attorneys advised that the pilot programs did not provide authority to make most of the proposed human capital changes. Implementation of the new 2003 pilot program faces several challenges. First, DOD has not addressed implementation problems. For example, clear guidance is still lacking and decision-making authority is still unclear. Second, the 2003 pilot program provides no change in authority concerning human capital initiatives. Finally, laboratories and test centers may be reluctant to participate. Many participants in the earlier pilots told us they were discouraged by their experience and consequently unwilling to repeat it.
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Both the federal government and the states share responsibility for administering the Medicaid program. At the federal level, CMS is responsible for overseeing states' design and operation of their Medicaid programs, and ensuring that federal funds are appropriately spent. The federal government sets broad federal requirements for Medicaid--such as requiring that state Medicaid programs cover certain populations and benefits--while states administer their respective Medicaid programs' day-to-day operations under their state plans. State responsibilities include, among other things, determining eligibility, enrolling beneficiaries, and adjudicating claims. Medicaid is funded jointly by the federal government and states. The federal government's share of most Medicaid expenditures is based on a statutory formula--the FMAP. Under the FMAP, the federal government pays a share of Medicaid expenditures based on each state's per capita income relative to the national average. The formula is designed such that the federal government pays a larger portion of Medicaid costs in states with lower per capita incomes (PCI) relative to the national average. Regular FMAP rates have a statutory minimum of 50 percent and a statutory maximum of 83 percent. For fiscal year 2014, regular FMAP rates ranged from 50.00 percent to 73.05 percent. Under PPACA, state Medicaid expenditures for certain Medicaid enrollees are subject to higher federal matching percentages. . We refer to FMAPs that are calculated using this formula as regular FMAP rates. subsequently deemed eligible under PPACA if the state opted to expand Medicaid under PPACA. The 2014 Medicaid enrollees consist of: 1. Traditionally eligible enrollees--individuals who are eligible under historic eligibility standards; states receive their regular FMAP for incurring expenditures related to this population. 2. PPACA-expansion enrollees--individuals who would not have been eligible under the rules in effect on December 1, 2009, and whose coverage began after their state opted to expand Medicaid as authorized by PPACA, and 3. State-expansion enrollees--individuals who were not traditionally eligible, but were covered by Medicaid under a state-funded program or pre-existing state demonstration as of December 1, 2009, in states that subsequently opted to expand Medicaid as authorized under PPACA. In states that choose to expand their Medicaid programs as authorized by PPACA, the federal government will provide an FMAP of 100 percent beginning in 2014 to cover expenditures for the PPACA-expansion enrollees. The increased FMAP will gradually diminish to 90 percent by 2020. States will also receive an FMAP above the state's regular match for their Medicaid expenditures for the state-expansion enrollees, ranging from 75-92 percent in 2014. This FMAP will gradually increase and will eventually equal the FMAP for the PPACA-expansion enrollees beginning in 2019. (See table 1.) Consequently, a state that chooses to expand its Medicaid program could potentially receive three different FMAPs for its different types of Medicaid enrollees. States are primarily responsible for verifying eligibility and enrolling Medicaid beneficiaries. These responsibilities include verifying and validating individuals' eligibility at the time of application and periodically thereafter, and promptly disenrolling individuals who are not eligible. Although states have the flexibility to use different sources of information and processes to verify eligibility factors, CMS guidelines call upon states to maximize automation and real-time adjudication of Medicaid applications through the use of electronic verification policies and the use of multiple application channels, including health insurance exchanges-- whether federally facilitated exchanges (FFE) or state-based exchanges (SBE)--to implement PPACA's coordinated eligibility determination process. Under this process, individuals can apply for health coverage through their state's Medicaid agency or its health insurance exchange, whether an FFE or an SBE, and regardless of which route they choose, their eligibility will be determined for coverage under the appropriate program. Consequently, FFEs and SBEs are designed to make assessments of Medicaid eligibility. As of November 6, 2014, 17 states had SBEs and 34 states had FFEs. Of these 34 FFE states, 10 had delegated authority to the FFEs to make Medicaid eligibility determinations for individuals applying through the exchanges. In the remaining states, an FFE's assessment that an applicant may be eligible for Medicaid is subject to a final eligibility determination by the state Medicaid agency, which is also the process followed in the SBE states. Moreover, PPACA required states to use third party sources of data to verify eligibility to the extent practicable. Consequently, states have had to make changes to their eligibility systems including implementing electronic systems for eligibility determination and coordinating systems to share information. In addition, states have had to make changes to reflect new sources of documentation and income used for verification. Federal regulations require states to develop and submit their Medicaid eligibility verification plans to CMS for approval. As part of its oversight role, CMS oversees state enrollment of beneficiaries and reporting of expenditures. In addition to reviewing state verification plans for assessing Medicaid eligibility, CMS requires states to conduct certain reviews to assess the accuracy of states' Medicaid eligibility determination processes through its Medicaid Eligibility Quality Control (MEQC) and Payment Error Rate Measurement (PERM) programs. MEQC is overseen by CMS and requires states to report to CMS every six months on the accuracy of their Medicaid eligibility determination processes. States can choose to participate in traditional MEQC or MEQC pilots, with the majority of states choosing to participate in the MEQC pilots. While the traditional MEQC requires states to report error rates for 6 month periods, MEQC pilots can be for a year and--for the annual pilots-- states are required to report on an annual basis by August 1st of each year. Pilots that are less than a year have 60 days from the end of the pilot to report findings. CMS implemented the PERM to measure improper payments in Medicaid--including payments made for treatments or services that were not covered by program rules, that were not medically necessary, or that were billed for but never provided--in response to the requirements of the Improper Payments Information Act of 2002, as amended. Under the PERM, CMS measures and reports to Congress improper payment rates in three component areas: (1) fee- for-service claims, (2) managed care, and (3) eligibility. To assess improper payments attributable to erroneous eligibility determinations, the PERM includes state-conducted eligibility reviews that are reported to CMS. Under the MEQC and PERM, state Medicaid staff were required to review all the documentation for a sample of both positive and negative eligibility cases--that is, both individuals who were determined to be eligible, and those determined to be ineligible and thus denied enrollment--and identify any improper payments for services. In light of the changes to Medicaid eligibility standards and state eligibility systems necessitated by PPACA, CMS announced that the agency has suspended the MEQC program and the eligibility portion of the PERM until fiscal year 2018. During this period, according to CMS, PERM managed care and fee-for-service payment reviews will continue uninterrupted, and CMS will continue to report Medicaid improper payment rates based on that data. In addition, CMS will report an estimated improper payment rate for the eligibility component based on historical data. As a temporary replacement to the MEQC and PERM eligibility reviews, CMS implemented a pilot eligibility review to assess states' determination of eligibility and eligibility type for fiscal year 2014 through fiscal year 2017. States develop their own approaches to testing their eligibility determinations under the pilot eligibility review, but must submit descriptions of their proposed methodology to CMS for review and approval. According to CMS's instructions for the pilot eligibility reviews, at a minimum, states must draw a sample of at least 200 eligibility determinations, including both positive and negative determinations. For these sample cases, states must review all caseworker action taken from initial application to the final eligibility determination. Among other factors, for each case reviewed, states must assess the correctness of decisions relating to program eligibility and eligibility group (i.e., whether an enrollee was correctly identified as a traditionally eligible enrollee, a PPACA- expansion enrollee or a state-expansion enrollee). For each error identified, states are required to develop a corrective action plan to avoid similar errors in the future. States were required to have one round of the pilot eligibility reviews completed by the end of June 2014, a second round completed by the end of December 2014, and subsequent reviews to be completed in 2015, 2016, and 2017. As part of its oversight responsibilities, CMS also conducts CMS-64 expenditure reviews. As we have previously reported, the agency collects and reviews aggregate quarterly expenditure information from the states through its CMS-64 form, which is used to reimburse states for their Medicaid expenditures. The CMS-64 data set contains program-benefit costs and administrative expenses at a state aggregate level--such as a state's total expenditures for such categories as inpatient hospital services and prescription drugs--and these reported expenditures are not linked to individual enrollees. State Medicaid agencies typically submit this information to CMS 30 days after a quarter has ended. CMS regional office staff review expenditures submitted through CMS-64 for reasonableness and to determine whether reported expenditures are allowable in accordance with Medicaid rules, and use the data to compute the federal share for each state's Medicaid program expenditures. If, during the CMS-64 expenditure review, CMS is uncertain as to whether a particular state expenditure is allowable, then CMS regional offices may recommend that CMS defer the expenditure pending further review. PPACA- and state-expansion enrollees comprised about 14 percent of Medicaid enrollees at the end of the last quarter in calendar year 2014. Additionally, these enrollees comprised about 10 percent of total Medicaid expenditures for 2014 enrollees. As of June 2, 2015, approximately 69.8 million individuals were recorded as enrolled in Medicaid at the end of the last quarter of calendar year of 2014. Most of these individuals--about 60.1 million--were traditionally eligible enrollees--comprising about 86 percent of total enrollees. About 9.7 million of the 2014 enrollees--approximately 14 percent--were PPACA-expansion or state-expansion enrollees, with 7.5 million (11 percent of all Medicaid enrollees) as PPACA-expansion enrollees and 2.3 million (3 percent of all Medicaid enrollees) as state-expansion enrollees. (See figure 1 for information on Medicaid enrollment in the last quarter of calendar year 2014 and appendix III for information comparing enrollment for all four quarters in 2014.) As of June 2, 2015, states had reported $481.77 billion in Medicaid expenditures for services in calendar year 2014. Of this total, expenditures for traditionally eligible enrollees were $435.91 billion (comprising about 90 percent of total expenditures), about $35.28 billion (7 percent of total expenditures) was for PPACA-expansion enrollees and $10.58 billion (2 percent of total expenditures) was for state-expansion enrollees. (See figure 2 and appendix IV for more information on 2014 Medicaid expenditures.) Overall, the federal share of Medicaid expenditures was approximately 61 percent of spending for Medicaid services in 2014. For traditionally eligible enrollees, the percentage of federal spending was 58 percent of total Medicaid expenditures for this population. For PPACA-expansion enrollees, the overall proportion of federal spending was 100 percent, and for state-expansion enrollees, the overall proportion of federal spending was 74 percent. CMS has implemented reviews that (1) assess the accuracy of eligibility determinations, and (2) examine states' expenditures to ensure they are attributed to the correct eligibility group. However, both reviews contain gaps that limit CMS's ability to ensure that expenditures for the different eligibility groups are appropriately matched with federal funds. CMS has implemented interim efforts to assess states' Medicaid eligibility determinations by requiring states to conduct pilot eligibility reviews. States conduct these reviews to assess the correctness of their decisions related to program eligibility and eligibility group, which defines the amount of federal matching funds for eligible individuals. To implement the changes required by PPACA to streamline and automate the Medicaid enrollment process, states had to make significant changes to their systems and develop new policies and procedures. In recognition of the states' need to redesign their Medicaid business operations and systems, CMS designed these pilot eligibility reviews to provide more timely feedback on the accuracy of states' eligibility determinations than under previous assessments, and allow for quicker corrective action. According to CMS, the pilot eligibility reviews (1) provide state-by-state programmatic assessments of the performance of new processes and systems in adjudicating eligibility; (2) identify strengths and weaknesses in operations and systems leading to errors; and (3) test the effectiveness of corrections and improvements in reducing or eliminating those errors. States have completed the initial round of pilot eligibility reviews, which showed wide variation in both the design and the results among the states--reflecting, in part, the latitude they were given in designing their review methodology. Although the results varied, pilot eligibility reviews for eight of the nine states we examined identified eligibility determination errors, improper payments associated with those errors, and described the states' plans for corrective action to prevent similar errors. For subsequent rounds, CMS revised its guidance. For example, CMS updated instructions for the second round to include standard definitions for errors and deficiencies, and to require the inclusion of eligibility redeterminations in the review, and plans to further refine the instructions for future rounds. Based on these updated instructions, the results of the future rounds of pilot eligibility reviews may result in more comparable information. However, the pilot eligibility reviews do not include a review of the accuracy of federal eligibility determinations in certain states that delegated authority to the federal government to make Medicaid eligibility determinations through the FFE. Officials from the National Association of Medicaid Directors told us that states had raised concerns earlier that federal determinations were incorrect, citing challenges related to transferring information between federal exchanges and state systems. Additionally, we recently reported that states using FFEs experienced challenges transferring applications and transmitting information between state and federal data sources, which contributed to enrollment delays. CMS has established another mechanism--termed the eligibility support contractor pilot program--to assist in developing new methodologies for assessing eligibility determinations; however, the eligibility support contractor program generally does not assess federal determinations for accuracy. Therefore, for the states in which the federal government performs eligibility determinations, there is a gap in assuring that the determinations are accurate. According to CMS officials, the purpose of the eligibility support contractor program--along with the pilot eligibility reviews--is to inform revisions to the eligibility component of the PERM, which will be resumed in 2018. In the interim, CMS uses the eligibility support contractor to assist CMS in developing a methodology for the future PERM eligibility review, including a methodology for assessing federal eligibility determinations. The contractor will make recommendations to CMS on necessary changes to the methodology used to test eligibility determinations for the MEQC and PERM. As a result, under the current process, CMS will not be able to assess the accuracy of federal eligibility determinations until 2018, thereby creating the potential risk for improper payments in the states that have delegated authority to the federal government to make eligibility determinations through the FFEs. Federal internal control standards require that federal agencies identify and assess risks associated with achieving agency objectives. One method for identifying the risk of inaccurate eligibility determinations could include consideration of findings from audits and other assessments. However, neither of the interim measures--the pilot eligibility reviews or the eligibility support contractor program-- implemented by CMS will identify risks for improper payments due to erroneous federal determinations. According to CMS officials, the agency excluded federal determinations from the pilot eligibility reviews states must conduct because these states do not have the resources to fully review the federal determinations. Moreover, CMS officials noted that a review of federal determinations--which are independent of a state's own process--would not assist states in correcting their own eligibility determination processes. However, a review of federal eligibility determinations would help CMS assess whether the FFEs are appropriately determining an applicant's eligibility for Medicaid. CMS modified its standard quarterly review of CMS-64 expenditures to examine expenditures for both categories of the expansion population. As part of this modified review, CMS staff must select a sample of different types of enrollees--including at least 25 PPACA-expansion eligible enrollees, 10 state-expansion eligible enrollees (where applicable), and 5 traditionally eligible enrollees--and examine their expenditures to ensure that they were reported as expenditures for the correct eligibility type. According to CMS officials, the expenditure review is primarily intended to ensure that states are correctly grouping expenditures for the different eligibility groups as initially determined, not whether the determination is correct. For example, the review assesses whether the expenditures for someone the state has determined to be a PPACA-expansion enrollee are submitted for the PPACA-expansion eligibility group. In our review of the pilot eligibility reviews, we found that eight of the nine states we reviewed reported errors that reflected both incorrect eligibility determinations and errors in the eligibility determination process that did not result in an incorrect determination. For example Eight of the nine states reported errors that resulted in incorrect eligibility determinations, including enrollment of individuals with insurance or incomes exceeding Medicaid standards. Total improper payment amounts among these states ranged from $20 to approximately $48,000 across their samples of approximately 200- 300 eligibility determinations. One of the eight states reported as an error its failure to send out notification letters to some enrollees within the correct timeframe--but this error did not affect the accuracy of the eligibility determination. We found that errors were often related to income verification, inadequately trained staff, or challenges transmitting information between exchange and Medicaid databases. States described the corrective actions they planned to take for each error identified in their pilot eligibility reviews. Although the changes CMS has made to the CMS-64 expenditure review have enabled the agency to identify certain types of erroneous expenditures for the expansion population, these reviews may not be able to identify expenditures that are erroneous due to incorrect eligibility determinations, such as those identified in the state pilot eligibility review examples above. As a result, CMS's expenditure review cannot provide assurance that states' expenditures are correctly matched based on enrollees' eligibility categories. CMS officials told us that the CMS-64 expenditure review process is not informed by the findings of the pilot eligibility reviews. Thus, if a state's pilot eligibility review identified errors in the state's eligibility determinations or automated eligibility systems, CMS is not using that information to target its CMS-64 review of that state's expenditures for PPACA-expansion enrollees. For example, none of the eight states we examined that reported eligibility determination errors in their pilot eligibility reviews were identified as having eligibility- related expenditure errors by CMS regional offices. As a result, CMS is missing the opportunity to better assure that the appropriate federal matching rate is being applied to states' expenditures. Federal internal control standards require that federal agencies identify and assess risks associated with achieving agency objectives. In addition, such information should be communicated to others within the agency to enable them to carry out their internal control responsibilities. Although the purposes of the CMS-64 expenditure review are distinct from the eligibility review, the information gained from the pilot eligibility reviews on state eligibility determination errors could be useful in identifying potentially erroneous expenditures that require further review by CMS. PPACA authorized many significant changes to the Medicaid program, such as expanded eligibility and streamlined eligibility processes between Medicaid and the exchanges. However, implementing these changes requires states to adapt their systems, policies, and procedures, resulting in a complex realignment of processes, and necessitating careful review by CMS to ensure that determinations of eligibility and the reporting of expenditures are accurate. As CMS redesigns its oversight and monitoring tools to better capture the changes brought about by PPACA to Medicaid eligibility and federal matching funds, the agency has implemented measures to inform its processes for assessing states' eligibility determinations and reporting of expenditures. However, in the short term, CMS is missing opportunities to better ensure the accuracy of eligibility determinations in all states, and also ensure that Medicaid expenditures for different eligibility groups are appropriately matched with federal funds. By excluding Medicaid eligibility determinations made by the FFEs from its pilot eligibility reviews, CMS has created a gap in efforts to ensure that only eligible individuals are enrolled into the Medicaid program. Furthermore, although CMS has a process for assessing the accuracy of eligibility determinations in the states, CMS does not use the results of these eligibility reviews, which have the potential to provide valuable information on state eligibility determinations, to better target its review of Medicaid expenditures for different eligibility groups. Using the eligibility reviews to inform its reviews of state-reported expenditures may assist CMS in identifying payments made on behalf of ineligible or incorrectly enrolled individuals, thereby reducing the risk of improper payments in the Medicaid program. To improve the effectiveness of its oversight of eligibility determinations, we recommend that the Administrator of CMS conduct reviews of federal Medicaid eligibility determinations to ascertain the accuracy of these determinations and institute corrective action plans where necessary. To increase assurances that states receive an appropriate amount of federal matching funds, we recommend that the Administrator of CMS use the information obtained from state and federal eligibility reviews to inform the agency's review of expenditures for different eligibility groups in order to ensure that expenditures are reported correctly and matched appropriately. We provided a draft of this report to HHS for comment. In its written comments, HHS highlighted the actions the department has taken to ensure the accuracy of Medicaid eligibility determinations made through the exchanges, citing the multi-layer verification processes in place to assess applicant eligibility, and also noted that it conducts reviews of expenditure data submitted by the states. HHS agreed with our first recommendation and agreed with the concept of our second recommendation. HHS concurred with our first recommendation to conduct reviews on federal Medicaid eligibility determinations to ascertain the accuracy of these determinations and institute corrective action plans where necessary. HHS noted that federal eligibility determinations in two states are currently being reviewed by the eligibility support contractor, and stated that federal determinations will be included as part of the future PERM eligibility review. However, the eligibility component of the PERM will not be resumed until 2018, and in the interim, without a systematic assessment of federal eligibility determinations, we remain concerned that CMS lacks a mechanism to identify and correct federal eligibility determination errors and associated payments. Given the program benefits and federal dollars involved, we urge CMS to look for an opportunity to identify erroneous federal eligibility determinations and implement corrective actions as soon as possible. With regard to our second recommendation, HHS agreed that ensuring accurate eligibility determinations and correct expenditure reporting is an important safeguard for the Medicaid program but did not state whether it specifically concurred with the recommendation. HHS further noted that eligibility and expenditure reviews are two distinct, but complementary oversight processes, with different timeframes. In consideration of HHS's comments, we adjusted our recommendation to take into account the differences in the timeframes for these two types of reviews. We continue to believe that using the information obtained from state and federal eligibility reviews to inform the agency's review of expenditures for different eligibility groups will help ensure that expenditures are reported correctly and matched appropriately. Eligibility reviews are conducted on a different timeframe than the expenditure reviews, and because states are required to identify errors and develop corrective action plans to address these errors, it is anticipated that, over time, the eligibility reviews will support HHS's efforts to appropriately match state expenditures. HHS's comments are reproduced in appendix I. HHS also provided technical comments, which we incorporated as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Health and Human Services, the Administrator of CMS, 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 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 key contributions to this report are listed in appendix V. To determine the enrollment and spending for individuals who enrolled in Medicaid in 2014, and the extent to which these individuals were identified as eligible under the Patient Protection and Affordable Care Act (PPACA), we examined data submitted to the Centers for Medicare & Medicaid Services (CMS) by states as part of their enrollment and expenditure reporting. These data included information from new enrollment forms developed by CMS that are used by states to report the number of enrollees by eligibility type, as well as expenditure data, to CMS by means of the Quarterly Medicaid Statement of Expenditures for the Medical Assistance Program--also known as the form CMS-64-- within the Medicaid Budget and Expenditure System (MBES). We reviewed data for each quarter in calendar year 2014 and relevant guidance and documentation where available. We also interviewed knowledgeable CMS officials in the Center for Medicaid and CHIP Services about data available on Medicaid enrollment and expenditures, and what steps they take to ensure data reliability. Based on these discussions, we determined that these data were sufficiently reliable for our purposes. States submit total enrollment and aggregate actual total quarterly Medicaid expenditures on the CMS-64 no later than 30 days after the end of each quarter. However, states may continue to submit additional data for each quarter on a continual basis and make adjustments to the previous three quarters submitted. States may report expenditures up to a period of two years (possibly more) after the date of the original service payment. Because these are point-in-time estimates, the data are current as of the date we pulled the data from MBES. States do not necessarily report consistently for each eligibility or service category or quarter. For example, at the time of our review of the data, of the 28 states that had expanded Medicaid, 21 had reported enrollment data for PPACA-expansion eligible enrollees for December 2014 and 14 had reported enrollment data for the state-expansion individuals for December 2014. Some states had reported data for both groups. We obtained enrollment and expenditure data for calendar year 2014-- the first full year that states had the option of expanding Medicaid under PPACA. This includes the first through fourth quarters of the 2014 calendar year (ending March, June, September, and December 2014, respectively). Because data are reported for each month, we use the last month of the quarter to report for that quarter. For example, we used the numbers reported for March 2014 as the numbers reported by states for the first quarter of 2014. We extracted these data from the MBES on June 2, 2015. We reviewed the data for reasonableness and consistency, including screening for missing data, outliers, and obvious errors. While enrollment data may be identified for a particular month in a quarter, expenditure data may not be identified for a particular month in a quarter because it is reported cumulatively for each quarter and added each subsequent quarter in the year. Beginning in January 2014, states and territories also began reporting enrollment data. CMS implemented a new form--the CMS-64.Enroll form--to collect information on total enrollment and enrollment eligibility type (e.g., PPACA-expansion enrollees and state-expansion enrollees). These data show the numbers of beneficiaries who were enrolled at any time during each month. This would include, for example, beneficiaries who may have been enrolled at the beginning of June and were no longer enrolled at the end of June. Because the enrollment data are point-in-time estimates, we were unable to add the numbers of enrollees across quarters to obtain the total number of Medicaid enrollees for the year. Individuals might be enrolled continuously and adding up each month would count the same individuals multiple times. The CMS-64 data are used to reimburse the states for the applicable federal share of Medicaid expenditures. As we previously stated, CMS reviews these submissions, and the data are the most reliable accounting of total Medicaid expenditures. We extracted expenditure data from the CMS-64 net expenditures Financial Management Report for calendar year 2014. The Financial Management Report is an annual account of states' program and administrative Medicaid expenditures, including federal and state expenditures by expenditure category. This source includes expenditures under Medicaid demonstrations, as well as adjustments by states or CMS and collections. Expenditure data from the CMS-64 may not have been reviewed by CMS. Additionally, these data do not tie expenditures to services provided to particular individuals during the reporting period. Table 2 shows the number of individuals enrolled in Medicaid at any time during the last month of each quarter in 2014, by eligibility group. As shown, Patient Protection and Affordable Care Act (PPACA)-expansion enrollees and state-expansion enrollees comprised a small portion of total enrollees in all quarters of 2014. These are point-in-time estimates--that is, counts of enrollees for the last month in each quarter. These numbers should not be added across quarters to obtain the total number of Medicaid enrollees for the year because doing so might count the same enrollees multiple times. Table 3 reflects Medicaid expenditures paid by eligibility group, in 2014. As shown, expenditures for Patient Protection and Affordable Care Act (PPACA)-expansion enrollees and state-expansion enrollees comprised a small portion of total Medicaid expenditures in 2014. In addition to the contact named above, Robert Copeland, Assistant Director; Christine Davis; Sandra George; Giselle Hicks; Drew Long; Jasleen Modi; Giao N. Nguyen; and Emily Wilson made key contributions to this report.
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Historically, Medicaid eligibility has been limited to certain categories of low-income individuals, but PPACA, enacted on March 23, 2010, gave states the option to expand coverage to nearly all adults with incomes at or below 133 percent of the federal poverty level, beginning January 1, 2014. States that do so are eligible for increased federal matching rates for enrollees receiving coverage through the state option to expand Medicaid under PPACA, and where applicable, enrollees in states that expanded coverage prior to PPACA's enactment. GAO was asked to examine Medicaid enrollment and expenditures, and CMS oversight of the appropriateness of federal matching funds. This report examines (1) Medicaid enrollment and spending in 2014 by different eligibility groups; and (2) how CMS ensures states are accurately determining eligibility, and that expenditures are appropriately matched. GAO analyzed enrollment and expenditure data for enrollee eligibility groups submitted by states to CMS, examined relevant federal laws and regulations, internal control standards, CMS guidance and oversight tools, and interviewed CMS officials. PPACA-expansion and state-expansion enrollees--individuals who were not eligible under historic Medicaid eligibility rules but are eligible under (1) a state option to expand Medicaid under the Patient Protection and Affordable Care Act (PPACA), or (2) a state's qualifying expansion of coverage prior to PPACA's enactment--comprised about 14 percent of Medicaid enrollees and about 10 percent of Medicaid expenditures at the end of 2014. According to GAO's analysis of state reported data, of the approximately 69.8 million individuals recorded as enrolled in Medicaid, about 60.1 million were traditionally eligible enrollees, comprising about 86 percent of the total; about 7.5 million (11 percent of all Medicaid enrollees) were PPACA-expansion enrollees, and 2.3 million (3 percent of all Medicaid enrollees) were state-expansion enrollees. With regard to expenditures, states had reported $481.77 billion in Medicaid expenditures for services in calendar year 2014. Of this total, expenditures for traditionally eligible enrollees were $435.91 billion (about 90 percent of total expenditures), expenditures for PPACA-expansion enrollees were about $35.28 billion (7 percent of total expenditures), and expenditures for state-expansion enrollees were $10.58 billion (2 percent of total expenditures). Proportion of Medicaid Enrollees by Eligibility Group, Last Quarter of Calendar Year 2014 The Centers for Medicare & Medicaid Services (CMS), which oversees Medicaid, has implemented interim measures to review the accuracy of state eligibility determinations and examine states' expenditures for different eligibility groups, for which states may receive up to three different federal matching rates. However, CMS has excluded from review federal Medicaid eligibility determinations in the states that have delegated authority to the federal government to make Medicaid eligibility determinations through the federally facilitated exchange. This creates a gap in efforts to ensure that only eligible individuals are enrolled into Medicaid and that state expenditures are correctly matched by the federal government. In addition, CMS reviews of states' expenditures do not use information obtained from the reviews of state eligibility determination errors to better target its review of Medicaid expenditures for the different eligibility groups. An accurate determination of these different eligibility groups is critical to ensuring that only eligible individuals are enrolled, that they are enrolled in the correct eligibility group, and that states' expenditures are appropriately matched with federal funds for Medicaid enrollees, consistent with federal internal control standards. Consequently, CMS cannot identify erroneous expenditures due to incorrect eligibility determinations, which also limits its ability to ensure that state expenditures are appropriately matched with federal funds. GAO recommends that CMS (1) review federal determinations of Medicaid eligibility for accuracy, and (2) use the information obtained from the eligibility reviews to inform the expenditure review, and increase assurances that expenditures for the different eligibility groups are correctly reported and appropriately matched. In its response, the agency generally concurred with these recommendations.
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In 1986, the Air Force began developing TSSAM to provide a low observable conventional cruise missile. Key characteristics included long-range, autonomous guidance, automatic target recognition, and precision accuracy with a warhead able to destroy a well-protected structure. After the TSSAM procurement unit cost increased from an estimated $728,000 in 1986 to $2,062,000 in 1994 (then-year dollars), the Department of Defense (DOD) terminated the program. Following a comprehensive reassessment of force requirements, the Air Force and Navy agreed they urgently needed an affordable missile with most of TSSAM's characteristics. They proposed a joint program that would build upon the lessons learned from TSSAM and more recent programs that use new acquisition approaches. On September 20, 1995, the Principal Deputy Under Secretary of Defense for Acquisition and Technology approved the initiation of the JASSM program, under Air Force leadership. It is to be developed, produced, and initially deployed over the next 5 years. The Air Force's April 1996 schedule for JASSM development and early production calls for a 24-month competitive program definition and risk reduction phase beginning in June 1996 (milestone I); a 32-month engineering and manufacturing development phase beginning in June 1998 (milestone II); production of 75 low-rate initial production missiles beginning in production of 90 full-rate production missiles beginning in April 2001 (milestone III); and initial JASSM deployment in June 2001. Figure 1 shows the Air Force's schedule for JASSM development, missile deliveries, and testing. The estimated development cost for the JASSM program is $675 million (fiscal year 1995 dollars). The Air Force plans to buy about 2,400 missiles at an average unit procurement price of $400,000 to $700,000 (fiscal year 1995 dollars). Based on these unit prices, we estimate the procurement cost for 2,400 Air Force missiles is $960 million to $1.68 billion, and the total estimated acquisition cost (development and procurement) is $1.64 billion to $2.36 billion. The Congress appropriated $25 million to start the JASSM program in fiscal year 1996, and the President's fiscal year 1997 budget includes $198.6 million for the program. The JASSM Single Acquisition Management Plan has an overriding theme of affordability. To provide the required capability at an affordable cost, the Air Force plans to use a series of new acquisition processes and encourage industry to use commercial practices to lower the missile's price and speed its deployment. To accomplish these challenging goals, the Air Force intends to establish a unique partnership with industry. In contrast to its past practice, the Air Force intends to minimize (1) the requirements to use military specifications and standards and (2) government oversight. The JASSM request for proposal, for example, is significantly shorter than for TSSAM and other past missile acquisition programs, focuses on the desired capability, and does not tell industry how to develop the missile. The Air Force intends to offer industry the maximum possible flexibility to apply commercial practices and innovation. During the 24-month competitive phase, JASSM program office personnel plan to join with contractor personnel to form problem-solving teams and help facilitate the development of the proposed missile design. The JASSM contractors are expected to modify an existing missile design, use available off-the-shelf technology, and use a variety of commercial business and technical practices. The use of commercial practices has been stressed to all potential JASSM developers. These initiatives are intended to lower development, production, and operational support costs, as well as reduce the time needed to develop and produce the system. The principal focus of the 24-month competition, for example, is to eliminate unnecessary cost and allow the contractors to trade off performance and other requirements. JASSM cost is as important as technical performance and schedule. Another innovation is that the contractor is expected to provide a lifetime, total system warranty for each missile. A similar approach using reforms and commercial practices is being used in a pilot program to acquire the Joint Direct Attack Munition (JDAM). Under this pilot program, the Air Force is developing a guidance system and steerable tail kit to significantly improve the accuracy of 1,000- and 2,000-pound general purpose bombs that are currently in its inventory. The JDAM program office is projecting at least a 50-percent reduction in the baseline average unit procurement price, which includes the cost of a full system warranty. Although the Air Force plans to rely upon existing missile designs and off-the-shelf technology to speed JASSM development, essential guidance and automatic target recognition technologies are not mature. The 2 to 3 years available before JASSM flight testing may not be sufficient time to fully develop, integrate, and test these complex subsystems. Because these technologies are essential to meeting the program's requirements, their successful development is one of the pacing items of the program. JASSM is expected to use an inertial navigation system integrated with a global positioning system receiver to navigate from its launch point to the target area. This navigation system is expected to be low-cost, reliable, and accurate to about 13 meters. Global positioning system receivers, however, are vulnerable to both intentional and unintentional interference, including jamming. Recent studies by DOD and the Air Force describe how properly placed jammers can cause an unprotected global positioning system-aided weapon to entirely miss its target. One problem facing the engineering community is defining the potential jamming threat so that a cost-effective countermeasure can be developed. Although the Air Force is evaluating electronic and other countermeasures to develop an antijam capability, it appears a combination of techniques may be needed to ensure reliable and accurate missile guidance. Specially designed antennas and more rapid connection with global positioning system satellites are among the techniques being considered. The Defense Science Board recommended that DOD develop more accurate inertial navigation systems that do not rely on a global positioning system as much. The high cost of potential antijam devices or more accurate navigational systems has limited their use in precision-guided munitions. An Air Force laboratory is conducting a program to develop and test a global positioning system antijam system suitable for precision-guided munitions such as JDAM. Development of the antijam system began in 1995, and it is scheduled to be tested in fiscal year 1998. Assuming the threat uncertainties are resolved and the antijam system's cost is acceptable, it could initially be added to JDAM. It may also be adaptable to JASSM and other precision-guided munitions. With this schedule, however, this system may not be available in time to meet JASSM's June 1998 critical design freeze when the missile design is to be finalized. JASSM requires an automatic target recognition system for a true fire-and-forget precision attack capability under adverse weather conditions. Other programs, such as the Tomahawk, are trying to develop this technology, but no precision-guided munition available today has that capability. Although navigating to the target using a global positioning system-aided preprogrammed flight plan is a well-understood technology, reliably finding the target, and specifically, the desired aim-point without the aid of a pilot remains an unfilled DOD requirement. Precision accuracy in smoke, fog, and adverse weather conditions is a critical aspect of this technology that remains to be demonstrated in an operational system. Affordability and reliability are also important issues. The three basic sensor technologies that have been evaluated in laboratory studies are imaging infrared, laser radar, and synthetic aperture radar. All three appear suitable for JASSM, with laser and synthetic aperture radar technologies offering better adverse weather performance and easier, less costly mission planning. None of them, however, are mature enough to incorporate into an existing design today. All would require, in the opinion of Wright Laboratory engineers, intensive development in an actual weapon system program like JASSM to become a fully operational system ready for production. Wright Laboratory and JASSM program engineers estimated 2 to 3 years would be needed to develop, integrate, and flight test this technology. With a June 1998 design freeze, this does not appear to support the JASSM development schedule. According to JASSM program office officials, synthetic aperture radar technology could not be available in time for JASSM, and the availability of laser radar technology is questionable. They said an imaging infrared radar could be ready and is a likely candidate for JASSM. Based on our analyses of other programs, including TSSAM, developing imaging infrared technology and its associated mission planning elements in 2 years will be difficult. In an autonomous guidance system using an imaging infrared sensor, the system tries to match the sensor-detected image to a computer image of the target obtained earlier. Because the system relies on light intensity variation, the time of day, time of year, and atmospheric conditions are important and sometimes difficult to manage. Extensive laboratory testing by the Air Force has shown that such systems are error prone and unreliable. Also, the key problems of mission planning have not yet been satisfactorily resolved. JASSM is to ultimately be carried by a variety of Air Force and Navy aircraft, including F-16, F-15, and F/A-18 fighters and B-52H, B-1B, and B-2 bombers. Because these aircraft have different structural and electrical systems, JASSM must be designed to be compatible with all of them. For example, the missile can weigh no more than 2,250 pounds based on a F-16 and F/A-18 carriage limitation. The missile can be no longer than 168 inches for it to fit on the B-1B's internal launcher. It must also be compatible with different electrical circuits and software systems applicable to the various aircraft launch platforms. Integrating a missile with multiple aircraft is a complex task and has taken other programs years of wind tunnel testing, fit checks, electrical and software analyses, and extensive flight testing. Numerous changes, for example, were made to TSSAM to accommodate the idiosyncracies of the same aircraft that are planned to carry JASSM. Attempts to integrate TSSAM with these same aircraft occurred over 8 years, yet not one aircraft was certified to carry the missile during that period. Availability of suitable test aircraft and stable electrical and software configurations were among the problems slowing the integration of TSSAM. The JASSM program office identified these same problems as potential risk areas. To speed JASSM's development, the Air Force has decided to initially integrate the missile only with F-16 and B-52H aircraft. Later, as funds are available, separate programs are to complete integration with the remaining aircraft. While the program manager expects this plan to reduce the complexity of the integration task during JASSM development, we believe it adds technical risk and undisclosed future costs. Technical risk remains because compatibility evaluations are not sufficient to identify all potential integration issues. Also, the costs of integrating JASSM on several other aircraft (i.e., F-15, F/A-18, B-1B, and B-2) are not included in the $675-million development cost estimate. Moreover, as currently planned, postponing these difficult tasks until after the government and contractor development team is dispersed risks losing essential experience and expertise. The Air Force plans to buy 72 JASSMs during development and 75 during low-rate initial production. Of the 72 developmental missiles, 37 are to support the development test program, including initial operational test and evaluation, and 35 are to be pilot production missiles to demonstrate that the contractor can repeatedly produce quality missiles for no more than an average unit price of $700,000 (fiscal year 1995 dollars). If the Air Force revised its JASSM acquisition schedule and used the low-rate initial production missiles for proving the production process and for initial operational test and evaluation, it could reduce the number of developmental missiles and save about $25 million. The Air Force plans to begin manufacturing the 35 pilot production missiles in November 1998, or soon after the start of the 32-month development and testing phase. Conducting pilot production early in the development phase, however, increases schedule risk and may result in manufacturing missiles requiring design and production process changes after production begins. A similar pilot production program was used for the Advanced Cruise Missile program, and none of those missiles were similar enough to the final configuration that they could be updated and deployed at a reasonable cost. In the case of the Advanced Cruise Missile program, as the flight test program identified design and manufacturing deficiencies, many changes were made to the missile's guidance set, sensor, actuators, and other subsystems; the program's schedule slipped; and projected costs increased. According to DOD Regulation 5000.2, low-rate initial production is the minimum quantity necessary to (1) provide production-configured or representative articles for operational tests, (2) establish an initial production base for the system, and (3) permit an orderly increase in the production rate for the system sufficient to lead to full-rate production upon successful completion of operational testing. The regulation, therefore, contemplates that low-rate initial production missiles can be used for proving the production process and for initial operational test and evaluation. As now planned, however, 9 of the 37 developmental missiles will be used for initial operational test and evaluation and the 75 low-rate initial production missiles will be delivered only after this testing is completed. The 35 pilot production missiles, after proving the production line, will be used for additional testing, if needed, and to establish an early operational capability. If the JASSM acquisition plan is revised to eliminate the 35 pilot production missiles, the Air Force could reduce some of the overlap between development and production, as well as the associated cost and schedule risk. Also, using low-rate initial production missiles would reduce the number of development test missiles required. Each of the early missiles is expected to cost approximately $700,000; eliminating the 35 pilot production missiles would reduce development cost by about $25 million. To ensure that JASSM is affordable, the Air Force established an average unit procurement price goal ranging from $400,000 to $700,000 (fiscal year 1995 dollars). The $400,000 price is the program objective, while the $700,000 price is the threshold beyond which the Air Force would reevaluate continuing the program. We support the Air Force's objective to acquire an affordable and capable replacement for TSSAM. However, we are concerned that the JASSM price is optimistic and could lead to acquisition problems as the program proceeds. As a critical parameter for the JASSM program, the average unit procurement price is firm and not expected to increase. In fact, the program manager has challenged interested contractors to achieve the $400,000 objective price, if possible. The Air Force believes the price objective is achievable if (1) JASSM is derived from an existing missile in a competitive environment and (2) the Air Force and contractor are able to realize savings by implementing acquisition reforms and using best commercial practices. The program office prepared a cost estimate that supports the $700,000 threshold price, and the Office of the Secretary of Defense is reviewing the estimate. Attaining a price within the $400,000 to $700,000 range will be the focus of the 24-month competition when the contractors are to trade off performance and other requirements to obtain the most cost-effective system possible. A similar process was used in the JDAM program, a guidance and steerable tail kit for general purpose bombs. The JDAM program office expects to reduce the average unit procurement price by at least 50 percent. Price goals were also proposed for other missile programs. For many of them, however, the average production unit price grew as the program matured. For example, the production unit price for TSSAM increased from an estimated $728,000 to about $2.1 million (then-year dollars). Although TSSAM's production price grew more than other programs, many of those we examined experienced cost growth. Our comparison of the estimated unit prices for several missiles in DOD's inventory and development disclosed that JASSM is expected to cost less yet provide significantly greater capability. Several precision-guided munitions in inventory and development cost more than the $700,000 average procurement price established for the JASSM program. Yet, none of these missiles have the automatic target recognition capability required for JASSM, which is expected to contribute significantly to the system's cost. Missile systems that most closely approximate the capability expected of JASSM, such as the Navy's Tomahawk and the Standoff Land Attack Missile-Expanded Response (SLAM-ER) missiles, cost significantly more. Others, such as the Air Force's AGM-130 and AGM-142, do not have the range, accuracy, or carrier flexibility required for JASSM, yet they cost about the same as the JASSM threshold price or more. Also, none of these missiles has the lifetime, full service warranty planned for JASSM. Containing cost growth on other missile programs has led to some of the following acquisition problems: reduced performance and system capability, postponement of key capabilities until a later production block or reduced procurement quantities and higher unit price, and initiation of other programs to meet unfilled requirements. In time, cumulative efforts to reduce costs led to contractor, user, and congressional dissatisfaction. Some programs were cut back significantly, while others were terminated. The TSSAM program, for example, was terminated after nearly 8 years and $4.4 billion were invested, because of significant development difficulties and growth in its expected unit cost. Based on this extensive history of overrunning initial cost estimates, it is incumbent for DOD to watch this program closely. Although JASSM is a joint Air Force and Navy program, the Navy has not provided development funding and, until March 1996, did not require carrier operability. Also, integration with the F/A-18 is not planned during the development program. Further, none of the 2,400 missiles planned for procurement are intended for Navy use. This brings the Navy commitment into question. For JASSM to be carried on, stored within, and launched from an aircraft carrier or other ship, it must meet Navy environmental and supportability requirements. These requirements are significantly more demanding than those for a land-based missile system. They must be designed into the missile system. Adding them later, according to the program office, would require a basic redesign of the system and a production block change. Until recently, these characteristics were optional, but, after a March 1996 meeting between DOD, service, and contractor personnel, carrier operability became a firm requirement and is to be designed into JASSM. Integrating JASSM with the F/A-18 is not scheduled during the development program. This integration issue was debated by the Air Force and Navy during the formation of the JASSM acquisition plan. The issues appear to be funding, availability of test aircraft, and increased complexity of the development program. In March 1996, the Chief of Naval Operations committed to providing funds for F/A-18 integration, but this is not expected to occur during JASSM development. To meet the Air Force's urgent need for JASSM, the program's development and initial production is scheduled to achieve an initial deployment of the weapon system in late 2001, or about 5 years after the start of the program. While no other missile in DOD's inventory provides all the capabilities planned for JASSM, several in inventory or development offer significant capability, particularly for the Navy. Accordingly, the services may have more time, if necessary, to develop and test JASSM without excessive schedule risk. The JASSM Mission Need Statement identifies an urgent need for a new missile, because current air-launched standoff weapons are very limited in number and do not provide the required capability. The Operational Requirements Document states that JASSM should provide the following required capabilities: autonomous guidance, precision accuracy, automatic target recognition, ability to destroy fixed hard and soft targets, carriage by the primary fighter and bomber aircraft, and survivability. According to Air Force officials at the Air Combat Command, JASSM is urgently needed because (1) the Command expected to have TSSAM in the year 2000; (2) until JASSM is deployed, Air Force bombers and fighters will have only a limited number of long-range missiles; and (3) available weapons are unable to destroy enemy command and control operations and integrated air defenses with acceptable attrition rates. Until this need is met, Command officials believe less cost-effective and less-capable alternatives will have to be used, resulting in potentially higher attrition rates for both the weapons and launch platforms. Although no existing weapon has all the characteristics planned for JASSM, several precision-guided munitions in the inventory or development have some of them. For example, the SLAM-ER will provide much of the range planned for JASSM. SLAM-ER does not have an automatic target recognition capability, but can achieve precision accuracy with pilot assistance. The Tomahawk missile, widely used during Desert Storm, can be launched hundreds of miles from a target to attack a specific building. The Navy has several thousand Tomahawk missiles in its inventory, and an improved version is being developed. Table 1 shows the characteristics and quantities of precision-guided munitions in inventory and development. In addition to developing JASSM, the Air Force and Navy are buying and/or modifying additional precision-guided munitions. For example, the Navy plans to modify 700 SLAMs to the SLAM-ER version, which is planned to have greater standoff range, lethality, and accuracy than SLAM. About 1,000 Harpoon missiles could also be upgraded to SLAM-ER missiles if they are needed. The Air Force has increased its procurement of AGM-142 and AGM-130 missiles and is modifying 200 nuclear Air-Launched Cruise Missiles to the conventional configuration. Although none of these weapons have all the characteristics planned for JASSM, the precision-guided munitions in the inventory and those planned to be added to the inventory in the next few years provide a strong capability for U.S. forces. Since several of these weapons were not available previously, this capability will be more effective than that used during the successful air campaign of Desert Storm. The difficulties of developing critical technologies and the potential of cost growth, as well as our view that this missile is not urgently needed, are real concerns. To minimize them, we believe that the progress of this program should be managed by accomplishment of significant events and not just to meet a tight time schedule. Therefore, we recommend that the Secretary of Defense ensure that (1) required autonomous guidance and automatic target recognition technologies are mature before finalizing the JASSM design, (2) the Air Force does not acquire the 35 pilot production missiles early in development without a demonstrated need for additional test missiles, (3) missiles used during planned initial operational test and evaluation are production-representative missiles, and (4) the Navy participates fully in the program so the final JASSM design meets both Air Force and Navy requirements. In commenting on a draft of this report, DOD agreed with three of the four recommendations. It agreed to ensure that essential technology is mature before finalizing the JASSM design, production-representative missiles are used for initial operational test and evaluation, and the Navy participates fully in the program so that the JASSM design meets the needs of both services. DOD did not agree with our recommendation that the Air Force not acquire the 35 pilot production missiles early in the development phase without a demonstrated need for more test missiles. DOD stated that the Air Force's plans to use these missiles for maturing the production process, for certain tests, for flight test spares, and for an early deployment option were justified. Although we agree the pilot production missiles can serve all of these purposes, without a sense of urgency for fielding this weapon, we are not convinced that spending about $25 million for these missiles so early in the program is necessary. Early pilot production increases the risk of manufacturing missiles that require significant changes to make them deployable. We further believe DOD would be better served if low-rate initial production missiles were used instead. Low-rate initial production missiles can serve all of the purposes identified by the Air Force for the 35 pilot production missiles, and they can be deployed. The DOD response is included in appendix I. Because the Air Force's plan to manufacture 35 pilot production missiles early in development increases schedule risk and results in buying developmental missiles that are not needed to support the planned test program, the Congress may wish to consider not providing the estimated $25 million for the 35 pilot production missiles. We reviewed Air Force and Navy requirements documents that are the basis for the JASSM program. We then reviewed the JASSM acquisition plans to determine if the program will fulfill the requirement. We reviewed historical cost data on existing missile systems to determine how planned acquisition costs compared to actual production costs. We identified Air Force and Navy precision-guided munitions that are in production or about to go into production to determine what interim capability will be available until JASSM becomes operational. We discussed precision-guided munition technology with research engineers to find out what capabilities are available now and what is still in development. We interviewed Air Force and Navy personnel concerning requirements and acquisition. We visited or spoke with personnel at the following locations: JASSM Program Office, Eglin Air Force Base, Florida; Air Force Air Combat Command, Langley Air Force Base, Virginia; Naval Air Systems Command, Arlington, Virginia; Air Force Headquarters, Washington, D.C.; Wright Laboratories, Wright-Patterson Air Force Base, Ohio; and Wright Laboratories, Eglin Air Force Base, Florida. We conducted our review between January 1995 and March 1996 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretaries of Defense, the Air Force, and the Navy; the Director, Office of Management and Budget; and other interested parties. We will also make copies available to others upon request. Please contact Thomas J. Schulz, Associate Director, Defense Acquisitions Issues at (202) 512-4841 if you or your staff have any questions concerning this report. Major contributors to this report were Raymond Dunham, Matthew R. Mongin, and Gerald W. Wood. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. 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GAO evaluated the Air Force's and Navy's Joint Air-to-Surface Standoff Missile (JASSM) program, focusing on: (1) the acquisition process; (2) schedule and cost risks; (3) the Air Force's plan to acquire 35 pilot production missiles; and (4) the Navy's commitment to the program. GAO found that: (1) the Air Force is using an innovative acquisition process to procure JASSM; (2) the Air Force expects JASSM contractors to modify existing missile designs, use off-the-shelf technology, and apply best commercial practices to their design and production work; (3) some crucial JASSM technologies may not be mature in time for them to be integrated into JASSM; (4) JASSM may be vulnerable to jamming, and the Air Force is trying to identify a cost-effective countermeasure; (5) a JASSM automatic target recognition capability is still under development; (6) the Air Force will phase in integration of JASSM with combat aircraft, undertaking separate programs to integrate the missile with each type of aircraft as funds become available; (7) the Air Force plans to acquire 35 pilot production missiles, but those missiles may not be needed for testing, and may not represent the actual production configuration; (8) the Air Force's unit price goal for JASSM is optimistic when compared to similar missile procurement programs; (9) the Navy has not provided JASSM development funding, but carrier operability is a firm JASSM requirement, and the Navy expects to commit funds for JASSM integration with the F/A-18 aircraft after JASSM development; and (10) the need for JASSM may not be as urgent as the Air Force believes.
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Since the 1960s, the United States has used polar-orbiting and geostationary satellites to observe the earth and its land, ocean, atmosphere, and space environments. Polar-orbiting satellites constantly circle the earth in a nearly north-south orbit, providing global coverage of conditions that affect the weather and climate. As the earth rotates beneath it, each polar-orbiting satellite views the entire earth's surface twice a day. In contrast, geostationary satellites maintain a fixed position relative to the earth from a high orbit of about 22,300 miles in space. Both types of satellites provide a valuable perspective of the environment and allow observations in areas that may be otherwise unreachable. Used in combination with ground, sea, and airborne observing systems, satellites have become an indispensable part of monitoring and forecasting weather and climate. For example, polar-orbiting satellites provide the data that go into numerical weather prediction models, which are a primary tool for forecasting weather days in advance--including forecasting the path and intensity of hurricanes. Geostationary satellites provide the graphical images used to identify current weather patterns and provide short-term warning. These weather products and models are used to predict the potential impact of severe weather so that communities and emergency managers can help prevent and mitigate its effects. Federal agencies are currently planning and executing major satellite acquisition programs to replace existing polar and geostationary satellite systems that are nearing the end of their expected life spans. However, these programs have troubled legacies of cost increases, missed milestones, technical problems, and management challenges that have resulted in reduced functionality and major delays to planned launch dates over time. We and others--including an independent review team reporting to the Department of Commerce and its Inspector General-- have raised concerns that problems and delays on environmental satellite acquisition programs will result in gaps in the continuity of critical satellite data used in weather forecasts and warnings. According to officials at NOAA, a polar satellite data gap would result in less accurate and timely weather forecasts and warnings of extreme events, such as hurricanes, storm surge and floods. Such degradation in forecasts and warnings would place lives, property, and our nation's critical infrastructures in danger. The importance of having such data available was highlighted in 2012 by the advance warnings of the path, timing, and intensity of Superstorm Sandy. Given the criticality of satellite data to weather forecasts, concerns that problems and delays on the new satellite acquisition programs will result in gaps in the continuity of critical satellite data, and the impact of such gaps on the health and safety of the U.S. population, we concluded that the potential gap in weather satellite data is a high-risk area and we added it to our High-Risk List in February 2013. For over forty years, the United States has operated two separate operational polar-orbiting meteorological satellite systems: the Polar- orbiting Operational Environmental Satellite series, which is managed by NOAA, and the Defense Meteorological Satellite Program, which is managed by the Air Force. Currently, there is one operational Polar- orbiting Operational Environmental Satellite and two operational Defense Meteorological Satellite Program satellites that are positioned so that they cross the equator in the early morning, midmorning, and early afternoon. In addition, the government relies on data from a European satellite, called the Meteorological Operational satellite. With the expectation that combining the Polar-orbiting Operational Environmental Satellite program and the Defense Meteorological Satellite Program would reduce duplication and result in sizable cost savings, a May 1994 Presidential Decision Directive required NOAA and the Department of Defense (DOD) to converge the two satellite programs into a single satellite program--the National Polar-orbiting Operational Environment Satellite System (NPOESS)--capable of satisfying both civilian and military requirements. To manage this program, DOD, NOAA, and the National Aeronautics and Space Administration (NASA) formed a tri-agency integrated program office. However, in the years after the program was initiated, NPOESS encountered significant technical challenges in sensor development, program cost growth, and schedule delays. Specifically, within 8 years of the contract's award, program costs grew by over $8 billion, and launch schedules were delayed by over 5 years. In addition, as a result of a 2006 restructuring of the program, the agencies reduced the program's functionality by decreasing the number of originally planned satellites, orbits, and instruments. Even after this restructuring, however, the program continued to encounter technical issues, management challenges, schedule delays, and further cost increases. Therefore, in August 2009, the Executive Office of the President formed a task force, led by the Office of Science and Technology Policy, to investigate the management and acquisition options that would improve the program. As a result of this review, the Director of Office of Science and Technology Policy announced in February 2010 that NOAA and DOD would no longer jointly procure NPOESS; instead, each agency would plan and acquire its own satellite system. Specifically, NOAA would be responsible for the afternoon orbit, and DOD would be responsible for the early morning orbit. The partnership with the European satellite agencies for the midmorning orbit would continue as planned. After the decision to disband NPOESS, DOD established its Defense Weather Satellite System program office and modified its contracts accordingly before deciding in early 2012 to terminate the program and reassess its requirements (as directed by Congress). program will be $11.3 billion through fiscal year 2025. The current anticipated launch date for the first JPSS satellite is March 2017, with a second satellite to be launched in December 2022. Over the last several years, we have issued a series of reports on the NPOESS program--and the transition to JPSS--that highlight the technical issues, cost growth, key management challenges, and key risks of transitioning from NPOESS to JPSS. In these reports, we made multiple recommendations to, among other things, improve executive- level oversight and establish mitigation plans for risks associated with pending polar satellite data gaps. NOAA has taken steps to address our recommendations, including taking action to improve executive-level oversight and in working to establish a contingency plan to mitigate potential gaps in polar satellite data. We subsequently assessed NOAA's progress in implementing both of these recommendations in our reports being issued today. In addition to the polar-orbiting satellites, NOAA operates GOES as a two-satellite geostationary satellite system that is primarily focused on the United States. The GOES-R series is the next generation of satellites that NOAA is planning; the satellites are planned to replace existing weather satellites that will likely reach the end of their useful lives in about 2015. NOAA is responsible for GOES-R program funding and overall mission success. The NOAA Program Management Council, which is chaired by NOAA's Deputy Undersecretary, is the program oversight body for the GOES-R program. However, since it relies on NASA's acquisition experience and technical expertise to help ensure the success of its programs, NOAA implemented an integrated program management structure with NASA for the GOES-R program. Within the program office, there are two project offices that manage key components of the GOES-R system. NOAA has delegated responsibility to NASA to manage the Flight Project Office, including awarding and managing the spacecraft contract and delivering flight-ready instruments to the spacecraft. The Ground Project Office, managed by NOAA, oversees the Core Ground System contract and satellite data product development and distribution. NOAA has made a number of changes to the program since 2006, including the removal of certain satellite data products and a critical instrument (the Hyperspectral Environmental Suite). In February 2011, as part of its fiscal year 2012 budget request, NOAA requested funding to begin development for two additional satellites in the GOES-R series. The program estimates that the development for all four satellites in the GOES-R series is to cost $10.9 billion through 2036. In August 2013, NOAA announced that it would delay the launch of the GOES-R and S satellites from October 2015 and February 2017 to the second quarter of fiscal year 2016 and the third quarter of fiscal year 2017, respectively. These are the current anticipated launch dates of the first two GOES-R satellites; the last satellite in the series is planned for launch in 2024. In September 2010, we recommended that NOAA develop and document continuity plans for the operation of geostationary satellites that include the implementation procedures, resources, staff roles, and time tables needed to transition to a single satellite, a foreign satellite, or other solution. In September 2011, the GOES-R program provided a draft plan documenting a strategy for conducting operations if there were only a single operational satellite. In June 2012, we reported that, in order to oversee GOES-R contingency funding, senior managers at NOAA should have greater insight into the amount of contingency reserves set aside for each satellite in the program and detailed information on how reserves are being used on both the flight and ground components. We recommended that the program assess and report to the NOAA Program Management Council the reserves needed for completing remaining development for each satellite in the series. We also found that unresolved schedule deficiencies remain in portions of the program's integrated master schedule, including subordinate schedules for the spacecraft and core We recommended that the program address shortfalls ground system.in schedule management practices, and NOAA has since taken steps to improve these practices. We subsequently assessed NOAA's progress in implementing both of these recommendations in our reports being issued today. NOAA has made progress towards JPSS program objectives of sustaining the continuity of NOAA's polar-orbiting satellite capabilities through the S-NPP, JPSS-1, and JPSS-2 satellites by (1) delivering S-NPP data to weather forecasters and (2) completing significant instrument and spacecraft development for the JPSS-1 satellite. However, the program has experienced delays on the ground system schedules for the JPSS-1 satellite. Moreover, the program is revising its scope and objectives to reduce costs and prioritize NOAA's weather mission. The JPSS program has made progress on S-NPP since its launch. For example, in November 2012 the office completed an interim backup command and control facility that could protect the health and safety of the satellite if unexpected issues occurred at the primary mission operations facility. Also, since completing satellite activation and commissioning activities in March 2012, the JPSS program has been working to calibrate and validate S-NPP products in order to make them precise enough for use in weather-related operations by October 2013. While the program office plans to have 18 products validated for operational use by the end of September 2013, it is behind schedule for other products. Specifically, the program expects to complete validating 35 S-NPP products by the end of September 2014 and one other product by the end of September 2015, almost one and two years later than originally planned. In order to sustain polar-orbiting earth observation capabilities beyond S-NPP, the program is working to complete development of the JPSS-1 systems in preparation for a March 2017 launch date. To manage this initiative, the program office organized its responsibilities into two separate projects: (1) the flight project, which includes sensors, spacecraft, and launch vehicles and (2) the ground project, which includes ground-based data processing and command and control systems. JPSS projects and components are at various stages of system development. The flight project has nearly completed instrument hardware development for the JPSS-1 satellite and has begun testing certain instruments. Key testing milestones and delivery dates for the instruments and spacecraft have generally held constant since the last key decision point in July 2012, and both the instruments and the spacecraft are generally meeting expected technical performance. All instruments are scheduled to be delivered to the spacecraft by 2014. Also, the flight project completed a major design review for the JPSS-1 satellite's spacecraft. The JPSS ground project has also made progress in developing the ground system components. However, the ground project experienced delays in its planned schedule due to issues with the availability of facilities required for hardware installation, software development, and testing. Consequently, the program has replanned the ground project schedule and is merging the next two major software releases. As a result, any complications in the merged ground system upgrades could affect the system's readiness to support the JPSS-1 launch date. While NOAA is moving forward to complete product development on the S-NPP satellite and system development on the JPSS-1 satellite, the agency recently made major revisions to the program's scope and planned capabilities and is moving to implement other scope changes as it finalizes its plans pending coordination with congressional committees. We previously reported that, as part of its fiscal year 2013 budget process, NOAA was considering removing selected elements of the program in order to reduce total program costs from $14.6 billion to $12.9 billion. By October 2012, NOAA had reduced the program's scope by, among other things, reducing the previously planned network of fifteen ground-based receptor stations to two receptor sites at the north pole and two sites at the south pole and increasing the time it takes to obtain satellite data and deliver it to the end user on JPSS-2 from 30 minutes to 80 minutes. More recently, as proposed by the administration, NOAA began implementing additional changes in the program's scope and objectives in order to meet the agency's highest-priority needs for weather forecasting and reduce program costs from $12.9 billion to $11.3 billion. In this latest round of revisions, NOAA revised the program's scope by, among other things, transferring requirements for certain climate sensors to NASA, creating a new Polar Free Flyer program within NOAA that would be responsible for missions supporting continued solar measurements and user service systems, and reducing the JPSS program's mission life cycle by 3 years--from 2028 to 2025. The changes NOAA implemented over the last 2 years will have an impact on those who rely on polar satellite data. Specifically, satellite data products will be delivered more slowly than anticipated because of the reduction in the number of ground stations, and military users may not obtain the variety of products once anticipated at the rates anticipated because of the removal of their ground-based processing subsystems. As NOAA moves to implement these program changes, it will be important to assess and understand the impact the changes will have on satellite data users. According to our draft guidance on best practices in scheduling,success of a program depends, in part, on having an integrated and reliable master schedule that defines when and how long work will occur and how each activity is related to the others. The JPSS program office provided a preliminary integrated master schedule in June 2013, but this schedule is incomplete. The schedule contains the scope of work for key program components, such as the JPSS-1 and JPSS-2 satellites and the ground system, and cites linkages to more detailed component schedules. However, significant weaknesses exist in the program's schedule. Specifically, about one-third of the schedule is missing logical relationships called dependencies that are needed to depict the sequence the in which activities occur. Complete network logic between all activities is essential if the schedule is to correctly forecast the start and end dates of activities within the plan. Program documentation acknowledges that this schedule is not yet complete and the program office plans to refine it over time. Until the program office completes its integrated schedule and includes logically linked sequences of activities, it will lack the information it needs to effectively monitor development progress, manage dependencies, and forecast the JPSS-1 satellite's completion and launch. While the program plans to refine its integrated master schedule, three component schedules supporting the JPSS-1 mission--VIIRS, the spacecraft, and the ground system--varied in their implementation of characteristics of high-quality, reliable schedules. Each schedule had strengths and weaknesses with respect to sound scheduling practices, but VIIRS was a stronger schedule with fewer weaknesses compared to the ground system and spacecraft schedules. The following table identifies the quality of each of the selected JPSS-1 component schedules based on the extent to which they met ten best practices of high-quality and reliable schedules. The inconsistency in quality among the three schedules has multiple causes, including the lack of documented explanations for certain practices and schedule management and reporting requirements that varied across contractors. Since the reliability of an integrated schedule depends in part on the reliability of its subordinate schedules, schedule quality weaknesses in these schedules will transfer to an integrated master schedule derived from them. Consequently, the extent to which there are quality weaknesses in JPSS-1 support schedules further constrains the program's ability to monitor progress, manage key dependencies, and forecast completion dates. Until the program office addresses the scheduling shortfalls in its component schedules, it will lack the information it needs to effectively monitor development progress, manage dependencies, and forecast the JPSS-1 satellite's completion and launch. The JPSS program office used data from flight project component schedules as inputs when it recently conducted a schedule risk analysis on the JPSS-1 mission schedule (and launch date) through NASA's joint cost and schedule confidence level (JCL) process. The JCL implemented by the JPSS program office represents a best practice in schedule management for establishing a credible schedule and reflects a robust schedule risk analysis conducted on key JPSS-1 schedule components. Based on the results of the JCL, the program office reports that its level of confidence in the JPSS-1 schedule is 70 percent and that it has sufficient schedule reserve to maintain a launch date of no later than March 2017. However, the program office's level of confidence in the JPSS-1 schedule may be overly optimistic for two key reasons. First, the model that the program office used was based on flight project activities rather than an integrated schedule consisting of flight, ground, program office, and other activities relevant to the development and launch of JPSS-1. As a result, the JPSS program office's confidence level projections do not factor in the ongoing scheduling issues that are impacting the ground project. Second, there are concerns regarding the spacecraft schedule's quality as identified above. Factoring in these concerns, the confidence of the JPSS-1 satellite's schedule and projected launch date would be lower. Until the program office conducts a schedule risk analysis on an integrated schedule that includes the entire scope of effort and addresses quality shortfalls of relevant component schedules, it will have less assurance of meeting the planned March 2017 launch date for JPSS-1. In recent years, NOAA officials have communicated publicly and often about the risk of a polar satellite data gap. Currently, the program estimates that there will be a gap of about a year and a half from the time when the current Suomi NPP satellite reaches the end of its expected lifespan and when the JPSS-1 satellite will be in orbit and operational. Satellite data gaps in the morning or afternoon polar orbits would lead to less accurate and timely weather forecasting; as a result, advanced warning of extreme events--such as hurricanes, storm surges, and floods--would be affected. See figure 1 for a depiction of a potential gap in the afternoon orbit lasting 17 months. Government and industry best practices call for the development of contingency plans to maintain an organization's essential functions in the case of an adverse event and to reduce or control negative impacts from such risks. In October 2012, in response to our earlier recommendations to establish mitigation plans,mitigation plan to address the impact of potential gaps in polar afternoon NOAA established a satellite data. This plan identifies alternatives for mitigating the risk of a 14- to 18-month gap in the afternoon orbit beginning in March 2016, between the current polar satellite and the JPSS-1 satellite. However, NOAA did not implement the actions identified in its mitigation plan and decided to identify additional alternatives. In October 2012, at the direction of the Under Secretary of Commerce for Oceans and Atmosphere (who is also the Administrator of NOAA), NOAA contracted for a detailed technical assessment of alternatives to mitigate the degradation of products caused by a gap in satellite data in the afternoon polar orbit. This assessment solicited input from experts within and outside of NOAA and resulted in a range of alternatives that included relying on existing polar satellites, making improvements to the forecast models, and relying on the use of a foreign satellite. By documenting its mitigation plan and conducting a study on additional alternatives, NOAA has taken positive steps towards establishing a contingency plan for handling the potential impact of satellite data gaps in the afternoon polar orbit. However, NOAA does not yet have a comprehensive contingency plan because it has not yet selected the strategies to be implemented or established procedures and actions to implement the selected strategies. In addition, there are shortfalls in the agency's current plans as compared to government and industry best practices, such as not always identifying specific actions with defined roles and responsibilities, timelines, and triggers. Moreover, multiple steps remain in testing, validating, and implementing the contingency plan. NOAA officials stated that the agency is continuing to work on refinements to its gap mitigation plan, and that they anticipate issuing an updated plan in fall 2013 that will reflect the additional alternatives. While NOAA expects to update its plan, the agency does not yet have a schedule for adding key elements--such as specific actions, roles and responsibilities, timelines, and triggers--for each alternative. Until NOAA establishes a comprehensive contingency plan that integrates its strategies and addresses the elements identified above to improve its plans, it may not be sufficiently prepared to mitigate potential gaps in polar satellite coverage. The GOES-R program has completed its design and made progress in building flight and ground components. Specifically, the program completed critical design reviews for the flight and ground projects and for the overall program between April and November 2012. The GOES-R flight components are in various stages leading up to the system integration review, with five of six completing a key environmental testing review. In addition, the program began building the spacecraft in February 2013. On the GOES-R core ground system, a prototype for the operations module was delivered in late 2012 and is now being used for initial testing and training. The program has also installed antenna dishes at NOAA's primary satellite communications site, and completed two key reviews of antennas at the GOES remote backup site. After the completion of design, and as the spacecraft and instruments are developed, NASA plans to conduct several interim reviews and tests before proceeding to the next major program-level review, the system integration review. However, the program has delayed several key milestones. Over the past 12 to 18 months, both the flight and ground segments experienced delays in planned dates for programwide milestones. More recently, in August 2013, the program announced that it would delay the launch of the first two satellites in the program. Specifically, the launch of the GOES-R satellite would be delayed from October 2015 to the quarter ending March 2016, and that the expected GOES-S satellite launch date would be delayed from February 2017 to the quarter ending June 2017. The GOES-R program is also experiencing technical issues on the flight and ground projects that could cause further schedule delays. For example, the electronics unit of the Geostationary Lightning Mapper flight instrument experienced problems during testing, which led the program office to delay the tests. The program is considering several options to address this issue, including using the electronics unit being developed for a later GOES-R satellite to allow key components to proceed with testing. If the issue cannot be resolved, it would affect the instrument's performance. As a result, the program is also considering excluding the Geostationary Lightning Mapper from the first GOES-R satellite. It plans to make its decision on whether or not to include the instrument in late 2013. The removal of this instrument would cause a significant reduction in the satellite's functionality. The program has reported that it is on track to stay within its $10.9 billion life cycle cost estimate. However, program officials reported that, while the program is currently operating without cost overruns on any of its main components, program life cycle costs may increase by $150 to $300 million if full funding in the current fiscal year is not received. While some improvements have been made, the GOES-R program continues to demonstrate weaknesses in the development of component schedules, which have the potential to cause further delays in meeting milestone timelines. In the time since our previous work on examining program schedules in June 2012, it has since improved selected practices on its spacecraft and core ground schedules. For example, NOAA has since included all subcontractor activities in the core ground schedule, and allocated a higher percentage of activities to resources in its schedules. As a result of these improvements, the program has increased the reliability of its schedules, and also decreased the risk of further delaying satellite launch dates due to incorrect schedule data. However, the program's performance on other scheduling best practices stayed the same or worsened. For example, both the spacecraft and core ground schedules have issues with sequencing remaining activities and integration between activities. Without the right linkages, activities that slip early in the schedule do not transmit delays to activities that should depend on them. Both schedules also have a very high average of total float time for detailed activities. Such high values of total float time can falsely depict true project status, making it difficult to determine which activities drive key milestone dates. Finally, the project's critical path does not match up with activities that make up the driving path on the core ground schedule. Without a valid critical path to the end of the schedule, management cannot focus on activities that will have a detrimental effect on the key project milestones and deliveries if they slip. Taken together, delays in key milestones, technical issues, and weaknesses in schedule practices could lead to further delays in the launch date of the first GOES-R satellite, currently planned to occur by March 2016. Launch delays such as the one recently experienced by the GOES-R program also increase the time that NOAA is without an on-orbit backup satellite. This is significant because, in April 2015, NOAA expects to retire one of its operational satellites and move its back-up satellite into operations. The recent delay in expected launch of the first GOES-R satellite from October 2015 to as late as March 2016 increases the projected gap in backup coverage to just short of two years. Also, the first satellite is now expected to complete its post-launch testing by September 2016, only five months before NOAA expects to retire the GOES-15 satellite. If launch of the first satellite were to have a further slip of more than five months, a gap in satellite coverage could occur. Figure 2 shows current anticipated operational and test periods for the two most recent series of GOES satellites. Because of the expected imminent use of the current on-orbit back-up satellite, a launch delay to GOES-R would also increase the potential for a gap in GOES satellite coverage should one of the two operational satellites (GOES-14 or -15) fail prematurely (see graphic)--a scenario given a 36 percent likelihood of occurring by an independent review team. Without a full complement of operational GOES satellites, the nation's ability to maintain the continuity of data required for effective weather forecasting could be compromised. This, in turn, could put the public, property, and the economy at risk. The impact of a gap in satellite coverage may also increase based on issues with NOAA's current contingency plans. Government and industry best practices call for the development of contingency plans to maintain an organization's essential functions in the case of an adverse event. These practices include key elements such as identifying and selecting strategies to address failure scenarios, developing procedures to implement selected strategies, and involving affected stakeholders. NOAA has established contingency plans for the loss of its GOES satellites and ground systems that are generally in accordance with best practices. Specifically, NOAA identified failure scenarios, recovery priorities, and minimum levels of acceptable performance. NOAA provided a final version of its satellite plan in December 2012 that included scenarios for three, two, and one operational satellites. It also established contingency plans that identify solutions and high-level activities and triggers to implement the solutions. However, these plans are missing key elements. For example, NOAA has not demonstrated that the contingency strategies for both its satellite and ground systems are based on an assessment of costs, benefits, and impact on users. Furthermore, NOAA did not work with the user community to address potential reductions in capabilities under contingency scenarios or identify alternative solutions for preventing a delay in the GOES-R launch date. In addition, while NOAA's failure scenarios for its satellite system are based on the number of available satellites--and the loss of a backup satellite caused by a delayed GOES- R launch would fit into these scenarios--the agency did not identify alternative solutions or time lines for preventing a GOES-R launch delay. Until NOAA addresses the shortfalls in its contingency plans and procedures, the plans may not work as intended in an emergency and satellite data users may not obtain the information they need to perform their missions. Both the JPSS and GOES-R programs continue to carry risks of future launch delays and potential gaps in satellite coverage; implementing the recommendations in our accompanying reports should help mitigate those risks. In the JPSS report being released today, we recommend, among other things, that NOAA establish a complete JPSS program integrated master schedule that includes a logically linked sequence of activities; address the shortfalls in the ground system and spacecraft component schedules outlined in our report; after completing the integrated master schedule and addressing shortfalls in component schedules, update the joint cost and schedule confidence level for JPSS-1, if warranted and justified; and establish a comprehensive contingency plan for potential satellite data gaps in the polar orbit that is consistent with contingency planning best practices identified in our report. The plan should include, for example, specific contingency actions with defined roles and responsibilities, timelines, and triggers; analysis of the impact of lost data from the morning orbits; and identification of opportunities to accelerate the calibration and validation phase of JPSS-1. In the GOES-R report being released today, we recommend, among other things, that NOAA given the likely gap in availability of an on-orbit GOES backup satellite in 2015 and 2016, address the weaknesses identified in our report on the core ground system and the spacecraft schedules. These weaknesses include, but are not limited to, sequencing all activities, ensuring there are adequate resources for the activities, and conducting a schedule risk analysis and revise the satellite and ground system contingency plans to address weaknesses identified in our report, including providing more information on the potential impact of a satellite failure, identifying alternative solutions for preventing a delay in GOES-R launch as well as time lines for implementing those solutions, and coordinating with key external stakeholders on contingency strategies. On both reports, NOAA agreed with our recommendations and identified steps it is taking to implement them. In summary, NOAA has made progress on both the JPSS and GOES-R programs, but key challenges remain to ensure that potential gaps in satellite data are minimized or mitigated. On the JPSS program, NOAA has made noteworthy progress in using S-NPP data in weather forecasts and developing the JPSS-1 satellite. However, NOAA does not expect to validate key S-NPP products until nearly 3 years after the satellite's launch, and there are remaining issues with the JPSS schedule that decrease the confidence that JPSS-1 will launch by March 2017 as planned. On the GOES-R program, progress in completing the system's design has been accompanied by continuing milestone delays, including delays in the launch dates for both the GOES-R and GOES-S satellites. The potential for further milestone delays also exists due to remaining weaknesses in developing and maintaining key program schedules. Faced with an anticipated gap in the polar satellite program and a potential gap in the geostationary satellite program, NOAA has taken steps to study alternatives and establish mitigation plans. However, the agency does not yet have comprehensive contingency plans that identify specific actions with defined timelines, and triggers. Until NOAA establishes comprehensive contingency plans that addresses these shortfalls, its plans for mitigating potential gaps may not be effective in avoiding significant impacts to its weather mission. Chairman Broun, Chairman Stewart, Ranking Member Maffei, Ranking Member Bonamici, and Members of the Subcommittees, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you have any questions on matters discussed in this testimony, please contact David A. Powner at (202) 512-9286 or at [email protected]. Other key contributors include Colleen Phillips (assistant director), Shaun Byrnes, Lynn Espedido, Nancy Glover, Franklin Jackson, Joshua Leiling, and Meredith Raymond. 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.
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As requested, this statement summarizes two reports being released today on (1) the JPSS program's status and plans, schedule quality, and gap mitigation strategies, and (2) the GOES-R series program's status, requirements management, and contingency planning. Since the 1960s, the United States has used polar-orbiting and geostationary satellites to observe the earth and its land, ocean, atmosphere, and space environments. Polar-orbiting satellites constantly circle the earth in a nearly north-south orbit, providing global coverage of conditions that affect the weather and climate. As the earth rotates beneath it, each polar-orbiting satellite views the entire earth's surface twice a day. In contrast, geostationary satellites maintain a fixed position relative to the earth from a high orbit of about 22,300 miles in space. Both types of satellites provide a valuable perspective of the environment and allow observations in areas that may be otherwise unreachable. Used in combination with ground, sea, and airborne observing systems, satellites have become an indispensable part of monitoring and forecasting weather and climate. For example, polar-orbiting satellites provide the data that go into numerical weather prediction models, which are a primary tool for forecasting weather days in advance--including forecasting the path and intensity of hurricanes. Geostationary satellites provide the graphical images used to identify current weather patterns and provide short-term warning. These weather products and models are used to predict the potential impact of severe weather so that communities and emergency managers can help prevent and mitigate its effects. National Oceanic and Atmospheric Administration (NOAA) has made progress on both the Joint Polar Satellite System (JPSS) and Geostationary Operational Environment Satellite-R series (GOES-R) programs, but key challenges remain to ensure that potential gaps in satellite data are minimized or mitigated. On the JPSS program, NOAA has made noteworthy progress in using Suomi National Polar-orbiting Partnership (S-NPP) data in weather forecasts and developing the JPSS-1 satellite. However, NOAA does not expect to validate key S-NPP products until nearly 3 years after the satellite's launch, and there are remaining issues with the JPSS schedule that decrease the confidence that JPSS-1 will launch by March 2017 as planned. On the GOES-R program, progress in completing the system's design has been accompanied by continuing milestone delays, including delays in the launch dates for both the GOES-R and GOES-S satellites. The potential for further milestone delays also exists due to remaining weaknesses in developing and maintaining key program schedules. Faced with an anticipated gap in the polar satellite program and a potential gap in the geostationary satellite program, NOAA has taken steps to study alternatives and establish mitigation plans. However, the agency does not yet have comprehensive contingency plans that identify specific actions with defined timelines, and triggers. Until NOAA establishes comprehensive contingency plans that addresses these shortfalls, its plans for mitigating potential gaps may not be effective in avoiding significant impacts to its weather mission.
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Among mandatory spending programs--and indeed tax expenditures--the health area is especially important because the long-term fiscal challenge is largely a health care challenge. Contrary to public perceptions, health care is the biggest driver of the long-term fiscal 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. Simply put, our nation's fiscal policy is on an imprudent and unsustainable course. These long-term budget simulations show, as do those published last December by the Congressional Budget Office (CBO), that over the long term we face a large and growing structural deficit due primarily to known demographic trends and rising health care costs and lower federal revenues as a percentage of the economy. Continuing on this unsustainable fiscal path will gradually erode, if not suddenly damage, our economy, our standard of living, and ultimately our national security. Our current path also will increasingly constrain our ability to address emerging and unexpected budgetary needs and increase the burdens that will be faced by future generations. Figures 3 and 4 present our long-term simulations under two different sets of assumptions. In figure 3, we start with CBO's 10-year baseline-- constructed according to the statutory requirements for that baseline. Consistent with these 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 is assumed to grow with the economy, and revenue is held constant as a share of GDP at the 2016 level. In figure 4, 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. For both simulations, Social Security and Medicare spending is based on the 2005 Trustees' intermediate projections, and we assume that benefits continue to be paid in full after the trust funds are exhausted. Medicaid spending is based on CBO's December 2005 long-term projections under mid-range assumptions. As these simulations illustrate, absent significant policy changes on the spending and/or revenue side of the budget, the growth in mandatory spending on federal retirement and especially health entitlements will encumber an escalating share of the government's resources. Indeed, when we assume that all the temporary tax reductions are made permanent and discretionary spending keeps pace with the economy, our long-term simulations suggest that by 2040 federal revenues may be adequate to pay only some Social Security benefits and interest on the federal debt. Neither slowing the growth in discretionary spending nor allowing the tax provisions to expire--nor both together--would eliminate the imbalance. Although revenues will be part of the debate about our fiscal future, assuming no changes to Social Security, Medicare, Medicaid, and other drivers of the long-term fiscal gap would require at least a doubling of taxes--and that seems highly implausible. Economic growth is essential, but we will not be able to simply grow our way out of the problem. The numbers speak loudly: our projected fiscal gap is simply too great. Closing the current long-term fiscal gap would require sustained economic growth far beyond that experienced in U.S. economic history since World War II. Tough choices are inevitable, and the sooner we act the better. Accordingly, substantive reform of the major health programs and Social Security is critical to recapturing our future fiscal flexibility. Ultimately, the nation will have to decide what level of federal benefits and spending it wants and how it will pay for these benefits. Our current fiscal path will increasingly constrain our ability to address emerging and unexpected budgetary needs and increase the burdens that will be faced by future generations. Continuing on this path will mean escalating and ultimately unsustainable federal deficits and debt that will serve to threaten our future national security as well as the standard of living for the American people. The aging population and rising health care spending will have significant implications not only for the budget, but also the economy as a whole. Figure 5 shows the total future draw on the economy represented by Social Security, Medicare, and Medicaid. Under the 2005 Trustees' intermediate estimates and CBO's 2005 long-term Medicaid estimates under mid-range assumptions, spending for these entitlement programs combined will grow to 15.7 percent of gross domestic product (GDP) in 2030 from today's 8.4 percent. It is clear that, taken together, Social Security, Medicare, and Medicaid represent an unsustainable burden on future generations. Furthermore, most of the long-term growth is in health care. While Social Security in its current form will grow from 4.3 percent of GDP today to 6.4 percent in 2080, Medicare's burden on the economy will quintuple--from 2.7 percent to 13.8 percent of the economy--and these projections assume a growth rate for Medicare spending that is below historical experience! As figure 5 shows, unlike Social Security which grows larger as a share of the economy and then levels off, within this projection period we do not see Medicare growth abating. Whether or not the President's Budget proposals on Medicare are adopted, they should serve to raise public awareness of the importance of health care costs to both today's budget and tomorrow's. This could serve to jump start a discussion about appropriate ways to control the major driver of our long-term fiscal outlook--health care spending. As noted, unlike Social Security, Medicare spending growth rates reflect not only a burgeoning beneficiary population, but also the escalation of health care costs at rates well exceeding general rates of inflation. The growth of medical technology has contributed to increases in the number and quality of health care services. Moreover, the actual costs of health care consumption are not transparent. Consumers are largely insulated by third-party payers from the cost of health care decisions. The health care spending problem is particularly vexing for the federal budget, affecting not only Medicare and Medicaid but also other important federal health programs, such as for our military personnel and veterans. For example, Department of Defense health care spending rose from about $12 billion in 1990 to about $30.4 billion in 2004--in part, to meet additional demand resulting from program eligibility expansions for military retirees, reservists, and the dependents of those two groups and for the increased needs of active duty personnel involved in conflicts in Iraq, Bosnia, and Afghanistan. Expenditures by the Department of Veterans Affairs have also grown--from about $12 billion in 1990 to about $26.8 billion in 2004--as an increasing number of veterans look to federal programs to supply their health care needs. The challenge to rein in health care spending is not limited to public payers, however, as the phenomenon of rising health care costs associated with new technology exists system-wide. This means that addressing the unsustainability of health care costs is also a major competitiveness and societal challenge that calls for us as a nation to fundamentally rethink how we define, deliver, and finance health care in both the public and the private sectors. A major difficulty is that our current system does little to encourage informed discussions and decisions about the costs and value of various health care services. These decisions are very important when it comes to cutting-edge drugs and medical technologies, which can be incredibly expensive but only marginally better than other alternatives. As a nation, we are going to need to weigh unlimited individual wants against broader societal needs and decide how responsibility for financing health care should be divided among employers, individuals, and government. Ultimately, we may need to define a set of basic and essential health care services to which every American is ensured access. Individuals wanting additional services, and insurance coverage to pay for them, might be required to allocate their own resources. Clearly, such a dramatic change would require a long transition period--all the more reason to act sooner rather than later. In recent years, policy analysts have discussed a number of incremental reforms that take aim at moderating health care spending, in part by unmasking health care's true costs. (See fig. 6 for a list of selected reforms.) Among these reforms is to devise additional cost-sharing provisions to make health care costs more transparent to patients. Currently, many insured individuals pay relatively little out of pocket for care at the point of delivery because of comprehensive health care coverage--precluding the opportunity to sensitize these patients to the cost of their care. Develop a set of national practice standards to help avoid unnecessary care, improve outcomes, and reduce litigation. Encourage case management approaches for people with expensive acute and chronic conditions to improve the quality and efficiency of care delivered and avoid inappropriate care. Foster the use of information technology to increase consistency, transparency, and accountability in health care. Emphasize prevention and wellness care, including nutrition. Leverage the government's purchasing power to control costs for prescription drugs and other health care services. Revise certain federal tax preferences for health care to encourage the more efficient use of appropriate care. Create an insurance market that adequately pools risk and offers alternative levels of coverage. Develop a core set of basic and essential services with supplemental coverage being available as an option but at a cost. Use the Federal Employees Health Benefits Program (FEHBP) model as a possible means to experiment and see the way forward. Limit spending growth for government-sponsored health care programs (e.g., percentage of the budget and/or the economy). Other steps include reforming the policies that give tax preferences to insured individuals and their employers. These policies permit the value of employees' health insurance premiums to be excluded from the calculation of their taxable earnings and exclude the value of the premium from the employers' calculation of payroll taxes for both themselves and employees. Tax preferences also exist for health savings accounts and other consumer-directed plans. These tax exclusions represent a significant source of forgone federal revenue and work at cross-purposes to the goal of moderating health care spending. As figure 7 shows, in 2005 the tax expenditure responsible for the greatest revenue loss was that for the exclusion of employer contributions for employees' insurance premiums and medical care. Another area conducive to incremental change involves provider payment reforms. These reforms are intended to induce physicians, hospitals, and other health care providers to improve on quality and efficiency. For example, studies of Medicare patients in different geographic areas have found that despite receiving a greater volume of care, patients in higher use areas did not have better health outcomes or experience greater satisfaction with care than those living in lower use areas. Public and private payers are experimenting with payment reforms designed to foster the delivery of care that is proven to be both clinically and cost effective. Ideally, identifying and rewarding efficient providers and encouraging inefficient providers to emulate best practices will result in better value for the dollars spent on care. The development of uniform standards of practice could lead to ensuring that people with chronic illnesses, a small but expensive population, received more and cost-effective and patient- centered care while reducing unwarranted medical malpractice litigation. The problem of escalating health care costs is complex because addressing federal programs such as Medicare and the federal-state Medicaid program will need to involve change in the health care system of which they are a part--not just within federal programs. This will be a major societal challenge that will affect all age groups. Because our health care system is complex, with multiple interrelated pieces, solutions to health care cost growth are likely to be incremental and require a number of extensive efforts over many years. In my view, taking steps to address the health care cost dilemma system-wide puts us on the right path for correcting the long-term fiscal problems posed by the nation's health care entitlements. I have focused today on health care because it is a driver of our fiscal outlook. Indeed, health care is already putting a squeeze on the federal budget. Health care is the dominant but not the only driver of our long-term fiscal challenge. Today it is hard to think of our fiscal imbalances as a big problem: the economy is healthy and interest rates seem low. We, however, have an obligation to look beyond today. Budgets, deficits, and long-term fiscal and economic outlooks are not just about numbers: they are also about values. It is time for all of us to recognize our stewardship obligation for the future. We should act sooner rather than later. We all must make choices that may be difficult and unpleasant today to avoid passing an even greater burden on to future generations. Let us not be the generation who sent the bill for its consumption to its children and grandchildren. Thank you Mr. Chairman, Mr. Spratt, and members of the Committee for having me today. We at GAO, of course, stand ready to assist you and your colleagues as you tackle these important challenges. 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.
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This testimony discusses entitlement and other mandatory spending programs in light of our nation's long-term fiscal outlook and the challenges it poses for the budget and oversight processes. In our report entitled 21st Century Challenges: Reexamining the Base of the Federal Government, we presented illustrative questions for policy makers 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. Congress will also receive more specific proposals, some of them will be presented within comprehensive agendas. Our report provides examples of the kinds of difficult choices the nation faces with regard to discretionary spending; mandatory spending, including entitlements; as well as tax policies and compliance activities. Mandatory spending programs--like tax expenditures--are governed by eligibility rules and benefit formulas, which means that funds are spend as required to provide benefits to those who are eligible and wish to participate. Since Congress and the President must change substantive law to change the cost of these programs, they are relatively uncontrollable on an annual basis. Moreover, as we reported in a 1994 analysis, their cost cannot be controlled by the same "spending cap" mechanism used for discretionary spending. By their very nature mandatories limit budget flexibility. Mandatory spending has grown as a share of the total federal budget. Under both the Congressional Budget Office baseline estimates and the President's Budget, this spending would grow further. While the long-term fiscal outlook is driven by Medicare, Medicaid and Social Security, it does not mean that all other mandatory programs should be "given a pass." As we have noted elsewhere, reexamination of the "fit" between government programs and the needs and priorities of the nation should be an accepted practice. So in terms of budget flexibility--the freedom of each Congress and President to allocate public resources--we cannot ignore mandatory spending programs even if they do not drive the aggregate. While some might suggest that mandatory programs could be controlled by being converted to discretionary or annually appropriated programs, that seems unlikely to happen. If we look across the range of mandatories we see many programs have objectives and missions that contribute to the achievement of a range of broad-based and important public policy goals such as providing a floor of income security in retirement, fighting hunger, fostering higher education, and providing access to affordable health care. To these ends, these programs--and tax expenditures--were designed to provide benefits automatically to those who take the desired action or meet the specified eligibility criteria without subjecting them to an annual decision regarding spending or delay in the provision of benefits such a process might entail. Although mandatory spending is not amenable to "caps," that does not mean that mandatory programs should 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 the 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 those rules or formulas. We recently issued a report on "triggers"--some measure which, 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.
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To address Medicare's vulnerability to fraud, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) established the Medicare Integrity Program (MIP). In particular, HIPAA required the Secretary of HHS to enter into contracts to promote the integrity of the Medicare program. In exercising its authority to identify and combat improper payments, CMS created 18 Program Safeguard Contractors (PSC) to identify and investigate potential fraud in specific parts of Medicare, such as Part A, in particular states or regions. In 2008, as part of the implementation of broader agency contracting reform, CMS began replacing PSCs with ZPICs, reducing the total number of contractors and giving additional responsibilities to ZPICs to investigate potential fraud across the Medicare fee-for-service program. In September 2008, CMS awarded the first two ZPIC contracts for Zones 4 and 7. As of September 2013, all but one of the ZPICs-- Zone 6--was in operation. PSCs continue to operate in Zone 6 because of protest-related delays with respect to the Zone 6 ZPIC contract. The term of each ZPIC contract is generally for a 1-year base period followed by 4 option years, enabling CMS to extend each contract through 5 years of performance. (See table 1 for contract performance timelines and fig. 1 for a map of the seven ZPIC zones.) In 2010, CMS established the Center for Program Integrity (CPI), which oversees the agency's program integrity efforts, including ZPICs. CPI's stated mission is to ensure that correct payments are made to legitimate providers for covered, appropriate, and reasonable services for eligible beneficiaries. CPI has undertaken an effort to try to move beyond the "pay and chase" approach--which focused on the recovery of funds lost due to payments of fraudulent claims--to focusing on fraud prevention. To enhance these efforts, the Small Business Jobs Act of 2010 appropriated funds for and required CMS to implement predictive analytics technologies, which are automated systems and tools that can help identify patterns of potentially fraudulent claims before they are paid. In turn, CMS developed the Fraud Prevention System (FPS), an electronic system in which Medicare claims data are compared against models of potentially fraudulent behavior to identify and prioritize for investigation providers with aberrant billing patterns. As part of implementing FPS, CPI modified ZPICs' work. They are to continue to investigate and quickly initiate actions to protect Medicare, but are also charged with investigating certain referrals from FPS. To detect and investigate potential fraud within each zone, ZPICs develop leads, investigate them, and initiate appropriate actions against suspect providers, suppliers, and others. ZPICs do this with teams of investigators, data analysts, and medical reviewers. Investigators perform a range of actions to examine potential fraud, including conducting provider audits, making site visits to suspect providers' offices, and interviewing Medicare beneficiaries. Data analysts, including statisticians, examine Medicare claims and other data to support investigations and search for potential fraud and new schemes. Medical reviewers, primarily nurses, provide clinical knowledge to support the work of investigators and data analysts. ZPICs identify potential targets for fraud investigations using three categories of sources: 1. Reactive sources. Reactive sources are notifications of potential fraud submitted to ZPICs, which may result in a ZPIC conducting an investigation. A number of entities refer potential fraud to ZPICs for investigation. These entities include Medicare Administrative Contractors (MAC), which examine their contacts with beneficiaries for indications of potential fraud and may forward the contacts to ZPICs for additional scrutiny. In addition, HHS OIG operates a fraud hotline and may refer calls from it to the MACs for initial screening and then to the ZPICs for further investigation. Other sources include investigations ZPICs receive directly from CMS. 2. Proactive sources. ZPICs are required to maintain at least 3 years of Medicare claims data for analysts to examine for potential fraud using a variety of analytic tools and methods. For example, analysts examining these data may identify providers that, compared with their peers, have aberrant billing patterns, which can indicate potentially fraudulent behavior. If analysts identify such patterns, those findings may result in a ZPIC investigation. 3. FPS. FPS identifies providers for ZPICs to investigate, with the goal of identifying aberrant billing patterns early so that ZPICs can investigate suspect providers before they generate large amounts of potentially fraudulent claims. ZPICs prioritize their investigations according to CMS guidance, which states that ZPICs should give priority to investigations with the greatest program impact and/or urgency. CMS's Program Integrity Manual defines such investigations as those involving patient abuse or harm, multistate fraud, high dollar amounts of potential overpayments, likely increase in the amount of fraud or enlarged pattern of fraud, and complaints made by Medicare supplemental insurers. In addition, with the implementation of FPS in July 2011, CMS directed the ZPICs to investigate certain high-risk leads from that system. As part of their investigations, ZPICs initiate administrative actions against Medicare providers or suppliers, coordinating with CMS and MACs to carry out those actions, which may result in Medicare savings. (See table 2 for the administrative actions ZPICs may initiate as part of their investigations.) For example, ZPICs may initiate payment suspensions that allow CMS to stop payment on suspect claims and prevent the payment of future claims until an investigation is resolved. In addition, a ZPIC may recommend to CMS that the agency revoke a provider's Medicare billing privileges and will coordinate with a MAC to implement that action following CMS approval. In addition to administrative actions, ZPICs may forward vulnerabilities identified during an investigation to CMS for consideration as possible local or national prepayment edits. In addition to administrative actions, if a ZPIC investigation uncovers suspected instances of fraud, the ZPIC must refer the investigation to HHS OIG for further examination and, if HHS OIG declines to investigate, the ZPIC may refer the issue to the FBI or any other interested law enforcement entity, such as a U.S. Attorney's Office. A ZPIC investigation that is referred to and accepted by law enforcement for further exploration and potential prosecution is then called a case. As long as law enforcement entities have not closed a case, it is considered open by both law enforcement and ZPICs. CMS also requires ZPICs to support HHS OIG, the Department of Justice (DOJ), and other law enforcement entities with their Medicare fraud investigations. This support can be for these entities' own, independently initiated cases, or for those that ZPICs initiated and then referred to law enforcement. ZPICs provide support on ZPIC-initiated and non-ZPIC- initiated cases by responding to law enforcement requests for information. These requests may be for data analysis; provider enrollment records, which ZPICs obtain from MACs; medical review; or other investigative support. ZPIC contracts cover three areas of work: 1. Fee-for-service program integrity work. ZPICs are to identify and investigate potential fraud in Medicare fee-for-service. The contracts for this work outline four categories of investigations: Part A, Part B, durable medical equipment (DME), and home health and hospice. Although DME providers and home health and hospice suppliers provide services covered under Medicare Parts A and B, the ZPIC contracts identify them separately and ZPICs track their fee-for- service program integrity work based on these four categories. 2. Medicare-Medicaid Data Match Program (Medi-Medi). Medi-Medi is a joint effort between CMS and states to identify providers with aberrant Medicare and Medicaid billing patterns through analyses of claims for individuals with both Medicare and Medicaid coverage. States participate voluntarily and ZPIC Medi-Medi work and funding is dependent on the number of states, if any, actively participating in each zone. 3. Special projects. CMS may also fund ZPICs for special zone- or fraud- specific projects. Special projects can vary in duration and can be as short as several months or run for multiple years. The total award amount for the six operating ZPIC contracts through all option years is more than $600 million. Of that amount, $411 million is for fee-for-service program integrity work, $169 million is for Medi-Medi, and $62 million is for special zone- and fraud-specific projects over the life of the contracts. (See fig. 2.) The contract award amounts for the six operating ZPIC contracts (inclusive of option years) range from $67 million to $182 million, which reflects variations between the zones in terms of their size, exposure to fraud risk, and receipt of special projects. For example, Zone 7 covers a geographically small area comprising one state and one territory, but is an area CMS considers to be at high risk for fraud. In comparison, Zone 2 is a geographically large but predominantly rural area comprising 14 states and including areas that may be at a lower risk of fraud. In addition, although not all ZPICs currently receive funding for a special project, all six operating ZPICs have at some time received such funding. For example, one ZPIC was awarded almost $50 million for an ongoing state-specific fraud hotline and another received almost $3 million for a completed project specifically examining potential fraud among home health providers. CMS primarily oversees ZPICs through the coordinated efforts of CPI and the Office of Acquisition and Grants Management (OAGM). The ZPIC Contracting Officer in OAGM is responsible for ensuring effective contracting, and the Contracting Officer's Representatives (COR) are in CPI. Each ZPIC is assigned a different COR, who helps oversee ZPIC contractor compliance through ongoing reviews. Among other things, the CORs use CMS ARTS to review their ZPICs' monthly invoices and aggregate workload, such as the total number of new investigations, administrative actions, and dollar amounts recouped in a month. Each ZPIC contract includes award fee provisions, which give contractors the opportunity to earn all or some of the award fee allowed under their contracts, depending on their level of performance. CMS evaluates each ZPIC's performance annually and determines how much of its award fees it will receive. CMS first evaluates whether a ZPIC is eligible for an award fee. For these reviews, CMS instructs its CORs on how to assess specific areas of their ZPICs' performance by interviewing ZPIC and other staff; reviewing a sample of open and closed investigations and cases, as well as other documents; reviewing data in CMS ARTS, FID, and other systems; and making observations during ZPIC site visits. If in this review CMS finds that a ZPIC meets certain performance thresholds, the CORs move to the second step: using their annual review findings to recommend the amount of award fees a ZPIC should receive. The ZPICs' contracts specify through Award Fee Plans the criteria against which CMS will measure ZPICs' performance to earn their fees. These criteria fall into two overarching areas: (1) quality of service measures that apply to all ZPICs, worth 60 percent of the award fee, and (2) ZPIC-specific plans drafted in the prior year by each ZPIC and approved by CMS on how the ZPIC will improve its administrative actions--Award Fee Administrative Action Plans--worth 40 percent. ZPICs can receive all or part of their proposed award fees based on how well they perform in each of the elements within the two areas. CMS paid the six operating ZPICs about $108 million in calendar year 2012, including about $1.3 million in award fees for each ZPIC's most recent contract year evaluation. CMS's payments were primarily to reimburse contractors for fee-for-service work, comprising $77 million of the $108 million paid. ZPICs reported spending most of their fee-for-service funding in 2012 on fraud case development, primarily for investigative staff. (See fig. 3 for the breakdown of ZPIC fee-for-service spending.) According to CMS officials, fraud case development costs are those related to identifying and investigating potential Medicare fraud. These costs include those associated with developing proactive sources, and addressing potential fraud identified by FPS. Personnel accounts for most of these costs, with ZPICs reporting that half their fraud case development staff are investigators and the other half are split between medical reviewers and data analysts. ZPIC officials told us that identifying and investigating potential Medicare fraud can be labor intensive, which is why the largest direct cost was for personnel. In 2012, ZPICs reported that their investigations included 3,600 beneficiary interviews, 777 onsite inspections, prepayment reviews of 190,000 suspended claims and postpayment reviews of 32,000 paid claims. Additionally, ZPICs added more than 1,100 providers to prepayment review and almost 300 providers to postpayment review. In calendar year 2012, ZPICs reported more than $250 million in savings to Medicare by stopping payment on suspect claims and recouping money from overpayments. However, it is unclear if ZPICs could save more money by taking swifter actions since CMS lacks information on the speed of those actions. ZPICs took these actions based primarily on reactive sources, such as tips and complaints. Example of investigations resulting in a revocation: One ZPIC described that investigations involving "false fronts"--meaning there is no provider at the designated address--allow the ZPIC to quickly initiate revocations of those providers' billing privileges. ZPICs reported initiating administrative actions that led to more than $250 million in savings or money recovered to Medicare in calendar year 2012 (see table 3). These savings represent nearly $100 million in claims flagged for review and then denied before payment; almost $100 million in auto-denial edits for suspect providers, suppliers, and beneficiaries; and almost $60 million recouped by MACs at the request of ZPICs. In addition, ZPICs placed more than $14 million in suspense accounts while the claims for that money were reviewed. ZPICs also reported taking actions that could result in savings that may not be easily quantifiable. For example, in 2012 ZPICs reported implementing more than 160 revocations and deactivations. Although these actions represent no direct CMS has reported that revocations are the most effective fraud savings,prevention tool because they prevent providers from submitting additional potentially fraudulent claims. (See app. II for more information on ZPICs' actions, including by provider type.) ZPICs coordinate with law enforcement entities on ZPIC-initiated and other investigations, resulting in additional savings to Medicare and other results. In 2012, ZPICs reported that law enforcement entities accepted more than 130 new cases from them, with HHS OIG as the primary entity accepting the cases, followed by the FBI. In addition, ZPICs reported completing almost 1,800 requests for information for cases initiated by law enforcement and almost 700 for cases that had been initiated by ZPICs, primarily for data analysis. ZPICs also reported that, as a result of their cases being accepted and prosecuted by law enforcement, convicted providers were ordered to pay almost $80 million in court- determined fines, settlements, and/or restitutions. Cases can also result in prison sentences and other actions, though CMS does not consistently track those outcomes. ZPICs are to track information on the results of their cases in FID, but the system contains few outcomes. CMS officials said that they are aware of this issue and have taken steps to both improve ZPICs' use of FID and integrate the system with CMS ARTS and other systems to improve the data in FID. As of August 2013, CMS officials reported that the agency was testing the integration of the systems and expected the integration to be completed by late 2013. According to CMS, ZPICs are to take immediate action to protect Medicare funds, but CMS may be missing opportunities for additional savings to Medicare because the agency lacks information on the timeliness of certain ZPIC actions. ZPIC officials reported taking actions and preventing potentially fraudulent payments before they were made, in line with CMS fraud strategies, and CMS ARTS data show ZPICs implementing some aspects of these strategies. For example, ZPIC officials reported focusing on prepayment reviews of claims--preventing potentially fraudulent payments--and 2012 CMS ARTS data showed that, of the providers whom ZPICs reviewed in 2012, almost five times as many had their claims reviewed on a prepayment basis rather than a postpayment basis. However, CMS does not track information on the swiftness of these actions, such as the length of time between a ZPIC's receipt of a complaint about a suspect provider and the ZPIC's visit to that provider, or between identifying a potentially fraudulent provider and initiating an administrative action. Federal internal control standards state that agencies' management should have information on performance relative to established objectives so that actual performance can be continually compared against goals and differences can be analyzed. Because CMS does not have information on ZPICs' timeliness for these types of activities, the agency cannot benchmark any changes in timeliness or measure the effectiveness of its strategies, such as whether ZPICs are limiting unnecessary losses to Medicare from suspect providers continuing to receive potentially fraudulent Medicare payments while awaiting investigative or administrative actions. Reactive sources--primarily complaints--were the major source of new ZPIC investigations in 2012, accounting for almost 90 percent of the almost 5,000 new investigations that year. (See fig. 4 for the sources of ZPIC investigations.) In 2012, ZPICs received almost 5,000 complaints, 45 percent of which were from MACs and over 50 percent from other sources, primarily the HHS OIG hotline, as reported by ZPIC officials. Proactive projects and FPS each accounted for less than 10 percent of investigations. Examples of proactive projects include analyzing data to identify spikes--large, rapid increases--in providers' billing patterns; aberrant providers, such as those with unusual billing patterns; and schemes related to stolen beneficiary identities. ZPIC officials reported that their proactive data analysis projects are valuable because they find zone-specific fraud or new fraud schemes that reactive sources or FPS may not identify. For example, one ZPIC that covers multiple frontier states conducted a proactive project related to critical access hospitals, 40 percent of which are in that ZPIC's geographic zone. ZPIC officials reported that as a result of this project, they identified overpayments to several hospitals that had opened new psychiatric units, as well as opportunities for education to improve patient care. (See app. II for more information on the sources of ZPIC investigations.) Although ZPIC officials previously reported issues with the quality of leads from FPS, as well as a decline in the number of proactive projects as a result of increased work to address FPS leads, officials have since reported improvements in FPS and their ability to address leads from the system. For example, officials from one ZPIC reported that the leads from FPS have improved and that the zone developed a new process for investigating those leads, thereby improving results. CPI officials reported that they will continue to direct ZPICs to investigate leads from proactive and reactive sources, as well as FPS, noting that the most successful ZPICs are those that can effectively address leads from all three categories. Based on CMS's annual reviews, five of the six operating ZPICs were eligible for some portion of their contracts' available award fees, and ZPICs received almost 70 percent of all fees for their most recent periods of performance.the annual reviews--elements that measure aspects of quality of service, cost control, business relations, and timeliness of certain activities-- ranged from satisfactory to exceptional, meeting the award fee eligibility requirement of at least a satisfactory rating in all four of these elements. CMS awarded the five eligible ZPICs about two-thirds of the available award fees--$1.3 million out of $1.9 million--in the ZPICs' most recent contract years based on ZPIC performance both on quality-of-service measures in the annual reviews and achievement of their Award Fee Administrative Action Plan goals. CMS officials reported that they assigned the majority of available award fee amounts--60 percent--to the quality-of-service measures in the annual evaluations because quality is the most important element of ZPICs' work. CMS apportions the 60 percent of award fee amounts for quality of service across multiple The five ZPICs' ratings for the elements considered in assessment criteria. Table 4 lists the quality-of-service measures for which ZPICs could earn award fees. Among the highest-value elements are how well ZPICs prioritize and document investigations, conduct medical reviews, and analyze data. ZPICs' Award Fee Administrative Action Plan goals varied by ZPIC, and included goals such as developing a project to identify and prevent phantom provider schemes and improving the timeliness of initiating and implementing payment suspensions. CMS officials said that this portion of the award fee is intended to encourage ZPICs to develop more innovative ways to take administrative actions. CMS follows some best practices for its oversight of ZPICs, but does not clearly link ZPIC performance to agency performance measures and goals. The award fee evaluations allow CMS to assess key elements of ZPICs' work, which follows federal best practices. Federal standards state that performance measures may address the type or level of program activities conducted (process), the direct products and services delivered by a program (outputs), or the results of those products and services (outcomes). CMS's measures evaluate ZPICs' processes and outputs, but not their outcomes. Moreover, these performance measures do not connect ZPIC work to agency performance measures that are linked to its goals, which is another best practice. One way that agencies examine the effectiveness of their programs is by measuring performance as required by the Government Performance and Results Act of 1993 (GPRA), as amended by the GPRA Modernization Act of 2010. One of CMS's GPRA goals is to fight fraud and work to eliminate improper payments. Within that goal are two Medicare fee-for-service performance measures for determining progress toward that goal, and CMS officials reported that ZPICs are the primary actors for one of the measures: increasing the percentage of providers who are identified as high risk against whom CMS takes administrative actions. CMS's fiscal year 2014 target for this performance measure is to increase the percentage of administrative actions taken for these high-risk providers from 27 percent to 36 percent. Federal standards state that entities should link performance measurements to goals and objectives, and previous GAO work found that leading organizations try to link the goals and performance measures for each organizational level to successive levels and ultimately to the organization's strategic goals.none of the ZPICs' performance measures link to the agency's measures of increasing the percentage of administrative actions taken against high- risk providers, or to the other Medicare fee-for-service program integrity performance measure of reducing improper payments. Some ZPICs had goals in their Award Fee Administrative Action Plans related to the agency's performance measures--for example, one ZPIC set a goal of increasing the value of its referrals of overpayments, which could reduce improper payments--but these were zone-specific and do not allow CMS to evaluate the overall impact of ZPICs on agency measures and, ultimately, goals. CMS officials told us in April 2013 that they are revising the ZPIC Award Fee Plans, but based on a draft of the revisions and discussions with CMS officials, the revised plans will continue to lack measures related to outcomes and will not tie performance to agency program integrity measures or goals. difficult and setting targets can be problematic, CMS could explicitly link ZPICs' work to the agency's progress toward meeting its performance measures and goals. Specifically, CMS officials reported that they are using FPS to identify and track high-risk providers for the performance measure of increasing the number of administrative actions taken against those providers. Although ZPICs are the primary users of FPS and have primary responsibility for initiating administrative actions, CMS does not link ZPICs' use of FPS to that measure, hindering the agency's ability to effectively oversee its progress toward meeting its goal of fighting fraud and working to eliminate improper payments. Given the vulnerability of the Medicare program to fraud and the lack of reliable estimates of the extent of fraud in the program, determining how well CMS is carrying out its fraud prevention strategy is a vital, if challenging, task. ZPICs, which are central to that strategy, reported that their efforts have yielded positive results, such as savings greater than their contract costs and multiple other actions that helped protect Medicare from potentially fraudulent providers, such as referring suspect providers to law enforcement. Yet little is known about how expeditiously ZPICs take action to save Medicare funds--an important consideration given that the longer a fraud scheme operates, the greater the potential financial losses. As a result, CMS would benefit from enhancing its collection and evaluation of information on the timeliness of ZPICs' actions, including information on whether new tools or strategies have increased the speed with which ZPICs investigate potentially fraudulent providers or initiate administrative actions. In addition, as CMS attempts to achieve its agencywide program integrity goal of fighting fraud and eliminating improper payments in the Medicare program, it would benefit from knowing how ZPICs are contributing to efforts to achieve this goal. By linking the evaluation of ZPICs' work to the agency's program integrity performance measures--in particular the performance measure focused on administrative actions, which are a significant portion of ZPICs' work-- CMS would have greater assurance that its ZPIC activities are appropriately supporting CMS fraud prevention efforts. To help ensure that CMS's fraud prevention activities are effective and that CMS is comprehensively assessing ZPIC performance, the Administrator of CMS should take the following two actions: Collect and evaluate information on the timeliness of ZPICs' investigative and administrative actions, such as how soon investigations are initiated after ZPICs identify potential fraud and how swiftly ZPICs initiate administrative actions after identifying potentially fraudulent providers. Develop ZPIC performance measures that explicitly link their work to the agency's Medicare fee-for-service program integrity performance measures and targets for its GPRA goal of fighting fraud and working to eliminate improper payments. We requested comments from HHS, but none were provided. 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 Secretary of Health and Human Services, the Acting Administrator of CMS, 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 at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. To determine Zone Program Integrity Contractors' (ZPIC) contract costs and how ZPICs use those funds, we examined data from CMS's Analysis, Reporting, and Tracking System (ARTS), an online system ZPICs use to submit invoices and report workload statistics and which CMS uses to track and analyze ZPIC workload, performance, and production. Specifically, we examined aggregated ZPIC invoices and workload statistics that specified how ZPICs allocate their funds, and interviewed ZPIC officials to confirm these data. We also reviewed the task orders outlining the scope of each zone's work and obtained data from CMS on ZPIC contract amounts. To describe the results of ZPIC Medicare fee-for-service investigations, we examined data from CMS ARTS and the Fraud Investigation Database (FID), a secure system that contains details related to Medicare fraud and abuse investigations. We analyzed calendar year 2012 data for the six operating ZPICs on the sources of their investigations, the numbers of administrative actions taken, and dollar values of relevant actions. We reviewed CMS guidance on how ZPICs should prioritize their work and how to conduct investigations. We interviewed officials from the CMS Center for Program Integrity about how they review and track ZPIC administrative actions and their process of approval for actions, such as revocations. We interviewed officials from all six ZPICs to learn about their internal guidance on prioritizing and conducting their work, how they determine when to take administrative actions, and how they decide to refer a case to law enforcement. To examine the results of CMS's evaluation of ZPICs' performance and aspects of CMS's evaluation practices, we reviewed the following: each ZPIC's most recent Contractor Performance Assessment Report; each ZPIC's most recently completed Award Fee Administrative Action Plan, which describes the ZPIC's plans to improve administrative actions and how it will earn its award fee; and data from CMS on the percentage and amount of each zone's award fee. We reviewed internal CMS guidance on how to evaluate ZPICs' performance, as well as federal standards and best practices for measuring performance. We also interviewed CMS contracting and other officials to learn about the review process and how such guidance is applied, and to discuss changes to ZPIC evaluations and performance measures. We also interviewed ZPIC officials to learn more about how ZPICs determine their Award Fee Administrative Action Plan goals and how they evaluate themselves on these goals and other work. We assessed the reliability of the data we obtained from CMS ARTS and FID through interviews with agency officials and users, system demonstrations, and, in the case of CMS ARTS, direct use of the system. We shared with CMS and the relevant ZPIC any errors we identified through reviews of the data and comparisons with other sources to obtain corrected information. We found the data sufficiently reliable for the purposes of this review. We conducted this performance audit from October 2012 to September 2013 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The following table shows selected ZPIC activities and results reported by ZPICs in CMS ARTS. Durable medical equipment (DME) is covered under Medicare Part B, and home health and hospice under are covered under Part A, but ZPICs report data in CMS ARTS as monthly aggregates by Part A, Part B, DME, and home health and hospice. CMS ARTS data do not allow us to identify particular provider types, such as whether a Part B provider was a family physician or podiatrist. In addition to the contact named above, Karen Doran, Assistant Director; Matthew Gever; Elizabeth Morrison; Eden Savino; Kristin Van Wychen; and Jennifer Whitworth made key contributions to this report.
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GAO has designated Medicare as a high-risk program, in part because its size and complexity make it particularly vulnerable to fraud. To help detect and prevent potential Medicare fraud, CMS--the agency within the Department of Health and Human Services (HHS) that administers the Medicare program--contracts with ZPICs. These contractors are to identify potential fraud, investigate it thoroughly and in a timely manner, and take swift action, such as working to revoke suspect providers' Medicare billing privileges and referring potentially fraudulent providers to law enforcement. GAO examined (1) ZPIC contract costs and how ZPICs use those funds, (2) the results of ZPICs' work, and (3) the results of CMS's evaluations of ZPICs' performance and aspects of CMS's evaluation practices. To do this, GAO examined ZPIC funding, contracts, and related documents; data on ZPICs' workloads, investigations, and results; and CMS evaluations of ZPICs as well as federal standards for performance measurement. GAO also interviewed CMS and ZPIC officials. The Centers for Medicare and Medicaid Services (CMS) paid its Zone Program Integrity Contractors (ZPIC) about $108 million in 2012. ZPICs reported spending most of this funding on fraud case development, primarily for investigative staff, who in 2012 reported conducting about 3,600 beneficiary interviews, almost 780 onsite inspections, and reviews of more than 200,000 Medicare claims. ZPICs reported that their actions resulted in more than $250 million in savings to Medicare in calendar year 2012 from actions such as stopping payment on suspect claims. ZPICs also reported taking other actions to protect Medicare funds, including having more than 130 of their investigations accepted by law enforcement for potential prosecution, and working to stop more than 160 providers from receiving additional Medicare payments in 2012. However, CMS lacks information on the timeliness of ZPICs' actions--such as the time it takes between identifying a suspect provider and taking actions to stop that provider from receiving potentially fraudulent Medicare payments--and would benefit from knowing if ZPICs could save more money by acting more quickly. ZPICs generally received good ratings in annual reviews, with five of six eligible for incentive awards. CMS follows some best practices for ZPICs' oversight, but the agency does not clearly link ZPIC performance to agency program integrity goals. The majority of the measures CMS uses to evaluate ZPICs relate to the quality of their work because, according to CMS officials, quality is the most important element. However, evaluation of such measures, while a best practice, does not connect ZPIC work to agency performance measures. For example, CMS aims to increase the percentage of actions taken against certain high risk Medicare providers--work central to ZPICs--but does not explicitly link ZPICs' work to the agency's progress toward that goal, another best practice that would allow the agency to better assess the ZPICs' support of CMS's fraud prevention efforts. GAO recommends that CMS collect and evaluate information on the timeliness of ZPICs' investigative and administrative actions, and develop ZPIC performance measures that explicitly link ZPICs' work to Medicare program integrity performance measures and goals. GAO requested comments from HHS on the draft report, but none were provided.
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GAO is a key source of professional and objective information and analysis and, as such, plays a crucial role in supporting congressional decision making. For example, in fiscal year 2003, as in other years, the challenges that most urgently engaged the attention of the Congress helped define our priorities. Our work on issues such as the nation's ongoing battle against terrorism, Social Security and Medicare reform, the implementation of major education legislation, human capital transformations at selected federal agencies, and the security of key government information systems all helped congressional members and their staffs to develop new federal policies and programs and oversee ongoing ones. Moreover, the Congress and the executive agencies took a wide range of actions in fiscal year 2003 to improve government operations, reduce costs, or better target budget authority based on GAO's analyses and recommendations. In fiscal year 2003, GAO served the Congress and the American people by helping to identify steps to reduce improper payments and credit card fraud in government programs; restructure government and improve its processes and systems to maximize homeland security; prepare the financial markets to continue operations if terrorism update and strengthen government auditing standards; improve the administration of Medicare as it undergoes reform; encourage and help guide federal agency transformations; contribute to congressional oversight of the federal income tax system; identify human capital reforms needed at the Department of Defense, the Department of Homeland Security, and other federal agencies; raise the visibility of long-term financial commitments and imbalances in the federal budget; reduce security risks to information systems supporting the nation's critical infrastructures; oversee programs to protect the health and safety of today's workers; ensure the accountability of federal agencies through audits and serve as a model for other federal agencies by modernizing our approaches to managing and compensating our people. To ensure that we are well positioned to meet the Congress's future needs, we update our 6-year strategic plan every 2 years, consulting extensively during the update with our clients in the Congress and with other experts (see app. I for our strategic plan framework). The following table summarizes selected performance measures and targets for fiscal years 1999 through 2005. Highlights of our fiscal year 2003 accomplishments and their impact on the American public are shown in the following sections. Many of the benefits produced by our work can be quantified as dollar savings for the federal government (financial benefits), while others cannot (other benefits). Both types of benefits resulted from our efforts to provide information to the Congress that helped (1) improve services to the public, (2) provide information that resulted in statutory or regulatory changes, and (3) improve core business processes and advance governmentwide management reforms. In fiscal year 2003, our work generated $35.4 billion in financial benefits-- a $78 return on every dollar appropriated to GAO. The funds made available in response to our work may be used to reduce government expenditures or reallocated by the Congress to other priority areas. Nine accomplishments accounted for nearly $27.4 billion, or 77 percent, of our total financial benefits for fiscal year 2003. Six of these accomplishments totaled $25.1 billion. Table 2 lists selected major financial benefits in fiscal year 2003 and describes the work contributing to financial benefits over $500 million. Many of the benefits that flow to the American people from our work cannot be measured in dollar terms. During fiscal year 2003, we recorded a total of 1,043 other benefits--up from 607 in fiscal year 1999. As shown in appendix II, we documented instances where information we provided to the Congress resulted in statutory or regulatory changes, where federal agencies improved services to the public and where agencies improved core business processes or governmentwide reforms were advanced. These actions spanned the full spectrum of national issues, from securing information technology systems to improving the performance of state child welfare agencies. We helped improve services to the public by Strengthening the U.S. visa process as an antiterrorism tool. Our analysis of the U.S. visa-issuing process showed that the Department of State's visa operations were more focused on preventing illegal immigrants from obtaining nonimmigrant visas than on detecting potential terrorists. We recommended that State reassess its policies, consular staffing procedures, and training program. State has taken steps to adjust its policies and regulations concerning the screening of visa applicants and its staffing and training for consular officers. Enhancing quality of care in nursing homes. In a series of reports and testimonies since 1998, we found that, too often, residents of nursing homes were being harmed and that programs to oversee nursing home quality of care at the Centers for Medicare and Medicaid Services were not fully effective in identifying and reducing such problems. In 2003, we found a decline in the proportion of nursing homes that harmed residents but made additional recommendations to further improve care. Making key contributions to homeland security. Drawing on an extensive body of completed and ongoing work, we identified specific vulnerabilities and areas for improvement to protect aviation and surface transportation, chemical facilities, sea and land ports, financial markets, and radioactive sealed sources. In response to our recommendations, the Congress and cognizant agencies have undertaken specific steps to improve infrastructure security and improve the assessment of vulnerabilities. Improving compliance with seafood safety regulations. We reported that when Food and Drug Administration (FDA) inspectors identified serious violations at seafood processing firms, it took FDA 73 days on average, well above its 15-day target. Based on our recommendations, FDA now issues warning letters in about 20 days. We helped to change laws in the following ways: We highlighted the National Smallpox Vaccination program volunteers' concerns about losing income if they sustained injuries from an inoculation. As a result, the Smallpox Emergency Personnel Protection Act of 2003 (Pub. L. No. 108-20) provides benefits and other compensation to covered individuals injured in this way. We performed analyses that culminated in the enactment of the Postal Civil Service Retirement System Funding Reform Act of 2003 (Pub. L. No. 108-18), which reduced USPS's pension costs by an average of $3 billion per year over the next 5 years. The Congress directed that the first 3 years of savings be used to reduce USPS's debt and hold postage rates steady until fiscal 2006. We also helped to promote sound agency and governmentwide management by Encouraging and helping guide agency transformations. We highlighted federal entities whose missions and ways of doing business require modernized approaches, including the Postal Service and the Coast Guard. Among congressional actions taken to deal with modernization issues, the House Committee on Government Reform established a special panel on postal reform and oversight to work with the President's Commission on the Postal Service on recommendations for comprehensive postal reform. Our recommendations to the Coast Guard led to better reporting by the Coast Guard and laid the foundation for key revisions the agency intended to make to its strategic plan. Helping to advance major information technology modernizations. Our work has helped to strengthen the management of the complex multibillion-dollar information technology modernization program at the Internal Revenue Service (IRS) to improve operations, promote better service, and reduce costs. For example, IRS implemented several of our recommendations to improve software acquisition, enterprise architecture definition and implementation, and risk management and to better balance the pace and scope of the program with IRS's capacity to effectively manage it. Supporting controls over DOD's credit cards. In a series of reports and testimonies beginning in 2001, we highlighted pervasive weaknesses in DOD's overall credit card control environment, including the proliferation of credit cards and the lack of specific controls over its multibillion-dollar purchase and travel card programs. DOD has taken many actions to reduce its vulnerabilities in this area. While our primary focus is on improving government operations at the federal level, sometimes our work has an impact at the state and local levels. To the extent feasible, in conducting our audits and evaluations, we cooperate with state and local officials. At times, our work results will have local applications, and local officials will take advantage of our efforts. We are conducting a pilot to determine the feasibility of measuring the impact of our work on state and local governments. The following are examples we have collected during our pilot where our work is relevant for state and local government operations: Identity theft. Effective October 30, 1998, the Congress enacted the "Identity Theft and Assumption Deterrence Act of 1998" prohibiting the unlawful use of personal identifying information, such as names, Social Security numbers, and credit card numbers. GAO report GGD-98-100BR is mentioned prominently in the act's legislative history. Subsequently, a majority of states have enacted identity theft laws. Sponsors of some of these state enactments--Alaska, Florida, Illinois, Michigan, Pennsylvania, and Texas--mentioned the federal law and/or our report. For example, in 1999, Texas enacted SB 46, which is modeled after the federal law. Justice officials said that enactment of state identity theft laws has multijurisdictional benefits to all levels of law enforcement-- federal, state, and local. Pipeline safety. Our report GAO-RCED-00-128, Pipeline Safety: The Office of Pipeline Safety Is Changing How It Oversees the Pipeline Industry, found that the Department of Transportation's Office of Pipeline Safety was reducing its reliance on states to help oversee the safety of interstate pipelines. The report stated that allowing states to participate in this oversight could improve pipeline safety. As a result, the Office of Pipeline Safety modified its Interstate Pipeline Oversight Program for 2001-2002 to allow greater opportunities for state participation. Temporary Assistance for Needy Families Grant Program. We reported on key national and state labor market statistics and changes in the levels of cash assistance and employment activities in five selected states. We also highlighted the fact that the five states had faced severe fiscal challenges and had used reserve funds to augment their spending above the amount of their annual Temporary Assistance for Needy Families block grant from the federal government. Issued to coincide with the start of each new Congress, our high-risk update lists government programs and functions in need of special attention or transformation to ensure that the federal government functions in the most economical, efficient, and effective manner possible. This is especially important in light of the nation's large and growing long- term fiscal imbalance. Our latest report, released in January 2003, spotlights more than 20 troubled areas across government. Many of these areas involve essential government services, such as Medicare, housing programs, and postal service operations that directly affect the lives and well-being of the American people. Our high-risk program, which we began in 1990, includes five high-risk areas added in 2003: implementing and transforming the new Department of Homeland Security, modernizing federal disability programs, Pension Benefit Guaranty Corporation's (PBGC) single-employer pension insurance program. In fiscal year 2003, we also removed the high-risk designation from two programs: the Social Security Administration's Supplemental Security Income program, and Asset Forfeiture programs administered by the U.S. Departments of Justice and the Treasury. In fiscal 2003, we issued 208 reports and delivered 112 testimonies related to high-risk areas, and our related work resulted in financial benefits totaling almost $21 billion. Our sustained focus on high-risk problems also has helped the Congress enact a series of governmentwide reforms to strengthen financial management, improve information technology, and create a more results-oriented and accountable federal government. The President's Management Agenda for reforming the federal government mirrors many of the management challenges and program risks that we have reported on in our performance and accountability series and high- risk updates, including a governmentwide initiative to focus on strategic management of human capital. Following GAO's designation of federal real property as a high-risk issue, the Office of Management and Budget (OMB) has indicated its plans to add federal real property as a new program initiative under the President's Management Agenda. OMB recently issued an executive order on federal real property that addresses many of GAO's concerns, including the need to better emphasize the importance of government property to effective management. We have an ongoing dialog with OMB regarding the high-risk areas, and OMB is working with agency officials to address many of our high-risk areas. Some of these high-risk areas may require additional authorizing legislation as one element of addressing the problems. Our fiscal year 2003 high-risk list is shown in table 3. During fiscal year 2003 GAO executives testified at 189 congressional hearings--sometimes with very short notice--covering a wide range of complex issues. Testimony is one of our most important forms of communication with the Congress; the number of hearings at which we testify reflects, in part, the importance and value of our expertise and experience in various program areas and our assistance with congressional decision making. The following figure highlights, by GAO's three external strategic goals for serving the Congress, examples of issues on which we testified during fiscal year 2003. While the vast majority of our products--97 percent--were completed on time for our congressional clients and customers in fiscal year 2003, we slightly missed our target of providing 98 percent of them on the promised day. We track the percentage of our products that are delivered on the day we agreed to with our clients because it is critical that our work be done on time for it to be used by policymakers. Though our 97 percent timeliness rate was a percentage point improvement over our fiscal year 2002 result, it was still a percentage point below our goal. As a result, we are taking steps to improve our performance in the future by encouraging matrix management practices among the teams supporting various strategic goals and identifying early those teams that need additional resources to ensure the timely delivery of their products to our clients. The results of our work were possible, in part, because of the changes we have made to maximize the value of GAO. With the Congress's support, we have demonstrated that becoming world class does not require substantial staffing increases, but rather maximizing the efficient and effective use of the resources available to us. Since I came to GAO, we have developed a strategic plan, realigned our organizational structure and resources, and increased our outreach and service to our congressional clients. We have developed and revised a set of congressional protocols, developed agency and international protocols, and better refined our strategic and annual planning and reporting processes. We have worked with you to make changes in areas where we were facing longer-term challenges when I came to GAO, such as in the critical human capital, information technology, and physical security areas. We are grateful to the Congress for supporting our efforts through pending legislation that, if passed, would give us additional human capital flexibilities that will allow us, among other things, to move to an even more performance-based compensation system and help to better position GAO for the future. As part of our ongoing effort to ensure the quality of our work, this year a team of international auditors will perform a peer review of GAO's performance audit work issued in calendar year 2004. We continued our policy of proactive outreach to our congressional clients, the press, and the public to enhance the visibility of our products. On a daily basis we compile and publish a list of our current reports. This feature has more than 18,000 subscribers, up 3,000 from last year. We also produced an update of our video on GAO, "Impact 2003." Our external Web site continues to grow in popularity, having increased the number of hits in fiscal year 2003 to an average of 3.4 million per month, 1 million more per month than in fiscal year 2002. In addition, visitors to the site are downloading an average of 1.1 million files per month. As a result, demand for printed copies of our reports has dramatically declined, allowing us to phase out our internal printing capability. For the 17th consecutive year, GAO's financial statements have received an unqualified opinion from our independent auditors. We prepared our financial statements for fiscal year 2003 and the audit was completed a month earlier than last year and a year ahead of the accelerated schedule mandated by OMB. For a second year in a row, the Association of Government Accountants awarded us a certificate of excellence; this year the award was for the fiscal year 2002 annual performance and accountability report. Given our role as a key provider of information and analyses to the Congress, maintaining the right mix of technical knowledge and expertise as well as general analytical skills is vital to achieving our mission. Because we spend about 80 percent of our resources on our people, we need excellent human capital management to meet the expectations of the Congress and the nation. Accordingly, in the past few years, we have expanded our college recruiting and hiring program and focused our overall hiring efforts on selected skill needs identified during our workforce planning effort and to meet succession planning needs. For example, we identified and reached prospective graduates with the required skill sets and focused our intern program on attracting those students with the skill sets needed for our analyst positions. Our efforts in this area were recognized by Washingtonian magazine, which listed GAO as one of the "Great Places to Work" in its November 2003 issue. Continuing our efforts to promote the retention of staff with critical skills, we offered qualifying employees in their early years at GAO student loan repayments in exchange for their signed agreements to continue working at GAO for 3 years. We also have begun to better link compensation, performance, and results. In fiscal year 2002 and 2003, we implemented a new performance appraisal system for our analyst, attorney, and specialist staff that links performance to established competencies and results. We evaluated this system in fiscal year 2003 and identified and implemented several improvements, including conducting mandatory training for staff and managers on how to better understand and apply the performance standards, and determining appropriate compensation. We will implement a new competency based appraisal system, pay banding and a pay for performance system for our administrative professional and support services staff this fiscal year. To train our staff to meet the new competencies, we developed an outline for a new competency-based and role- and task-driven learning and development curriculum that identified needed core and elective courses and other learning resources. We also completed several key steps to improve the structure of our learning organization, including hiring a Chief Learning Officer and establishing a GAO Learning Board to guide our learning policy, to set specific learning priorities, and to oversee the implementation of a new training and development curriculum. We also drafted our first formal and comprehensive strategic plan for human capital to communicate both internally and externally our strategy for enhancing our standing as a model professional services organization, including how we plan to attract, retain, motivate, and reward a high- performing and top-quality workforce. We expect to publish the final plan this fiscal year. Our Employee Advisory Council is now a fully democratically elected body that advises GAO's senior executives on matters of interest to our staff. We also established a Human Capital Partnership Board to gather opinions of a cross section of our employees about upcoming initiatives and ongoing programs. The 15-member board will assist our Human Capital Office in hearing and understanding the perspectives of its customers--our staff. In addition, we will continue efforts to be ready to implement the new human capital authorities included in legislation currently pending before the Senate. This legislation, if passed, would give us more flexibility to deal with mandatory pay and related costs during tight budgetary times. Our resourceful management of information technology was recognized when we were named one of the "CIO (Chief Information Officer) 100" by CIO Magazine, recognizing excellence in managing our information technology (IT) resources through "creativity combined with a commitment to wring the most value from every IT dollar." We were one of three federal agencies named, selected from over 400 applicants, largely representing private sector firms. In particular, we were cited for excellence in asset management, staffing and sourcing, and building partnerships, and for implementing a "best practice"--staffing new projects through internal "help wanted" ads. We have expanded and enhanced the IT Enterprise Architecture program we began in fiscal year 2002. We formally established an Enterprise Architecture oversight group and steering committee to prioritize our IT business needs, provide strategic direction, and ensure linkage between our IT Enterprise Architecture and our capital investment process. We implemented a number of user friendly Web-based systems to improve our ability to obtain feedback from our congressional clients, facilitate access to our information for the external customer, and enhance productivity for the internal customer. Among the new and enhanced Web-based systems were an application to track and access General Counsel work by goal, team, a Web site on emerging trends and issues to provide information for our teams and offices as they consult with the Congress; and an automated tracking application for our staff to monitor the status of products to be published. In addition, we developed and released a system to automate an existing data collection and analysis process, greatly expanding our annual capacity to review DOD weapons systems programs. As a result, we were able to increase staff productivity and efficiency and enhance the information and services provided to the Congress. In the past, we were able to complete a review annually of eight DOD weapons systems programs. In fiscal year 2003 we reviewed 30 programs and reported on 26. Within the next year, that number will grow to 80 per year. We recognize the ongoing, ever present threat to our shared IT systems and information assets and continue to promote awareness of this threat, maintain vigilance, and develop practices that protect information assets, systems, and services. As part of our continuing emergency preparedness plan, we upgraded the level of telecommunications services between our disaster recovery site and headquarters, expanded our remote connectivity capability, and improved our response time and transmission speed. To further protect our data and resources, we drafted an update to our information systems security policy, issued network user policy statements, hardened our internal network security, expanded our intrusion detection capability, and addressed concerns raised during the most recent network vulnerability assessment. We plan to continue initiatives to ensure a secure environment, detect intruders in our systems, and recover in the event of a disaster. We are also continuing to make the investments necessary to enhance the safety and security of our staff, facilities, and other assets for the mutual benefit of GAO and the Congress. In addition, we plan to continue initiatives designed to further increase employees' productivity, facilitate knowledge sharing, and maximize the use of technology through tools available at the desktop and by reengineering the systems that support our business processes. On the basis of recommendations resulting from our physical security evaluation and threat assessment, we continue to implement initiatives to improve the security and safety of our building and personnel. In terms of the physical plant improvements, we upgraded the headquarters fire alarm system and installed a parallel emergency notification system. We completed a study of personal protective equipment, and based on the resulting decision paper, we have distributed escape hoods to GAO staff. We have also made a concerted effort to secure the perimeter and access to our building. Several security enhancements will be installed in fiscal year 2004, such as vehicle restraints at the garage ramps; ballistic-rated security guard booths; vehicle surveillance equipment at the garage entrances; and state-of-the-art electronic security comprising intrusion detection, access control, and closed-circuit surveillance systems. A team of international auditors, led by the Office of the Auditor General of Canada, will conduct a peer review for calendar year 2004 of our performance audit work. This entails reviewing our policies and internal controls to assess the compliance of GAO's work with government audit standards. The review team will provide GAO with management suggestions to improve our quality control systems and procedures. Peer reviews will be conducted every 3 years. GAO is requesting budget authority of $486 million for fiscal year 2005. The requested funding level will allow us to maintain our base authorized level of 3,269 full-time equivalent (FTE) staff to serve the Congress, maintain operational support at fiscal year 2004 levels, and continue efforts to enhance our business processes and systems. This fiscal year 2005 budget request represents a modest increase of 4.9 percent over our fiscal year 2004 projected operating level, primarily to fund mandatory pay and related costs and estimated inflationary increases. The requested increase reflects an offset of almost $5 million from nonrecurring fiscal year 2004 initiatives, including closure of our internal print plant, and $1 million in anticipated reimbursements from a planned audit of the Securities and Exchange Commission's (SEC) financial statements. Our requested fiscal year 2005 budget authority includes about $480 million in direct appropriations and authority to use $6 million in estimated revenue from reimbursable audit work and rental income. To achieve our strategic goals and objectives for serving the Congress, we must ensure that we have the appropriate human capital, fiscal, and other resources to carry out our responsibilities. Our fiscal year 2005 request would enable us to sustain needed investments to maximize the productivity of our workforce and to continue addressing key management challenges: human capital, and information and physical security. We will continue to take steps to "lead by example" within the federal government in these and other critical management areas. If the Congress wishes for GAO to conduct technology assessments, we are also requesting $545,000 to obtain four additional FTEs and contract assistance and expertise to establish a baseline technology assessment capability. This funding level would allow us to conduct one assessment annually and avoid an adverse impact on other high priority congressional work. We are grateful to the Congress for providing support and resources that have helped us in our quest to be a world class professional services organization. The funding we received in fiscal year 2004 is allowing us to conduct work that addressed many difficult issues confronting the nation. By providing professional, objective, and nonpartisan information and analyses, we help inform the Congress and executive branch agencies on key issues, and covered programs that continue to involve billions of dollars and touch millions of lives. I am proud of the outstanding contributions made by GAO employees as they work to serve the Congress and the American people. In keeping with my strong belief that the federal government needs to exercise fiscal discipline, our budget request for fiscal year 2005 is modest, but would maintain our ability to provide first class, effective, and efficient support to the Congress and the nation to meet 21st century challenges in these critical times. This concludes my statement. I would be pleased to answer any questions the Members of the Subcommittee may have. GAO Efforts That Helped to Change Laws and/or Regulations Consolidated Appropriations Resolution, 2003, Public Law 108-7. The law includes GAO's recommended language that the administration's competitive sourcing targets be based on considered research and sound analysis. Smallpox Emergency Personnel Protection Act of 2003, Public Law 108-20. GAO's report on the National Smallpox Vaccination program highlighted volunteers' concerns about losing income if they sustained injuries from an inoculation. This statute provides benefits and other compensation to covered individuals injured in this way. Postal Civil Service Retirement System Funding Reform Act of 2003, Public Law 108-18. Analyses performed by GAO and OPM culminated in the enactment of this law that reduces USPS's pension costs by an average of $3 billion per year over the next 5 years. The Congress directed that the first 3 years of savings be used to reduce USPS's debt and hold postage rates steady until fiscal 2006. Accountability of Tax Dollars Act of 2002, Public Law 107-289. A GAO survey of selected non-CFO Act agencies demonstrated the significance of audited financial statements in that community. GAO provided legislative language that requires 70 additional executive branch agencies to prepare and submit audited annual financial statements. Emergency Wartime Supplemental Appropriations Act, 2003, Public Law 108-11. GAO assisted congressional staff with drafting a provision that made available up to $64 million to the Corporation for National and Community Service to liquidate previously incurred obligations, provided that the Corporation reports overobligations in accordance with the requirements of the Antideficiency Act. Intelligence Authorization Act for Fiscal Year 2003, Public Law 107-306. GAO recommended that the Director of Central Intelligence report annually on foreign entities that may be using U. S. capital markets to finance the proliferation of weapons, including weapons of mass destruction, and this statute instituted a requirement to produce the report. GAO Efforts That Helped to Improve Services to the Public Strengthening the U.S. Visa Process as an Antiterrorism Tool. Our analysis of the U.S. visa-issuing process showed that the Department of State's visa operations were more focused on preventing illegal immigrants from obtaining nonimmigrant visas than on detecting potential terrorists. We recommended that State reassess its policies, consular staffing procedures, and training program. State has taken steps to adjust its policies and regulations concerning the screening of visa applicants and its staffing and training for consular officers. Enhancing Quality of Care in Nursing Homes. In a series of reports and testimonies since 1998, we found that, too often, residents of nursing homes were being harmed and that programs to oversee nursing home quality of care at the Centers for Medicare and Medicaid Services were not fully effective in identifying and reducing such problems. In 2003, we found a decline in the proportion of nursing homes that harmed residents but made additional recommendations to further improve care. Making Key Contributions to Homeland Security. Drawing upon an extensive body of completed and ongoing work, we identified specific vulnerabilities and areas for improvement to protect aviation and surface transportation, chemical facilities, sea and land ports, financial markets, and radioactive sealed sources. In response to our recommendations, the Congress and cognizant agencies have undertaken specific steps to improve infrastructure security and improve the assessment of vulnerabilities. Improving Compliance with Seafood Safety Regulations. We reported that when Food and Drug Administration (FDA) inspectors identified serious violations at seafood processing firms, it took FDA 73 days on average, well above its 15-day target. Based on our recommendations, FDA now issues warning letters in about 20 days. Strengthening Labor's Management of the Special Minimum Wage Program. Our review of this program resulted in more accurate measurement of program participation and noncompliance by employees and prevented inappropriate payment of wages below the minimum wage to workers with disabilities. Reducing National Security Risks Related to Sales of Excess DOD Property. We reported that DOD did not have systems and procedures in place to maintain visibility and control over 1.2 million chemical and biological protective suits and certain equipment that could be used to produce crude forms of anthrax. Unused suits (some of which were defective) and equipment were declared excess and sold over the Internet. DOD has taken steps to notify state and local responders who may have purchased defective suits. Also, DOD has taken action to restrict chemical-biological suits to DOD use only--an action that should eliminate the national security risk associated with sales of these sensitive military items. Lastly, DOD has suspended sales of the equipment in question pending the results of a risk assessment. GAO Efforts That Helped to Change Laws and/or Regulations Protecting the Retirement Security of Workers. We alerted the Congress to potential dangers threatening the pensions of millions of American workers and retirees. The pension insurance program's ability to protect workers' benefits is increasingly being threatened by long-term, structural weaknesses in the private-defined, pension benefit system. A comprehensive approach is needed to mitigate or eliminate the risks. Improving Mutual Fund Disclosures. To improve investor awareness of mutual fund fees and to increase price competition among funds, we identified alternatives for regulators to increase the usefulness of fee information disclosed to investors. Early in fiscal year 2003, the Securities and Exchange Commission issued proposed rules to enhance mutual fund fee disclosures using one of our recommended alternatives. GAO Efforts That Helped to Promote Sound Agency and Governmentwide Management Encouraging and Helping Guide Agency Transformations. We highlighted federal entities whose missions and ways of doing business require modernized approaches, including the Postal Service, and the Coast Guard. Among congressional actions taken to deal with modernization issues, the House Committee on Government Reform established a special panel on postal reform and oversight to work with the President's Commission on the Postal Service on recommendations for comprehensive postal reform. We also reported this year on the Coast Guard's ability to effectively carry out critical elements of its mission, including its homeland security responsibilities. We recommended that the Coast Guard develop a blueprint for targeting its resources to its various mission responsibilities and a better reporting mechanism for informing the Congress on its effectiveness. Our recommendations led to better reporting by the Coast Guard and laid the foundation for key revisions the agency intended to make to its strategic plan. Helping DOD Recognize and Address Business Modernization Challenges. Several times we have reported and testified on the challenges DOD faces in trying to successfully modernize about 2,300 business systems, and we made a series of recommendations aimed at establishing the modernization management capabilities needed to be successful in transforming the department. DOD has implemented some key architecture management capabilities, such as assigning a chief architect and creating a program office, as well as issuing the first version of its business enterprise architecture in May 2003. In addition, DOD has revised its system acquisition guidance. By implementing our recommendations, DOD is increasing the likelihood that its systems investments will support effective and efficient business operations and provide for timely and reliable information for decision making. Helping to Advance Major Information Technology Modernizations. Our work has helped to strengthen the management of the complex, multibillion-dollar information technology modernization program at the Internal Revenue Service (IRS) to improve operations, promote better service, and reduce costs. For example, IRS implemented several of our recommendations to improve software acquisition, enterprise architecture definition and implementation, and risk management and to better balance the pace and scope of the program with its capacity to effectively manage it. Improving Internal Controls and Accountability over Agency Purchases. Our work examining purchasing and property management practices at FAA identified several weaknesses in the specific controls and overall control environment that allowed millions of dollars of improper and wasteful purchases to occur. Such weaknesses also contributed to many instances of property items not being recorded in FAA's property management system, which allowed hundreds of lost or missing property items to go undetected. Acting on our findings, FAA established key positions to improve management oversight of certain purchasing and monitoring functions, revised its guidance to strengthen areas of weakness and to limit the allowability of certain expenditures, and recorded assets into its property management system that we identified as unrecorded. Strengthening Government Auditing Standards. Our publication of the Government Auditing Standards in June 2003 provides a framework for audits of federal programs and monies. This comes at a time of urgent need for integrity in the auditing profession and for transparency and accountability in the management of scarce resources in the government sector. The new revision of the standards strengthens audit requirements for identifying fraud, illegal acts, and noncompliance, and gives clear guidance to auditors as they contribute to a government that is efficient, effective, and accountable to the people. Supporting Controls over DOD's Credit Cards. In a series of reports and testimonies beginning in 2001, we highlighted pervasive weaknesses in DOD's overall credit card control environment, including the proliferation of credit cards and the lack of specific controls over its multibillion dollar purchase and travel card programs. We identified numerous cases of fraud, waste, and abuse and made 174 recommendations to improve DOD's credit card operations. DOD has taken many actions to reduce its vulnerabilities in this area. 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.
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GAO exists to support the Congress in meeting its constitutional responsibilities and to help improve the performance and ensure the accountability of the federal government for the benefit of the American people. GAO's work covers virtually every area in which the federal government is or may become involved, anywhere in the world. Perhaps just as importantly, our work sometimes leads us to sound the alarm over problems looming just beyond the horizon--such as our nation's enormous long-term fiscal challenges--and help policymakers address these challenges in a timely and informed manner. This testimony focuses on GAO's (1) fiscal year 2003 performance and results; (2) efforts to maximize our effectiveness, responsiveness, and value; and (3) budget request for fiscal year 2005 to support the Congress and serve the American people. In summary, the funding GAO received in fiscal year 2003 allowed it to conduct work that addressed many of the difficult issues confronting the nation, including diverse and diffuse security threats, selected government transformation challenges, and the nation's long-term fiscal imbalance. Perhaps the foremost challenge facing the government decision makers this year was ensuring the security of the American people. By providing professional, objective, and nonpartisan information and analyses, GAO helped inform the Congress and the executive branch agencies on key security issues, such as the nature and scope of threats confronting the nation's nuclear weapons facilities, its information systems, and all areas of its transportation infrastructure, as well as the challenges involved in creating the Department of Homeland Security. Its work was also driven by changing demographic trends, which led it to focus on such areas as the quality of care in the nation's nursing homes and the risks to the government's single-employer pension insurance program. Its work in these and other areas covered programs that involve billions of dollars and touch millions of lives. Importantly, in fiscal year 2003, GAO generated a $78 return for each $1 appropriated to the agency. With the Congress's support, GAO has demonstrated that becoming world class does not require a substantial increase in the number of staff authorized, but rather maximizing the efficient and effective use of the resources available to us. GAO has worked with Congress to obtain targeted funding for areas critical to GAO such as information technology, security, and human capital management. In keeping with the Comptroller General's belief that the federal government needs to exercise a greater degree of fiscal discipline, GAO has kept its request to $486 million, an increase of only 4.9 percent over fiscal year 2004. In keeping with the Congress' intent, GAO is continuing its efforts to revamp its budget presentation to make the linkages between funding and program areas more clear.
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The federal Marketplace approved coverage for 11 of our 12 fictitious applicants who initially applied online, or by telephone. We later received notices in 10 of 11 of these cases that failure to submit documentation needed to verify eligibility could lead to loss of coverage or subsidies we received. For 1 of the 11 approvals, we initially were denied coverage, but were successful when we subsequently reattempted the application. Applicants for coverage are required to attest that they have not intentionally provided false or untrue information. Applicants who provide false information are subject to penalties under federal law, including fines and imprisonment. For each of the approved applications, we were ultimately directed to submit supporting documentation to the Marketplace, such as proof of income, identity, or citizenship. For each of our 11 approved applications, we paid the required premiums to put policies into force, and are continuing to pay the premiums. For the 11 applications that were approved for coverage, we obtained the advance premium tax credit in all cases. The total amount of these credits for the 11 approved applications is about $2,500 monthly or about $30,000 annually. We also obtained cost-sharing reduction subsidies, according to Marketplace representatives, in at least 9 of the 11 cases. As noted, these advance premium tax credits and cost-sharing reductions are not paid directly to enrolled consumers; instead, the federal government pays them to issuers on consumers' behalf. To receive advance payment of the premium tax credit, applicants agree that they will file a tax return for the benefit year, and applicants receiving premium tax credits during the inconsistency period must indicate their understanding that premium tax credits are subject to reconciliation on their federal tax return. For each of our 6 online applications that were among the total group of 12, we failed to clear an identity checking step during the front end of the online application process, and thus could not complete the process online. However, we subsequently were able to obtain coverage for all 6 of these applications begun online by completing them by phone. In 5 of these 6 cases, the online system directed us to contact a Marketplace contractor that handles identity checking. The contractor was unable to resolve the identity issues. According to a CMS public information website, if the contractor cannot resolve the issue, applicants may be asked to provide identity documents, by online upload or by mail. In such cases, according to CMS officials, applications are to be put on hold until identity proofing is completed. For this group of 5 applications, however, contractor representatives did not ask us to submit identity documents but instead directed us to call the Marketplace. We did, and after speaking with Marketplace representatives as instructed, we were able to successfully proceed with our applications by phone and obtain coverage for the 5 applications. In the sixth case, the online system directed us to call the Marketplace directly, without contacting the contractor. In that case, too, we proceeded to successfully complete the application by phone and obtained coverage. According to CMS officials and executives of the Marketplace's call center contractor, an identity discrepancy must be cleared and identity verified before an application can proceed to completion. For our 6 phone applications, we successfully completed the application process, with the exception of one applicant who declined to provide a Social Security number and was not allowed to proceed. In the course of follow-up dealings with the Marketplace, call-center representatives in at least four cases could not locate our existing applications and, as a result, began new applications, according to our conversations with the representatives. According to CMS call-center and document-processing contractors, multiple electronic applications have been common. The Marketplace is required to seek postapproval documentation in the case of certain application "inconsistencies"--instances in which information an applicant has provided does not match information contained in data sources that the Marketplace uses for eligibility verification at time of application, or such information is not available. If there is an application inconsistency, the Marketplace is to provide eligibility while the inconsistency is being resolved using "back-end" Under these controls, applicants will be asked to provide controls.additional information or documentation for a Marketplace contractor to review in order to resolve the inconsistency. Among the 11 of our 12 undercover applications that successfully obtained coverage, the Marketplace initially directed that we submit supplementary documentation in 10 cases, with a request for supplementary documentation in the 11th case coming a few months after approval of coverage. Among the Marketplace communications were the following: The Marketplace asked two of three applicants with inactive Social Security numbers to submit proof of citizenship, identity, and income, but it asked a third only for income information. In four cases, the Marketplace asked for additional documentation a few months after initial document requests were made. The Marketplace directed two applicants to log into online accounts for messages--but these applicants had no such online accounts. The Marketplace sent unclear reminders to three applicants to file supplementary documentation, with a cover letter directing applicants to submit one type of document to resolve a particular inconsistency (for example, income), but then in an enclosure to be returned to the Marketplace requesting that another type of document be sent (for example, citizenship). As part of our testing and in response to Marketplace requests, we provided counterfeit follow-up documentation, but varied what we submitted by application--providing all, none, or only some of the material requested--in order to note any differences in outcomes. Specifically, among the 10 applications for which we were directed to send documentation at the time of approval, we submitted all requested documentation for 3 of the 10 applications, partial documentation for 4 applications, and no documentation for the remaining 3 applications. In addition, in 2 cases in which we were directed to submit income information, we reported income substantially higher than the amount we initially stated on our applications, and at levels that should disqualify our applications from obtaining subsidies. CMS officials told us that a CMS contractor evaluates follow-up documentation on a rolling basis as it receives submissions. If the contractor deems the information submitted to be complete, a decision on eligibility is typically made within 1 to 2 days, according to the officials. Otherwise, applicants may be directed to submit additional information as deemed necessary. In all cases, CMS officials told us, applicants are to be notified of the outcome of the review of their submitted documentation. For the seven applications for which we elected to submit full or partial follow-up documentation, approximately 3 months have elapsed since we submitted the requested information. As of July 17, 2014, we had received notifications indicating the Marketplace had reviewed portions of the counterfeit documentation sent for two applications. Specifically, the Marketplace notified both these applicants that their proof of citizenship/immigration status had been verified and no further action is necessary. One of them also had identity verified. We are awaiting notice on other documents filed for these two applicants. In the time since we filed documents requested at time of approval, we have received a number of follow-up communications from the Marketplace, which, as noted earlier, include requests for documentation not originally requested. In response, we have submitted a second round of documents, which responds to the requests but also maintains our testing methodology of submitting all, none, or some of the items requested. As of July 17, 2014, outcomes were still pending for these applications. Regardless of the status of any postapproval communications, our coverage remains in effect for all 11 approved applications. Overall, among all applications for the federal Marketplace, about 4.3 million application inconsistencies have been identified, representing about 3.5 million people, according to the CMS contractor handling receipt and evaluation of submitted materials. Of the total inconsistencies, about 2.6 million are for applicants who took the step of selecting health care plans after completing their applications. As of mid-July 2014, about 650,000 inconsistencies had been cleared. However, according to contractor executives, due to system limitations, processing of income and citizenship/immigration status inconsistencies--which together account for 75 percent of inconsistency volume--began in May and June 2014.cannot be matched to their respective applications, and become "orphans." As of mid-July 2014, the contractor said, there had been about 227,000 such documents. According to the contractor executives, unmatched documents are retained and reconsidered every 21 days to see if new information is available that can enable a match to be made. In some cases, according to the CMS contractor, documents As noted, applicants attest at the time of application that information they provide is not false or untrue. According to CMS officials, its document processing contractor is not required under its contract to authenticate documentation or to conduct forensic analysis. Executives of the contractor concurred, and told us the review standard the contractor uses is that it accepts documents as authentic unless there are obvious alterations. According to the executives, the contractor does not certify authenticity, does not engage in fraud detection, and does not undertake investigative activities. Specifically, in the contractor's standard operating procedures for its work for CMS, document review workers are directed under "general verification guidance" to "determine if the document image is legible and appears unaltered by visually inspecting it." Further, the contractor is not equipped to attempt to identify fraud, the contractor executives told us, and the contractor does not have the means to judge whether documents submitted might be fraudulent. The standard of accepting authenticity unless there is obvious alteration originated from CMS, the executives said. According to the contractor executives, when consumers send copies of documents, as directed, rather than originals, there inevitably is a loss of image quality such that the contractor could not closely examine whether a document is authentic.thoroughly analyze document authenticity, the CMS contractor executives Costs would increase by several times to told us. Even if such an effort was attempted, they said, it would be difficult to say if anti-fraud measures would be effective, because that is not the company's business. The contractor also does not currently make use of outside data sources in its document review; instead, it inspects what documents are received. Overall, the contractor executives told us, the contractor is not aware of any fraudulent applications and that, based on its practices, it also is not in a position to know whether fraud is being attempted. CMS officials similarly told us they did not know the extent of any attempts at application or enrollment fraud, but said that to date, there is no evidence of applicants defrauding the federal Marketplace. In following through on our applications, we also identified a potential challenge to consumers obtaining information about review of documentation submitted. In communications we received from the Marketplace about our document submissions, we were directed to call the Marketplace with questions. When we called to inquire about the status of our document filings, representatives could not answer our questions. They told us they were not able to confirm receipt of requested documentation and were not able to provide information on whether requested documentation has been reviewed. The CMS contractors handling consumer calls and document verification each confirmed to us that the call centers cannot access document-submission information. Hence, it is currently not possible for a call-center representative, fielding an inquiry such as ours, to obtain document status information in order to provide that information to the consumer. Overall, CMS officials told us that they have internal controls for the eligibility-determination process, and that experience has not shown the need for any changes in that process. They said that thus far, the focus has been on stabilizing processes being implemented for the first time. Our work continues on the postapproval verification process. In particular, we are tracking whether we receive any additional adjudication notices from the CMS verification contractor, or whether the contractor identifies supporting documentation we submitted as fictitious or inconsistent with information submitted at time of application. We will continue to assess CMS's management of the application and approval process through our ongoing work and consider any recommendations needed to address these issues. We attempted six in-person applications, in order to test income- verification controls only. Specifically, we sought to determine the extent to which, if any, in-person assisters would encourage our applicants to misstate income in order to qualify for either of the income-based PPACA subsidies. According to CMS, in-person assistance is to be available for those seeking assistance in filing applications.applications, we randomly chose three Navigators and three non- Navigators in the target areas of our selected states. For the in-person applications, because our sole interest was any potential advice on reporting income, we did not seek or obtain policies, as we did with our phone and online applications. During our testing, we visited one in-person assister and obtained information on whether our stated income would qualify for subsidy. In that case, a Navigator correctly told us that our income would not qualify for subsidy. However, for the remaining five in-person applications, we were unable to obtain such assistance. We encountered a variety of situations that prevented us from testing our planned scenarios, including the following: One of the three Navigators required that we make an appointment in advance by phone. When we were unable to reach the Navigator by phone, we made an in-person visit. The Navigator declined to provide assistance, or to schedule an appointment, saying instead we would need to phone to schedule an appointment to return. One of the three non-Navigators initially said it provides assistance only after people already have an application in progress. The non- Navigator did offer to assist us with an application, but the HealthCare.gov website was down. He directed us to call later for assistance. After we did so, this non-Navigator did not respond to three follow-up phone calls. Another of the three non-Navigators, a health care services company, told us it only handles applications from those having a medical bill at its medical facility. The third non-Navigator did not provide assistance, telling us it handles only applications for Medicaid. In two of the five instances in which we were unable to obtain assistance at our originally selected locations, we proceeded to seek assistance at other randomly selected locations in our target areas. In these follow-up attempts, we again encountered difficulty in obtaining assistance for our applicants, including the following: For one test, we visited two additional locations beyond the initial location before finding an in-person assister at a third who correctly told us our income was insufficient to qualify for subsidy. At the first two locations, we were told, among other things, that appointments were necessary. For another test, which occurred late in the open-enrollment period, non-Navigator representatives declined to provide help, telling us they were uncomfortable doing so and planned to take a seminar on enrollment. We further pursued, by phone calls to the Marketplace, the applications for which we could not get explicit in-person guidance on income and qualification for subsidy. In these calls, we were correctly advised that our income was outside the range eligible for income-based subsidy. Figure 1 summarizes our process and results for each of the groups of applicants--the 12 phone and online applications, and the six in-person attempts. The federal government, in administering the two income-based subsidies, makes payments to issuers of health insurance on behalf of eligible consumers who have enrolled in a qualified health plan. According to CMS officials, individuals are considered to be enrolled in a plan after they pay the initial premium. Thus, a key factor in analyzing enrollment in Marketplace coverage--and federal expenditures and subsidies that follow--is the ability to identify which applicants approved for coverage have subsequently paid premiums and put policies in force. According to HHS, more than 8 million people selected a plan for coverage during the initial open-enrollment period that ended in April. CMS officials, however, told us they are thus far unable to identify individuals who have made premium payments. Issuers have reported this information to CMS, but the agency has not yet created a system to process the information, according to CMS officials. In May 2014, CMS officials told us that work is underway to implement such a system. However, CMS does not have a timeline for completing and deploying this work. As a result, under current operations, CMS must rely on health insurance issuers to self-report enrollment data reflecting individuals for whom CMS owes the issuers the income-based subsidies arising from obtaining coverage through the Marketplace. We plan to continue examining this issue, among others, as part of our ongoing work, and to consider any recommendations needed to address it. Chairman Boustany, Ranking Member Lewis, and Members of the subcommittee, this concludes my statement. I would be pleased to respond to any questions that you may have. For questions about this statement, please contact Seto Bagdoyan 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 statement. Individuals making key contributions to this statement include: Wayne A. McElrath, Director; Matthew Valenta, Gary Bianchi, and Kristi Peterson, Assistant Directors; Carrie Davidson; Paul Desaulniers; Sandra George; Robert Graves; Barbara Lewis; Maria McMullen; George Ogilvie; Shelley Rao; Ramon Rodriguez; Christopher H. Schmitt; Julie Spetz; Cherie Starck, Helina Wong; Elizabeth Wood; and Michael Zose. This appendix provides background on certain requirements related to the submission of applications and eligibility-verification procedures to enroll in qualified health plans and qualify for income-based subsidies under the Patient Protection and Affordable Care Act (hereafter PPACA). To be eligible to enroll in a qualified health plan offered through a marketplace established under PPACA, an individual must be a U.S. citizen or national, or otherwise be lawfully present in the United States; reside in the marketplace service area; and not be incarcerated (unless pending disposition of the charges). moderate-income individuals and families may be eligible for income- based subsidies authorized by PPACA to make coverage more affordable: (1) a refundable tax credit, generally paid on an advance basis, to reduce premium costs for marketplace coverage (referred to as premium tax credits) and (2) reductions in cost-sharing associated with such coverage (known as cost-sharing reductions) for items such as copayments for physician visits or prescription drugs. To qualify for either subsidy, an individual must meet applicable income requirements and must not be eligible for coverage under another qualifying plan or program, such as affordable employer-sponsored coverage, Medicaid, or the State Children's Health Insurance Program. Subsidy payments are made to the issuer of the qualified health plan to offset the cost of the plan to the individual. PPACA, SS 1312(f)(1), (3),124 Stat. at 183-184; 45 C.F.R. SS 155.305(a). subsidy eligibility. Applicants for coverage are to attest that they have not intentionally provided false or untrue information. Applicants who provide false information are subject to penalties under federal law, including fines and imprisonment. Marketplaces are required by law to take several steps to verify application information to assess eligibility for enrollment in a qualified health plan and, if applicable, to qualify for an income-based subsidy. These verification steps include validating an applicant's Social Security number, if one is provided; verifying an applicant's citizenship, status as a national, or lawful presence with the Social Security Administration (SSA) and/or the Department of Homeland Security; verifying household income and family size against the most recent tax-return data from the Internal Revenue Service (IRS), as well as data on Social Security benefits from the SSA; and verifying whether the applicant is eligible for health coverage under another qualifying plan or program that would preclude eligibility for subsidy purposes. Where the marketplace identifies certain inconsistencies in an application that it cannot resolve through reasonable effort, the marketplace must undertake an "inconsistency process," under which the applicant is given 90 days to present satisfactory evidence to resolve the identified inconsistencies. For example, the inconsistency process applies when the marketplace is unable to validate an individual's Social Security number or attestation regarding citizenship or immigration status. It also applies when the marketplace is unable to verify eligibility for income- based subsidies, including, for example, if an applicant indicates a change in circumstances, such as substantial changes in income compared with the most recent tax return available, or IRS does not have recent tax-return data. During the inconsistency period, the marketplace must allow the applicant to enroll in a qualified health plan and, if applicable, authorize the advance payment of any premium tax credit or cost-sharing reduction to the applicant's issuer on the basis of the applicant's attestations. PPACA authorizes the Department of Health and Human Services to extend the 90-day period for enrollments occurring during 2014. PPACA, SS 1411(e)(4)(A)(ii), 124 Stat. at 228. CMS regulations also generally permit the marketplaces to extend the 90-day period if the applicant has made a good faith effort to obtain documentation required to resolve the inconsistency. 45 C.F.R. SS 155.315(f)(3). inconsistency period, an applicant also must attest to understanding that any advance payments of premium tax credits received during this period are subject to reconciliation. Marketplaces are required to permit applicants to receive less than the full amount of advance payments of the premium tax credits in order to minimize the possibility of having to repay such credits if their actual income for the benefit year is higher. 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.
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PPACA provides for the establishment of health insurance exchanges, or marketplaces, where consumers can compare and select private health insurance plans. The act also expands the availability of subsidized health care coverage. The Congressional Budget Office estimates the net federal cost of coverage provisions at $36 billion for fiscal year 2014, with subsidies and related spending accounting for a large portion. PPACA requires marketplaces to verify application information to determine enrollment eligibility and, if applicable, eligibility for subsidies. GAO was asked to examine issues related to controls for application and enrollment for coverage through the federal marketplace. This testimony discusses preliminary observations on (1) results of undercover testing in which we obtained health care coverage; (2) additional undercover testing, in which we sought to obtain consumer assistance with our applications; and (3) delays in the development of a system needed to analyze enrollment. This statement is based on preliminary analysis from GAO's ongoing review for this subcommittee and other congressional requesters. GAO created fictitious identities to make applications through the federally facilitated exchange in several states by telephone, online, and in-person. The number and locations of the target areas are not disclosed because of ongoing testing. The results, while illustrative, cannot be generalized to the overall applicant or enrollment populations. GAO expects to issue a final report next year. Centers for Medicare & Medicaid Services (CMS) officials told us they have internal controls for health care coverage eligibility determinations. GAO's undercover testing addressed processes for identity- and income-verification, with preliminary results revealing questions as follows: For 12 applicant scenarios, GAO tested "front-end" controls for verifying an applicant's identity or citizenship/immigration status. Marketplace applications require attestations that information provided is neither false nor untrue. In its applications, GAO also stated income at a level to qualify for income-based subsidies to offset premium costs and reduce cost sharing. For 11 of these 12 applications, which were made by phone and online using fictitious identities, GAO obtained subsidized coverage. For one application, the marketplace denied coverage because GAO's fictitious applicant did not provide a Social Security number as part of the test. The Patient Protection and Affordable Care Act (PPACA) requires the marketplace to provide eligibility while identified inconsistencies between information provided by the applicant and by government sources are being resolved through submission of supplementary documentation from the applicant. For its 11 approved applications, GAO was directed to submit supporting documents, such as proof of income or citizenship; but, GAO found the document submission and review process to be inconsistent among these applications. As of July 2014, GAO had received notification that portions of the fake documentation sent for two enrollees had been verified. According to CMS, its document processing contractor is not required to authenticate documentation; the contractor told us it does not seek to detect fraud and accepts documents as authentic unless there are obvious alterations. As of July 2014, GAO continues to receive subsidized coverage for the 11 applications, including 3 applications where GAO did not provide any requested supporting documents. For 6 applicant scenarios, GAO sought to test the extent to which, if any, in-person assisters would encourage applicants to misstate income in order to qualify for income-based subsidies. However, GAO was unable to obtain in-person assistance in 5 of the 6 initial undercover attempts. For example, one in-person assister initially said that he provides assistance only after people already have an application in progress. The in-person assister was not able to assist us because HealthCare.gov website was down and did not respond to follow-up phone calls. One in-person assister correctly advised the GAO undercover investigator that the stated income would not qualify for subsidy. A key factor in analyzing enrollment is to identify approved applicants who put their policies in force by paying premiums. However, CMS officials stated that they do not yet have the electronic capability to identify such enrollees. As a result, CMS must rely on health insurance issuers to self-report enrollment data used to determine how much CMS owes the issuers for the income-based subsidies. Work is underway to implement such a system, according to CMS, but the agency does not have a timeline for completing and deploying it. GAO is continuing to look at these issues and will consider recommendations to address them.
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The MEP program traces its origins to the Manufacturing Technology which was established by NIST's predecessor, the Centers Program,National Bureau of Standards (NBS). In July 1988, NBS published the first of 12 federal funding opportunity announcements that have been issued to date for the establishment of MEP centers.announcement led to the establishment of the first 3 centers in 1989, as part of an initial pilot program. By 1990, NBS had become NIST, and the agency published the second federal funding opportunity announcement for the establishment of two additional centers, bringing the total number of centers to 5. In 1992, NIST announced a federal funding opportunity for 2 more centers, bringing the total to 7. The number of centers grew rapidly thereafter, with a nationwide network of 44 centers in place by 1995. NIST has since added to its network and, as of 2013, has 60 centers that cover all 50 states and Puerto Rico. Appendix I provides a list of the 60 MEP centers. The original legislation authorizing the MEP program emphasized the transfer of advanced technologies developed within NIST and other federal laboratories to small and medium-sized manufacturing firms. As we reported in 1991, however, the centers soon found that firms primarily needed proven, not advanced, technologies because advanced technologies were generally expensive, untested, and too complex to be practical for most small manufacturing firms. a key mandate of the program was not realistically aligned with the basic needs of most small manufacturing firms. In recognition of this situation, NIST reoriented the program to focus on basic technologies that permitted firms to improve their competitive position. By the time we reported on the program in 1996, centers were providing a wide range of business services, including helping companies solve individual manufacturing problems, obtain training for their workers, create We reported, therefore, that marketing plans, and upgrade their equipment and computers. GAO, Technology Transfer: Federal Efforts to Enhance the Competitiveness of Small Manufacturers, GAO/RCED-92-30 (Washington, D.C.: Nov. 22, 1991). Next Generation Strategy and, in December 2008, NIST released its current strategic plan referred to by that name. The plan articulates NIST's new vision for the program as a catalyst for accelerating manufacturing's transformation into a "more efficient and powerful engine of innovation driving economic growth and job creation." The plan also defines the program's mission: "to act as a strategic advisor to promote business growth and connect manufacturing firms to public and private resources essential for increased competitiveness and profitability." The plan focuses the program's activities around the following five strategic areas: Continuous Improvement. This area includes enhancing manufacturing firms' productivity and freeing up their capacity to provide them a stable foundation to pursue innovation and growth through services and programs that target manufacturing plant efficiencies. Technology Acceleration. This area includes developing tools and services to bring new product and process improvement opportunities to manufacturing firms, accelerating firms' opportunities to leverage and adopt technology, connecting firms with technology opportunities and solutions, and making available a range of product development and commercialization assistance services. Supplier Development. This area includes developing and delivering the national capacity, tools, and services needed to put suppliers in a position to thrive in existing and future global supply chains. Sustainability. This area includes helping companies gain a competitive edge by reducing environmental costs and impact by developing new environmentally focused materials, products, and processes to gain entry into new markets. Workforce. This area includes developing and delivering training and workforce assistance to manufacturing firms, as well as expanding partnerships and collaborations to develop and deliver tools and services to foster the development of progressive managers and entrepreneurial CEOs. MEP centers work with manufacturing firms to plan and implement projects in these and other areas. For example, in 2011, the Delaware Valley Industrial Resource Center (DVIRC)--a MEP center in Pennsylvania--worked with a manufacturing firm in Hatfield, Pennsylvania, on a continuous improvement project when the company faced price increases from its vendors it did not want to pass on to its customers. DVIRC trained company staff on methods to achieve efficiencies and helped identify areas for improvement in the company's production process, resulting in increased productivity and reduced inventory levels that allowed the company to save space and lower costs, as reported by the manufacturing firm. Similarly, the Texas MEP center worked with a manufacturing firm in El Paso, Texas, on a sustainability project in 2013. The MEP center and the firm partnered with New Mexico State University's Institute for Energy and the Environment on an economy, energy, and environment (E3) project that included training and an effort to identify inefficiencies in the manufacturing process. As a result of this partnership, the firm reported saving 40,000 gallons of water and reducing solid waste by 56 tons, among other accomplishments. NIST has recently begun developing a new strategic planning process for the MEP program to update its Next Generation Strategy. According to NIST officials, the process will include extensive participation by stakeholders, including MEP centers. NIST expects to implement the planning process through the spring of 2014 and release an updated strategic plan shortly after the planning process is complete. The program has also evolved in its matching fund requirements. The program as originally implemented provided federal funding to reimburse each $1 of nonfederal contributions with no more than $1 of federal funding--referred to as a 1:1 cost share--for the first 3 years that a center operated. For the fourth year of operation, every $3 of nonfederal contributions were reimbursed with $2 of federal funding--referred to as a 3:2 cost share. For the fifth and sixth years of operation, every $2 of nonfederal contributions were reimbursed with $1 of federal funding-- referred to as a 2:1 cost share. Under the original legislation, federal funding was scheduled to end once a center had operated for 6 years. The 6-year federal funding limit was temporarily suspended by the fiscal year 1997 and 1998 appropriations acts and was eliminated in 1998 when Congress passed legislation changing the program to, among other things, provide for continued federal funding and set the cost share at 2:1 for all centers that had been in operation for at least 6 years. NIST spent $608.3 million in federal funding on the MEP program in fiscal years 2009 through 2013 and used most of these funds to directly support MEP centers and their work with manufacturing firms. Specifically, NIST spent $494.6 million on cooperative agreement awards and competitive grant awards to MEP centers, which NIST considers to be direct support. NIST spent $78 million for contracts, and for NIST staff salaries and benefits, some of which NIST considers direct support and some administrative spending. The remaining $35.7 million was spent for agency-wide overhead charges and travel, training, performance awards, and other items, all of which NIST considers administrative spending. NIST defines direct support as spending that directly supports the MEP center system's work with manufacturing firms, such as awards to centers or spending on training for MEP center staff. NIST considers all other spending to be administrative, including spending on performance evaluations of centers and on agency-wide overhead charges that pay for facilities operations and maintenance at the NIST campus. NIST is not required to track, and historically has not tracked, administrative spending, but NIST officials told us the agency developed its definitions of direct support and administrative spending in fiscal year 2013 in response to congressional interest. It then conducted an analysis of fiscal year 2013 federal MEP program spending using those definitions. NIST estimated that about 88.5 percent of federal MEP program spending in fiscal year 2013 was for direct support, and the remaining 11.5 percent was administrative. (See fig. 2.) It is not possible to determine whether NIST's amount of administrative spending is appropriate because there is no standard definition of administrative spending for federal programs. In addition, conducting the analysis using different definitions could produce different results. There is no standard definition of administrative expenses for federal programs. Executive Order 12837, issued on February 10, 1993, called on the Director of the Office of Management and Budget (OMB) to establish a definition of administrative expenses for agencies, but OMB did not develop a definition. Definitions and reporting of administrative expenses vary across public and private entities depending on their mission, priorities, services, clients, and on the purposes for which management needs the information. NIST spent $471 million on MEP center cooperative agreement awards in fiscal years 2009 through 2013. NIST considers all of this spending direct support. Federal funds for center cooperative agreements can be used by MEP centers for capital and operating and maintenance expenses. As stated earlier, these funds are awarded contingent on each MEP center meeting its cost-share requirement and having positive performance evaluations. NIST officials told us that spending on cooperative agreements and spending on staff salaries and benefits are NIST's top spending priorities. In fiscal years 2009 through 2013, NIST spent $23.6 million on awards to centers that were granted on a competitive basis. These awards are made in addition to cooperative agreement awards. The bulk of these awards went to two competitive grant programs; about $12.7 million was awarded to MEP centers through the Expansion of Services Cooperative Agreement Recipients (E-CAR) competition, and about $7.3 million was awarded through the Tool Development Cooperative Agreement Recipients (T-CAR) competition. NIST also awarded a small amount through grant competitions conducted under two other programs: the Advanced Manufacturing Jobs and Innovation Accelerator Challenge, and the Energy-Efficient Buildings Hub project.the competitive grants that it awarded under the four programs encourage projects in the five strategic areas identified in the MEP program's strategic plan. For example, NIST awards to MEP centers through the E- CAR competition funded 14 projects designed to integrate two or more of the five strategic areas, and NIST awards through the T-CAR competition funded 8 projects aimed at addressing the new and emerging needs of manufacturing firms in any of the strategic areas. In fiscal years 2009 through 2013, NIST spent $45.9 million on contracts for goods or services, some of which directly supported MEP centers and some of which were administrative. Of the $8 million spent on such contracts in fiscal year 2013, NIST estimated that it spent $5 million on direct support contracts and $3 million on administrative contracts. The contracts that NIST considered direct support in fiscal year 2013 were for training and support for MEP centers on tools that centers could use to assist manufacturing firms, or for work with centers on implementing MEP initiatives. For example, NIST awarded a $3.7 million contract to International Management and Consulting, LLC, to provide training for MEP center staff on innovation engineering, which NIST describes as a business support service that informs companies how to quickly assess innovative ideas resulting in new business models, processes, and products. The training is intended to help MEP center staff provide guidance in these areas to clients. Contracts that NIST considered administrative in fiscal year 2013 were for services related to performance evaluations of MEP centers, telephone and mobile broadband, information technology (IT), and other products and services. According to NIST officials, some of these contracts helped the program meet legal requirements, such as for services related to performance evaluations of MEP centers, which are required by the program's enabling legislation and implementing regulations. Other contracts supported areas of the program's strategic plan, such as the contracts for MEP center staff training. Finally, some of the contracts were for operational functions, such as the contracts for telephone and mobile broadband and IT. NIST staff told us the program is currently reviewing all large direct support contracts with the intent of reducing contract spending and directing more funds to MEP centers. They expect the review to be complete in spring 2014. NIST spent $32.1 million on staff salaries and benefits in fiscal years 2009 through 2013. As of fiscal year 2013, NIST employed 55 staff under the MEP program. According to NIST's definitions, some of its staff directly supported MEP centers, and some were administrative. In fiscal year 2013, NIST estimated that it spent $2.9 million on direct support staff, and $4.4 million on administrative staff. As shown in figure 3, the direct support staff worked in NIST's strategic partnerships team, as well as in its program development and system operations offices for the MEP program. In NIST's 2013 analysis of administrative spending, NIST considered the strategic partnerships and program development staff to be entirely dedicated to directly supporting MEP centers, and the system operations staff to be half dedicated to directly supporting MEP centers and half dedicated to program administration. NIST considered the other six units and teams in the MEP program to be dedicated to program administration, including the Director and the administration and finance team. NIST officials told us that they increased spending for staff salaries and benefits during the past 5 years, in part to return the program's staffing level to that before substantial budget cuts in fiscal year 2004. New hiring focused on staff with expertise in areas of the program's strategic plan, according to these officials. NIST spent $30.6 million in federal MEP program funds in fiscal years 2009 through 2013 on agency-wide overhead required by NIST. NIST considers this spending to be administrative. NIST does not receive an appropriation for the costs of agency-wide general administration; instead it levies surcharges on programs to pay overhead costs, including the operation and maintenance of facilities, grants management, and mail distribution. NIST spent the remainder of its federal funds--$5.1 million in fiscal years 2009 through 2013--on travel, training, staff performance awards, and other items. NIST considers all of this spending to be administrative. According to NIST's travel tracking spreadsheet, fiscal year 2013 travel included participation in on-site panel reviews of MEP centers, attendance at MEP center board meetings, and attendance at meetings with state and federal partners, among other things. Officials told us training funds are used for continuing education and professional training for MEP program staff, as opposed to training for MEP center staff. For example, some program staff hold professional credentials, such as a Contracting Officer Technical Representative, which require periodic training to be maintained. Performance award spending is used for discretionary bonuses and cash awards paid to MEP program staff for performance and to NIST staff outside the program, such as legal counsel, for exemplary support of the program. Table 1 summarizes the spending described above. NIST's spending on cooperative agreement awards is based on the historical amount awarded to each center when it was established. This took into account each center's identification of target manufacturing firms in its service area--including characteristics such as business size, industry types, product mix, and technology requirements--and its costs of providing services to those manufacturing firms. However, because NIST made the awards on an incremental basis to individual centers serving different areas over a period of more than 15 years, NIST's awards to individual centers did not take into account variations across different service areas in the demand for program services--a function of the number and characteristics of target manufacturing firms--or variations across different service areas in costs of providing services. NIST's cooperative agreement award spending is, therefore, inconsistent This standard--which is commonly with the beneficiary equity standard.used in social science research to design and evaluate funding formulas--calls for funds to be distributed in a way that takes these variations into account so that centers can provide the same level of services to each target manufacturing firm, according to its needs. Because NIST did not account for these variations across service areas, NIST's cooperative agreement award spending may not allow centers to provide the same level of services to target manufacturing firms, according to their needs. NIST officials told us that an analysis they recently conducted showed a wide variation across centers in the relationship between their cooperative agreement award amounts and the number of target manufacturing firms in their service areas. NIST officials told us they are exploring ways to revise NIST's cooperative agreement award spending to take into account variations across service areas in the number of target manufacturing firms, among other factors. NIST's spending on cooperative agreement awards is based on the historical amount awarded to each center when it was established. Most of the currently operating centers were established between 1989 and 1996, according to our analysis of NIST data estimating the establishment dates of current centers. When the centers were established, their original award amounts were based on the proposals that they submitted in response to NIST's federal funding opportunity announcements. For all but the first federal funding opportunity announcement, NIST specified that it would evaluate proposals by assigning scores to the following equally weighted criteria:Identification of target firms in the proposed region. The proposals had to demonstrate an understanding of the service area's manufacturing base, including concentration of industry, business size, industry types, product mix, and technology requirements, among other things. Technology resources. The proposals had to assure strength in technical personnel and programmatic resources, full-time staff, facilities, equipment, and linkages to external sources of technology, among other things. Technology delivery mechanisms. The proposals had to define an effective methodology for delivering advanced manufacturing technology to manufacturing firms, among other things. Management and financial plan. The proposals had to define a management structure and assure management personnel to carry out development and operation of an effective center, among other things. Budget. The proposals had to contain a detailed 1-year budget and budget outline for subsequent years, among other things. For funding opportunity announcements that NIST published after it issued its 2008 strategic plan, these criteria were to be discussed in the context of the proposer's ability to align the proposal with the program's strategic objectives. The announcements stated that, after scoring the proposals, NIST would select award recipients based upon their score ranking and other factors such as availability of federal funds and the need to assure appropriate regional distribution. After centers were established, their subsequent cooperative agreement awards have remained at the historical amount when they were renewed each year. According to NIST officials, in some instances, centers' cooperative agreements are not renewed and are instead opened to recompetition; during fiscal years 2009 to 2013, eight cooperative agreements were opened to recompetition. NIST officials told us that recompetitions typically occur because the existing center has voluntarily closed or the organization has decided its mission no longer supports running a MEP center. According to NIST's funding opportunity announcements, NIST used the same evaluation criteria discussed above to select new centers and establish their awards. Unlike renewed cooperative agreement awards, which remain at the historical amount each year, recompeted awards are based on, but can be greater than, the historical amount. NIST officials told us that they use the historical amounts as a baseline in establishing the recompeted award amounts, but they may make additional funding available for the recompetitions. This was the case for all but one of the eight recompetitions that took place during fiscal years 2009 to 2013. According to NIST officials, during these years, NIST reserved additional funds for seven of the recompetitions to accommodate compelling proposals such as those that identified increased matching funds or broadened the work historically done in the service area. All but one of those seven recompetitions led to award amounts greater than the historical amount. In addition to renewing existing awards and recompeting awards when a center has closed, NIST officials told us that NIST recently added a new center to the nationwide system and based the new award on the historical amount awarded for the area. Specifically, in 2012, a new center was added in South Dakota. Previously, the MEP center located in North Dakota served both North and South Dakota and received separate cooperative agreement awards for each. Serving both states proved to be difficult for the center, however, and most of its activity was focused in North Dakota. According to NIST officials, the state of South Dakota suggested to NIST the addition of a new South Dakota center. Through a competitive process, the new South Dakota center received an award equal in amount to the award that the North Dakota center previously received to serve South Dakota. The North Dakota center received an award equal in amount to the award it previously received to serve North Dakota. NIST's spending on cooperative agreement awards to MEP centers does not account for variations across centers' service areas in terms of the demand for program services, which is a function of the number and characteristics of target manufacturing firms. As a result, NIST's cooperative agreement award spending falls short of a component of beneficiary equity--a standard commonly used to design and evaluate funding formulas-- that calls for funds to be distributed in a way that takes into account these variations so that each center can provide the same level of services to each target manufacturing firm, according to its needs. The original awards were made in part on the basis of each center's identification of target manufacturing firms in its service area, including characteristics such as business size, industry types, product mix, and technology requirements, among other things. NIST's funding opportunity announcements published in June 1995, May 1996, July 2000, March 2001, and March 2003 specified that award amounts should be directly related to the level of activity of the center, which is a function of the number of manufacturing firms in the designated service area. Because most of the current MEP center cooperative agreements were made on an incremental basis over a period of more than 15 years, they did not take into account the distribution of demand for program services across service areas. NIST officials told us they recognize that, as a result of the incremental addition of centers, wide variations emerged across centers in the relationship between their cooperative agreement award amounts and the number of target manufacturing firms in their service areas. Specifically, NIST officials told us that an analysis they recently conducted of current cooperative agreement award amounts per target manufacturing firm across service areas showed a mean of $333 per target manufacturing firm and a range of $82 to $972, with 75 percent of centers falling between $179 and $487. As a result, centers may not be able to provide the same level of services to each target manufacturing firm, according to its needs. NIST's spending on cooperative agreement awards also does not take into account variations in MEP centers' costs of providing services to target manufacturing firms. As a result, NIST's cooperative agreement award spending falls short of another component of beneficiary equity. Under the beneficiary equity standard, funds should be distributed in a way that accounts for variations in the cost of providing services in each area, so that target manufacturing firms across MEP center service areas may receive the same level of assistance, according to their needs. The costs of operating the centers to provide assistance to manufacturing firms affect the amount of funding that centers have available for direct assistance to firms. According to NIST's funding opportunity announcements, costs--as presented by the centers' budgets--were considered in making the original awards, but these costs were presented on an incremental basis over a period of more than 15 years and, therefore, NIST's consideration of these costs did not account for variations across service areas. By not accounting for these variations, NIST's cooperative agreement award spending may further call into question centers' ability to provide the same level of services to each target manufacturing firm, according to its needs. NIST officials told us they are exploring ways to revise cooperative agreement award spending to take into account variations across service areas in the number of target manufacturing firms, among other factors. The officials discussed various options they are considering, but they did not identify an option they had agreed to implement or a timeline for decision making and implementation. They stated that one option they are considering is to provide increased awards to those centers that are currently underfunded relative to the mean relationship between centers' cooperative agreement award amounts and the number of manufacturing firms in their service areas. They told us that doing so would result in a greater benefit in terms of manufacturing firms served than providing additional funds to centers that are overfunded relative to the mean. NIST estimates that if it were to increase cooperative agreement award amounts for the underfunded centers, the program would see up to a 20 percent increase in the number of manufacturing firms served in these service areas over a 3-year period. NIST officials told us that they face at least two impediments in revising cooperative agreement award spending. First, they stated that revising cooperative agreement award spending within the current level of funding would likely mean taking funds from some centers to give to others, and NIST is concerned about the effect this disruption might have on the impact of the program. The officials told us that they would like to increase NIST's total cooperative agreement award spending and that they are exploring options to do so. They said they are examining their spending on direct support contracts to determine whether cost savings can be realized and redirected to cooperative agreement awards. They also said that they are considering making any changes over a multiyear period. Our prior work has shown that phasing in changes to funding levels gradually over a number of years minimizes disruptions to funding recipients by providing them time to adjust. The second impediment that the officials identified is the requirement in the MEP program's authorizing legislation that federal cooperative agreement funds provided to MEP centers after their sixth year of operation not exceed one-third of their capital and annual operating and maintenance costs. This requirement leaves the centers responsible for raising the remaining two-thirds of matching funds from other sources. NIST officials told us that many centers already face difficulties raising the required two-thirds of matching funds and may not be able to raise the additional funds needed to access an increased cooperative agreement award. Manufacturing plays a key role in the U.S. economy, and NIST has established a nationwide system of MEP centers dedicated to supporting and strengthening the U.S. manufacturing base. However, because NIST's cooperative agreement award spending does not take into account variations across service areas in the demand for program services--a function of the number and characteristics of target manufacturing firms--or variations in MEP centers' costs of providing services, centers may not be able to provide the same level of services to each target manufacturing firm, according to its needs. NIST officials told us they are exploring ways to revise cooperative agreement award spending to take into account variations across service areas in the number of target manufacturing firms, among other factors. Revising NIST's cooperative agreement award spending poses challenges because it could result in award decreases for some centers, along with increases for others. However, there are ways to ease the transition, such as phasing in changes gradually to minimize disruption to centers and the manufacturing firms they serve. To ensure that NIST's spending on cooperative agreement awards to MEP centers is more equitable to manufacturing firms in different service areas, we recommend that the Secretary of Commerce revise the program's cooperative agreement award spending to account for variations across service areas in: the demand for program services--a function of the number and characteristics of target manufacturing firms--and MEP centers' costs of providing services. We provided a draft of this report to the Department of Commerce's NIST for review and comment. In its written comments, reproduced in appendix II, NIST generally agreed with our findings and recommendation. In commenting on our recommendation, NIST stated that information in our report could help NIST continue to efficiently operate the MEP program. NIST also provided technical comments, which we incorporated into the report as appropriate. We are sending a copy of this report to the Secretary of Commerce, the appropriate congressional committees, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. Name Alaska Manufacturing Extension Partnership Colorado Association for Manufacturing and Technology Connecticut State Technology Extension Program Iowa Center for Industrial Research and Services Illinois Manufacturing Excellence Center-Chicago Region Manufacturing Extension Partnership of Louisiana North Carolina Industrial Extension Service North Dakota Manufacturing Extension Partnership New Hampshire Manufacturing Extension Partnership New Jersey Manufacturing Extension Partnership New Mexico Manufacturing Extension Partnership Empire State Development's Division of Science, Technology and Innovation (NYSTAR) According to NIST officials, the Alaska Manufacturing Extension Partnership closed in September 2013. According to NIST officials, the Florida Manufacturing Extension Partnership is expected to close by March 2014. According to NIST officials, the Maryland MEP was established in July 2013. According to NIST officials, Rhode Island Manufacturing Extension Services was established in February 2013. According to NIST officials, South Dakota Manufacturing and Technology Solutions was established in January 2013. In addition to the individual named above, Susan Quinlan (Assistant Director), Greg Dybalski, Kim Frankena, Cindy Gilbert, Mark M. Glickman, Paul Kinney, Cynthia Norris, Marietta Mayfield Revesz, Emmy Rhine Paule, William B. Shear, Barbara Timmerman, and Jack Wang made key contributions to this report.
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Manufacturing plays a key role in the U.S. economy. Congress established the MEP program in NIST in 1988. The program's objectives are to enhance productivity and technological performance and to strengthen the global competitiveness of target manufacturing firms, namely small and medium-sized U.S.-based firms. Under this program, NIST partners with 60 nonfederal organizations called MEP centers. The centers, located in 50 states and Puerto Rico, help target firms develop new customers and expand capacity, among other things. NIST awards federal funding to centers under annually renewed cooperative agreements, subject to the centers providing matching funds and receiving a positive performance evaluation. The Consolidated and Further Continuing Appropriations Act, 2013, mandated GAO to report on MEP program administrative efficiency, which relates to funding provided to centers. This report (1) describes, over the past 5 years, how NIST spent federal MEP program funds and (2) examines the basis for NIST's cooperative agreement award spending. To conduct this work, GAO analyzed obligations data, reviewed relevant legislation and policies, and interviewed NIST officials. Of the approximately $608 million spent by the Department of Commerce's (Commerce) National Institute of Standards and Technology (NIST) in fiscal years 2009 through 2013 on the Manufacturing Extension Partnership (MEP) program, NIST used most of the funds to directly support MEP centers. Specifically, NIST spent about $495 million on awards to centers and spent the rest on contracts, staff, agency-wide overhead charges, and other items, some of which NIST considered direct support and some of which NIST considered administrative spending. Although NIST is not required to track, and has not historically tracked, administrative spending, NIST officials told GAO the agency developed definitions of direct support and administrative spending in fiscal year 2013 in response to congressional interest, then conducted an analysis of fiscal year 2013 federal MEP program spending using those definitions. NIST defines direct support spending as spending that directly supports the MEP center system's work with manufacturing firms, such as awards to centers or contracts to train MEP center staff on how to quickly assess innovative ideas for new products. NIST considers all other spending to be administrative, including spending on performance evaluations for MEP centers or on agency-wide overhead fees that pay for facilities operations and maintenance at the NIST campus. Using these definitions, NIST estimated that about 88.5 percent of federal MEP program spending in fiscal year 2013 was for direct support, and the remaining 11.5 percent was for administration. NIST's spending on cooperative agreement awards is based on the historical amount awarded to each center when it was established. This took into account each center's identification of target manufacturing firms in its service area--including characteristics such as business size, industry types, product mix, and technology requirements--and its costs of providing services to those firms. However, because NIST made the awards on an incremental basis to individual centers serving different areas over a period of more than 15 years, NIST's awards did not take into account variations across service areas in the demand for program services--a function of the number and characteristics of target firms--or variations across service areas in costs of providing services. NIST's cooperative agreement award spending is, therefore, inconsistent with the beneficiary equity standard. This standard--commonly used to design and evaluate funding formulas--calls for funds to be distributed in a way that takes these variations into account so that centers can provide the same level of services to each target manufacturing firm, according to its needs. Because NIST did not account for these variations across service areas, NIST's cooperative agreement award spending may not allow centers to provide the same level of services to target manufacturing firms, according to their needs. NIST officials told GAO that an analysis they recently conducted showed wide variation across centers in the relationship between their cooperative agreement award amounts and the number of target manufacturing firms in their service areas. NIST officials told GAO they are exploring ways to revise NIST's cooperative agreement award spending to take into account variations across service areas in the number of target manufacturing firms, among other factors. The officials discussed various options they are considering, but they did not identify an option they had agreed to implement or a timeline for decision making and implementation. GAO recommends that Commerce's spending on cooperative agreement awards be revised to account for variations across service areas in demand for program services and in MEP centers' costs of providing services. Commerce agreed with GAO's recommendation.
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Mr. Chairman and Members of the Subcommittee: I am pleased to be here today to discuss recent Medicaid spending trends and their potential implications for future outlays. My comments are based on work that we have in progress at the request of the Chairmen of the Senate and House Budget Committees. Their request was prompted by an interest in what contributed to the precipitous drop in the annual growth rate of Medicaid spending from over 20 percent in the early 1990s to 3.3 percent in fiscal year 1996. In addition, you have asked us to comment on aspects of the administration's fiscal year 1998 proposal for the Medicaid program. My remarks today focus on two broad issues: (1) key factors that explain the 3.3-percent growth rate in fiscal year 1996 and their implications for future Medicaid spending and (2) the administration's proposal to contain Medicaid cost growth through decreases in disproportionate share hospital (DSH) payments and per capita caps, and to increase state flexibility. Our findings are based on our analysis of Medicaid expenditure data published by the Department of Health and Human Services' Health Care Financing Administration and our review of federal outlays as reported by the Department of the Treasury. We also contacted Medicaid officials in 18 states that represent a cross-section of state spending patterns over the past 2 years and that account for almost 70 percent of Medicaid expenditures. Our comments on the administration's proposal are based on a review of budget documents and previous work we have conducted. in the 1996 growth rate, so a variety of factors--such as a downturn in the economy--could result in increased growth rates in subsequent years. Finally, the administration's proposal for Medicaid reform would further control spending by reducing DSH expenditures and imposing a per capita cap, while providing the states greater flexibility in program policy and administration for their managed care and long-term care programs. These initiatives should produce cost savings. However, in controlling program spending, attention should be given to targeting federal funds appropriately and ensuring that added program flexibility is accompanied by effective federal monitoring and oversight. Medicaid, a federal grant-in-aid program that states administer, finances health care for about 37 million low-income people. With total federal and state expenditures of approximately $160 billion in 1996, Medicaid constitutes a considerable portion of both state and federal budgets, accounting for roughly 20 percent and 6 percent of total expenditures, respectively. For more than a decade, the growth rate in Medicaid expenditures nationally has been erratic. Between 1984 and 1987, the annual growth rates remained relatively stable, ranging between roughly 8 and 11 percent. Over the next 4 years, beginning in 1988, annual growth rates increased substantially, reaching 29 percent in 1992--an increase of over $26 billion for that year. From this peak, Medicaid's growth rates declined between 1993 and 1995 to approximately the levels of the mid-1980s. Then, in fiscal year 1996, the growth rate fell to 3.3 percent. In analyzing the growth rate for 1996 we found that no single spending growth pattern was evident across the states nor did we find a single factor that explained the decrease in growth. Rather there was a confluence of factors, some of which are unlikely to recur, while others are part of a larger trend. Future spending will potentially be higher if the economy weakens and as the elderly population continues to grow. to the next because of major changes in program structure or accounting variances that change the fiscal year in which a portion of expenditures is reported. To determine the stability of the growth rates among states, we compared states' growth rates in fiscal year 1995 with those in fiscal year 1996. Our analysis showed that states could be placed in one of five categories, as shown in table 1. (See app. I for specific state growth rates.) Ten states that collectively account for 16 percent of 1996 federal outlays experienced substantial decreases in fiscal year 1996 growth compared with fiscal year 1995's. However, 80 percent of 1996 federal Medicaid outlays were in states that either experienced moderate decreases or minimal changes in their fiscal year 1996 growth. Although five states' fiscal year 1996 growth rates increased, those states did not have much effect on spending growth patterns because their combined share of Medicaid outlays is only 4 percent. many states' growth rates. The convergence of these factors resulted in the historically low 3.3-percent growth rate in fiscal year 1996 Medicaid spending. The growth rate changes in those states that experienced large decreases in 1996 were largely attributable to three factors not expected to recur: substantial decreases in DSH funding, slowdowns in state-initiated eligibility expansions, and accelerated 1995 payments in reaction to block grant proposals for Medicaid. In 1991 and 1993, the Congress acted to bring under control DSH payments that had grown from less than $1 billion to $17 billion in just 2 years. After new limits were enacted, DSH payments nationally declined in 1993, stabilized in 1994, and began to grow again in 1995. An exception to this pattern, however, was Louisiana--a state that has had one of the largest DSH programs in the nation. It experienced a substantial decrease in its 1996 growth rate as its DSH payments continued to decline. The state's federal outlays decreased by 16 percent in 1996 because of a dramatic drop in DSH payments. Recent slowdowns in state-initiated eligibility expansions also helped to effect substantial decreases in the growth rates in selected states. Over the past several years, some states implemented statewide managed care demonstration waiver programs to extend health care coverage to uninsured populations not previously eligible for Medicaid. Three states that experienced substantial decreases in their 1996 growth rates--Hawaii, Oregon, and Tennessee--undertook the bulk of their expansions in 1994. The expenditure increases related to these expansions continued into 1995 and began to level off in 1996. Tennessee actually experienced a drop in the number of eligible beneficiaries in 1996, as formerly uninsured individuals covered by the program lost their eligibility because they did not pay the required premiums. aggregate Medicaid spending limits, which would be calculated using a base year. Officials from a few states told us that, in response to the anticipated block grant, they accelerated their Medicaid payments to increase their expenditures for fiscal year 1995--the year the Congress was considering for use as the base. For example, one state, with federal approval, made a DSH payment at the end of fiscal year 1995 rather than at the beginning of fiscal year 1996. An official from another state, which had a moderate decrease in growth, told us that the state expedited decisions on audits of hospitals and nursing homes to speed payments due these providers. Improved economic conditions, reflected in lower unemployment rates and slower increases in the cost of medical services, also have contributed to a moderation in the growth of Medicaid expenditures. Between 1993 and 1995, most states experienced a drop in their unemployment rates--some by roughly 2 percentage points. As we reported earlier, every percentage-point drop in the unemployment rate is typically associated with a 6-percent drop in Medicaid spending. States told us that low unemployment rates had lowered the number of people on welfare and, therefore, in Medicaid. In addition, growth in medical service prices has steadily been declining since the late 1980s. In 1990, the growth in the price of medical services was 9.0 percent; by 1995, it was cut in half to 4.5 percent. In 1996, it declined further to 3.5 percent. Declines in price inflation have an indirect effect on the Medicaid rates that states set for providers. Officials of several of the states we spoke with reported freezing provider payment rates in recent years, including rates for nursing facilities and hospitals. Such a freeze might not have been possible in periods with higher inflation because institutional providers might challenge state payment rates in court, arguing they had not kept pace with inflation. With inflation down, states can restrain payment rates with less concern about such challenges. uncertain because of state variations in program scope and objectives. States also mentioned initiatives to use alternative service delivery methods for long-term care. While these initiatives may have helped to bring Medicaid costs down, measuring their effect is difficult. Although some states have been using managed care to serve portions of their Medicaid population for over 20 years, many of the states' programs have been voluntary and limited to certain geographic areas. In addition, these programs tend to target women and children rather than populations that may need more care and are more expensive to serve--such as people with disabilities and the elderly. Only a few states have mandated enrollment statewide--fewer still have enrolled more expensive populations--and these programs are relatively new. Arizona, which has the most mature statewide mandatory program, has perhaps best proven the ability to realize cost savings in managed care, cost savings it achieved by devoting significant resources to its competitive bidding process.However, other states have emphasized objectives besides cost control in moving to managed care. In recently expanding its managed care program, Oregon chose to increase per capita payments to promote improved quality and access and to look to the future for any cost savings. Officials from Minnesota, which has a mature managed care program, and California, which is in the midst of a large expansion, told us that managed care has had no significant effect on the moderate decreases they experienced. Given the varying objectives, the ability of managed care to help control state Medicaid costs and moderate spending growth over time is unclear. options as alternatives to nursing facilities. Our previous work showed that such strategies can work toward controlling long-term care spending if controls on the volume of nursing home care and home- and community-based services, such as limiting the number of participating beneficiaries and having waiting lists, are in place. Many of the factors that resulted in the 3.3-percent growth rate in 1996--such as DSH payments, unemployment rates, and program policy changes--will continue to influence the Medicaid growth rate in future years. However, there are indications that some of these components may contribute to higher--not lower--growth rates, while the effect of others is more uncertain. Without new limits, DSH payments can be expected to add to the growth of the overall program. While Louisiana's adjustments to its DSH payments resulted in a substantial reduction in its 1996 spending, other states' DSH spending began to grow moderately in 1995 as freezes imposed on additional DSH spending no longer applied. Although DSH payments are not increasing as fast as they were in the early 1990s, these payments did grow 12.4 percent in 1995. Even though the economy has been in a prolonged expansion, history indicates that the current robust economy will not last indefinitely. The unemployment rate cannot be expected to stay as low as it currently is, especially in states with rates below 4 percent. Furthermore, any increases in medical care price inflation will undoubtedly influence Medicaid reimbursement rates, especially to institutional providers. While states have experienced some success in dealing with long-term care costs, the continued increase in the number of elderly people will inevitably lead to an increase in program costs. Alternative service delivery systems can moderate that growth but not eliminate it. services--may decrease, since some Medicaid-eligible people may be discouraged from seeking eligibility and enrollment apart from the new welfare process. However, states may need to restructure their eligibility and enrollment systems to ensure that people who are eligible for Medicaid continue to participate in the program. Restructuring their systems will undoubtedly increase states' administrative costs. The net effect of these changes remains to be seen. The potential for cost savings through managed care also remains unclear, as experience is limited and state objectives in switching to managed care have not always emphasized immediate cost-containment. Yet it is hoped that managed care will, over time, help constrain costs. While Arizona's Medicaid managed care program has been effective, cost savings were due primarily to considerable effort to promote competition among health plans. The challenge is whether the state can sustain this competition in the future. To help control Medicaid spending and increase state flexibility, the administration's 1998 budget proposal includes three initiatives: (1) imposing additional controls over DSH payments, (2) implementing a per capita cap policy, and (3) eliminating waiver requirements and the Boren Amendment. Through the implementation of these and other initiatives, the administration's proposal projects a net saving in federal Medicaid spending of $9 billion over 5 years. As previously mentioned, in 1995 DSH payments began to grow moderately as states began to reach their federal allotments. The Congressional Budget Office's Medicaid baseline estimates the federal share of DSH payments over the next 5 years will increase from $10.3 billion in 1998 to $13.6 billion in 2002. The administration's proposal would cap federal spending on DSH at $10 billion in 1998, $9 billion in 1999, and $8 billion in 2000 and thereafter. To achieve the projected savings, the administration's proposal would limit federal DSH payments for 1998 in each state to the state's 1995 level. In subsequent years, the national limit is lowered, and the reduction is distributed across states by taking an equal percentage reduction of all or some of each state's 1995 DSH payments. In states where DSH payments in 1995 exceeded 12 percent of total Medicaid expenditures, the percentage reduction would only apply to the amounts at or under the 12-percent limit. This limit on reductions would affect 16 states that in 1995 had DSH payments in excess of 12 percent of their total Medicaid expenditures. In the past we reported on states using creative mechanisms to increase their federal Medicaid dollars, specifically through DSH, provider-specific taxes and voluntary contributions, and intergovernmental transfers.Legislation in 1991 and 1993 went a long way toward controlling DSH payments and provider taxes and voluntary contributions. In particular, the 1991 legislation froze DSH payments for "high-DSH" states--those whose DSH expenditures exceeded 12 percent of Medicaid expenditures--because of concerns that these high levels included inappropriate efforts to increase federal matching funds. The administration's proposal would provide some protection for high-DSH states at the expense of low-DSH states that have kept their share of program spending on DSH below the congressionally specified target level. The administration's proposed per capita cap aims at more certain control over federal Medicaid spending but does not address concerns about the distribution of federal funding resulting from the current matching formula. The administration's proposal defines a per capita cap policy that would limit federal Medicaid spending on a per beneficiary basis. As Medicaid enrollment increases in a particular state, so would the federal dollars available to the state. The per capita cap would be set using 1996 as the base year--including both medical and administrative expenditures. The proposal would use an index based on nominal gross domestic product (GDP) per capita plus an adjustment factor to account for Medicaid's high utilization and intensity of services provided. This index and the number of people eligible for Medicaid in a particular year would be applied to the total 1996 expenditures to determine a state's per capita limit of federal dollars. Savings expected from this proposal will depend on restraining the growth in spending per beneficiary to about 5 percent a year over the 5-year period. capacity. In addition, current law guarantees that no state will have to pay more than half of the total costs of its Medicaid program, meaning states with higher income receive a higher federal share than they otherwise would. This has contributed to disparities among states in coverage of population groups and services as well as in federal funding. The administration's proposal would not address these disparities. To the extent there is congressional interest in lessening them, we have previously indicated that any distribution formula should include (1) better and more direct measures than per capita income for both the incidence of poverty and states' ability to finance program benefits, (2) adjustors for geographic differences in the cost of health care, and (3) a reduced guaranteed federal minimum match. In regard to state flexibility, the administration has proposed changes in three areas: managed care programs, long-term care programs, and the Boren Amendment. Currently, states must obtain waivers of certain federal statutory requirements in order to implement large-scale managed care programs and to provide home- and community-based services as alternatives to nursing facility care. The administration has proposed eliminating the need for a waiver for such programs. In addition, the Boren Amendment, which places certain requirements on how states can set reimbursement rates for hospitals and nursing facilities, would be repealed. Medicaid's restrictions on states' use of managed care reflect historical concerns over access and quality. For example, the so-called 75/25 rule that stipulates that, to serve Medicaid beneficiaries, at least 25 percent of a health plan's total enrollment must consist of private paying patients, was intended as a proxy for quality because private patients presumably have a choice of health plans and can vote with their feet. A second provision, allowing Medicaid beneficiaries to terminate enrollment in a health plan at almost any time, aims to provide them with a similar capacity to express dissatisfaction over the provision of care. The administration's proposal would replace these requirements with enhanced quality monitoring systems. states' cost-containment efforts. However, the experience of states with Medicaid managed care programs underscores the importance of adequate planning and appropriate quality assurance systems. If states are granted more direct control to aggressively pursue managed care strategies, the importance of continuous oversight of managed care systems to protect both Medicaid beneficiaries from inappropriate denial of care and federal dollars from payment abuses should not be overlooked. We have also reported on the successful use by states of home- and community-based care services as an alternative to nursing facilities. States we contacted in the course of this work have expanded the use of such services as part of a strategy to help control rapidly increasing Medicaid expenditures for institutional care. States have told us that when implementing these programs, they value the control they have under a waiver but not under the regular program over the amount of home- and community-based services provided. They indicated this control allows them to serve the population in need within budgetary constraints. Despite the limitations in program size, these programs have allowed states to serve more people with the dollars available. Originally, the Boren Amendment was intended to provide states with greater latitude in setting hospital and nursing facility reimbursement rates while ensuring rates were adequate to provide needed services. Over time, however, states believe court decisions have made the Boren Amendment burdensome to states and affected their ability to set reimbursement rates. The uncertainty created by the language of the Boren Amendment is potentially preventing states from controlling rates of payment to institutional providers in ways that compromise neither access nor quality. While some clarification of the Boren Amendment to address state concerns is needed, its original goals are still valid. Mr. Chairman, this concludes my statement. I would be happy to answer any questions you or members of the Subcommittee might have at this time. Thank you. For more information on this testimony, please call Kathryn G. Allen, Assistant Director, on (202) 512-7059. Other major contributors included Lourdes R. Cho, Richard N. Jensen, Deborah A. Signer, and Karen M. Sloan. GAO developed a growth stability index that shows the direction and magnitude of change in the growth rates of federal outlays between fiscal years 1995 and 1996. An index of 1.0 indicates no change in the growth rates for the 2 years. An index greater than 1.0 indicates a decrease in the 1995-96 growth rates. For example, Colorado's index of 1.37 ranks it as having the largest decrease. States and District of Columbia (continued) The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. 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GAO discussed recent Medicaid spending trends and their potential implications for future outlays, focusing on: (1) key factors that explain the Medicaid 3.3-percent growth rate in fiscal year 1996; and (2) the administration's proposal to contain Medicaid cost growth through decreases in disproportionate share hospital (DSH) payments and per capita caps, and to increase state flexibility. GAO noted that: (1) GAO found no single pattern across all states that accounts for the recent dramatic decrease in the growth of Medicaid spending; (2) rather, a combination of factors, some affecting only certain states and others common to many states, explains the low 1996 growth rate; (3) leading factors include continued reductions in DSH payments in some states as a result of earlier federal restrictions on the amount of such payments and the leveling off of Medicaid enrollment in other states following planned expansions in prior years; (4) a number of states GAO contacted attributed the lower growth rate to a generally improved economy and state initiatives to limit expenditure growth through programmatic changes, such as managed care programs and long-term care alternatives; (5) while the magnitude of the effect of these programmatic changes is less clear, there is evidence that they helped to restrain program costs; (6) it is likely that the 3.3-percent growth rate is not indicative of the growth rate in the years ahead; (7) just as a number of factors converged to bring about the drop in the 1996 growth rate, so a variety of factors, such as a downturn in the economy, could result in increased growth rates in subsequent years; (8) the administration's proposal for Medicaid reform would further control spending by reducing DSH expenditures and imposing a per capita cap, while providing the states greater flexibility in program policy and administration for their managed care and long-term care programs; (9) these initiatives should produce cost savings; and (10) however, in controlling program spending, attention should be given to targeting federal funds appropriately and ensuring that added program flexibility is accompanied by effective federal monitoring and oversight.
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SSA administers three major federal programs. The Old Age and Survivors Insurance (OASI) and the Disability Insurance (DI) programs, together commonly known as "Social Security," provide benefits to retired and disabled workers and their dependents and survivors. Monthly cash benefits are financed through payroll taxes paid by workers and their employers and self-employed people. The third program, SSI, provides means-tested assistance to needy aged, blind, or disabled people. SSI payments are financed from general tax revenues. In 1997, 50 million beneficiaries--about one of every five individuals in this country-- received benefits from SSA each month. SSA serves the public through a nationwide network that includes 1,300 field offices, 132 hearings offices, and a national toll-free telephone system. To administer these programs, SSA must perform certain essential tasks: issue Social Security numbers to individuals; maintain earnings records for individual workers by collecting wage reports from employers, using these records to determine the amount of benefits an applicant may receive; and process benefit claims for all three programs. In addition, SSA must determine beneficiaries' continuing eligibility, provide hearings and appeals for denied applicants, and disseminate information about its programs. The OASI and DI programs are facing significant financial problems as a result of profound demographic changes. As a share of the total U.S. population, the elderly population grew from 7 percent in 1940 to 13 percent in 1996; this share is expected to increase to 20 percent by 2050. As it ages, the baby boom generation will increase the size of the elderly population. However, other demographic trends are at least as important. Life expectancy has increased continually since the 1930s, and further increases are expected. Moreover, the fertility rate has declined from 3.6 children per woman in 1960 to around 2 children per woman today and is expected to level off at about 1.9 by 2020. Combined, increasing life expectancy and falling fertility rates mean that fewer workers will be contributing to Social Security for each aged, disabled, dependent, or surviving beneficiary. While 3.3 workers support each Social Security beneficiary today, only 2 workers are expected to be supporting each beneficiary by 2030. In addition, as the population ages, the number of disabled individuals is expected to rise. Beginning in 2012--14 years from now--Social Security's expenditures are expected to exceed its tax income. By 2029, without corrective legislation, the trust funds are expected to be depleted, leaving insufficient funds to pay the current level of OASI and DI benefits. These demographic changes will also affect SSA's workload and approach to customer service. When the baby boom generation begins to retire shortly after the turn of the century, the agency must look for ways to cope efficiently with its increasing workloads without adding substantial numbers of employees. In addition, SSA knows that this new set of beneficiaries will likely prefer to be served differently from those whom SSA has served in the past. While SSA has traditionally delivered face-to-face service through its network of field offices, the public has begun to conduct more and more business by telephone. In the future, even more individuals may prefer to do business by telephone or other electronic means, such as the Internet. As a result, SSA must increasingly rely on the use of new technology to meet its workload challenges and provide service in the ways its new customers will expect. In addition, SSA currently relies heavily on information technology to support its administrative processes, and it has acknowledged that its goals for improved operations outlined in its strategic plan are not achievable unless the agency invests wisely in information technology. how the agency intends to achieve its goals and the measures it will use to hold itself accountable over the next year. The two documents together chart SSA's future course. SSA's strategic plan and its performance plan demonstrate that the agency recognizes its most pressing problems. In addition, they highlight the importance of leadership and recognize the need to ensure that the agency changes at the pace necessary to meet the goals it has set. The national debate on Social Security solvency has begun. The Advisory Council on Social Security and others have advanced a range of proposals to address the system's solvency. Some proposals represent a significant departure from the current program. The President has made Social Security reform a top priority, and the Congress is beginning to discuss options. Given the magnitude of the financial problems facing the system, the nature of the proposals for change, and the growing interest in these topics across the country, we can expect the debate over Social Security's financing and structure to continue and intensify in the coming years. To understand and debate the proposals, policymakers and the general public need thoughtful and detailed analyses of their likely effect on workers, beneficiaries, and the economy--as well as the impact of their implementation on SSA and other government agencies. SSA is in a unique position to inform policymakers and the public about the long-term financing issues, yet we have reported that the agency has not undertaken the range of research, evaluation, and policy analysis needed to fully contribute to the debate. In addition to the solvency debate, other issues call for enhanced research, evaluation, and policy analysis. For example, from 1988 to 1996, SSA's disability programs grew significantly. The number of beneficiaries receiving SSI increased by about 70 percent, while the number of DI beneficiaries grew by about 49 percent. In addition, beneficiaries are staying on the disability rolls longer. To better manage these programs, policymakers need more information on the causes of these changes, whether the programs are meeting their objectives, and the impact of possible changes. By improving its research and evaluation capacity, SSA also would be in a better position to propose legislative changes. In its current strategic plan, SSA committed itself to a new goal: "to . . . conduct effective policy development, research, and program evaluation." The agency is taking steps to strengthen its capacity in these areas. It has increased its funding for external research; plans to expand its ability to use modeling techniques to predict the effects of proposed program changes; and, by the end of this fiscal year, plans to have established a research consortium to advise it on relevant research and policy activities. However, these efforts have a long lead time before useful products will become available. In the meantime, SSA will not be fully contributing to the current debate on Social Security reform. In addition, a recent report by a private consultant recommended that SSA substantially increase the number of its research and evaluation staff and combine the research and evaluation office with the policy analysis office. To date, the agency has added only a fraction of the recommended staff and does not have a long-range plan to add many more. SSA's need to strengthen its research, evaluation, and policy analysis capacity is not new; we and others have highlighted this weakness for a number of years. We are concerned that the agency has not seized the opportunity to build its capacity. Without an adequate number of skilled staff and a vital, responsive research, evaluation, and policy analysis agenda, the agency cannot fulfill its current and future role as the nation's expert on Social Security issues. living arrangements to determine initial and continuing eligibility for the program. Our previous and ongoing reviews have highlighted long-standing problem areas. SSA does not pay enough attention to verifying eligibility information in a timely way, has failed to recover millions of dollars in SSI overpayments, has not installed adequate internal controls, and has failed to curb SSI program fraud and abuse. The program's complex policies and SSA's insufficient management attention exacerbate these problems. We have also criticized SSA for not initiating legislative proposals to improve program operations. Together, these deficiencies have eroded program integrity and contributed to significant annual increases in SSI overpayments to recipients. During 1997, current and former recipients owed SSA more than $2.6 billion, including $1 billion in newly detected overpayments for the year. On the basis of the agency's prior experience, SSA is likely to collect less than 15 percent of the outstanding debt in a given year. SSA has acknowledged the need to attack this problem aggressively, and the agency is taking steps to address some of the weaknesses in the SSI program. For example, it is developing a new automated system to track and recover SSI overpayments and is expanding its use of on-line access to state data to obtain real-time applicant and recipient financial information. To address the overpayment problem, the fiscal year 1999 budget requests $50 million to complete redeterminations for recipients who have been designated by SSA as having a high probability of having been overpaid.Finally, SSA has recently taken a stronger role in addressing fraud and abuse. For example, it has initiated several pilot programs aimed at detecting fraud and abuse earlier in the SSI application process. plan, SSA has made a commitment to complete a comprehensive action plan to improve the management of the SSI program in fiscal year 1998. This step links to SSA's strategic goal of making "SSA programs the best in the business, with zero tolerance for fraud and abuse." To be effective, the SSI action plan must include a carefully designed set of measures to evaluate progress and hold the agency accountable. The 1996 welfare reform legislation changed the definition of childhood disability for the SSI program, and in February 1997, SSA issued regulations to implement the legislative changes. Under the new regulations, SSA reviewed the cases of 263,000 children and conducted an extensive review of the outcome of this process. The regulations represent a stricter standard of severity than existed in previous law. Under this standard, a child's impairment generally must result in marked limitations in two areas of functioning or an extreme limitation in one area, such as social functioning, cognition and communication, personal functioning, and motor functioning. Previously, a child was eligible if his or her impairment resulted in one marked and one moderate limitation or three moderate limitations. In supporting the "two marked or one extreme" severity standard in its regulatory analysis, SSA concluded that the Congress meant to establish a stricter standard of severity than had previously existed. Nevertheless, some children whose impairments are at the prior, less severe threshold have been awarded benefits because SSA has not updated some of its medical listings, which are set below the two marked or one extreme functional limitation level. SSA has not quantified how many children are in this situation and may have difficulty doing so because its listing codes are not always reliable. Some of these less severe listings, however, are for prevalent impairments, including mental retardation, cerebral palsy, epilepsy, and asthma. SSA is aware that these listings are below the two marked or one extreme level, but has not established a schedule for updating its listings. This update is necessary to ensure that all children are awarded benefits on the basis of a uniform standard of severity. standard. SSA is taking steps to improve decisional accuracy by training its adjudicators and quality assurance staff in areas SSA has found to be problematic. Moreover, it will be reviewing a larger sample of new childhood claims to identify problems unique to these cases so that it can issue policy clarifications and additional guidance as necessary. Under our mandate to report on the implementation of the legislation, we will continue to monitor the accuracy and consistency of decisions on childhood cases. SSA's disability programs face several challenges. The agency's disability claims process is time-consuming and expensive, but the agency's efforts to redesign the process are disappointing. Moreover, SSA's disability caseloads for its DI and SSI programs have grown by nearly 65 percent in the past decade; SSA has not developed a plan that sufficiently addresses actions needed to help beneficiaries fully develop their productive capacities, and few people have left the rolls to return to work. Despite these systemic problems, however, SSA recently has been making progress in reducing its continuing disability review (CDR) backlogs. Making disability decisions is one of SSA's most demanding and administratively complex tasks, and SSA has struggled to keep pace with applications for disability benefits and appeals of disability decisions. Disability claimants often wait more than a year for a final decision. To manage the disability caseload growth, increase efficiency, and improve service to its customers, SSA began a major effort in 1993 to redesign the way it makes disability decisions. The agency developed an ambitious plan for change that included testing and implementing 26 key initiatives over a period of 6 years. In December 1996, we reported that SSA was already one-third of the way through the 6-year period but had made little progress with testing and implementing the initiative. We identified a number of problems: SSA had delayed testing and project development, expanded the scope and complexity of certain initiatives, changed executive leadership, and risked losing stakeholder support. In that report, we recommended that SSA (1) focus on the initiatives most likely to reduce claims-processing time and administrative costs and (2) combine those initiatives in an integrated process and test them at a few sites before full-scale implementation. Responding to these concerns and those of other stakeholders, SSA revised its redesign plan in February 1997. It developed a scaled-down plan that focused on testing and implementing eight key initiatives. However, the new strategy retained plans to first test certain initiatives individually at a large number of sites nationwide. On the basis of our ongoing work, we have determined that the success of SSA's scaled-down plan may also be threatened. SSA continues to experience delays in testing or implementing initiatives--anywhere from 2 months to 3 years. More importantly though, test results for the first two initiatives are disappointing. As tested, they will not result in dramatic improvements in efficiency and quality of claims processing. In addition, SSA has encountered performance problems with the software it considers vital to support the redesign effort, and the pilot tests have been delayed. On a more positive note, SSA is also conducting a test that combines a number of the initiatives into an integrated process, and the early results are more promising, according to SSA officials. It is too early to tell whether these positive results will continue and be significant enough to lead to the needed improvement in the claims process. If the results of these efforts do not demonstrate significant improvements, SSA will have some hard choices to make about whether and how to proceed with its current redesign plan. Even before receiving the disappointing test results, SSA had reduced or deferred its projected 5-year savings from disability redesign by more than 25 percent, or more than 4,500 work-years. Finally, as we have reported, one redesign initiative--process unification--is the linchpin of SSA's efforts to improve the integrity and efficiency of the disability claims process. This initiative focuses on reducing the inconsistency of decisions made by examiners at the state disability determination services (DDS), who make initial decisions, and by administrative law judges (ALJ), who decide appeals. We have supported SSA's efforts to improve consistency and have also recommended that SSA develop a performance goal to measure and report its progress in doing so. While SSA does not believe such a goal is appropriate and has not included one in its new performance plan, the agency has taken some steps toward reducing the inconsistency between decisions. The agency has (1) provided initial common training to decisionmakers at all levels and developed plans for follow-up training, (2) issued several rulings to clarify and reinforce current policy, and (3) initiated a pilot effort in 10 states to study the effects of providing more detailed explanations of the reasons for decisions at the initial level. By improving these explanations, SSA hopes to give ALJs a better understanding of the basis for the initial decision and to lay the foundation for greater consistency. Following the training and the new rulings, SSA officials told us they have seen some decline in the allowance rates at the appellate level. Today, more than ever, people with disabilities have new opportunities to return to work, yet very few DI and SSI beneficiaries do so. New technologies and medical advances have provided people with disabilities with greater independence and ability to function. Also, the Americans With Disabilities Act supports the premise that people with disabilities can work and have the right to work, and the Social Security Act calls for rehabilitating benefit applicants to the maximum extent possible. Yet not more than 1 in 500 DI beneficiaries, and few SSI beneficiaries, have left the rolls to return to work. Over the past few years, we have issued a series of reports recommending that SSA place a higher priority on helping DI and SSI beneficiaries maximize their work potential. The lengthy disability determination process encourages applicants to emphasize their inabilities, not their abilities. Beneficiaries receive little encouragement to use rehabilitation services. Also, work incentives may not make it financially advantageous for people to work to their full capacity. intervention and provision of return-to-work assistance as well as changes in the structure of cash and health benefits. CDRs are required by law for all DI and some SSI beneficiaries to help ensure that only those eligible continue receiving benefits. In the past, however, SSA has not conducted the number of reviews required by law. We have reported on several occasions that SSA's failure to consistently complete these CDRs has led to hundreds of millions of dollars in unnecessary costs each year and has undermined program integrity. For almost a decade, budget and staff reductions and large increases in initial claims have hampered SSA's efforts to conduct these reviews. Consequently, more than 4 million beneficiaries were due or overdue for CDRs by 1996. As a result of congressional attention to this problem, SSA developed a plan to conduct 8.2 million CDRs between 1996 and 2002, and the Congress authorized funding of about $4.1 billion over 7 years for this purpose. SSA is currently revising this plan to incorporate new CDR requirements included in the August 1996 welfare reform legislation. In 1997, we found that SSA's experience in conducting CDRs was encouraging. In that year, SSA conducted 690,000 CDRs, exceeding its goal of 603,000. In addition, the agency increased its goal to 1,245,000 for 1998 and 1,637,000 for 1999. The more quickly SSA can remove those who are no longer eligible from the rolls, the more it can save in program costs. However, key issues, such as deciding which beneficiaries should undergo a full medical review--a lengthy and costly process--are still unresolved but will determine how expeditiously and at what cost SSA can become current on its CDR caseload. Finally, we have noted that many beneficiaries whose health will not improve could nevertheless have or regain work capacity. Therefore, we believe SSA should consider how the CDR point of contact with beneficiaries could be integrated with return-to-work initiatives. In the near future, SSA will be challenged to serve increasing numbers of customers with fewer staff. The agency is counting on its effective use of technology to cope with these changes, although it is currently facing challenges with the installation of its crucial new computer network. In addition, SSA must accommodate the increases in workload and changing customer preferences with a flexible service delivery structure. Difficult choices about the future service delivery structure lie ahead. The agency is, however, taking positive steps to better prepare for the retirement of large numbers of its management staff and is taking advantage of new technologies to provide more accessible training to its staff around the country. To handle increasing workloads and improve public service, SSA is in the midst of a multiyear, multibillion-dollar systems modernization effort. The cornerstone of this modernization effort is the intelligent workstation/local area network (IWS/LAN) initiative. SSA plans to install up to 56,500 workstations and 1,742 local area networks in SSA field offices and state DDS offices throughout the country. The initiative is expected to improve productivity and customer service in field offices and teleservice centers and lay the needed foundation for further technology enhancements. SSA is depending on the success of this initiative and has stated that it cannot achieve its strategic goals unless it invests wisely in this infrastructure. However, the size and complexity of the IWS/LAN initiative pose significant challenges for SSA. We are monitoring SSA's progress as it installs its IWS/LAN and have some concerns, which we will present in a separate testimony today. and teleservice centers. Over time, SSA will likely need to restructure how it does business to take advantage of new technologies, cope with staff reductions, and cost-effectively meet changing customer preferences. One of the major challenges facing SSA in the future is its aging workforce. More than 57 percent of SSA employees are over the age of 45 and, therefore, approaching retirement. In addition, many of those retiring will be managers; over the next 5 years, 40 percent of SSA's staff at the middle management level and above will be eligible for retirement. In the past, we have criticized SSA for not adequately preparing for the loss of its experienced workforce. However, SSA has recently begun to better prepare for this retirement attrition. Officials told us the agency is in the process of conducting a detailed analysis of retirement patterns in order to predict when staff will retire and which offices or geographic areas will be most affected. The study is showing that SSA can expect a dramatic wave of retirements over the next 10 years. To help train staff to replace its retiring management corps, SSA plans to conduct a series of management development programs. It has formally announced plans for a Senior Executive Service Career Development Program and expects to complete selections in early spring of this year. SSA also plans to conduct a mid-level management development program and a management intern program. SSA has also begun to revitalize its training programs to enhance the skills of current staff and to prepare them for future challenges and changes in their job expectations. For its current managers, SSA is developing a series of seminars designed to deliver a common message concerning leadership and change management related to the goals and objectives described in its strategic plan. SSA expects to have trained 100 percent of its DDS and SSA managers by the end of fiscal year 1999. SSA is also taking advantage of technology advances to provide training. Employees will be able to access a variety of training tools via the new intelligent workstations provided in SSA's technology roll-out. In addition, SSA is greatly enhancing its capacity to provide interactive video training/interactive distance learning throughout its entire service delivery structure. By the end of the summer of this year, SSA hopes to have deployed enough video training sites that 89 percent of its staff will be within 20 minutes of a site. This offers SSA the advantage of providing training to a wide audience at once, ensuring that most of its staff throughout the country receive the same message. retirements and the certain future technological changes, it is especially important that SSA complete its retirement study, disseminate the detailed results, and sustain its momentum in ongoing employee training and career development. A recent audit by an independent accounting firm found that SSA's fiscal year 1997 financial statements were fairly presented, in all material respects. However, the audit did identify significant deficiencies in the design and operation of information systems' internal controls that raise some concern for the future. The audit identified vulnerabilities that expose SSA and its systems to both internal and external intrusion; subject sensitive information such as Social Security numbers and benefit-related data to unauthorized access, modification, and disclosure; and increase the risk of fraud. For example, the audit found that SSA's agencywide security program does not provide the comprehensive protection needed to safeguard the sensitive information its systems maintain. The audit also found that, because of deficiencies in the agency's contingency plans, SSA's systems are vulnerable to disruptions in the event of a long-term emergency. These deficiencies could significantly affect SSA's ability to continue critical operations without interruption in the event of a long-term emergency. The audit also reported that SSA's controls do not adequately protect the integrity of its systems' applications. These weaknesses expose SSA's application systems to unauthorized or undetected changes that could affect the integrity of processed information. Finally, the audit noted that SSA continues to have insufficient separation of duties or compensating controls to reduce, to an acceptable level, the risk of undetected errors, irregularities, or both. When SSA streamlined its business processes, the agency gave workers increasing control over information processing without imposing effective mitigating controls over their activities. As a result, SSA has limited its ability to prevent errors, fraud, waste, and abuse in a timely manner. take to enhance its systems controls and security, and we support these recommendations. The Commissioner of SSA has stated that agency officials are working with the auditors to resolve any differences. He further stated that the agency will make every effort to take the steps necessary to ensure that information in its systems is protected and that SSA is able to continue operations in a time of emergency. Overall, our work suggests that SSA recognizes each of the challenges we have identified and, in almost every case, has taken some action to address them. However, in some cases the steps have been too fragmented, and the results have often been slow in coming and disappointing. Yet, we recognize the issues are complex, and solutions are not easy. To effect meaningful change, SSA must address the root causes of its problems and ensure sustained management oversight. The new Commissioner will need to effectively lead the agency to move with a sense of urgency to address its long-standing problems. Messrs. Chairmen, this concludes my prepared statement. I would be pleased to answer any questions you or Members of the Subcommittees may have. Social Security: Restoring Long-Term Solvency Will Require Difficult Choices (GAO/T-HEHS-98-95, Feb. 10, 1998). Social Security Disability: SSA Is Making Progress Toward Eliminating Continuing Disability Review Backlogs (GAO/T-HEHS-97-222, Sept. 25, 1997). Social Security Disability: SSA Must Hold Itself Accountable for Continued Improvement in Decision-making (GAO/HEHS-97-102, Aug. 12, 1997). Social Security Disability: Improving Return-to-Work Outcomes Important, but Trade-Offs and Challenges Exist (GAO/T-HEHS-97-186, July 23, 1997). Social Security: Disability Programs Lag in Promoting Return to Work (GAO/HEHS-97-46, Mar. 17, 1997). High Risk Series: An Overview (GAO/HR-97-2, Feb. 1997). Social Security Administration: Significant Challenges Await New Commissioner (GAO/HEHS-97-53, Feb. 20, 1997). SSA Disability Redesign: Focus Needed on Initiatives Most Crucial to Reducing Costs and Time (GAO/HEHS-97-20, Dec. 20, 1996). Social Security Disability: Alternatives Would Boost Cost-Effectiveness of Continuing Disability Reviews (GAO/HEHS-97-2, Oct. 16, 1996). Supplemental Security Income: SSA Efforts Fall Short in Correcting Erroneous Payments to Prisoners (GAO/HEHS-96-152, Aug. 30, 1996). SSA Disability: Program Redesign Necessary to Encourage Return to Work (GAO/HEHS-96-62, Apr. 24, 1996). Supplemental Security Income: Disability Program Vulnerable to Applicant Fraud When Middlemen Are Used (GAO/HEHS-95-116, Aug. 31, 1995). Social Security Administration: Leadership Challenges Accompany Transition to an Independent Agency (GAO/HEHS-95-59, Feb. 15, 1995). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. 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Pursuant to a congressional request, GAO discussed the Social Security Administration's (SSA) progress in addressing its management challenges, focusing on: (1) SSA's need to strengthen its research and policy capacity in order to address the future solvency of the Social Security Trust Funds; (2) SSA's management and oversight problems with its Supplemental Security Income (SSI) program; (3) its disability programs; and (4) its future workload demands. GAO noted that: (1) SSA recognizes the challenges GAO has identified and has taken or plans to take steps to address many of these problems; (2) in 1997, for example, SSA conducted even more eligibility reviews of disabled beneficiaries than it had planned; (3) also, after changes in the childhood disability program were enacted, SSA rapidly reviewed the cases of over 260,000 children receiving SSI benefits; (4) nevertheless, the pace at which the agency is moving does not seem adequate to resolve most of its challenges within a meaningful timeframe; (5) for example, SSA's efforts to bolster its research, evaluation, and policy analysis capabilities have a long lead time before useful products will be available; (6) in the meantime, SSA will not be able to fully contribute to the current debate on social security reform; (7) in addition, in some areas, SSA's efforts have also been too limited; (8) its steps to date, for example, to address deep-seated problems in its SSI program have been piecemeal and have not addressed the root causes of the SSI problems; and (9) given the long-standing nature of challenges SSA faces and their far-reaching implications for current and future beneficiaries, the new Commissioner will need to assert strong leadership to spell out the expected changes and marshal the agency's resources to translate SSA's plans into timely action.
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There is growing agreement on the need to better link individual pay to performance. Establishing such linkages is essential if we expect to maximize the performance and assure the accountability of the federal government for the benefit of the American people. As a result, from a conceptual standpoint, we strongly support the need to expand broad banding approaches and pay for performance-based systems in the federal government. However, moving too quickly or prematurely at DOD or elsewhere can significantly raise the risk of doing it wrong. This could also serve to severely set back the legitimate need to move to a more performance- and results-based system for the federal government as a whole. Thus, while it is imperative that we take steps to better link employee pay to performance across the federal government, how it is done, when it is done, and the basis on which it is done can make all the difference in whether or not such efforts are successful. In our view, one key need is to modernize performance management systems in executive agencies so that they are capable of adequately supporting more performance-based pay and other personnel decisions. Unfortunately, based on GAO's past work, most existing federal performance appraisal systems, including a vast majority of DOD's systems, are not designed to support a meaningful performance-based pay system. At the request of Representative Jo Ann Davis and Senator George Voinovich, we identified key practices leading public sector organizations both here in the United States and abroad have used in their performance management systems to link organizational goals to individual performance and create a "line of sight" between an individual's activities and organizational results. These practices can help agencies develop and implement performance management systems with the attributes necessary to effectively support pay for performance. The bottom line, however, is that in order to implement any additional performance-based pay flexibility for broad based employee groups, agencies should have to demonstrate that they have modern, effective, credible, and, as appropriate, validated performance management systems in place with adequate safeguards, including reasonable transparency and appropriate accountability mechanisms, to ensure fairness and prevent politicalization and abuse. As a result, Congress should consider establishing statutory standards that an agency must have in place before it can implement broad banding or a more performance-based pay program. At the request of Congressman Danny Davis, we developed an initial list of possible safeguards for Congress to consider to help ensure that any pay for performance systems in the government are fair, effective, and credible: Assure that the agency's performance management systems (1) link to the agency's strategic plan, related goals, and desired outcomes, and (2) result in meaningful distinctions in individual employee performance. This should include consideration of critical competencies and achievement of concrete results. Involve employees, their representatives, and other stakeholders in the design of the system, including having employees directly involved in validating any related competencies, as appropriate. Assure that certain predecisional internal safeguards exist to help achieve the consistency, equity, nondiscrimination, and nonpoliticization of the performance management process (e.g., independent reasonableness reviews by Human Capital Offices and/or Offices of Opportunity and Inclusiveness or their equivalent in connection with the establishment and implementation of a performance appraisal system, as well as reviews of performance rating decisions, pay determinations, and promotion actions before they are finalized to ensure that they are merit-based; internal grievance processes to address employee complaints; and pay panels whose membership is predominately made up of career officials who would consider the results of the performance appraisal process and other information in connection with final pay decisions). Assure reasonable transparency and appropriate accountability mechanisms in connection with the results of the performance management process (e.g., publish overall results of performance management and pay decisions while protecting individual confidentiality, and report periodically on internal assessments and employee survey results). The above items should help serve as a starting point for Congress to consider in crafting possible statutory safeguards for executive agencies' performance management systems. OPM would then issue guidance implementing the legislatively defined safeguards. The effort to develop such safeguards could be part of a broad-based expanded pay for performance authority under which whole agencies and/or employee groups could adopt broad-banding and move to more pay for performance oriented systems if certain conditions are met. Specifically, an agency would have to demonstrate, and OPM would have to certify, that a modern, effective, credible, and, as appropriate, validated performance management system with adequate safeguards, including reasonable transparency and appropriate accountability mechanisms, is in place to support more performance-based pay and related personnel decisions, before the agency could implement a new system. OPM should be required to act on any individual certifications within prescribed time frames (e.g., 30-60 days). This alternative approach would allow for a broader-based yet more conceptually consistent approach to linking federal employee pay and other personnel decisions to performance. It would help to assure that agencies have the reasonable flexibility they need to modernize their human capital policies and practices, while maximizing the chances of success and minimizing the potential for abuse. This alternative approach would also facilitate a phased-implementation approach throughout government. Congress should also consider establishing a governmentwide fund whereby agencies, based on a sound business case, could apply for funds to modernize their performance management systems and ensure those systems have adequate safeguards to prevent abuse. This approach would serve as a positive step to promote high-performing organizations throughout the federal government while avoiding human capital policy fragmentation within the executive branch. With almost 700,000 civilian employees on its payroll, DOD is the second largest federal employer of civilians in the nation, after the Postal Service. Defense civilian personnel, among other things, develop policy, provide intelligence, manage finances, and acquire and maintain weapon systems. NSPS is intended to be a major component of DOD's efforts to more strategically manage its workforce and respond to current and emerging challenges. This morning I will highlight several of the key provisions of NSPS that in our view are most in need of close scrutiny as Congress considers the DOD proposal: The DOD proposal would allow the Secretary of Defense to jointly prescribe regulations with the Director of OPM to establish NSPS. However, unlike the legislation creating the Department of Homeland Security (DHS), the Defense Transformation for the 21st Century Act would allow the Secretary of Defense to waive the requirement for joint issuance of regulations if, in his or her judgment, it is "essential to the national security" which is not defined in the act. Therefore, the act would, in substance, provide the Secretary of Defense with significant independent authority to develop a separate and largely autonomous human capital system for DOD. As I have noted, performance-based pay flexibility for broad-based employee groups should be grounded in performance management systems that are capable of supporting pay and related decisions. DOD's personnel demonstration projects clearly provide helpful insights and valuable lessons learned in connection with broad banding and pay for performance efforts. At the same time these projects and related DOD efforts involve less than 10 percent of DOD's civilian workforce and expanding these approaches to the entire department will require significant effort and likely need to be implemented in phases over several years. Similarly, the NSPS would increase the current total allowable annual compensation limit for senior executives up to the Vice President's total annual compensation. The Homeland Security Act provided that OPM, with the concurrence of the Office of Management and Budget, certify that an agency has performance appraisal systems that, as designed and applied, make meaningful distinctions based on relative performance before an agency is allowed to increase the annual compensation limit for senior executives. NSPS does not include such a certification provision. On the other hand, the Senior Executive Service needs to take the lead in matters related to pay for performance. The NSPS would include provisions intended to ensure collaboration with employee representatives in the planning, development, and implementation of a human resources management system. As discussed at the Civil Service and Agency Organization Subcommittee, Committee on Government Reform hearing on Tuesday, direct employee involvement in the development of the NSPS legislative proposal has thus far been limited. Moving forward, and aside from the specific statutory provisions on consultation, the active involvement of employees will be critical to the success of NSPS, or for any human capital reform for that matter. The legislation has a number of provisions designed to give DOD flexibility to help obtain key critical talent. These authorities give DOD considerable flexibility to obtain and compensate individuals and exempt them from several provisions of current law. While we have strongly endorsed providing agencies with additional tools and flexibilities to attract and retain needed talent, the broad exemption from some existing ethics and other personnel authorities without prescribed limits on their use raises some concern. Congress should consider building into the NSPS appropriate numerical or percentage limitations on the use of these provisions and basic safeguards to ensure such provisions are used appropriately. The NSPS proposal would provide DOD with a number of broad authorities related to rightsizing and organizational alignment. Authorities such as voluntary early retirements have proven to be effective tools in strategically managing the shape of the workforce. I have exercised the authority that Congress granted me to offer voluntary early retirements in GAO in both fiscal years 2002 and 2003 as one element of our strategy to shape the GAO workforce. In DOD's case, while it has used existing authorities to mitigate the adverse effects of force reductions in the past, the Department's approach to those reductions was not oriented toward strategically shaping the makeup of the workforce. Given these problems, there is reason to be concerned that DOD may struggle to effectively manage additional authorities that may be provided. Importantly, the NSPS provisions would create an uneven playing field among agencies in competing for experienced talent. The legislation would also allow DOD to revise Reduction-in-Force (RIF) rules to place greater emphasis on an employee's performance. I conceptually support revised RIF procedures that involve much greater consideration of an employee's performance. However, as noted above, agencies must have the proper performance management systems in place to effectively and fairly implement such authorities. Furthermore, DOD proposes to lower the degree of preference provided to veterans under current law. The proposed NSPS would allow the Secretary, after consultation with the Merit Systems Protection Board, to prescribe regulations providing fair treatment in any appeals brought by DOD employees relating to their employment. The proposal states that the appeals procedures shall ensure due process protections and expeditious handling, to the maximum extent possible. This provision is substantially the same as a similar provision in the Homeland Security Act of 2002 allowing DHS to prescribe regulations for employee appeals related to their employment. Given the transparency of the federal system dispute resolution and its attendant case law, the rights and obligations of the various parties involved are well developed. It is critical that any due process changes that DOD would make under this authority are not only fair and efficient but, importantly, minimize any perception of unfairness. In summary, many of the basic principles underlying DOD's civilian human capital proposals have merit and deserve serious consideration. They are, however, unprecedented in their size, scope, and significance. As a result, they should be considered carefully--and not just from a DOD perspective. The DOD proposal has significant precedent-setting implications for the human capital area in government in general, and for OPM in particular. The DOD civilian human capital proposal raises several critical questions both for DOD as well as for governmentwide policies and approaches. Should DOD and/or other federal agencies be granted broad-based exemptions from existing law, and if so, on what basis? Does DOD have the institutional infrastructure in place to make effective use of the new authorities? Our work has shown that while progress is being made, additional efforts are needed by DOD to integrate its human capital planning process with the department's program goals and mission. The practices that have been shown to be critical to the effective use of flexibilities provide a validated roadmap for DOD and Congress to consider. We believe it would be more prudent and appropriate to approve the broad banding and pay for performance issues on a governmentwide basis. Nevertheless, if additional authorities are granted to DOD, Congress should consider establishing additional safeguards to ensure the fair, merit-based, transparent, and accountable implementation of NSPS. This includes addressing the issues I have raised in this statement. As I have suggested, Congress should consider providing governmentwide broad banding and pay for performance authorities that DOD and other federal agencies can use provided they can demonstrate that they have a performance management system in place that meets certain statutory standards and can be certified to by a qualified and independent party, such as OPM. Congress should also consider establishing a governmentwide fund whereby agencies, based on a sound business case, could apply for funds to modernize their performance management systems and ensure that those systems have adequate safeguards to prevent abuse. This would serve as a positive step to promote high- performing organizations throughout the federal government while avoiding further fragmentation within the executive branch in critical human capital policies and approaches. We look forward to continuing to support Congress and work with DOD in addressing the vital transformation challenges it faces. Chairman Hunter, Mr. Skelton, and Members of the Committee, this concludes my prepared statement. I would be pleased to respond to any questions that you may have. For further information on human capital issues at DOD, please contact Derek Stewart, Director, Defense Capabilities and Management on (202) 512-5559 or at [email protected]. For further information on governmentwide human capital issues, please contact J. Christopher Mihm, Director, Strategic Issues, on (202) 512-6806 or at [email protected]. Individuals making key contributions to this testimony included William Doherty, Clifton G. Douglas, Jr., Christine Fossett, Bruce Goddard, Judith Kordahl, Janice Lichty, Bob Lilly, Lisa Shames, Ellen Rubin, Edward H. Stephenson, Jr., Tiffany Tanner, Marti Tracy, and Michael Volpe.
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DOD is in the midst of a major transformation effort including a number of initiatives to transform its forces and improve its business operations. DOD's legislative initiative would provide for major changes in civilian and military human capital management, make major adjustments in the DOD acquisition process, affect DOD's organization structure, and change DOD's reporting requirements to Congress, among other things. DOD's proposed National Security Personnel System (NSPS) would provide for wide-ranging changes in DOD's civilian personnel pay and performance management, collective bargaining, rightsizing, and a variety of other human capital areas. The NSPS would enable DOD to develop and implement a consistent DOD-wide civilian personnel system. This testimony provides GAO's preliminary observations on aspects of DOD's legislative proposal to make changes to its civilian personnel system and discusses the implications of such changes for governmentwide human capital reform. This testimony summarizes many of the issues discussed in detail before the Subcommittee on Civil Service and Agency Organization, Committee on Government Reform, House of Representatives on April 29, 2003. Many of the basic principles underlying DOD's civilian human capital proposal have merit and deserve serious consideration. The federal personnel system is clearly broken in critical respects--designed for a time and workforce of an earlier era and not able to meet the needs and challenges of our current rapidly changing and knowledge-based environment. DOD's proposal recognizes that, as GAO has stated and the experiences of leading public sector organizations here and abroad have found, strategic human capital management must be the centerpiece of any serious government transformation effort. More generally, from a conceptual standpoint, GAO strongly supports the need to expand broad banding and pay for performance-based systems in the federal government. However, moving too quickly or prematurely at DOD or elsewhere, can significantly raise the risk of doing it wrong. This could also serve to severely set back the legitimate need to move to a more performance- and results-based system for the federal government as a whole. Thus, while it is imperative that we take steps to better link employee pay and other personnel decisions to performance across the federal government, how it is done, when it is done, and the basis on which it is done, can make all the difference in whether or not we are successful. One key need is to modernize performance management systems in executive agencies so that they are capable of supporting more performance-based pay and other personnel decisions. Unfortunately, based on GAO's past work, most existing federal performance appraisal systems, including a vast majority of DOD's systems, are not currently designed to support a meaningful performance-based pay system. The critical questions to consider are: should DOD and/or other agencies be granted broad-based exemptions from existing law, and if so, on what basis? Do DOD and other agencies have the institutional infrastructure in place to make effective use of any new authorities? This institutional infrastructure includes, at a minimum, a human capital planning process that integrates the agency's human capital policies, strategies, and programs with its program goals and mission, and desired outcomes; the capabilities to effectively develop and implement a new human capital system; and, importantly, a set of adequate safeguards, including reasonable transparency and appropriate accountability mechanisms to ensure the fair, effective, and credible implementation of a new system. In GAO's view, as an alternative to DOD's proposed approach, Congress should consider providing governmentwide broad banding and pay for performance authorities that DOD and other federal agencies can use provided they can demonstrate that they have a performance management system in place that meets certain statutory standards, that can be certified to by a qualified and independent party, such as OPM, within prescribed timeframes. Congress should also consider establishing a governmentwide fund whereby agencies, based on a sound business case, could apply for funding to modernize their performance management systems and ensure that those systems have adequate safeguards to prevent abuse. This approach would serve as a positive step to promote high-performing organizations throughout the federal government while avoiding further human capital policy fragmentation.
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Inherently governmental functions require discretion in applying government authority or value judgments in making decisions for the government; as such, they should be performed by government employees--not private contractors. The Federal Acquisition Regulation (FAR) provides 20 examples of functions considered to be, or to be treated as inherently governmental (see Appendix I), including determining agency policy and priorities for budget requests, directing and controlling intelligence operations, approving contractual requirements, and selecting individuals for government employment. The closer contractor services come to supporting inherently governmental functions, the greater the risk of their influencing the government's control over and accountability for decisions that may be based, in part, on contractor work. Table 1 provides examples of the range of services contractors provide to the federal government--from basic activities, such as custodial and landscaping, to more complex professional and management support services--and their relative risk of influencing government decision making. The potential for the loss of government management control and accountability for decisions is a long-standing governmentwide concern. For example, in 1981, we found that the level of contractor involvement in management functions at the Departments of Energy and Defense was so extensive that the agencies' ability to develop options other than those proposed by the contractors was limited. More recently, in 2006, government, industry, and academic participants in GAO's forum on federal acquisition challenges and opportunities and the congressionally mandated Acquisition Advisory Panel noted how an increasing reliance on contractors to perform services for core government activities challenges the capacity of federal officials to supervise and evaluate the performance of these activities. FAR and Office of Federal Procurement Policy (OFPP) guidance state that services that tend to affect government decision-making, support or influence policy development, or affect program management are susceptible to abuse and require a greater level of scrutiny and an enhanced degree of management oversight. This would include assigning a sufficient number of qualified government employees to provide oversight and to ensure that agency officials retain control over and remain accountable for policy decisions that may be based in part on a contractor's performance and work products. A broad range of program-related and administrative activities was performed under the professional and management support services contracts we reviewed. DHS decisions to contract for these services were largely driven by the need for staff and expertise to get programs and operations up and running. While DHS has identified core mission-critical occupations and plans to reduce skill gaps in core and key competencies, it has not directly addressed the department's use of contractors for services that closely support the performance of inherently governmental functions. A broad range of activities related to specific programs and administrative operations was performed under the professional and management support services contracts we reviewed. The categories of policy development, reorganization and planning, and acquisition support were among the most often requested in the 117 statements of work, as well as in the nine case studies. For example, TSA obligated $1.2 million to acquire contractor support for its Acquisition and Program Management Support Division, which included assisting with the development of acquisition plans and hands-on assistance to program offices to prepare acquisition documents. A $7.9 million OPO human capital services order provided a full range of personnel and staffing services to support DHS's headquarters offices, including writing position descriptions, signing official offer letters, and meeting new employees at DHS headquarters for their first day of work. Contractor involvement in the nine case studies ranged from providing two to three supplemental personnel to staffing an entire office. Figure 1 shows the type and range of services provided in the nine cases and the location of contractor performance. Many of the program officials we spoke with said that contracting for services was necessary because they were under pressure to get program and administrative offices up and running quickly, and they did not have enough time to hire staff with the right expertise through the federal hiring process. For example: According to officials at TSA, federal staff limitations was a reason for procuring employee relations support services. Specifically, the agency needed to immediately establish an employee relations office capable of serving 60,000 newly hired airport screeners--an undertaking TSA Office of Human Resources officials said would have taken several years to accomplish if they hired qualified federal employees. DHS human capital officials said there were only two staff to manage human resources for approximately 800 employees, and it would have taken 3 to 5 years to hire and train federal employees to provide the necessary services. In prior work, GAO has noted that agencies facing workforce challenges, such as a lack of critical expertise, have used strategic human capital planning to develop long-term strategies for acquiring, developing, motivating, and retaining staff to achieve programmatic goals. While DHS's human capital strategic plan notes that the department has identified core mission-critical occupations and seeks to reduce skill gaps in core and key competencies, DHS has not determined the right mix of government performed and contractor performed services or assessed total workforce deployment across the Department to guide decisions on contracting for selected services. We have noted the importance of focusing greater attention on which types of functions and activities should be contracted out and which ones should not, while considering other reasons for using contractors, such as a limited number of federal employees. DHS's human capital plan is unclear as to how this could be achieved and whether it will inform the Department's use of contractors for services that closely support the performance of inherently governmental functions. While program officials generally acknowledged that their professional and management support services contracts closely supported the performance of inherently governmental functions, they did not assess the risk that government decisions may be influenced by, rather than independent from, contractor judgments--as required by federal procurement policy. In addition, none of the program officials and contracting officers we spoke with was aware of these requirements, and few believed that their professional and management support service contracts required enhanced oversight. Federal guidance also states that agency officials must retain control over and remain accountable for policy and program decisions. For the nine cases we reviewed, the level of oversight DHS provided did not always help ensure accountability for decisions or the ability to judge whether contractors were performing as required; however, DHS's Chief Procurement Officer is implementing an acquisition oversight program with potential to address this issue. To help ensure the government does not lose control over and accountability for mission-related decisions, long-standing federal procurement policy requires attention to the risk that government decisions may be influenced by, rather than independent from, contractor judgments when contracting for services that closely support inherently governmental functions. The nine cases we reviewed in detail provided examples of conditions that we have found need to be carefully monitored to help ensure the government does not lose control over and accountability for mission-related decisions. Contractors providing services integral to an agency's mission and comparable to those provided by government employees: In seven of the nine cases, contractors provided such services. For example, one contractor directly supported DHS efforts to hire federal employees, including signing offer letters. In another case, a contractor provided acquisition advice and support while working alongside federal employees and performing the same tasks. Contractors providing ongoing support: In each of the nine case studies, the contractor provided services for more than 1 year. In some of these cases, the original justification for contracting had changed, but the components extended or recompeted services without examining whether it would be more appropriate for federal employees to perform the service. For example, OPO established a temporary "bridge" arrangement without competition that was later modified 20 times, and extended for almost 18 months, to avoid disruption of critical support including budget, policy, and intelligence services. Subsequently, these services were competed and awarded to the original contractor under six separate contracts. Broadly defined requirements: In four of the case studies, the statements of work lacked specific details about activities that closely support inherently governmental functions. In addition, several program officials noted that the statements of work did not accurately reflect the program's needs or the work the contractors actually performed. For example, a Coast Guard statement of work for a $1.3 million order initially included services for policy development, cost- benefit analyses, and regulatory assessments, though program officials told us the contractors provided only technical regulatory writing and editing support. The statement of work was revised in a later contract to better define requirements. Federal acquisition guidance highlights the risk inherent in services contracting--particularly those for professional and management support services--and federal internal control standards require assessment of risks. OFPP staff we met with also emphasized the importance of assessing the risk associated with contracting for services that closely support the performance of inherently governmental functions. While contracting officers and program officials for the nine case studies generally acknowledged that their professional and management support services contracts closely supported the performance of inherently governmental functions, none assessed whether these contracts could result in the loss of control over and accountability for mission-related decisions. Furthermore, none were aware of federal requirements for enhanced oversight of such contracts. Contracting officers and program officials, as well as DHS acquisition planning guidance, did not cite services that closely support the performance of inherently governmental functions as a contracting risk and most did not believe enhanced oversight of their contracts was warranted. Current DHS initiatives may have the potential to address oversight when contracting for services that closely support inherently governmental functions. DHS's Chief Procurement Officer is in the process of implementing an acquisition oversight program that is intended to assess contract administration, business judgment, and compliance with federal acquisition guidance. This program was designed to allow flexibility to address specific procurement issues and is based on a series of reviews at the component level that could address selected services. Both the FAR and OFPP policy state that when contracting for services-- particularly for professional and management support services that closely support the performance of inherently governmental functions--a sufficient number of qualified government employees assigned to plan and oversee contractor activities is needed to maintain control and accountability. While most contracting officers and program officials that we spoke with held the opinion that the services they contracted for did not require enhanced oversight, we found cases in which the components lacked the capacity to oversee contractor performance due to limited expertise and workload demands. For example: One Contracting Officer's Technical Representative (COTR) was assigned to oversee 58 tasks, ranging from acquisition support to intelligence analysis to budget formulation and planning, across multiple offices and locations. Program and contracting officials noted the resulting oversight was likely insufficient. To provide better oversight for one of the follow-on contracts, the program official assigned a new COTR to oversee just the intelligence work and established monthly meetings between the COTR and the program office. According to program officials, this change was made to ensure that the contract deliverables and payments were in order, not to address the inherent risk of the services performed. Similarly, a DHS Human Capital Services COTR assigned to oversee an extensive range of personnel and staffing services provided by the contractor lacked technical expertise, which the program manager believed affected the quality of oversight provided. To improve oversight for the follow-on contract, the program manager assigned a COTR with more human resources experience along with an employee with human resources expertise to assist the COTR. DHS components were also limited in their ability to assess contractor performance, which is necessary to ensure control and accountability, in a way that addressed the risk of contracting for professional and management support services that closely support the performance of inherently governmental functions. Assessing contractor performance requires a plan that outlines how services will be delivered and establishes measurable outcomes. However, none of the related oversight plans and contract documents we reviewed contained specific measures for assessing contractors' performance of the selected services. Until the department provides greater scrutiny and enhanced management oversight of contracts for selected services--as required by federal guidance--it will continue to risk transferring government responsibility to contractors. To improve the department's ability to manage the risk associated with contracting for services that closely support the performance of inherently governmental functions and help ensure government control and accountability, the report we are releasing today recommends that the Secretary of Homeland Security take several actions. These actions include establishing strategic-level guidance for determining the appropriate mix of government and contractor employees, assessing the risk of using contractors for selected services, more clearly defining contract requirements, assessing the ability of the government workforce to provide sufficient oversight when using selected services, and reviewing contracts for selected services as part of the acquisition oversight program. DHS generally concurred with our recommendations and provided information on what actions would be taken to address them. However, DHS partially concurred with our recommendation to assess the risk of selected services as part of the acquisition planning process and modify existing guidance and training, noting that its acquisition planning guidance already provides for the assessment of risk. Our review found that this guidance does not address the specific risk of services that closely support the performance of inherently governmental functions. DHS also partially concurred with our recommendation to review selected services contracts as part of the acquisition oversight program. DHS stated that rather than reviewing selected services as part of the routine acquisition oversight program, the Chief Procurement Officer will direct a special investigation on selected issues as needed. We did not intend for the formal oversight plan to be modified, rather we recognize that the program was designed with flexibility to address specific procurement issues as necessary. We leave it to the discretion of the Chief Procurement Officer to determine how to implement the recommendation. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions you or other members of the committee may have at this time. For further information regarding this testimony, please contact me at (202) 512-4841 or ([email protected]). Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this product. Staff making key contributions to this statement were Amelia Shachoy, Assistant Director; Katherine Trimble; Jennifer Dougherty; Karen Sloan; Julia Kennon; and Noah Bleicher. Federal Acquisition Regulation (FAR) section 7.503 provides examples of inherently governmental functions and services or actions that are not inherently governmental, but may approach being inherently governmental functions based on the nature of the function, the manner in which the contractor performs the contract, or the manner in which the government administers contractor performance. These examples are listed in tables 1 and 2.
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In fiscal year 2005, the Department of Homeland Security (DHS) obligated $1.2 billion to procure four types of professional and management support services. While contracting for such services can help DHS meet its needs, using contractors to provide services that closely support inherently governmental functions increases the risk of government decisions being influenced by, rather than independent from, contractor judgments. This testimony summarizes our September 2007 report to this Committee and others and focuses on (1) the types of professional and management support services DHS has contracted for and the circumstances that drove its contracting decisions, and (2) DHS's consideration and management of risk when contracting for such services. GAO analyzed 117 statements of work and 9 case studies in detail for selected contracts awarded in fiscal year 2005 by the Coast Guard, the Office of Procurement Operations, and the Transportation Security Administration. A broad range of program-related and administrative activities was performed under the four types of professional and management support services contracts we reviewed--program management and support, engineering and technical, other professional, and other management support. DHS decisions to contract for these types of services were largely driven by the need for staff and expertise to get programs and operations up and running. While DHS has identified core mission critical occupations and plans to reduce skill gaps in core and key competencies, it is unclear whether this will inform the department's use of contractors for services that closely support the performance of inherently governmental functions. Program officials generally acknowledged that their professional and management support services contracts closely supported the performance of inherently governmental functions, but they did not assess the risk that government decisions may be influenced by, rather than independent from, contractor judgments--as required by federal procurement guidance. In addition, none of the program officials and contracting officers we spoke with was aware of these requirements, and few believed that their professional and management support service contracts required enhanced oversight. Federal guidance also states that agency officials must retain control over and remain accountable for policy and program decisions. For the nine cases we reviewed, the level of oversight DHS provided did not always help ensure accountability for decisions or the ability to judge whether contractors were performing as required. DHS's Chief Procurement Officer is implementing an acquisition oversight program--designed to allow flexibility to address specific procurement issues--with potential to address this issue.
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Throughout this report, we refer to program integrity activities as those activities designed to prevent fraud, waste, and abuse of government resources. Program integrity activities may encompass a broad range of activities, such as identifying improper payments or improper access to federal programs or benefits. An improper payment is defined by statute as any payment that should not have been made or that was made in an incorrect amount (including overpayments and underpayments) under statutory, contractual, administrative, or other legally applicable requirements. Among other things, it includes payment to an ineligible recipient, payment for an ineligible good or service, and any duplicate payment. In the context of this report, improper access to a federal program or benefit refers to access that should not have occurred under statutory, contractual, administrative, or other legally applicable requirements. Additionally, Standards for Internal Control in the Federal Government states that management should use information that is appropriate, current, complete, accurate, and provided on a timely basis to achieve an entity's objectives. To do this, management obtains relevant data from reliable internal and external sources in a timely manner based on the identified information requirements, which may vary depending on the program's objectives. Management uses the quality information to make informed decisions and evaluate the entity's performance in achieving key objectives and addressing risks, such as the risk of fraud, waste, and abuse. As such, information and communication are a key component of agencies' internal control over their programs. Commercial data may or may not help agencies meet these information needs. Throughout this report, we refer to commercial data and data service providers. These include private companies and nonprofit entities that gather and maintain data as well as provide a variety of analytical and consulting support to federal agencies as part of their data services. The types of data these entities provide access to may include data from federal government entities, such as death information from the Social Security Administration (SSA); data from state and local government entities, such as real estate and personal property ownership records; and data from commercial entities, such as the name and address of a private business that the data service provider collects, maintains, and updates through its own efforts. Figure 1 shows examples of the types of data that agencies may obtain from data service providers. In addition to aggregating information from multiple data sources and providing access to various databases, commercial data service providers may provide technical and analytical support to federal agencies, such as by developing user-friendly interfaces for agency staff and producing analytical reports that agencies can use to identify potential fraud. As mentioned, agencies may pay for commercial data and data services in different ways, such as through contracts for a set amount or through rates based on usage. Additional background information on each of the five commercial data service providers we selected as part of our nonprobability sample appears later in this report. RELX Group is a public company that provides data services to private sector and government agencies. These data services include those provided through LexisNexis Risk Solutions and the Accuity Asset Verification Solution. LexisNexis Risk Solutions can provide access to public, proprietary, and third-party data--such as data on an individual's name, current address, and criminal history information--as well as data analytics as part of a data service. The Accuity Asset Verification Solution allows federal agencies to obtain information from the U.S. banking community to verify applicants' financial assets as part of program eligibility determinations, such as through SSA's Access to Financial Institutions initiative. Equifax Inc. is a public company that provides data services that include consumer and commercial information as well as workforce information. For example, Equifax provides automated verification of employment and income to both the public and private sectors through its proprietary The Work Number®️ database. According to Equifax officials, Equifax performed 74 million employment verifications through The Work Number®️ in 2015. In addition to The Work Number, Equifax provides its eIDVerifier product to the Internal Revenue Service (IRS), which IRS uses to support the authentication of taxpayers in a call center environment as part of its Taxpayer Protection Program. NAPHSIS is a nonprofit membership organization representing the 57 vital records jurisdictions that collect, process, and issue vital records in the United States. Vital records jurisdictions review, edit, process, and officially register births and deaths based on information submitted to them by various parties. The jurisdictions are then responsible for maintaining registries of such vital events and for issuing certified copies of birth and death records. NAPHSIS has worked to promote the adoption of electronic death registration systems and is developing an online tool that federal agencies and others may use to verify birth and death certificate information. Thomson Reuters Corporation is a public company and a multinational media and information firm that sells data services to its customers. Among these data services is the Thomson Reuters CLEAR data product, which allows users to search both public and proprietary records as part of research or investigations. According to representatives from Thomson Reuters, the CLEAR data service is used predominately in the law enforcement and inspector general communities for investigative purposes. D&B is a public company that provides both public and commercial data and data analytics services to its customers. The federal government has contracted with D&B since 1978 to provide Data Universal Numbering System (DUNS) identification numbers for all government contractors. A DUNS number is a unique nine-digit number that is assigned to every business entity in D&B's global business database, which according to D&B contains more than 240 million records. In addition to the right to use DUNS numbers as a unique identification number, the General Services Administration (GSA) also contracts with D&B to provide business information and related services on all existing and potential government contractors and awardees. This information is linked to the business entity through the DUNS number. The DUNS number and associated business information are owned and controlled by D&B, but licensed to the government to be used for selected federal award management purposes. Officials from SSA, the Department of Labor (DOL), the U.S. Department of Homeland Security (DHS), GSA, and IRS told us that using commercial data services can help their agencies to access proprietary private sector data that are not available from government sources and improve the efficiency of program integrity activities. Commercial bank account information from private financial institutions may not be available from government sources, and this proprietary private sector information may help a federal agency to identify improper payments. For example, as part of SSA's Access to Financial Institutions initiative, SSA contracts with Accuity to use its Asset Verification Solution to electronically search for account ownership and balances at financial institutions, such as commercial bank accounts where Supplemental Security Income (SSI) program recipients have a direct deposit account. These searches can provide SSA with independent data on a recipient's financial institution accounts when a new SSI claim is filed or when the agency periodically redetermines program eligibility for some SSI recipients. Similarly, in August 2012 DOL contracted with Accuity for a pilot project that explored how accessing data from commercial financial institutions, which are not available from a government source, could help detect and prevent overpayments in the Unemployment Insurance (UI) program. The pilot project tested whether obtaining financial transaction data--such as deposits that could represent wages from work--through a data match with commercial financial institutions would allow three states to more accurately determine whether UI claimants had returned to work and therefore may no longer have been eligible for UI benefits. The results of this pilot indicated a significant increase in the number of UI claimants detected with unreported income, translating into a more than $80 million increase in the amount of potential improper payments identified during the 15-month period of the pilot project. However, in January 2015, Accuity and its project partner informed DOL that it no longer wished to participate in the project, absent legislation compelling the financial institutions to do so. DOL officials we spoke with during our review indicated that they are currently exploring a new pilot to use wage data from another commercial data service provider to identify improper UI payment stemming from unreported income from work. Additionally, officials from DOL, DHS, and GSA as well as representatives of the commercial data service providers told us that, while some data sets they obtain are available from federal agencies, some federal agencies likely could not provide the level of data service they receive from commercial data service providers without making significant investments in various data service activities. These various data service activities include collecting, maintaining, and verifying data from both public and proprietary sources; providing IT infrastructure; providing data analytics services; and providing user-friendly interfaces and output, among other activities. Consequently, officials from these agencies speculated that relying on these commercial data service providers likely costs their agencies less than if they attempted to provide a similarly extensive data service using only agency resources. Using commercial data may also help realize efficiencies by freeing up agency staff to perform other mission-oriented work. For example, IRS officials told us that using commercial data service providers to provide web and phone-based services to help authenticate certain taxpayers' identities allowed their staff to focus on other work rather than deal with large volumes of in-person requests for identity authentication. IRS's Taxpayer Protection Program reviews suspicious returns flagged by IRS's identity theft filters and requires taxpayers to confirm their identities before IRS issues a refund. To do this, IRS asks authentication questions about personal information that only the taxpayer should know, such as: "Who is your mortgage lender?" or "Which of the following is your previous address?" IRS's Taxpayer Protection Program database includes data from LexisNexis and Equifax. If the individual's identity cannot be authenticated, IRS removes the tax return from processing, an action designed to prevent the agency from issuing a fraudulent tax refund. The IRS officials we spoke with indicated that using these web and phone based services likely required fewer IRS resources than authenticating identities in person at an IRS office. Further, the IRS officials we spoke with as part of this review also stated that using commercial data services to provide web and phone-based services to authenticate taxpayers' identities may reduce the burden on taxpayers who live far from an IRS office or are otherwise unable to visit an office in person. Factors agencies may consider in determining whether data from nongovernmental data services meet their information requirements for conducting program integrity activities include the accuracy of data; the currency and timeliness of data; the completeness of data; and technical aspects of using the data for these purposes, according to officials we spoke with. As mentioned, our work was based on a nonprobability sample of agencies and nongovernmental entities, and the information and perspectives that we obtained are not generalizable to other federal agencies and data service providers. Officials from DOL, SSA, and DHS told us that these federal agencies consider the accuracy of data and related laws and policies when determining whether commercial data meet their information requirements for conducting program integrity activities. For example, DOL officials noted that individuals who are legitimately eligible for federal programs could be unfairly denied program benefits if agencies rely on inaccurate data to make a determination about their eligibility for a program. SSA officials stated that using less accurate data in making eligibility and payment determinations could also place undue burdens on applicants and payment recipients and increase the agency's appeals workload, which could create inefficiencies in the agency's program integrity efforts. At the same time, representatives of some commercial data service providers we spoke with stated that they work continuously to ensure the accuracy of their data, but also acknowledged that it is unreasonable to expect all data to be perfectly accurate. As part of our review, OMB staff described provisions of the Computer Matching and Privacy Protection Act of 1988 ("Computer Matching Act") designed to mitigate the risk of agencies using inaccurate data in conducting program integrity activities. Specifically, OMB staff noted that the Computer Matching Act generally requires that agencies independently verify information produced through data matching and provides due process rights to individuals whose benefits may be affected by the data obtained through computer matching activities. OMB staff emphasized that agencies must consider relevant provisions of the Computer Matching Act when using commercial data to conduct program integrity activities. Additionally, DHS and DOL officials cited agency policies designed to ensure that officials verify data obtained from commercial data sources before making final program determinations. For example, officials from DHS's United States Citizenship and Immigration Services provided us with a document of their standard operating procedure that requires officers investigating immigration benefit fraud--such as fraud committed to obtain a visa--to provide adjudicators with original source documents rather than summarizing information contained in commercial databases. These DHS officials stated that they use information from commercial data sources such as LexisNexis and Thomson Reuters CLEAR as "leads" to original or primary sources rather than as the basis for making final program determinations. Similarly, DOL officials told us that they issued an advisory to the state workforce agencies that administer UI payments citing the need to independently verify information received through various analytic techniques before suspending, terminating, reducing, or making a final denial of UI benefits. Officials from DHS, DOL, and SSA told us these federal agencies consider how the currency and timeliness of data obtained through commercial data services meet their information requirements for conducting program integrity activities. For example, DHS officials told us that outdated information, such as a name or address that may have been previously, but not currently, associated with an individual, could hinder the efficiency of tracking down that individual. Similarly, representatives from some commercial data service providers we spoke with described the need for data to be up-to-date, such as by continually updating information on whether entities are still in business or have changed addresses. These representatives described steps they take to do so, such as by electronically and manually verifying information in their databases on a regular basis. Moreover, the timeliness of data can be an important factor in identifying and preventing improper payments. For example, DOL officials told us that state UI agencies could likely improve their ability to identify and prevent improper UI payments to claimants who return to work by obtaining wage data from Equifax's Work Number system, which are generally more recent than quarterly wage data that UI agencies receive from employers. Specifically, the officials noted that state UI agencies currently rely on wage data from employers that are usually reported on a quarterly basis, while Equifax's Work Number data can be obtained on a "real time" basis corresponding to the weekly, biweekly, or monthly pay period of the employer. Because a significant proportion of overpayments in the UI program occur because individuals return to work without notifying the state workforce agency that administers those benefits, obtaining these data may be an opportunity for UI agencies to improve their efforts to reduce UI improper payments, according to DOL officials. In April 2016, DOL officials told us that the agency is currently working with three states and Equifax to conduct a pilot project to examine the use of Equifax's Work Number data to identify improper payments to UI recipients with disqualifying income from work. The DOL officials expect the pilot project to last for up to 4 months. Similarly, a provision of the Social Security Benefit Protection and Opportunity Enhancement Act of 2015, which goes into effect in November 2016, authorizes SSA to enter into data exchanges with payroll providers, such as Equifax's Work Number system, to help prevent improper Disability Insurance and SSI payments to individuals with relevant work and income by helping SSA access timely information on wages and income. SSA's preliminary cost estimates, which were prepared before the enactment of the legislation, suggest that the agency would realize savings by accessing and using wage data from commercial databases. However, the SSA officials we spoke with also stated that because the agency's savings estimates were completed prior to actual implementation planning and before the Social Security Benefit Protection and Opportunity Enhancement Act became law, they expect the estimates to change as the agency implements provisions of the Act. Officials from SSA told us that they also consider the completeness of data from various governmental and commercial sources when determining whether data meet their information requirements for conducting program integrity activities. For example, death data can help agencies to prevent improper payments to deceased individuals, but the completeness of death data varies depending on the source. For example, SSA receives death reports from multiple sources, including state vital records agencies, family members, and other federal agencies in order to administer its programs. During our review, SSA officials told us that obtaining death data helps them to prevent around $50 million in improper payments each month. In accordance with the Social Security Act, SSA shares its full set of death data with certain agencies that pay federally funded benefits, for the purpose of ensuring the accuracy of those payments. For other users of SSA's death data, including commercial data service providers, SSA extracts a subset of records into a file called the Death Master File (DMF), which, to comply with federal law, excludes state-reported death data. Agencies and commercial data service providers can purchase a DMF subscription through the Department of Commerce's National Technical Information Service, which reimburses SSA for the cost of providing the file. However, the death information included in the publicly available DMF is less complete than the death information contained in SSA's full death file because the publicly available DMF does not include state-reported death information. Further, during our review, SSA officials said they expect the percentage of state-reported deaths as a proportion of all of SSA's death records to increase, which over time will lead to a smaller portion of all of SSA's death records being included on the DMF. In that scenario, federal, state, or local agencies that use death data from the DMF will receive increasingly less complete and therefore less useful information than agencies that use death data from SSA's full death file. While SSA has a role collecting and distributing death records as described above, SSA officials told us that the most important step in ensuring the quality and completeness of their death records would be for all vital records agencies to use electronic death registration systems. According to SSA officials, electronic death registration systems automate the death reporting process and allow vital records agencies to verify the name and Social Security Number of a deceased individual before they issue the death certificate or transmit a report of death to SSA. As of November 2015, 46 of 57 vital records agencies have implemented electronic death registration systems, according to NAPHSIS. NAPHSIS and SSA officials told us that they are continuing efforts to expand electronic death record reporting, and NAPHSIS officials cited the need for additional funding to facilitate the adoption and use of electronic data registration systems by all 57 jurisdictions. Additionally, NAPHSIS is developing an online tool that may provide agencies the ability to access death information maintained by vital statistics agencies, which could provide federal agencies access to a more complete set of death records than SSA's full death file. However, at the time of this report, this tool is in a preliminary testing phase, and no federal agencies currently access the system. Officials from IRS, SSA, and GSA told us that federal agencies also consider technical aspects of commercial data services when determining whether commercial data meet their information requirements for conducting program integrity activities, such as restrictions on batch versus manual data processing. For example, IRS officials told us that large-scale, batch processing can be more efficient than manual, case- by-case processing, which would be unfeasible for analyses involving large populations or large amounts of data from various sources. The IRS officials noted that the agency determined that some potential data service providers could not meet their requirements because the potential providers' processing capability was limited to manual or case-by-case processing. Similarly, SSA officials stated that data providers may place restrictions on whether agencies can access and process data on a manual, case-by-case basis or in batches, and these restrictions can affect the efficiency of their program integrity activities. For example, SSA officials noted that batch processing could save operational and administrative resources compared to case-by-case or manual database searches for its SSI program. The SSA officials stated that their current process involves staff requesting data on a single case basis, reviewing the response, and transcribing information into the agency's case processing system. According to SSA officials, batch processes would afford technicians more time to focus on other critical agency workloads. Additionally, SSA officials stated that routine batch processes would potentially allow the agency to detect unreported income and resources before an improper payment is made, which could save administrative resources on the back end related to processing improper payments. Commercial data service providers may also place restrictions on how agencies can use data. For example, D&B's DUNS--a proprietary, unique identifier for businesses--helps the federal government track entities across various data systems, but D&B has placed restrictions on how GSA can use the data. During our review, officials from GSA noted that using D&B's proprietary DUNS number allowed the federal government to track contracts, grants, awards, and other business with that entity across various agencies and data systems, which can help identify "bad actors" that are barred from holding federal contracts. However, due to the proprietary nature of DUNS numbers, D&B has placed restrictions on how GSA can use them. These restrictions limit the purposes for which the government can use the data and hampers the ability to switch to a new numbering system. The federal government is currently exploring alternatives to the DUNS, but GSA officials noted that the costs of switching to a new unique numbering system across all government information systems were unknown. Representatives of one data service provider told us that their customers may also consider issues related to the infrastructure needed to conduct large-scale, data-intensive program integrity activities when determining whether commercial data meet its information requirements. Specifically, NAPHSIS representatives stated that, at the conclusion of their current testing phase, NAPHSIS may need to expand its infrastructure to accommodate increased data traffic for its online tool that federal agencies and others may use to verify death information. The NAPHSIS officials we spoke with stated that they were partnering with LexisNexis Risk Solutions on this project, which required significant investments from both parties. According to NAPHSIS officials, NAPHSIS is also in the process of upgrading software and hardware at some vital statistics agencies to support its online tool. As mentioned, this tool is in a preliminary testing phase and no federal agencies currently access the system. Additionally, agency officials may consider the design of software associated with a data service when determining whether commercial data meet their information requirements for conducting program integrity activities, as illustrated by an example from prior GAO work. In June 2015, we reported that we examined practice location addresses of providers and suppliers listed in Centers for Medicare & Medicaid Services (CMS) data and found that an estimated 23,400 (22 percent) of 105,234 were potentially ineligible. Potentially ineligible addresses include those that are associated with a certain type of a Commercial Mail Receiving Agency (CMRA) or vacant or invalid addresses. To do this, we used a software package that provides more detailed information on provider practice location addresses than that used by CMS. To help improve the Medicare provider and supplier enrollment-screening procedures, we recommended in June 2015 that that the Acting Administrator of CMS modify the CMS software integrated into CMS data to include specific flags to help identify potentially questionable practice location addresses, such as CMRA, vacant, and invalid addresses. In its comments on the June 2015 report, the Department of Health and Human Services (HHS) agreed with our recommendation and noted plans to configure the provider and supplier address-verification system in CMS data to flag CMRAs, vacancies, invalid addresses, and other potentially questionable practice locations. Because HHS has not yet initiated specific actions to implement our recommendations, it is too early for us to determine whether the actions the agency outlined in its official comments on a draft of that report would fully address the intent of the recommendations. However, if effectively implemented, the actions could prevent ineligible providers from enrolling into the Medicare program and obtaining Medicare funds, thus potentially reducing the amount of improper payments. We plan to continue to monitor the agency's efforts in this area. We are not making recommendations in this report. We provided a draft of this report to OMB, GSA, DOL, IRS, SSA, DHS, and Fiscal Service for review and comment. OMB provided comments, which are reproduced in appendix I, that describe ongoing efforts to use data analytics for federal program integrity efforts. GSA and DOL provided technical comments, which we incorporated as appropriate. IRS, SSA, DHS, and Fiscal Service had no comments on this report. We are sending copies of this report to the Commissioner of the Bureau of the Fiscal Service, the Administrator of GSA, the Secretary of Homeland Security, the Commissioner of Internal Revenue, the Secretary of Labor, the Director of OMB, the Commissioner of Social Security, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-6722 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II. In addition to the contact named above Jennifer Cook, Marcus Corbin, Gabrielle Fagan (Assistant Director), Colin Fallon, Michele Fejfar, Barbara Lewis, Maria McMullen, James Murphy, Jonathon Oldmixon, and Anna Maria Ortiz made key contributions to this report.
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Federal agencies may use commercial data services in conducting program integrity activities designed to identify fraud and improper payments, which pose a significant risk to the integrity of federal programs. For example, federal agencies may obtain commercial data--subject to applicable laws and protections--that identifies individuals' deaths, income and assets, or other information that may help the agency determine whether individuals or entities are eligible for a government program or benefit. GAO was asked to review issues surrounding the use of commercial data in conducting program integrity activities. This report identifies and describes the views of selected agency officials and commercial data service providers regarding (1) reasons selected agencies have used commercial data services in conducting program integrity activities; and (2) factors agencies may consider in determining whether commercial data services meet their information requirements for conducting program integrity activities. To do this, GAO reviewed documents and conducted interviews with federal agency officials and representatives of commercial data service providers selected as part of a nonprobability sample of 12 entities selected to represent a range of program integrity activities and commercial data services. The information and perspectives that GAO obtained are not generalizable to other agencies and providers. GAO is making no recommendations in this report, which incorporates various technical comments from the agencies. Officials from selected federal agencies told GAO that using commercial data services can help their agencies improve the efficiency of program integrity activities. For example, Internal Revenue Service (IRS) officials told GAO that using commercial data service providers to provide web and phone-based services to help authenticate certain taxpayer's identities likely allowed their staff to focus on other work rather than deal with large volumes of in-person requests for identity authentication. Commercial data services can also provide federal agencies access to private sector data, such as bank deposit information, that is not available from federal government sources. This financial information may help agencies to determine whether individuals have income from work or assets that indicate they are not eligible for certain programs, such as disability programs. Applicable laws generally require that agencies independently verify instances of matching data identified by computer matching programs before taking action and provide minimum notice to affected individuals. The figure below shows examples of the types of data that agencies may obtain from data service providers. Federal agencies may consider various factors in determining whether data from commercial data services meet their information requirements for conducting program integrity activities. These factors include the accuracy of data; the currency and timeliness of data; the completeness of data; and technical aspects of using the data for these purposes, according to officials from agencies in GAO's nonprobability sample. For example, Department of Labor (DOL) officials told GAO that state Unemployment Insurance (UI) agencies could likely improve their ability to identify and prevent improper UI payments to claimants who return to work by obtaining commercially available wage data from a data service provider that are generally more recent than quarterly wage data that UI agencies receive directly from employers. DOL officials also told GAO that the agency is currently working with three states and a provider to conduct a pilot project to examine the use of the provider's payroll data to identify improper payments to UI recipients with disqualifying income from work. DOL expects the pilot to last up to 4 months.
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The Section 202 and Section 811 programs are two federally funded programs intended to expand the supply of affordable housing for very low-income elderly persons and individuals with disabilities, respectively. The Housing Act of 1959, as amended, established the Section 202 Direct Loan Program to provide direct loans to nonprofit organizations to develop housing and provide supportive services for low-income older adults and individuals with disabilities. Under this loan program, over 278,000 units were funded from 1959 through 1990. In 1990, the Cranston-Gonzalez National Affordable Housing Act amended the Housing Act of 1959 and created separate programs: (1) the Section 202 Supportive Housing for the Elderly program to support affordable housing for very low-income elderly persons and (2) the Section 811 program for very low-income persons with disabilities. Section 202 households must be very low income (at or below 50 percent of area median income) and must include at least one member who is at least 62 years old. Section 811 households must also be very low income with at least one adult member with a disability (such as a physical or developmental disability or chronic mental illness). Since 1990, the Section 202 program has provided approximately 120,000 affordable housing units for older adults. As of fiscal year 2011, Section 811 has provided approximately 31,000 units for individuals with disabilities. Since 1990, the Section 202 and Section 811 programs have provided financing to nonprofit organizations known as sponsors through capital advances for the construction, acquisition, or rehabilitation of new affordable housing units. Section 202 and Section 811 sponsors are not required to repay the capital advance as long as they continue to make supportive housing affordable to eligible households for 40 years. HUD also provides rental assistance payments to Section 202 and Section 811 sponsors to cover the difference between the unit's rent and the household's rental contribution, which is typically equal to 30 percent of the household income. For Section 202, sponsors can also use rental assistance payments to help pay for activities of daily living and instrumental activities of daily living, such as eating, dressing, managing finances, and managing medications. Funding for Section 202 and Section 811 capital advances and rental assistance has decreased in recent years (see table 1). The combined fiscal years 2010 and 2011 Notice of Funding Availability was the last capital advance competition for new units in both programs. Beginning with fiscal year 2012, appropriations have not been made for the production of new units. In the combined fiscal years 2010 and 2011 capital advance competition cycle, HUD awarded 99 Section 202 capital advances in 33 states and 86 Section 811 capital advances in 34 states. With the suspension of funding for new construction or rehabilitation, housing developers must now rely on other funding sources, such as Low Income Housing Tax Credits, if they wish to build housing for these populations. Although Congress continues to appropriate funds for rental assistance for existing Section 202 and Section 811 units, these appropriations also declined from 2011 to 2013. According to HUD, most Section 202 and Section 811 projects that received funding in fiscal year 2008, fiscal year 2009, or the combined fiscal year 2010/ 2011 funding cycle have been completed but some are still in the process of being completed. Until fiscal year 2012, when funding for new units ceased, HUD used a two-phase process to allocate and award Section 202 and Section 811 capital advances (see fig. 1). First, HUD headquarters allocated the total amount of appropriated funds for capital advances to each of the 18 Hubs (which in this report we refer to as regional offices) based on a funding formula, which accounted for regional housing needs and cost characteristics. Second, applicants submitted applications online and staff from the applicable regional office evaluated applications using a technical review and a point system and awarded capital advances to the highest-scoring applicants. While our discussion of funding below analyzes the number of capital advances and the amount by state, award determinations were based on applications received in each regional office. For the Section 202 program, HUD used a needs-based funding allocation formula that reflected the relevant characteristics of prospective program beneficiaries in each regional office. Under the Section 202 program, HUD allocated 85 percent of the total capital advance amount to metropolitan areas and 15 percent to nonmetropolitan areas within each regional office. HUD then applied a "fair share" factor for each metropolitan and nonmetropolitan portion of each of the 18 regional offices, which allowed it to adjust the allocated funds per region based on the number of elderly very low-income adults with housing conditions and geographic costs of providing housing in each region. According to HUD officials, in fiscal year 2010, HUD implemented changes in the way it distributed capital advances among the regional offices to better target resources for the Section 202 program. Prior to 2010, HUD allocated funds to each of the 18 regional offices and then further subdivided the funds among 52 local program offices associated with each regional office. At that time, each local program office received a minimum set-aside for metropolitan and nonmetropolitan areas. The set-aside was intended to provide enough funding to support the development of at least 20 units in metropolitan areas and 5 units in nonmetropolitan areas. However, in the combined fiscal year 2010/2011 capital advance competition, HUD did not subdivide the funds to local offices and discontinued the minimum set-aside of 20 units in metropolitan and 5 units in nonmetropolitan areas in order to fund properties at a higher level. According to HUD headquarters officials, by eliminating the field office set-aside, HUD could develop affordable housing in a more cost-effective manner. HUD officials said that while the 2010 Notice of Funding Availability no longer had a minimum set-aside, the process for reviewing applications and making award determinations remained the same. Prior to 2010/2011, under the Section 811 program, each local office received capital advance funds for a minimum of 10 units. Similar to Section 202, the Section 811 program applied a "fair share" factor to distribute capital advances. The Section 811 funding formula for fiscal years 2010/2011 used the number of institutionalized persons age 16 to 64 with a disability, as well as geographic costs of providing housing, to allocate funding to each region. Unlike for Section 202, for Section 811 HUD did not require that a portion of the funding be allocated to metropolitan and nonmetropolitan areas. Both Section 202 and Section 811 followed a similar competitive process for awarding capital advances. After HUD announced the availability of funds, applicants submitted applications online and were then routed on to the applicable regional office. The review process involved a technical review followed by a rating process. During the technical review, regional office staff examined each application to determine adherence to eligibility requirements, such as responsiveness to local housing needs, project size, and development cost limits. They also assessed each application to identify deficiencies that are curable--for example, incomplete information submitted by the applicant that is not part of the scored application. If an application included curable deficiencies, the regional office notified the applicant and provided a time frame for resolving the deficiencies. Applications that did not pass the technical review were rejected. HUD provided a written notice to rejected applicants, which included the rationale for rejection and an opportunity for appeal. According to HUD headquarters officials, common reasons for rejection were noncompliance with environmental requirements and site control. Rejected applicants could file an appeal with HUD. Applications that passed the technical review proceeded to the rating process. During the rating process, the regional office evaluated each application in several categories using a point system. These categories were (1) capacity of the applicant and relevant organizational staff; (2) need, or the extent of the problem; (3) soundness of approach; (4) leveraging resources; and (5) achieving results and program evaluation. Each application was scored on a number of criteria within each of these categories, and applications were required to meet a minimum point threshold in order to be considered for funding. According to HUD, once scores were compiled, HUD awarded capital advances through a competitive process to applicants selected in each region with the greatest number of points in each regional office. Because the regional offices received separate funding allocations for metropolitan and nonmetropolitan areas for Section 202, they were required to first split the applications into metropolitan and nonmetropolitan developments and then rank each application within these areas. The funding levels provided did not allow them to fund all eligible applicants. Each regional office selected eligible applications from highest to lowest scores until no more funding from the metropolitan and nonmetropolitan allocations remained. If an applicant were next in rank order but needed more funds than remained, regional offices were not permitted to skip over that applicant in order to select another lower scoring applicant whose project required less funds. Instead, according to HUD headquarters officials, once each regional office had awarded all the funds it could based on the stated criteria in the Notice Of Funding Availability (NOFA), HUD headquarters combined any remaining metropolitan and nonmetropolitan funds to select the next highest ranked application from either a metropolitan or nonmetropolitan area. Once each regional office finished selecting applicants, any remaining funds were returned to HUD headquarters, where the remaining eligible applicants were entered into a nationwide competitive pool. Then HUD headquarters awarded the remaining capital advance funds starting with the highest rated application nationwide that had not already received funding. HUD headquarters first selected the next highest ranked nonmetropolitan applications in order to satisfy its statutory requirement of 15 percent of the dollars going to nonmetropolitan areas. Any remaining funds were then used to fund qualified metropolitan applications. The allocation process continued until HUD headquarters allocated all available funds to eligible applicants. During this process, HUD headquarters was allowed to skip over a higher-rated applicant if selecting a lower-rated applicant meant all the remaining funds would be exhausted. From fiscal years 2008 through 2011, most states had at least one Section 202 applicant that received capital advance award dollars. See appendix I for a full list of all Section 202 and Section 811 awards and award amounts from fiscal years 2008 through 2011. As shown in figure 2, for fiscal years 2008 through 2011, applicants in 9 states received 10 or more awards, 15 states received between 5 and 9 awards, 19 states received between 2 and 4 awards, and 5 states received 1 award. Total capital advance amounts awarded varied across states for the Section 202 program (see fig. 3). From fiscal years 2008 through 2011, three states received total capital advances of $75 million or more. All three of these states (California, Florida, and New York) have large metropolitan areas, and all three received 10 or more awards during the period under review. Eight states received between $50 million and $74,999,999, while 6 states received between $25 million and $49,999,999. Thirty-one states received between $1,085,400 and $24,999,999. Four states had no Section 202 awards during this period: the District of Columbia, New Mexico, South Dakota, and West Virginia. As shown in table 2, HUD's regional offices received applications from sponsors to develop properties in all four of these states in at least one of the funding years. Since applications were only maintained for 3 years, HUD officials were not able to tell us why a specific application did not receive funding, but they identified possible reasons why applicants may not have received funding during this period. Specifically, HUD officials noted that applications that were submitted may have been ineligible; applications may have failed to meet the minimum point threshold for selection; or higher-scoring applications from other states may have been selected instead. Similarly, from fiscal years 2008 through 2011, Section 811 applicants in most states received funding for Section 811 projects. As shown in figure 4, applicants in 8 states received 10 or more awards, 12 states received between 5 and 9 awards, 19 states received between 2 and 4 awards, and 5 states received 1 award. Total amount of capital advances awarded varied across states for the Section 811 program (see fig. 5). From fiscal years 2008 through 2011, 6 states received capital advances of $15 million or more. Five of these were states that received 10 or more capital advances during the period under review, while the sixth state, California, received 7 during this period. Six states received between $10 million and $14,999,999, while 11 states received between $5 million and $9,999,999. Twenty-one states received between $652,100 and $4,999,999. Eight states did not have any Section 811 awards during this period: the District of Columbia, Montana, New Hampshire, New Mexico, Puerto Rico, Utah, Vermont, and Wyoming. As shown in table 3, HUD's regional offices received applications to develop Section 811 properties in six of these states in at least 1 of the 3 funding years. Sponsors did not submit applications to develop properties in the District of Columbia and Wyoming in any of these years. HUD officials said that sponsors in these states did not receive capital advances for reasons similar to those for the Section 202 program. We provided a copy of this report to HUD for its review. HUD provided us technical comments which we incorporated where appropriate. We are sending copies of this report to the Secretary of Housing and Urban Development and interested congressional committees. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs are listed on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. Tables 4 through 7 show the number of Section 202 and Section 811 capital advance awards and the total dollar amounts by state (including the District of Columbia and Puerto Rico) from fiscal years 2008 through 2011. Tables 5 and 7 also include the percentage of the total appropriated capital advance amount that each state received as well as the total percentage for fiscal years 2008 through 2011. As noted in the report, capital advance award decisions were made at the Housing and Urban Development (HUD) regional office and were not made by state, but rather across all states within a region. The fair share factor that HUD applied to the appropriated amount each year to determine the funding available to each region accounted for the number of elderly (or disabled for Section 811) renter households in each metropolitan and nonmetropolitan portion of the United States. That number was then adjusted to reflect the relative cost of providing housing in each HUD region and then multiplied by the respective total remaining capital advance funds nationwide to ensure that each HUD region received its fair share of the funding. The amount of funding and awards across individual states within each region could vary from year to year. In addition to the contact named above, Paul Schmidt, Assistant Director; Rachel Siegel, Analyst-in-Charge; John McGrail; Ruben Montes de Oca; Jennifer Schwartz; Jena Sinkfield; and Nina Thomas-Diggs made key contributions to this report.
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Over 151,000 very low-income elderly and disabled households rely on the Section 202 and the Section 811 programs to provide affordable rents and housing with supportive services. Before fiscal year 2012, nonprofit organizations interested in developing units for these populations could apply to HUD for grants known as capital advances, which did not have to be repaid as long as the property continued to serve these populations for 40 years. Since fiscal year 2012, Congress has not appropriated any funding for capital advances for either program, although it has continued to fund rental assistance for existing developments. The House report accompanying the Consolidated and Further Continuing Appropriations Act of 2015 contained a provision for GAO to provide information on HUD capital advances for the Section 202 and Section 811 programs from 2008-2013. This report examines (1) how HUD determined the capital advance amounts awarded to sponsors for Section 202 and Section 811 and (2) the number of capital advance awards and amounts by state from fiscal years 2008-2011 and any changes in the distribution of capital advances over that period. GAO reviewed budget documents and funding announcements and interviewed agency officials. GAO makes no recommendations in this report. GAO provided a draft to HUD for its review and received technical comments, which were incorporated as appropriate. Until program funding for new development ceased in fiscal year 2012, the Department of Housing and Urban Development (HUD) used a two-phase process to allocate and award capital advances for Section 202 Supportive Housing for the Elderly (Section 202) and Section 811 Supportive Housing for Persons with Disabilities (Section 811). First, HUD headquarters allocated the amount of appropriated funds for capital advances to each of the 18 regional offices using a funding formula, which accounted for regional housing needs and cost characteristics. Funding was further divided among 52 local offices using a set-aside formula and was also split between metropolitan and nonmetropolitan areas for Section 202. In 2010, HUD eliminated the set-aside which had guaranteed a minimum amount of funding for each local field office. The process for making capital advance awards did not change, but HUD was better able fund properties at a higher level. Second, applicants submitted applications to the applicable HUD regional office, and staff from these offices evaluated and scored applications based on various criteria, including capacity to provide housing and ability to secure funding from other sources. Applicants in each regional office were ranked highest to lowest and funded in that order. Any residual funds that were not sufficient to fund the next project in rank order were pooled nationwide and HUD headquarters used a national ranking to fund additional projects. Most but not all states (including the District of Columbia and Puerto Rico) had applicants that received capital advances for Section 202 and Section 811 in fiscal years 2008 through 2011. GAO found that some states had applicants that received capital advances in each of the years reviewed, while other states did not. In the period reviewed, four states had no applicants that received Section 202 capital advance awards, and eight states had no applicants that received Section 811 capital advance awards. HUD officials cited several reasons applicants from some states may not have received funding during this period, including applications that were submitted may have been ineligible or higher-scoring applications from other states may have been selected instead. The capital advance amounts varied. For Section 202, total capital advance amounts for fiscal years 2008-2011 for states that received at least one award ranged from less than $24 million to more than $75 million. For Section 811, total capital advance amounts for fiscal years 2008-2011 for states that received at least one capital advance award ranged from less than $4 million to more than $15 million.
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Directly or indirectly, HUD affects millions of Americans as it carries out the federal government's missions, policies, and programs for housing and community development. These missions range from making housing affordable by insuring loans for multifamily rental housing properties and providing rental assistance for about 4.5 million low-income residents, to helping revitalize over 4,000 localities through community development programs, to encouraging homeownership by providing mortgage insurance to about 7 million homeowners who might not have been able to qualify for nonfederally supported loans. HUD is also one of the nation's largest financial institutions, with significant commitments, obligations, and exposure. As of September 30, 1997, HUD was responsible for managing about $454 billion in insured mortgages and $531 billion in guarantees of mortgage-backed securities. For fiscal year 1999, it has $24.3 billion in budget authority. HUD initiated a number of reforms and downsizing efforts in the 1990s. In February 1993, then Secretary Cisneros initiated a "reinvention" process under which task forces were established to review and refocus HUD's mission and identify improvements in the delivery of program services. HUD also took measures in response to the National Performance Review's September 1993 report, which recommended that HUD eliminate its regional offices, realign and consolidate its field office structure, and reduce its field workforce. Following a July 1994 report by the National Academy of Public Administration that criticized HUD's performance and capabilities, Secretary Cisneros issued a reinvention proposal in December 1994 that called for major reforms, including a consolidation and streamlining of HUD's programs coupled with a reduction in staff. Building upon the earlier reinvention efforts, Secretary Cuomo initiated the 2020 planning process in early 1997 to address, among other things, HUD's downsizing goals and management deficiencies. HUD has taken important steps to strengthen its internal controls and financial reporting, improve its information and financial management systems, consolidate its operations, and appropriately deploy and train its staff. Guiding many of these efforts has been its 2020 Management Reform Plan, introduced in June 1997. While it is still too soon to evaluate the effectiveness of some of these efforts, we believe that the Department has made credible progress in correcting many of the management deficiencies that we and others have identified. HUD has improved its financial reporting and has strengthened its internal controls by conducting risk assessments for some of its programs . HUD's fiscal year 1996 and 1997 financial statements were audited by HUD's Inspector General and HUD's Federal Housing Administration's (FHA) fiscal year 1997 and 1998 financial statements were audited by KPMG Peat Marwick LLP, a public accounting firm. For fiscal years 1996 and 1997, HUD's Inspector General was able to provide qualified opinions on HUD's financial statements, compared with no opinion on the reliability of its financial statements for fiscal year 1995. In addition, as the public accounting firm KPMG Peat Marwick LLP reported this month, FHA presented its fiscal year 1998 financial statements in accordance with federal accounting standards and received an unqualified opinion on those statements. In 1998, HUD's Office of Chief Financial Officer (CFO) established a risk management division, which has continued efforts initiated by the CFO to work with the Department's program offices and new nationwide centers to identify risks and develop action plans to reduce them. As of September 30, 1998, the risk assessment division had completed risk management training for over 1,100 headquarters and field managers. Efforts to integrate and replace HUD's information systems, begun in 1991, received support and higher priority under HUD's 2020 plan. As of December 1998, HUD reported, it had developed and deployed 11 new financial management systems or components of these systems. For example, in March 1998, the Office of Housing deployed the first phase of the real estate management system, a new system being developed to implement 2020 reforms. In addition, the Office of the CFO developed and deployed a consolidated general ledger for fiscal year 1999 that will include summary transactions for the entire Department. The Office of the CFO is also developing a risk evaluation database that will be used to identify programs needing special risk reviews. The database will include information on the programs' funding, as well as findings reported by us, HUD's Inspector General, and internal reviews. Further agencywide improvements include cleaning up certain data elements in the Department's information systems and verifying the reliability of these and other data. Finally, HUD recently reported that it had completed all of its year 2000 renovations for both mission-critical and non-mission-critical systems and had finished certifying 100 percent of these systems and implementing 97 percent of them. Under its 2020 plan, HUD has significantly revised its organization and redeployed its staff in an effort to operate more efficiently and provide better service to its customers. Specifically, it has consolidated programs and centralized processes and functions within and across program areas, transferring much of its workload from its 81 field offices to several specialized national centers. As it completes these workload transfers, it is reassigning staff and retraining them to perform their new functions. HUD has also strengthened its management reform efforts by linking them to the strategic and annual plans it has developed under the Government Performance and Results Act of 1993. In 1994, we designated HUD programs as a high-risk area because of serious, long-standing departmentwide deficiencies in four management areas. These deficiencies, taken together, placed the integrity and accountability of HUD's programs at high risk. First, internal control weaknesses, such as a lack of necessary data and management processes, were a major factor leading to the scandals. Second, poorly integrated, ineffective, and generally unreliable information and financial management systems did not meet the needs of program managers and weakened their ability to provide management control over housing and community development programs. Third, HUD had organizational problems, such as overlapping and ill-defined responsibilities and authorities between its headquarters and field organizations and a fundamental lack of management accountability and responsibility. Finally, an insufficient mix of staff with the proper skills hampered the effective monitoring and oversight of HUD's programs and the timely updating of procedures. Our recent work indicates that these management deficiencies continue to exist or it is too soon to tell whether HUD's reforms will resolve them. While HUD has initiated actions that should help to address its internal control weaknesses, material internal control weaknesses persist in its management of the Section 8 subsidy payment process, which provides $18 billion in rental assistance; control and management of staff resources; management of losses resulting from defaults in the single-family and multifamily insurance programs; implementation of automated systems to provide needed management information or reliable data; and monitoring of multifamily properties and of the single-family and multifamily notes inventories. In addition, we have reported recently that HUD has not adequately monitored, among other things, contractors' management of the Department's real estate assets; appraisals of properties purchased with FHA-insured loans; and its process for deobligating funds no longer needed for Section 8 project-based rental assistance contracts. The most recently issued financial statement audits, performed by HUD's Inspector General and KPMG Peat Marwick, found continued material internal control weaknesses in both HUD and FHA's programs. The Inspector General's fiscal year 1997 financial statement audit continued to find material weaknesses in HUD's internal controls, and the Inspector General reported that HUD continues to face major challenges in its efforts to correct long-standing material internal control weaknesses. For example, HUD reported that it spent about $18 billion to provide rent and operating subsidies through a variety of programs. On the basis of data for calendar year 1996, HUD estimated that it had provided over $900 million in overpayments. This high level of improper payments exists because HUD does not have adequate internal controls over the process of verifying tenants' self-reported income--the primary factor in determining the amount of assistance HUD pays. In fiscal year 1998, HUD unveiled a multifaceted plan to identify households' unreported and/or underreported income. In our January 1999 report, we pointed out that KPMG Peat Marwick's audit of FHA's financial statements for fiscal year 1997 continued to find material weaknesses in FHA's internal controls. These weaknesses included insufficient staff and administrative resources for such tasks as performing loss mitigation functions, managing troubled assets, and implementing new automated systems; inadequate emphasis on providing early warning of, and preventing losses due to defaults on insured mortgages; and resolving remaining problems with accounting and financial management systems. The report added that because of the issues' complexity, implementing sufficient changes to mitigate these internal control weaknesses will take several years. After we issued our January 1999 report, KPMG Peat Marwick LLP issued, on March 5, 1999, its unqualified opinion on FHA's federal accounting-based financial statements for fiscal year 1998. However, the auditors did report a new material internal control weakness in addition to those described above related to the need for FHA to improve its process for preparing federal accounting-based financial statements. In addition to the issues disclosed by the audits of HUD's and FHA's financial statements, we and HUD's Inspector General have identified weaknesses related to HUD's contract management, including problems with the Department's automated procurement systems, assessment and planning for contract needs, and oversight of contractors' performance. Following the Inspector General's 1997 review of HUD's contracting practices, contracting departmentwide was added as a material internal control weakness in HUD's Federal Managers' Financial Integrity Act (FMFIA) assessment for fiscal year 1997. HUD is implementing reforms to address these weaknesses, including appointing a chief procurement officer, redesigning the contract procurement process, and establishing standard training requirements for staff responsible for monitoring contractors' progress and performance. Some of the other material internal control weaknesses reported as open under the FMFIA assessment for fiscal year 1997 pertained to HUD's (1) monitoring of insured mortgages and multifamily projects, (2) Secretary-held multifamily and single-family mortgage notes inventories, and (3) income verification process. HUD has reduced its material weaknesses from 51 in fiscal year 1991 to the 9 remaining open as of fiscal year 1997. Some of these remaining weaknesses are long-standing--one dates back to 1983, while four others date back to 1993--and some, such as those relating to the $18 billion rental assistance program, involve billions of dollars. Despite its importance as a management control tool, monitoring continues to be problematic for HUD in many program areas. Since the Department announced its 2020 Management Reform Plan in June 1997, we have issued reports pointing out problems with HUD's (1) oversight of real estate asset management contractors, (2) monitoring of the performance of appraisers of selected properties for home buyers seeking FHA single-family loans in two field offices, (3) procedures for identifying and deobligating funds that are no longer needed, (4) ability to ensure that its housing preservation program is being managed effectively and efficiently, and (5) oversight of lenders' compliance with requirements of the home improvement loan insurance program. While efforts to integrate HUD's information and financial management systems are well under way, the Department will continue to be adversely affected by inadequate systems and information until it has completed these efforts. We reported in December 1998 that HUD has not finalized detailed project plans or cost and schedule estimates for its financial systems integration effort. We concluded that without such plans the Department is likely to continue to spend millions of dollars, miss milestones, and still not fully meet its objective of developing and fully deploying an integrated financial management system. We also reported that HUD has not yet established an effective process for managing its information technology investments. As a result, it cannot effectively monitor its progress in implementing the new systems and cannot be sure that it is selecting the right projects. In addition, the fiscal year 1997 audit of HUD's consolidated financial statements continued to report material internal control weaknesses in financial systems that were departmentwide or FHA-wide. HUD agreed with our overall recommendations to prepare complete and reliable estimates of the life-cycle costs and benefits of the 1997 systems integration strategy. HUD also agreed that the management and oversight of its systems integration effort could be improved by fully implementing and institutionalizing the provisions of the Clinger-Cohen Act and the Paperwork Reduction Act, including our recommendations to implement defined processes for managing information technology investments and for estimating costs. Other problems with information and financial management systems were identified by us, the Inspector General, or HUD. These problems included (1) the effectiveness of HUD's processes for taking unexpended balances into account when determining funding needs as part of its budget process; (2) a February 1998 determination by HUD that 38 of its 92 systems did not conform to the requirements of FMFIA and of the Office of Management and Budget Circular A-127; and (3) a March 1998 report by the Inspector General which continued to report material internal control weaknesses in financial management systems including insufficient information on the credit quality of individual multifamily loans and insufficient information on FHA's operations by program, geographical area, or other relevant components. During 1998, HUD implemented the organizational changes set forth in its 2020 Management Reform Plan. All of HUD's various offices, hubs, program centers, and specialized and nationwide centers became operational. However, the real estate assessment, enforcement, and financial management centers will not be performing all of their centralized functions until 1999 and 2000. While the managers and staff we interviewed regarded these organizational changes as beneficial overall, it is still too soon to evaluate the effectiveness of HUD's reorganization. HUD's new real estate assessment center has issued regulations on the physical and financial assessments of multifamily properties and public housing authorities. However, the center will not begin financial assessments of multifamily properties until around April 1999, when audited financial statements on the properties are submitted to HUD. Although physical inspections of public housing authorities will start in 1999, financial assessments will not begin until 2000. The additional year is needed to give housing authorities time to convert their annual financial statements from HUD's accounting guidance to generally accepted accounting principles in accordance with the uniform financial standards for HUD's housing programs. The center began physically inspecting multifamily properties in October 1998 and, according to HUD, had inspected over 4,200 properties as of late December 1998. HUD's new enforcement center will investigate and take enforcement actions against troubled multifamily and public housing authority properties that do not comply with HUD's regulations. Although the enforcement center began operations on September 1, 1998, it is not scheduled to perform all of its centralized functions until around April 1999, when it is to begin receiving referrals of troubled multifamily properties from the real estate assessment center. However, as of December 1998, the enforcement center was working on 200 multifamily property cases referred to it by housing staff, according to HUD. Also, according to HUD, debarments of landlords of multifamily properties totaled about 100 in 1997, more than three times the 1996 total. HUD's new financial management center is assuming responsibility for the Department's Section 8 financial management processing workload. The transfer of much of this workload from HUD's public housing field offices was expected to be completed in January 1999. However, the transfer of the Section 8 financial management workload relating to 4,600 annual contribution contracts from the Office of Housing's field offices was not expected to begin until February 1999 and is not scheduled to be completed until mid- to late summer 1999. In addition, the schedule for transferring the financial management workload for approximately 21,000 housing assistance contracts from the Office of Housing's field offices will depend on when contract administrators are selected and deployed. According to the director of the financial management center, the transfer may not take place until late 1999 or early 2000. There has not yet been a significant shift of functions and responsibilities from the field offices to the centers except at homeownership centers, according to the field office managers and staff we interviewed between July and October 1998. Office managers also indicated that the transfer of community service and outreach functions and responsibilities from the field offices to the community builders was in a transitional phase. A recent survey by the National Partnership for Reinventing Government showed that 70 percent of HUD's workforce identified the agency's reinvention efforts as a top priority. All of the managers and staff we interviewed said that the organizational changes under the 2020 Management Reform Plan were beneficial overall. For example, some managers and staff stated that their responsibilities and lines of authority and accountability for programs were more clearly defined. In addition, some managers and staff pointed out that obtaining clearance on routine issues took less time because program managers in the field had greater authority to make decisions. Managers and staff also stated that once the various centers and community builders assume all of their functions, the field offices will have more time to carry out their public trust responsibilities--namely, compliance and monitoring. However, most managers and staff we interviewed said the transfer of functions was in transition, and they generally did not know when it would be complete. Because staffing reforms and workload transfers from the field offices to the centers are still occurring, the effectiveness of HUD's changes in correcting staffing deficiencies cannot be determined. Staff who were reassigned during the reorganization were receiving training in their new functions and both staff and managers were positive about the amount and quality of the training. Most of the field offices we visited initially lost staff following the 2020 staffing changes. However, some of these staff losses were recovered after HUD decided in May 1998 to assign unplaced staff to permanent positions. According to HUD, most of the formerly unplaced staff had been assigned positions as of September 1998, and most were in place. At a few locations, some of the formerly unplaced staff will not be reporting to their new positions until 1999. While most of the offices we visited reported being fully staffed, three of the centers were understaffed. The enforcement center had 62 percent of its authorized staff level, the real estate assessment center 40 percent, and the Memphis troubled agency recovery center 86 percent. HUD managers said the vacant positions in these centers will be advertised sometime in 1999. Once workload transfers are completed, managers at the field offices we visited expect their workload to decrease, although these manager did not know how much of a reduction would occur. There has not been a significant shift in workload from the field offices to the centers, according to the staff and managers we interviewed from July through October 1998. These managers and staff said the transfer of work to the centers and the assumption by community builders of their responsibilities was in transition. Efforts to match workforce to workload at HUD's homeownership centers have presented difficulties. According to the Inspector General's December 1998 semiannual report, HUD's single-family homeownership centers cannot handle the workload currently associated with HUD's inventory of Secretary-held mortgages or inventory of single-family properties, which HUD receives through foreclosures. This situation has developed because HUD's plans to sell the properties before they enter its inventory have not evolved, and its plans to sell the existing notes inventory have been postponed. HUD is currently hiring contractors to assist in managing and disposing of its single-family properties. In its annual performance plan for fiscal year 1999, submitted to the Congress in March 1998, HUD noted that it lacks a single integrated system to support resource allocation and no longer has departmental systems for measuring work and reporting time. However, HUD's 2020 Management Reform Plan calls for HUD to implement a proposed resource estimation and allocation process. In addition, HUD reported that it intends to work with the National Academy of Public Administration to develop a methodology or approach for resource management that will allow the Department to identify and justify its resource requirements for effective and efficient program administration and management. According to the Academy, the resource estimation elements will include workload factors and analysis based on quantifiable estimates of work requirements for planning, developing, and operating current and proposed programs, priority initiatives, and functions. The methodology will also enable HUD to estimate resources for its budget formulation and execution and to link resources to performance measures. Currently, work has been completed on the resource management methodology and was being tested at one office. The 2020 Management Reform Plan stated that HUD would retrain the majority of its staff. The field office managers and staff we interviewed during our 1998 field office visits reported that their training increased significantly with the plan's implementation. The managers and staff were generally positive about the amount of training available to them and the quality of the training. Training varied from that provided at universities, to external professional certification training, to videotaped programs and substantial on-the-job training needed because of staff reassignments. For example, staff at the Memphis troubled agency recovery center reported spending most of their first 3 months on the job in locally developed training programs and in on-the-job-training with more experienced public housing staff. Staff and managers reported a need for continuing program area and specialized computer training. In addition, managers reported during our 1998 field office visits that the skills of their staff varied from adequate to excellent and were sufficient for the staff to do their jobs, except in the case of some of the recently assigned, formerly unplaced staff. The managers told us that while the formerly unplaced staff may lack specific program knowledge, they have the ability to do the work. While HUD has initiated actions under the 2020 Management Reform Plan that could help to address its management deficiencies, the reforms are not fully implemented or it is too soon to assess their effectiveness. HUD faces significant material internal control weaknesses, including weaknesses in the control structure intended to help ensure that rental assistance payments of $18 billion are based on accurate reports of tenants' incomes. As reform efforts are fully implemented, HUD needs to ensure that the actions being taken under the 2020 reform plan and related efforts will address the remaining material internal control weaknesses. HUD will continue to be adversely affected by inadequate systems and information until its systems integration efforts are successfully completed. In the meantime, we believe HUD needs to strengthen its management and oversight of efforts to integrate its financial systems and the management of its information technology investments. In addition, HUD needs to continue its efforts to bring nonconforming systems into conformance with FMFIA requirements. As part of this process, HUD needs to ensure that its assessments of systems to determine conformance are well documented and verified. Finally, HUD needs to eliminate the material internal control weaknesses related to systems. In accordance with the Results Act, HUD needs to (1) monitor the performance of the centers as they assume their functions, as well as track the other organizational changes, to determine whether the 2020 reform plan's goals are being achieved and (2) closely monitor the implementation of its staffing reform efforts to ensure that the field offices and staff have the resources and skills to carry out the work assigned, including the monitoring of programs and activities and the assessment of outcomes. In addition, HUD needs to complete its efforts to develop a process for identifying and justifying its staff resource requirements. In closing, Mr. Chairman, given the severity of the management deficiencies that we and others have observed, it would not be realistic to expect that HUD would have substantially implemented its reform efforts and demonstrated success in resolving its management deficiencies in the 2 years since we issued our last report. Nevertheless, with close oversight by the Congress, HUD is making significant changes and has made credible progress since 1997 in laying the framework for improving its management. HUD's Secretary and leadership team have given top priority to addressing the Department's management deficiencies. This top management attention is critical and must be sustained in order to achieve real and lasting change. Importantly, given the nature and extent of the challenges facing the Department, it will take time to implement and assess the impact of any related reforms. While major reforms are under way, several are in the early stages of implementation, and it is too soon to tell whether they will resolve the major deficiencies that we and others have identified. Therefore, in our opinion, the integrity and accountability of HUD's programs remain at high risk. Mr. Chairman, this concludes my statement. We would be pleased to respond to any questions that you or Members of the Subcommittee may have. HUD Information Systems: Improved Management Practices Needed to Control Integration Cost and Schedule (GAO/AIMD-99-25, Dec. 18, 1998). Section 8 Project-Based Rental Assistance: HUD's Processes for Evaluating and Using Unexpended Balances Are Ineffective (GAO/RCED-98-202, July 22, 1998). Home Improvement: Weaknesses in HUD's Management and Oversight of the Title I Program (GAO/RCED-98-216, July 16, 1998). Appraisals for FHA Single-Family Loans: Information on Selected Properties in New Jersey and Ohio (GAO/RCED-98-145R, May 6, 1998). Housing Finance: FHA's Risk-Sharing Programs Offer Alternatives for Financing Affordable Multifamily Housing (GAO/RCED-98-117, Apr. 23, 1998). Single-Family Housing: Improvements Needed in HUD's Oversight of Property Management Contractors (GAO/RCED-98-65, Mar. 27, 1998). Year 2000 Computing Crisis: Strong Leadership Needed to Avoid Disruption of Essential Services (GAO/T-AMID-98-117, Mar. 24, 1998). HUD Management: Information on HUD's 2020 Management Reform Plan (GAO/RCED-98-86, Mar. 20, 1998). Section 8 Tenant-Based Housing Assistance: Opportunities to Improve HUD's Financial Management (GAO/RCED-98-47, Feb. 20, 1998). Housing Preservation: Policies and Administrative Problems Increase Costs and Hinder Program Operations (GAO/RCED-97-169, July 18, 1997). High-Risk Series: Department of Housing and Urban Development (GAO/HR-97-12, Feb. 1997). HUD: Field Directors' Views on Recent Management Initiatives (GAO/RCED-97-34, Feb. 12, 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.
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Pursuant to a congressional request, GAO discussed its January 1999 report on the Department of Housing and Urban Development's (HUD) major management challenges and program risks, focusing on: (1) corrective actions that HUD has taken or initiated on its major management challenges; (2) major management challenges that remain and limit HUD's effectiveness in carrying out its mission; and (3) further actions that are needed to resolve these challenges. GAO noted that: (1) HUD is making significant changes and has made credible progress in overhauling its operations to correct its management deficiencies; (2) among other things, it has improved its financial reporting and development risk assessments for its programs, developed and deployed components for its information and financial management systems, consolidated and centralized many of its operations, and reassigned and begun to retrain many of its staff; (3) a major contributor to this progress is HUD's June 1997 2020 Management Reform Plan, a set of proposals intended to, among other things, correct the management deficiencies that GAO and others identified; (4) however, it should be recognized that HUD's problems were years in the making and will take time and much effort to correct; (5) HUD management has placed high priority on removing HUD programs from the high-risk designation, but it will take continued and sustained efforts before meaningful and lasting results can be achieved; (6) while major reforms are under way, GAO's recent work indicates that internal control weaknesses and problems with information and financial management systems persist; (7) recently, GAO reported that HUD is likely to continue to spend millions of dollars, miss milestones, and still not meet its objective of developing and fully deploying an integrated financial management system because it has not yet finalized detailed project plans or cost and schedule estimates for this effort; (8) furthermore, recent reforms to address HUD's organizational and staffing problems are in the early stages of implementation, and it is too soon to tell whether the reforms will resolve the major deficiencies that GAO and others have identified; (9) therefore, pending the achievement of substantial results, the integrity and accountability of HUD's programs remain at high risk in GAO's opinion; and (10) GAO reached this conclusion using the same methodologies and criteria as it used for its 1995 and 1997 reports.
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Total Army Analysis is a biennial analytical process the Army uses to determine the numbers and types of support units it would need to support combat units in two simultaneous major theater wars and the infrastructure it would need to augment and support these units. The process also allocates the most recent authorized personnel level (end strength) among these requirements. The most recent iteration--Total Army Analysis 2007--was completed in late 1999. It showed the number and type of units required in the Army's force structure in fiscal year 2007 and allocated the Army's current authorized military end strength of 1,035,000 among these requirements. Total Army Analysis 2007 for the first time determined the numbers and types of units needed for contingency operations separately from its normal analysis of forces needed for two major theater wars. Starting with the Defense guidance, which identifies a number of typical contingency operations in which U.S. forces could be engaged, the Army identified seven operations that would require Army participation and that, according to the guidance, could occur simultaneously. On the basis of the missions to be accomplished, the Army then used expert panels of representatives from headquarters, major commands, and regional commanders in chief to determine the types and numbers of units required for engaging in these contingencies. It used the panels to arrive at these requirements because many of the factors the Army uses to model force requirements for war in Total Army Analysis do not apply to contingency operations. For example, contingencies related to peacekeeping or humanitarian tasks would not require facing a traditional "opposing force" threat. Accordingly, the panel identified the specific tasks to be accomplished and their associated workload, the unit types with the requisite skills to perform those tasks, and the numbers and types of support units needed to support the units carrying out the operation. The force structure requirements identified by this process were unconstrained. In other words, participants identified the logical Army unit types required to carry out the designated missions. This selection of force requirements was made irrespective of whether (1) the unit types currently existed within the Army force structure or (2) there were sufficient unit types to successfully carry out the Army's designated mission. Contingency operations encompass a full range of joint military operations beyond peacetime engagement activities (short of theatre warfare) and include such operations as shows of force, interventions, limited strikes, noncombatant evacuation operations, peacekeeping, humanitarian assistance, and disaster relief. According to Army officials, all of these operations, except humanitarian assistance and noncombatant evacuations, could and in fact have lasted more than 6 months and have required force rotations. Throughout this report, we use the terms "unit" and "unit type." Depending on its purpose and mission, a unit may vary significantly in size, from a 5-member linguistics team to a heavy armor or mechanized division of more than 16,000 personnel. Unit type refers to a specific type of team, company, battalion, or other organizational element comprised of one or more units. The Army has determined that 709 units of 248 different unit types, comprising about 76,000 troops, would be required to support seven simultaneous contingencies requiring Army participation. Our comparison of the Army's planned force structure for fiscal year 2007 (based on the two-war scenario) with these contingency force requirements showed that the Army would have most of the unit types and units required to carry out these illustrative contingency operations simultaneously, provided that U.S. forces were not also engaged in a major theater war. Table 1 identifies the seven illustrative contingencies in which the Army would likely participate and the number of units and personnel required for each operation as determined by the Army's panel of experts. Appendix I shows the types of forces that are most heavily used in such operations. Appendix II shows the total number of units and personnel needed to support the contingencies, by branch of service. To determine whether the Army's planned force structure for two major theater wars would be sufficient to support these seven concurrent contingency operations, we compared the results of Total Army Analysis 2007 with the contingency operations requirements shown in table 1. Our initial comparison showed that, collectively, the active Army, the Army Reserve, and the National Guard would have sufficient unit types, as determined by Total Army Analysis 2007, to meet the requirements of all but 52 of the 248 required unit types. The Army would have insufficient numbers of units for 13 of the 52 unit types. Examples of these unit types include Special Operations Aviation battalions, Psychological Dissemination battalions, and Aerial Reconnaissance battalions. The remaining 39 specific unit types needed for contingencies would not exist in the Army's planned force structure for fiscal year 2007. Examples of these unit types include Heavy Helicopter company, Animal Surgical detachment, Linguist team, Quartermaster Mortuary Affairs team, and Forward Support company. In total, the personnel end strength associated with the missing units would be about 23,000. Army officials pointed out that other existing units possess the same or similar capabilities as those identified as contingency requirements and could be used to cover some of these shortfalls. For example, the Army believes a Psychological Operations tactical company would be a suitable substitute for a Regional Support company. Both units provide support for operations such as the preparation and dissemination of leaflets and posters. Additionally, while the force structure will not contain the specific heavy helicopter company called for, it will contain other companies of a different unit type equipped with the same helicopter. At our request, the Army identified comparable units that could substitute for those experiencing shortfalls. In total, the Army identified substitutes for 5 of the 13 unit types with shortages and for 31 of the 39 unit types that are not planned for through 2007. We analyzed these substitutions and concluded that they were reasonable and would at least partially compensate for the shortfalls. As a result of these substitutions, the force structure deficiencies we initially identified were reduced to 61 units comprising 16 unit types and a total of about 2,500 personnel (about 3 percent of the total requirement). Army officials stated that these remaining shortfalls could be surmounted, since many of the skills required could be obtained in other ways. They pointed out, for example, that individuals in other units possessing the requisite skills could be detailed to meet contingency requirements. In the case of linguists, Army officials believe that they could meet these unfilled requirements through civilian contracts (see app. III for the specific shortfalls that would remain after the Army's substitutions). Although the Army's force structure could provide the 76,000 troops needed to support the seven illustrative contingencies, sustaining these operations beyond 6 months would pose greater challenges because force rotations would be needed. Under current policy, the Army limits unit deployments in contingency operations to no more than 6 months. If an operation lasts more than 6 months, new units and personnel are expected to rotate in as the deployed units return to their home station. This rotation policy applies to all three Army components--active duty, Army Reserve, and National Guard. According to Army officials, five of the seven illustrative contingency scenarios (all but humanitarian assistance and noncombatant evacuation operations), involving a total of about 61,000 troops, could last more than 6 months. Historical experiences related to counterdrug activities and various types of peacekeeping operations support this assertion. The Army contends that in order to adhere to its deployment policy, it needs to maintain a 3-to-1 pool of troops available for these missions. Should these five contingency operations occur simultaneously, 61,000 troops would be deployed, another 61,000 would be in training to prepare for deployment, and 61,000 recently deployed troops would be in the so-called "reconstitution" phase, retraining for their normal wartime mission. In effect, this policy requires the Army to maintain a ready pool of 183,000 troops to carry out the five contingency operations. Our analysis indicates that the Army's planned force structure for 2007 does not have enough units to support the five illustrative contingency operations over an extended period. For example, only 99 (about 40 percent) of the Army's active unit types have sufficient numbers of units to sustain 6-month force rotations. Collectively, the active Army, the National Guard, and the Army Reserve have enough units to support the rotational requirements of only 181 unit types, or about 73 percent of the 248 unit types required for the 5 operations. The shortfall of 67 unit types includes about 360 units with a total authorized strength of about 26,000. Military Intelligence would be the branch most affected, accounting for about half of the unit shortfall and about one-quarter of the personnel shortfall. The Psychological Operations, Medical, Signal, and Aviation branches would also be affected significantly (app. IV lists the branches that would be unable to sustain long-term rotations). The Army's ability to adhere to its rotation policy in sustaining contingency operations depends heavily on National Guard and Army Reserve participation because most of the Army's total force resides in those two components. For example, of the 6,892 units the Army planned in its latest force structure analysis, only 2,455 (about one-third) were active Army. As shown in figure 1, the National Guard and the Reserve each account for 32 percent of the total number of units. The percentage of units in the reserve components is important because the Army faces certain challenges in deploying these units during peacetime. As we reported in April 1998, peacetime restrictions on the use of reserve components affect the Army's ability to deploy them to a contingency operation. Thus, even if the Army's force structure collectively has sufficient required units, the Army may be restricted from deploying some of those units to a contingency. During recent contingencies, the Army has drawn heavily on volunteers to help reduce deployments of active units. However, if not enough reserve personnel volunteer for active duty, the Army cannot deploy reserve units unless the President exercises the Presidential Selected Reserve Call Up Authority and calls them to active duty. Further, reserve personnel cannot be required to serve on active duty for more than 270 days and may only be called up once for a given operation. Prior to our analysis, Army officials had not compared contingency requirements with the planned force structure for 2007 and thus were not aware of the shortfalls we identified. Therefore, they had neither assessed the criticality of such shortfalls nor developed mitigation plans. Such analysis and plans are important because critical shortages, if left unaddressed, could have adverse effects. Over the past several years, personnel in units that have been heavily demanded by contingencies but in short supply have had to deploy repeatedly and have exceeded Army standards for time spent away from home stations. Concerns that frequent and extensive deployments might adversely affect the services' ability to recruit and retain personnel led the Army to establish a 6-month ceiling on the length of deployments. We believe that past experience supports the Army's hypothetical scenario of five simultaneous contingencies, given the fact that counterdrug activities and various peace operations have in fact occurred simultaneously and have extended far beyond 6 months. Were the Army to decide that mitigating actions are needed, it could consider several alternatives. It could determine whether other type units have similar capabilities, contractors or host nation personnel could be employed, or auxiliary support could be obtained from other military services. Should these not be viable alternatives, the Army could also allocate end strength to new units in critical shortage areas. However, it is important to note that a decision to create new units would mean that other needs might go unaddressed, and that any decision to address these shortfalls would need to recognize the opportunity costs of not addressing others. For example, some currently existing units are not authorized all the personnel they require, while other units needed for the two-war scenario exist only on paper and are entirely without authorized personnel. Another concern Army officials raised about creating new units is whether current Defense guidance allows the Army to create new units if the units are not needed for the two-war scenario. Current guidance states that the services need to be prepared for a full spectrum of conflict, including both major theater wars and contingency operations. However, it does not explicitly say whether units needed exclusively for contingency operations but not major wars can be added and authorized personnel. Army force planning officials said that their interpretation of the guidance is that they can only authorize personnel for units needed for a two-war scenario and not units needed exclusively for contingencies. In support of their interpretation, the officials pointed out that the Office of the Secretary of Defense (OSD) had allowed the Army to authorize personnel for units needed exclusively for peace operations in only two cases. These involved 17,000 positions for units required for operations in the Sinai to satisfy the 1979 Middle East Peace Treaty and for a rapid reaction force for peacekeeping operations in Europe to satisfy Article 5 of the North Atlantic Treaty Organization Treaty. The rationale for these two exceptions is that these activities, which arise from treaty commitments, would need to continue even if a war arose and, as a result, units engaged in them could not be redeployed to a war effort. Notwithstanding the fact that OSD had permitted only these two exceptions to date, OSD officials said that guidance may be sufficiently broad to permit the Army to allocate personnel to other units needed for contingencies but not for major wars, if it chose to do so. Nevertheless, Army officials emphasized that they would need to have this issue clarified, were they to conclude that authorizing personnel for such units is the best option. In our opinion, the guidance is not explicit on this point, and a clarification may be in order. The Army's force structure, which is based on a two-war scenario, generally provides the number and types of units required to simultaneously carry out seven illustrative contingency operations requiring Army participation. However, it does not contain the number and types of units needed to meet the needs of five simultaneous contingencies lasting more than 6 months and requiring force rotations. If Army forces continue to be called on to engage in such contingencies for extended periods of time, as has been the case in recent years, it would seem prudent to have a force structure that is able to meet such needs. Unless the shortfalls we have identified are dealt with, the Army may continue to have to call on some units repeatedly and to deploy others well beyond its 6-month standard. Assessing the criticality of the shortfalls we have identified is a logical first step for the Army to take. If it decides that certain mitigating actions are needed, the Army could pursue a variety of means to supplement its capability in critical shortage areas. However, if it becomes necessary to authorize personnel for units needed only for contingencies and not for the two-war scenario, a clarification or change in the Defense guidance may be needed to permit the Army clearer direction with respect to its authority to take such action. We recommend that the Secretary of the Army assess the criticality of the shortfalls we have identified with respect to the Army's ability to carry out simultaneous contingency operations lasting more than 6 months. If it is determined that the risks associated with certain shortages require mitigating actions, we further recommend that the Secretary explore the range of options we have outlined. If the Secretary determines that the Army needs to authorize personnel for some units needed only for contingencies but not for the two-war scenario, we recommend that the Secretary of Defense either clarify whether authorizing personnel for such units is permitted under current Defense guidance or amend the guidance to permit this action. In written comments on a draft of this report, the Department of Defense concurred with our recommendations. It stated that the Army's analysis of the criticality of contingency operations shortfalls will be based on information derived from upcoming war games, since that information will be more current than that used for Total Army Analysis 2007. Additionally, Defense said that future Defense guidance will allow the services to make certain contingency operations force requirements additive to the major theater war force requirements. However, it said that prioritization of available resources will determine whether particular force requirements will be funded. We believe these actions by Defense and the Army, once implemented, will allow the Army to include in its force structure those units that it believes are critical to sustaining deployments to contingency operations over an extended period of time. Defense's comments are reprinted in appendix V. To determine whether the Army's force structure would provide adequate forces to conduct seven illustrative contingency operations, we met with Defense and Army officials responsible for force planning and obtained pertinent documents concerning the Army's force planning process and the numbers and types of units required to support the contingencies. We also obtained information concerning the Army's planned force for 2007. To determine whether there would be any shortfalls, we then compared the types and numbers of units the Army stated would be required to support the seven contingencies with the types and numbers of units the Army plans to have in its force structure in 2007. We determined the number of personnel required and personnel shortfalls by applying the Army's standard required strength for each unit type. After identifying the initial shortfalls, we asked the Army to review the list to determine whether there were other units in its force structure that were substantially capable of performing the required tasks. We compared the substitutions the Army provided and concluded that they were reasonable and would at least partially compensate for the shortfalls. We then incorporated those substitutions into our analysis. We performed a similar comparison to determine whether the force structure would be able to sustain longer-term deployments. We compared the needs of the five illustrative scenarios that Army officials believe could last more than 6 months with the planned force structure. We accepted the Army's criterion that it needs to maintain a 3-to-1 pool of troops to adhere to its 6-month deployment ceiling. Our analysis, which was based on unit comparisons, included the substitutions the Army had previously identified for unit types experiencing shortfalls. We did not assess Defense's selection of these contingencies or the likelihood that they may occur simultaneously. To identify various actions the Army might take to mitigate the shortages we identified, we gave Army force planning officials the results of our analysis and discussed possible mitigating actions. During these discussions, we became aware of varying interpretations of Defense guidance and whether it would permit the Army to authorize personnel for units needed exclusively for contingency operations. We discussed these varying interpretations with both Army and OSD officials. We also analyzed relevant Defense guidance provisions to understand the merits of individual interpretations. We conducted our review from March through November 2000 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Honorable Donald H. Rumsfeld, Secretary of Defense and the Secretary of the Army. We will also make copies available to others upon request. Please contact me at (202) 512-5140 if you or your staff have any questions concerning this report. GAO contacts and staff acknowledgments to this report are listed in appendix VI. The Army's force structure requirements for the seven illustrative contingency operations include units from nearly all the Army's 26 branches. However, support units are used more heavily in such operations than combat units. Table 2 shows the units and personnel most heavily used for each of the seven contingencies by Army branch. Table 3 shows the number of units and personnel needed to meet the requirements of the seven contingencies. The following table lists those unit types for which there will be insufficient units in the Army's force structure to meet the simultaneous demands of seven illustrative contingency scenarios in 2007. The shortages shown are those that would remain even after the Army substituted units with similar capabilities wherever possible. The following table lists Army branches with insufficient units to sustain deployments to illustrative contingencies lasting over 6 months. The analysis assumes concurrent operations related to counterdrug activities, maritime intercept operations, peace enforcement operations, and peacekeeping operations, each of which could be expected to continue more than 6 months. The analysis also assumes that humanitarian assistance and noncombatant evacuation operations would occur concurrently, though not for an extended period. In addition to those named above, James Mahaffey, Leo Jessup, Ron Leporati, and Tim Stone made key contributions to this report. The first copy of each GAO report is free. Additional copies of reports are $2 each. A check or money order should be made out to the Superintendent of Documents. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. Orders by mail: U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Orders by visiting: Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders by phone: (202) 512-6000 fax: (202) 512-6061 TDD (202) 512-2537 Each day, GAO issues a list of newly available reports and testimony. 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The National Military Strategy calls for U.S. forces to fight and win two nearly simultaneous major theater wars. Accordingly, the Army calculates its force structure requirements on the basis of this scenario. The strategy also calls for the Army to support operations in a series of concurrent contingencies and assumes that forces thus engaged will be withdrawn and redeployed if war occurs. The Army's difficulty in supporting contingency operations without repeatedly calling on some types of units has raised questions about whether forces structured to meet the two-war scenario can also support multiple peacetime contingency operations. GAO reviewed the Army's force planning process, known as Total Army Analysis 2007, to determine whether the Army's planned force structure will meet its contingency requirements. GAO found that the Army's force structure generally provides the number and types of units required to simultaneously carry out seven illustrative contingency operations requiring Army participation. However, it does not contain the number and types of units needed to meet the needs of five simultaneous contingencies lasting for more than six months and requiring force rotations. If Army forces continue to be called on to engage in such contingencies for long periods of time, it would seem prudent to have a force structure that is able to meet such needs.
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Compared to the U.S. employed civilian labor force, the federal government's workforce is made up of fewer millennials. In 2014, people 39 years old and younger represented 44.8 percent of the U.S. employed civilian labor force and 29.6 percent of the total civilian federal government workforce (see figure 1). The differences were greatest for the youngest portion of millennials. The increase of the number of millennials of working age has coincided with several events in the federal government--such as hiring freezes, sequestration, furloughs and a 3-year freeze on statutory annual pay adjustments from 2011 to 2013--that OPM and others contend negatively affected federal employee morale and limited opportunities for new employees to join the federal government. According to results from OPM's Federal Employee Viewpoint Survey (FEVS), government-wide levels of employee engagement declined from an estimated 67 percent in 2011, to an estimated 63 percent in 2014, and increased to 64 percent in 2015, as measured by a score OPM derived from the FEVS beginning in 2010--the Employee Engagement Index (EEI). OPM has conducted the FEVS--a survey that measures employees' perceptions of whether, and to what extent, conditions characterizing successful organizations are present in their agencies--every year since 2010. The EEI is composed of 15 FEVS questions covering the following areas: Leaders lead, which surveys employees' perceptions of the integrity of leadership, as well as employees' perception of leadership behaviors such as communication and workforce motivation. Supervisors, which surveys employees' perceptions of the interpersonal relationship between worker and supervisor, including trust, respect, and support. Intrinsic work experience, which surveys employees' feelings of motivation and competency relating to their role in the workplace. According to OPM, the EEI does not directly measure employee engagement. Instead it covers the conditions that lead to employee engagement. Specifically, OPM noted that organizational conditions lead to feelings of engagement, which in turn lead to engagement behaviors, such as discretionary effort, and then to optimum organizational performance. Engaged employees are more than simply satisfied with their jobs. According to employee engagement literature, engaged employees take pride in their work, are passionate about and energized by what they do, are committed to the organization, the mission, and their job, and are more likely to put forth extra effort to get the job done. In 2014, we reported that in the face of limited budgets, some agencies had reduced hiring. The Budget Control Act of 2011 established a 10- year cap on discretionary spending through 2021, but many agencies had experienced flat or declining budgets for several years prior. During that time, employment data show the following trends: From fiscal years 2008 to 2014, the total number of new federal employees hired decreased by 33 percent, from approximately 164,000 to 110,000 employees per fiscal year. Employees 25 years old and younger have experienced the largest decrease with 58 percent fewer hired in 2014 than in 2008 (see figure 2). For the entire millennial cohort (39 years old and younger), the decrease in hiring is similar to that of the non-millennial cohort (decreases of 34 and 32 percent, respectively). Compared to non-millennials, a greater percentage of millennials have non-permanent positions in the federal government than non- millennials. Examples of non-permanent positions include appointments that are term-limited or temporary such as park rangers or interns. In fiscal year 2014, 42 percent of employees 25 years old and younger and 15 percent of employees 26 to 29 years old held non-permanent positions. Across all age groups, 7 percent of employees in the federal government were in non-permanent positions. Attrition rates for all age groups were much higher in the early 2000s than they were in fiscal year 2014. For example, in fiscal year 2000, when millennials were just entering the workforce, 19 percent of permanent career employees 25 years and younger with 5 years or less of federal service resigned or separated, compared to 9.3 percent in fiscal year 2014 (see figure 3). Two economic recessions have occurred since 2000 (in 2001 and from 2007 to 2009) and may have contributed to declining attrition rates. In the federal government millennial attrition rates are slightly higher than other age groups, even when controlling for tenure. In fiscal year 2014, 9.3 percent of millennials 25 years old and younger who held permanent career positions for 5 years or less resigned or separated from the federal government. Fewer millennials 26 to 29 years old and 30 to 39 years old with 5 years or less of federal service left the government, with 7.0 percent and 6.3 percent, respectively, resigning or separating in fiscal year 2014. Non-millennial permanent career employees (age 40 and older) with 5 years or less of federal service had an attrition rate of 5.1 percent in fiscal year 2014, not including retirements. While many factors affect when a person actually retires, in 2015, we reported that across the government, 31 percent of the career permanent career employees on board as of September 2014 would be eligible to retire by September 2019. About 23 percent of Department of Homeland Security staff on board as of September 2014 will be eligible to retire in 2019, while more than 43 percent will be eligible to retire at both the Department of Housing and Urban Development and the Small Business Administration (see figure 4). Certain occupations--such as air traffic controllers, customs and border protection agents, and those involved in implementing government programs--will also have particularly high retirement-eligibility rates by 2019. As retirements of federal employees continue, some agencies with few millennials may face future gaps in leadership, expertise, and critical skills because millennials represent the next generation of workers. As with retirement eligibility, the percent of millennials in the workforce varies by agency. Millennials (39 years old and younger) make up more than 30 percent of the workforce at 8 of the 24 CFO Act agencies but less than a quarter at 7 agencies (see figure 4 above). Agencies that have high rates of retirement eligibility, such as the Environmental Protection Agency, also tend to have low percentages of millennials in the workforce. Actual retirement rates began to decline at the end of 2007 with the recession to 3.3 percent in 2008, 2.5 percent in 2009, and 2.7 percent in 2010, before increasing again to 3.5 percent in 2014. The large percentage of federal employees eligible for retirement creates both an opportunity and a challenge for federal agencies. On the one hand, as shown in our prior work, if accompanied with appropriate strategic and workforce planning, it allows agencies to realign their workforce with needed skills and leadership levels to better meet their existing and any newly emerging mission requirements. On the other hand, it means that agencies will need succession planning efforts as well as effective sources and methods for recruiting and retaining candidates in order to avoid a brain-drain and mission-critical skills gaps. We have found that leading organizations go beyond a succession planning approach that focuses on simply replacing individuals. Instead, leading organizations engage in broad, integrated succession planning and management efforts that focus on strengthening both current and future organizational capacity. To do this, it will be important for agencies to use workforce analytics to drive their decisions, as well as use available flexibilities from Congress and OPM to acquire, develop, motivate, and retain talent as needed. Mission-critical skills gaps within specific federal agencies as well as across the federal workforce pose a high risk to the nation because they impede the government from cost-effectively serving the public and achieving results. OPM and the Chief Human Capital Officer (CHCO) Council established an interagency working group and identified skills gaps in six government-wide, mission-critical areas: information technology/cybersecurity specialist, contract specialist/acquisition, economist, human resource specialist, auditor, and specialists in the science, technology, engineering, and mathematics (STEM) functional community. With one exception, millennials 39 years old and younger represent a greater percentage of employees in selected job series associated with these mission-critical occupations compared to their proportion in the workforce as a whole. Millennials represent 29.6 percent of the federal government workforce across all occupations in fiscal year 2014 (see table 1). Millennials' percentages in the economist, auditor, and contract specialist job series are all greater than the government-wide average for all occupations, by as much as almost 10 percentage points. However, for human resources specialists, only 24.7 percent of the occupation is made up of millennials. Today's federal jobs require more advanced skills, often at higher grade levels than federal jobs 30 years ago. In 2014, we found that employees working in professional (e.g., doctors and scientists) or administrative positions (e.g., financial and program managers), which often require specialized knowledge and advanced skills and degrees grew from 56 percent of the federal civilian workforce in 2004 to 62 percent in 2012. Also, from 2004 to 2012, permanent career employees with a master's or professional degree saw a 55.7 percent increase. A lower percentage of millennial employees 29 years old and younger in the federal government have advanced degrees than older millennials (30 to 39 years old) or non-millennials. In fiscal year 2014, 2.1 percent of permanent career millennials 25 years old and younger had advanced degrees, compared to 12.3 percent of 26 to 29 year olds and 21.8 percent of 30 to 39 year olds. One reason for these differences could be that younger millennials have not had the time to obtain a more advanced degree. Non-millennial permanent career employees were similar to older millennial employees in that 21.9 percent had advanced degrees. Government-wide the estimated engagement level across all age groups was 64 percent and engagement levels were similar between millennials and other age groups. Millennial EEI scores were 0.4 percentage points lower than non-millennials in 2015, at 63.8 and 64.2 respectively. Key findings from our analysis include the following: Millennials 25 years old and younger had the highest estimated EEI score across all age groups and were 7.6 percentage points higher than the age group with the lowest score, the 30 to 39 age group. However, employees age 25 and younger are a relatively small portion of the federal workforce, comprising only 1.8 percent in fiscal year 2014. In comparison, employees 30 to 39 years old comprised 21.4 percent of the federal workforce in fiscal year 2014 (see figure 5). Engagement scores of millennials vary across agency but were statistically higher than engagement scores of non-millennials at 14 of 24 CFO Act agencies in 2015. Engagement scores for millennials were statistically lower than those of non-millennials at 3 agencies, the U.S. Agency for International Development, Department of Defense, and Department of Homeland Security (DHS). There was no statistically significant difference between the engagement scores of millennials and non-millennials at the 7 remaining agencies (Department of Agriculture, Department of Housing and Urban Development, Department of Justice, Department of State, Department of Treasury, the National Science Foundation, and the Small Business Administration) (see figure 6). The difference between EEI scores for millennials and non-millennials was highest at the Department of Commerce, where millennial EEI scores were approximately 5 percentage points higher than engagement scores for non-millennials. The range between the agencies with the highest and lowest engagement scores was approximately 29 percentage points for millennials and approximately 23 percentage points for non- millennials. The National Aeronautics and Space Administration had the highest EEI scores, with millennials scoring approximately 16 percentage points higher than the government-wide average and non- millennials scoring approximately 14 percentage points higher. DHS had the lowest engagement scores for both age groups-- millennials scored approximately 13 percentage points lower than the government-wide average and non-millennials scored approximately 10 percentage points lower. Despite low EEI scores for millennials, as shown above in figure 4, DHS has the highest percentage (39.2 percent) of employees 39 years old and younger in their workforce, compared to other CFO Act agencies. Among all employees, millennials had similar perceptions of leaders as non-millennials, but, as shown in table 2, employees' perceptions of leaders consistently received the lowest score of the three components that comprise the EEI. Millennials had better perceptions of their supervisors than non-millennials and the supervisors component saw the highest scores in the EEI across all age groups in 2015. For the intrinsic work experience component, however, non-millennials had higher scores than millennials by more than three percentage points. As we have shown in the analysis above, the employee-supervisor relationship is an important aspect of employee engagement. FEVS questions on the supervisors component focus on the interpersonal relationship between worker and supervisor and concern supervisors' support for employee development, employees' respect, trust, and confidence in their supervisor, and employee perceptions of an immediate supervisor's performance. This is consistent with U.S. Merit Systems Protection Board (MSPB) research, which suggests that first-line supervisors are key to employee engagement and organizational performance. Questions on intrinsic work experience reflect employees' feelings of motivation and competency related to their role in the workplace, such as their sense of accomplishment and their perception of utilization of their skills. Overall we found that the drivers of engagement were similar for millennials and non-millennials. What matters most in improving engagement levels across all age groups is valuing employees--that is, an authentic focus on their performance, career development, and inclusion and involvement in decisions affecting their work. The key is identifying what practices to implement and how to implement them, which can and should come from multiple sources--FEVS and other data sources, other agencies, and OPM. Of the various topics covered by the FEVS that we analyzed, we identified six that had the strongest association with higher EEI levels compared to others for both millennials and non-millennials, as described in figure 7. We used regression analysis to test which selected FEVS questions best predicted levels of employee engagement as measured by the GAO-calculated EEI, after controlling for other factors such as employee characteristics and agency. Constructive performance conversations. We found that having constructive performance conversations was the strongest driver of the EEI government-wide. For the question "My supervisor provides me with constructive suggestions to improve my job performance," we found that, controlling for other factors, someone who answered "strongly agree" on that FEVS question would have on average an engagement score that was more than 20 percentage points higher, compared to someone who answered "strongly disagree" on the 5-point response scale. As we found in our March 2003 report on performance management, candid and constructive feedback helps individuals maximize their contribution and potential for realizing the goals and objectives of an organization. At the Department of Education (Education), one case study agency from our 2015 report on employee engagement, the Office of the Chief Information Officer (OCIO) implemented a process to help ensure that constructive performance conversations regularly occur. In addition to department-wide requirements for supervisors to hold two performance conversations a year, OCIO officials said that they require all supervisors to offer OCIO employees optional quarterly conversations. These quarterly performance conversations are guided by a set of specific topics that supervisors and employees developed together to ensure that employees receive consistent and regular constructive feedback and coaching. Career development and training. Our analysis found that career development and training was the second strongest driver government- wide. For the question, "I am given a real opportunity to improve my skills in my organization," we found that, controlling for other factors, someone who answered "strongly agree" to that question would have on average an engagement score that was approximately 15 percentage points higher than someone who answered "strongly disagree." As we found in 2004, the essential aim of training and development programs is to assist an agency in achieving its mission and goals by improving individual and, ultimately, organizational performance. At the National Credit Union Administration (NCUA), another case study agency from our 2015 report on employee engagement, officials said the agency focused on providing training for employees throughout their careers. For example, NCUA requires each employee to develop an individual development plan. For employees new to credit union examining--a majority of employees--NCUA has a standardized 18-month training program that combines classroom and practical work. New examiners must complete a core set of courses and may also choose additional elective courses. NCUA officials said that they are constantly assessing formal and informal training for entry-level employees to identify areas to improve the curriculum and instruction. For more experienced examiners, NCUA provides continuing training and development, according to these officials. Remaining drivers. For the remaining 4 drivers, we found that government-wide, controlling for other factors, someone who answered "strongly agree" to those questions would have on average an engagement score that was between 10 and 14 percentage points higher than someone who answered "strongly disagree." Those four drivers are work-life balance ("My supervisor supports my need to balance work and other life issues"), inclusive work environment ("Supervisors work well with employees of different backgrounds"), employee involvement ("How satisfied are you with your involvement in decisions that affect your work"), and communication from management ("How satisfied are you with the information you receive from management on what's going on in your organization"). Examples of how the three case study agencies from our 2015 report implemented practices consistent with these drivers include the following: Work-life balance. Federal Trade Commission (FTC) officials implemented an outreach strategy to inform staff about child and elder care resources after learning that employees were not aware of the services or did not know that they qualified for these services. Officials said employee knowledge of and agency commitment to these kinds of programs enhances supervisor support for work-life balance. Similarly, to support work-life balance, as part of its engagED initiative, Education revised telework policies, provided training for managers and employees on the new polices and on working in a telework environment, and improved infrastructure to make telework as effective as time spent in the office, according to Education officials. Inclusive work environment. The FTC established an agency-wide Diversity Council to develop comprehensive strategies to promote understanding and opportunity throughout FTC. FTC officials said that employees of all levels were interested in forming such a council. This included employees who experienced diversity issues firsthand as well as managers who could address those issues. The goal of FTC's Diversity Council--composed of representatives from each bureau and office--is to engage employees and supervisors across the agency, make recommendations for improving diversity, and foster the professional development of all agency employees, according to these officials. Employee involvement. Education's Office of General Counsel (OGC) has a permanent employee-driven Workforce Improvement Team (WIT) that grew out of an office-wide meeting with employees at all levels to involve employees in the discussions about the FEVS results. As a result of this group's work, Education's OGC management introduced additional training and professional development opportunities and improved employee on-boarding through a new handbook and mentoring program. Education's OGC officials said that the staff-driven WIT has created feelings of stronger ownership, engagement, and influence in office decision making. Education's OGC officials said that OGC's management seeks feedback from staff, including from the WIT, to evaluate the effectiveness of improvement efforts. These officials said that this strengthens two-way communication, which improves employee engagement and organizational performance. Communication from management. NCUA officials told us that the head of the agency and its senior leaders communicate with line employees (who are mostly in the field) through quarterly webinar meetings. The meetings are scheduled to accommodate the field employees' frequent travel schedule and generally start with any "hot topics" and continue with discussion of agency efforts to meet mission goals. The agency head takes questions in advance and during the webinar and, when needed, participants research and share responses with agency employees. According to NCUA officials, these regular, substantive conversations demonstrate top leadership's commitment and respect for all employees as valued business partners. These key drivers can help agencies develop a culture of engagement as agencies embed them into the fabric of everyday management practices, rather than simply reacting to the results of the most recent FEVS. Importantly, these six practices were generally the consistent drivers of higher EEI levels when we analyzed them government-wide and by age groups, and were the same drivers of engagement identified in our prior analysis of the 2014 EEI. Because these six practices are the strongest drivers of the EEI, this suggests they could be the starting points for all agencies seeking to improve engagement. In our 2015 report we identified three key lessons for improving employee engagement, each of which is described in greater detail below. Our three case study agencies in our 2015 report on employee engagement attributed their high or increasing levels of engagement to overall effective management practices more so than to efforts specifically aimed at improving engagement levels. Officials at these agencies said they pay attention to employee engagement scores, but also focus on overall positive organizational health and culture and on how their agency implements change efforts. Some of the practices agencies cited parallel those we identified in 2003 as key to successful organizational transformation, including top leadership involvement, consistency, creating a line of sight linking individual results to organizational performance, and employee outreach. Top leadership involvement. Officials from all three of our case study agencies said that top agency leaders were directly involved in organizational improvement efforts. We have previously reported top leadership that is clearly and personally leading the change presents stability and provides an identifiable source for employees to rally around and helps the process/efforts stay the course. For example, Education officials said Education's Chief Information Officer is directly involved in efforts to address FEVS scores--including being directly involved in the data analysis, reviewing Education's Office of the Chief Information Officer (OCIO) action plans developed by each of his subordinate directors, overseeing implementation of strategies, and assessing their effectiveness. Consistency. Officials at Education's OCIO said it is important to ensure that policies are applied consistently, which is the goal of that office's Speaking with One Voice initiative. The biweekly management meetings to discuss and clarify the implementation of department policies (e.g., telework, resources, and employee bonuses) were instituted after conversations with employees revealed that policies were inconsistently applied. As a result of the initiative, Education's OCIO officials said employees know that senior leaders are paying attention to how policies affect employees and are accountable for ensuring appropriate implementation. Line of sight. FTC officials emphasized the importance of creating a line of sight between the agency's mission and the work of each employee. As we have previously reported, successful organizations create a "line of sight" showing how team, unit, and individual performance can contribute to overall organizational results. FTC officials said that the agency lists every employee that contributed to a case in the pleadings, from the attorneys and paralegals to the information technology specialists who provided computer support. Importantly, FTC officials said they recognize how mission support functions, such as excellent human resources customer service contribute to the agency mission. Employee outreach. According to officials at all three case study agencies, they all reach out to employees and their labor union representatives, if applicable, to obtain insight into their FEVS scores or to inform other improvement efforts. Our 2003 report found that employee involvement strengthens the improvement process by including frontline perspectives and experiences. By participating in improvement task teams, employees have additional opportunities to share their experiences and shape policies and procedures as they are being developed and implemented. For example, in 2012, while NCUA's EEI score was above the government-wide level, FEVS questions about awards, performance appraisals, and merit-based promotions were its lowest scoring categories. NCUA officials said they contracted with an external facilitator to conduct workshops and webinar-based feedback sessions with employees to gain insight into their FEVS results and identify root causes influencing the survey scores. These officials said that using external facilitators offered employees confidentiality and created an environment that encouraged open conversations. Based on these feedback sessions, NCUA created an internal employee-driven committee to inform revisions to the awards, performance appraisals, and merit-based promotion process, and developed recommendations for NCUA's management to implement these changes. Most of the committee's recommendations were implemented. According to officials at our case study agencies in our 2015 report on employee engagement, while the EEI provides a useful barometer for engagement, other indicators can provide officials with further insight into reasons for engagement levels and areas for improvement. Other data such as turnover rates and equal employment opportunity (EEO) complaints--which are likely already collected by federal agencies--can provide additional insight and strategies for improving employee engagement. Notably, MSPB found that there is a statistically significant correlation between higher levels of employee engagement and fewer EEO complaints. Officials in the three case study agencies said that they pay attention to their FEVS scores, but other sources of data can provide explanatory or agency-specific information valuable to developing improvement strategies. Officials at case study agencies for our 2015 report on employee engagement told us that they take a multi-year, multi-prong approach to improving engagement and do not base engagement efforts solely on the survey cycle or focus their attention on year to year changes in the EEI. Some case study agency officials said a single survey cycle does not provide enough time to implement changes and see results because real change usually takes more than 1 year. The FEVS cycle begins around May and agencies receive results in September or October. It may be late-winter or early-spring before an agency will have designed an action plan. By the time the next survey cycle begins, agencies may still be interpreting results and developing and implementing their action plans. Moreover, according to case study agency and other officials we interviewed for the 2015 report, the annual survey cycle does not allow enough time for employees' perceptions to change before the next cycle begins. For example, an Education official said that it took a few years to see the effects of engagement-related actions. Members of the Chief Human Capital Officers Council and National Council on Federal Labor- Management Relations joint working group on employee engagement said that the effects of initiatives implemented to improve engagement, will not be reflected in the EEI scores for at least a couple of years, which makes evaluating their effectiveness challenging. Instead of focusing exclusively on FEVS and EEI scores, the case study agencies we examined took a longer term approach to their engagement efforts. For example, according to officials, Education established engagED, a long-term cultural change initiative aimed at building a more innovative, collaborative and results-oriented agency, and creating a more engaged workforce. Key components included quarterly all-staff meetings with the Secretary to discuss various topics; a "lunches with leaders" program that allowed agency employees to discuss key topics with senior agency leaders; and periodic leadership summits where agency leaders participate in developmental activities identified by staff and focused on teams, individual leadership, and problem resolution. In conclusion, more than simply a goal in its own right, higher levels of engagement can enhance an agency's "brand" to job seekers, reduce turnover, and most importantly, improve organizational performance. Moreover, while our analysis and the experience of our case study agencies suggests that developing a culture of engagement does not necessarily require expensive programs or technology, it does necessitate effective management strategies such as leadership involvement, strong interpersonal skills on the part of supervisors, and thoughtful use of data. The starting point is valuing employees, focusing on their performance and career development, and ensuring their inclusion in decisions affecting their work. These engagement efforts, combined with other components of a robust talent management strategy covering the full life-cycle of federal employment, provide an ample tool kit that should position agencies to be competitive in the labor market for top talent. This completes my prepared remarks. I would be happy to answer any questions the Subcommittee may have. For further information regarding this statement, please contact Robert Goldenkoff, Director, Strategic Issues, at (202) 512-2757, or [email protected]. Individuals making key contributions to this statement include Chelsa Gurkin, Assistant Director; Shelby Kain, Analyst-in-Charge; Giny Cheong, Sara Daleski, John F. Hussey III, Donna Miller, Anna Maria Ortiz, Ulyana Panchishin, and LaSonya Roberts. 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GAO's prior work found that skills gaps in government-wide fields such as cybersecurity are threatening the ability of agencies to carry out their missions. At the same time, government-wide trends in federal workforce retirement threaten to aggravate the problem. To help ensure agencies have the capacity to address complex national challenges, agencies need to be competitive for top talent, including those in the millennial generation. This testimony examines (1) recent employment trends of millennials in the federal workforce and how they compare to other employee cohorts; (2) trends in engagement levels of millennials versus other employee groups; and (3) the drivers of federal employee engagement and the key lessons learned for building a culture of engagement. This statement is based on GAO's 2015 review of the trends and drivers of government-wide employee engagement and our larger body of work on federal human capital, issued primarily between January 2014 and September 2016, and is updated with more recent information. Millennials are commonly considered as those born between the early 1980s and 2000. However, for the purposes of this statement GAO is including all employees 39 years old and younger as millennials in order to provide a consistent definition across datasets. GAO is not making any new recommendations in this testimony. We have previously made recommendations to the Office of Personnel Management (OPM) to improve engagement government-wide, which OPM has implemented. Employees 39 years of age and younger represented approximately 45 percent of the United States employed civilian labor force and about 30 percent of the civilian federal workforce in fiscal year 2014. This group includes the millennial generation. The percent of millennials within the federal workforce varies by agency and agencies that have high rates of retirement eligibility also tend to have low percentages of millennials in the workforce. In 2015, millennial employees in the federal government had an estimated Employee Engagement Index (EEI) score of 63.8 - as derived from the Office of Personnel Management's Federal Employee Viewpoint Survey - which is less than one percentage point lower than non-millennials. Engagement is usually defined as the sense of purpose and commitment employees feel towards their employer and its mission. As shown in the figure below, millennial subgroups had both the highest and lowest EEI scores among all age groups in 2015--employees 25 and younger had the highest EEI score (70.8), while employees 30 to 39 years old had the lowest EEI score (63.3). Key drivers of engagement can help agencies develop a culture of engagement. GAO's regression analysis identified six practices as key drivers of the EEI, which were similar for both millennials and non-millennials: (1) constructive performance conversations, (2) career development and training, (3) work-life balance, (4) inclusive work environment, (5) employee involvement, and (6) communication from management. As GAO found in a 2015 report on employee engagement, building a culture of engagement involves effective management strategies such as leadership involvement, strong interpersonal skills of supervisors, and thoughtful use of data.
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CDHPs are relatively new health care benefits plan designs that are offered in various forms, including that of an HDHP coupled with an HSA. The FEHBP began to offer CDHPs in 2003 and first offered HDHPs coupled with HSAs in January 2005. While insurers and employers offer several variants of CDHPs, these plans generally include three basic precepts--an insurance plan with a high deductible, a savings account to pay for services under the deductible, and enrollee decision support tools. An insurance plan with a high deductible. CDHP deductibles are about $1,900 on average nationwide for individual coverage and about $3,900 for family coverage, compared to about $320 and $680, respectively, on average, for a traditional PPO plan. A savings account to pay for services under the deductible. These savings accounts encompass different models, the most prominent being health reimbursement arrangements (HRA) and HSAs. Both HRAs and HSAs are tax advantaged, and funds from these accounts may be spent on qualified medical expenses--such as the plan deductible and payments for covered and noncovered services. Funds that are used for qualified medical expenses that are not covered by the health plan do not count toward meeting the plan's deductible or out-of-pocket spending limits. Important distinctions exist between HRAs and HSAs. HRAs are funded solely by the employer and are generally not portable once the employee leaves. These funds may accumulate up to any employer-specified maximums and may only be spent on qualified medical expenses. Although HRAs are generally coupled with health plans that include a high deductible, this is not a requirement for favorable tax treatment. An HSA is a new type of tax-advantaged savings account that, unlike HRAs, must be coupled with an HDHP that meets statutorily defined minimum deductibles and limits on out-of-pocket expenditures for enrollees. Contributions to an HSA may be made by both the employer and employee. The HSA account holder essentially owns the account and can transfer funds from one HSA account to another. Funds in these accounts may earn interest, are allowed to roll over from year to year, and may accumulate subject only to annual limits on contributions. HSA funds may also be withdrawn for purposes other than qualified medical expenses subject to regular taxes and an additional tax penalty, and may be used as retirement income subject to regular taxes. Certain individuals are not eligible for HSAs, including those eligible for Medicare or covered by another health plan in addition to the HDHP. Decision support tools. CDHPs may provide decision support tools for consumers to help them become actively engaged in making health care purchase decisions. These tools may provide enrollees online access to their savings accounts to help them manage their spending. They may also provide enrollees with information to assess the quality of health care providers and the prices for health care services. While health insurance carriers may provide decision support tools to all enrollees, these tools may be more important to CDHP enrollees who have a greater financial incentive to take a more active role in their health care purchase decisions. To help enrollees choose a doctor or a hospital, experts suggest they need data to assess the quality of those providers. Such data may include the volume of procedures provided; the outcomes of those procedures, such as mortality and complication rates; as well as certain process indicators, such as the percentage of cases in which a provider followed established clinical practice guidelines for a particular procedure. To help enrollees manage their HSA account funds and evaluate the price competitiveness of various providers, some experts believe enrollees need information about the expected costs of services-- such as an average or expected range of costs for a procedure, or the actual price a provider will charge based on the payment rates negotiated between the provider and the health insurance carrier. Insurance carriers have faced challenges in obtaining or presenting quality and cost data. For example, experts believe that it may be difficult for carriers to provide hospital- or physician-specific quality measures because such measures are not always readily available, particularly for physicians. They also believe that certain measures can be difficult for consumers to interpret, such as outcomes measures, and may not appropriately account for the poorer patient outcomes that may occur among providers who tend to treat sicker patients. Experts also believe that insurers have been reluctant to make negotiated provider payment rates available to consumers due to concerns over future provider contract negotiations. Therefore, the cost information insurers are willing to provide is more likely to reflect average rates or a range of costs within a geographic region rather than the actual negotiated rates. Federal employees have a choice of multiple health plans offered by private health insurance carriers participating in the FEHBP, with 19 national plans and more than 200 local plans offered in 2005. Plans vary in terms of benefit design and premiums. In 2004, nearly 75 percent of those covered under the FEHBP were enrolled in national plans, with the remainder in regional or local HMOs. Mirroring the private sector, FEHBP carriers began offering CDHP options in 2003. The FEHBP offers two types of CDHPs--high-deductible plans coupled with an HRA or an HSA. The American Postal Workers Union offered the first HRA-based option under the FEHBP in 2003. This was followed by HRA-based plans offered by Aetna and Humana in 2004. In 2005, 14 HDHPs coupled with HSAs were first offered. As of March 2005, 3,900 individuals were enrolled in these 14 HDHPs. Including retirees and family members, about 7,500 individuals were covered by the plans, with nearly all--about 96 percent--in the three multistate plans. All HDHPs offered by the FEHBP must include certain features. OPM requires that the plans cover preventive health services before the deductible has been met. In addition, because OPM is prohibited from contracting with plans that deny enrollment based on age, all must be offered with an HRA alternative of equivalent value for those who are ineligible for an HSA, such as Medicare enrollees. All HSAs and HRAs must be managed either by the insurance carrier or a trustee--such as a bank--which has received high ratings from a major financial rating service. OPM requires all HDHP carriers to offer health care decision support tools to enrollees. Finally, all HDHPs offered in the FEHBP must deposit a monthly contribution to the enrollee's HSA, which is a portion of the enrollee's premium payment, called the premium pass through. The premium pass through can be thought of as a required contribution to an employee's HSA, with the remainder of the premium going to the insurance carrier to pay for the insurance coverage. HDHP enrollees were younger, earned higher federal incomes, were more likely to be male, and were more likely to have individual coverage than other FEHBP enrollees. The average age of HDHP enrollees was similar to that of another new plan, but was 13 years younger than that of all FEHBP enrollees. The share of actively employed enrollees earning federal incomes of $75,000 or more was 43 percent for HDHPs, compared to 14 percent for the other new plan, and 23 percent for all FEHBP plans. About 69 percent of HDHP enrollees were male, compared to 59 percent in both the other new plan and all FEHBP plans, and about 47 percent of HDHP enrollees had individual coverage, compared to 35 and 37 percent for the other new plan and all FEHBP enrollees, respectively. The average age of HDHP enrollees was younger than all FEHBP plan enrollees, but was similar to that of enrollees in another new FEHBP plan. The average age of HDHP enrollees was 46, compared to 47 for the other new plan, and 59 for all FEHBP plans. Differences were largely due to fewer retirees selecting the HDHPs. Eleven and 18 percent of the HDHP and other new plan enrollees were retirees, respectively, compared to 45 percent for all FEHBP plan enrollees. Excluding the retirees, the average age narrowed to 44 for both the HDHP and other new plan enrollees, and 47 for all FEHBP plan enrollees. (See table 1.) The distribution of enrollees by age group similarly illustrates the relatively younger ages of HDHP enrollees and enrollees of the other new plan. Relative to all FEHBP enrollees, the HDHP and other new plan enrollees comprise a larger share of enrollees in each age group under 55 years and a smaller share of enrollees in each age group over 64. (See fig. 1.) HDHP enrollees who were actively employed by the federal government earned higher federal salaries than other active federal employees in the FEHBP. The share of enrollees earning federal incomes of $75,000 or more in 2005 was 43 percent for HDHPs, compared to 14 percent for the other new plan and 23 percent for all FEHBP plans. These differences existed across all age groups. (See fig. 2.) Excluding retirees, HDHP enrollees were more likely to be male and to select individual rather than family plans than were enrollees in other plans. Sixty-nine percent of HDHP enrollees were male, compared to 59 percent of enrollees in both the other new plan and all FEHBP plans. Forty-seven percent of HDHP enrollees selected individual plans, compared to 35 and 37 percent of enrollees in the other new plan and all FEHBP plans, respectively. (See table 2.) HDHPs generally covered the same services as those covered by their traditional plan counterparts; however, enrollees' financial responsibilities usually differed. The FEHBP HDHPs had higher deductibles than their traditional plan counterparts. In addition, relative to traditional plans, HDHP cost sharing after the deductible was comparable or lower for preventive services and prescription drugs. Cost sharing was mixed for physician office visits and hospital stays--higher than the carriers' traditional plans in some instances and the same or lower in others. Two of the HDHPs had higher out-of-pocket spending limits than their traditional plan counterparts, and in most cases the HDHPs had lower premiums. All three multistate HDHPs generally covered the same services as those covered by their traditional plan counterparts. These plans covered the same broad categories of services, such as preventive, diagnostic, maternity, surgical, outpatient, and emergency care, and all plans typically covered the same services within these categories. While each HDHP defined preventive services slightly differently, each plan covered certain core services: routine physical exam, routine immunizations, cholesterol screening, colorectal cancer screening, annual prostate-specific antigen test, well-child care. These same services were also covered by the traditional plans. The few instances where covered services differed typically involved vision, dental, or chiropractic care benefits. For example, one HDHP did not include glasses or contact lenses in its vision care coverage, while its counterpart plan did. While the same services were typically covered by the three multistate HDHPs and their traditional plan counterparts, the plans sometimes imposed different restrictions and stipulations on the coverage of these services. For example, one HDHP allowed more frequent vision exams, but covered fewer days in skilled nursing facilities relative to the traditional plan. Another HDHP had no time restrictions for receiving emergency services following an accidental injury, while the traditional plan did. In addition, the HDHP for which the traditional plan counterparts were HMOs offered coverage for out-of-network providers for nonemergency care, while the HMOs did not. The other two HDHPs had similar restrictions as the traditional plans on obtaining coverage from out-of-network providers. The three multistate HDHPs often differed from their traditional plan counterparts in terms of enrollees' financial responsibilities. All three HDHPs had higher deductibles, ranging from $1,100 to $2,500 for individual coverage and from $2,200 to $5,000 for family coverage, compared to $450 to $950 and $900 to $1,900 in their traditional PPO counterparts, respectively. Cost sharing also differed between HDHPs and the traditional plan counterparts. All HDHPs offered preventive care cost sharing for in-network providers that was the same or lower than the traditional plans. In addition, while all HDHPs covered preventive services before the deductible, those services were not always covered before the deductible by the traditional PPO plans. All HDHPs required that the deductible be met before prescription drug coverage began, whereas two of the traditional plans covered all prescription drugs before the deductible was met, and the third covered only generic drugs before the deductible was met. After the deductible was met, all HDHPs had comparable or lower cost sharing than the traditional plans for prescription drugs. Cost sharing for physician office visits for nonpreventive care and for hospital stays was mixed across plans--higher for the traditional plan counterparts in some instances, but the same or lower in others. Finally, two of the HDHPs had higher out-of-pocket spending limits for in-network providers of $4,000 and $5,000 for individual coverage and $8,000 and $10,000 for family coverage, compared to $1,500 and $4,450 and $3,000 and $5,400 for their traditional counterparts, respectively. HDHPs more often had lower monthly premiums than their traditional plan counterparts. One HDHP had lower premiums than both of its traditional plan counterparts, another plan had lower premiums than one of its two counterparts, and the third HDHP had lower premiums than a majority of its 22 traditional plan counterparts. On average, enrollees' monthly premiums for the three HDHPs were $91 for individual coverage and $208 for family coverage, compared to $99 and $243 for their traditional plan counterparts, respectively. (See table 3.) Another difference between the HDHPs and their traditional plan counterparts was the monthly contribution HDHPs made to the enrollee's HSA--the premium pass through--which was not a feature of the traditional plans. The average monthly pass through of the three multistate HDHPs was $82 for individual coverage and $165 for family coverage, representing 93 percent and 81 percent of the employee's share of the monthly premium on average, respectively. The annual sum of the monthly contributions represented an average of 53 percent of the annual deductible across the three plans. Each HDHP provided online account management tools and access to health education information on the plan's Web site. However, the extent to which they also included provider quality and health care cost data was more limited and varied across the plans. Moreover, the quality and cost information provided on the HDHP Web sites was available to both HDHP enrollees as well as to traditional plan enrollees. Each of the three multistate FEHBP HDHP Web sites provided online access to account management tools and health education information. The plans allowed enrollees to view their progress toward meeting their deductibles and track their HSA balances online. They also provided online access to certain health education information, including information on general preventive care, common medical procedures and conditions, various treatment options for certain conditions, information concerning prescription drug alternatives, and a disease management program. Two plans also provided a health risk assessment tool, and one offered access to a health advice line. The HDHPs provided varying degrees of provider quality data. Two of the three plans provided data on their Web sites for several measures to assess hospital quality, including outcomes data, procedure volumes, and patient safety ratings, and the other plan provided links to Web sites that contained this type of information. None of the plans provided similar process or outcome measures to assess individual physician quality, although one plan provided information on physicians' medical board certifications. Each of the plans provided certain general information about the physicians in the plan networks, such as their hospital affiliations, languages spoken, and gender. Cost information provided by the three multistate plans was limited. One of the plans provided average hospital cost estimates and two provided average physician cost estimates for a limited number of services. For example, one plan provided average cost estimates within certain geographic regions based on its own claims data for certain physician services, such as diagnostic tests and surgical procedures. It also provided estimated total annual costs to treat certain conditions, such as diabetes and heart disease. None of the plans provided the actual payment rates that would be charged to enrollees that the plan had negotiated with specific hospitals or physicians. Two of the three plans provided access to average retail prescription drug prices and estimates of out-of-pocket costs for drugs, and all three plans provided actual prices for drugs purchased through the mail-order pharmacy services offered by the plans. None of the plans provided the actual payment rate the plan had negotiated with particular retail pharmacies. (See table 4.) The quality and cost information provided on each plan's Web site was made available to the enrollees of both HDHP and traditional plans. In some instances, information was tailored to the specific plan in which an individual was enrolled. For example, one plan's out-of-pocket cost estimates for prescription drugs took into account plan-specific coverage and cost-sharing features. Like many large employers, the FEHBP has expanded enrollee health plan choices by offering HDHPs combined with HSAs. While first-year enrollment is modest, the number of carriers offering these products in 2005 and expected to offer them in 2006 indicates that OPM and health insurance carriers anticipate continued interest in these new plans. Although the first-year enrollment in FEHBP HDHPs may not predict future trends, it does raise the possibility that individuals with certain demographic characteristics may be disproportionately attracted to these plans. For example, first-year HDHP enrollees had consistently higher incomes across all age groups than enrollees of another new plan and all FEHBP enrollees. This may suggest that aspects of HDHPs--such as the greater financial exposure coupled with the potential for tax-advantaged savings--uniquely attract higher-income individuals with the means to pay higher deductibles and the desire to accrue tax-free savings. First-year enrollees were also younger on average than all FEHBP enrollees; however, they were not younger than enrollees in another new plan. Thus it is not clear whether younger individuals were uniquely attracted to HDHPs, or if younger enrollees are typical of recently introduced health plans in general. Additional years of enrollment data will be necessary to determine whether characteristics of first-year enrollees are predictive of future trends; to identify other important characteristics of HDHP enrollees, such as their health status; and to assess the implications of these enrollment trends for the FEHBP. HDHPs, like other CDHPs, are premised on the notion that enrollees will become more actively involved in making health care purchase decisions than enrollees of traditional health plans. To do so, enrollees need information to help them assess the cost and quality trade-offs between different health care treatments and providers. However, the extent to which FEHBP HDHPs made such information available to enrollees was varied and limited, and HDHP enrollees were not provided any more or different information than was provided to traditional plan enrollees. Most notably lacking was specific information to assess the quality of health care provided by particular physicians and the actual prices plans had negotiated with particular providers. Some of this information may become available in the future. Two of the three largest HDHPs were developing physician-specific patient satisfaction ratings to help enrollees assess physician quality, and one had initiated a pilot project to provide enrollees with the actual, negotiated prices they would pay for certain services performed by a particular provider. Until such provider-specific quality and cost data become more widely available, the CDHP goal of having enrollees make health care purchase decisions based on an informed assessment of the quality/cost trade-offs may not be fully realized. We received comments on a draft of this report from OPM (see app. I). OPM expressed interest in our findings on the differences in characteristics of first-year HDHP enrollees compared to traditional FEHBP plan enrollees, and said that it would monitor enrollment trends over time to assess whether certain individuals--such as younger or healthier individuals--disproportionately enroll in HDHPs. OPM also said that it would continue to encourage plans to expand the decision support information they provide to enrollees, including the pricing of health care services. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days after its issue date. At that time, we will send copies to the Director of OPM and other interested parties. We will also make copies available to others upon request. This report is also available at no charge on GAO's Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7119 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Randy DiRosa, Assistant Director; Gerardine Brennan; and Laura Brogan made major contributions to this report.
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The Federal Employees Health Benefits Program (FEHBP) recently began offering high-deductible health plans (HDHP) coupled with tax-advantaged health savings accounts (HSA) that enrollees use to pay for health care. Unused HSA balances may accumulate for future use, providing enrollees an incentive to purchase health care prudently. The plans also provide decision support tools to help enrollees make purchase decisions, including health care quality and cost information. Concerns have been expressed that HDHPs coupled with HSAs may attract younger, healthier, or wealthier enrollees, leaving older, less healthy enrollees to drive up costs in traditional plans. Because the plans are new, there is also interest in the plan features and the decision support tools they provide to enrollees. GAO was asked to evaluate the experience of the 14 HDHPs coupled with an HSA that were first offered under the FEHBP in January 2005. GAO compared the characteristics of enrollees in the 14 HDHPs to those of enrollees in another recently introduced (new) plan without a high deductible and to all FEHBP plans. GAO also compared characteristics of the three largest HDHPs to traditional FEHBP plans offered by the same insurance carriers, and summarized the information contained in the decision support tools made available to enrollees by these three plans. FEHBP HDHP enrollees were younger and earned higher federal salaries than other FEHBP enrollees. The average age of HDHP enrollees (46) was similar to that of the other new plan (47) and younger than that of all FEHBP enrollees (59). These differences were largely due to a smaller share of retirees enrolling in the HDHPs and the other new plan. HDHP enrollees earned higher federal salaries compared to other enrollees. Forty-three percent of HDHP enrollees actively employed by the federal government earned federal salaries of $75,000 or more, compared to 14 percent in the other new plan and 23 percent among all FEHBP plans. In addition, nonretired HDHP enrollees were more likely to be male and to select individual rather than family plans. The three largest FEHBP HDHPs generally covered the same range of services--including preventive services--as their traditional plan counterparts; however, enrollees' financial responsibilities usually differed. Compared to the traditional plans, the HDHPs had higher deductibles. HDHP cost sharing was the same or lower for preventive services and prescription drugs, and all plans covered preventive services before the deductible. Prescription drugs in the HDHPs were subject to the deductible, while they were generally exempt from the deductible in the traditional plans. HDHP cost sharing varied with respect to nonpreventive physician office visits and inpatient hospital stays. Two of the three HDHPs had higher out-of-pocket spending limits, and HDHP premiums were lower on average than the traditional plans. The extent to which the three largest FEHBP HDHPs made available provider quality and health care cost information was limited and varied. Two of the three plans provided several hospital-specific measures of quality on their Web sites, including the volumes of procedures provided by the hospitals and the outcomes of those procedures, and the other plan provided links to other Web sites containing such information. Regarding physician-specific quality data, one plan provided a single measure. One of the plans provided average hospital cost estimates and two provided average physician cost estimates for selected services, but none provided the actual rates an enrollee would pay that the plan had negotiated with providers. Regarding prescription drugs, two of the three plans provided the average retail pharmacy drug costs, but none provided the actual negotiated rates an individual would pay at a particular retail pharmacy. In commenting on a draft of this report, the Office of Personnel Management (OPM) said that it would monitor enrollment trends over time to assess whether certain individuals--such as younger or healthier individuals--disproportionately enroll in HDHPs. OPM also said it would continue to encourage plans to expand the decision support information they provide to enrollees, including the pricing of health care services.
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Located in FAA's Office of Aviation Safety (Aviation Safety), the Aircraft Certification Service (Aircraft Certification) and Flight Standards Service (Flight Standards) issue certificates and approvals for new aviation products to be used in the national airspace system as well as for new operators in the system, such as air carriers, based on federal aviation regulations (see fig. 1 below). FAA inspectors and engineers interpret and implement these regulations governing certificates and approvals through FAA policies and guidance, including orders, notices, and advisory circulars. Additionally, FAA also has the authority to use private individuals and organizational entities, known as designees, to carry out many certification activities on behalf of the FAA Administrator in order to enable FAA to better concentrate its limited staff resources on safety- critical functions. In Aircraft Certification, approximately 880 engineers and inspectors issue certifications and approvals to the designers and manufacturers of new aircraft and aircraft engines, propellers, parts, and equipment, including the avionics and other equipment required for modernizing the air traffic control system under the Next Generation Air Transportation System (NextGen). Since 2005, Aircraft Certification has used a project sequencing system to nationally prioritize certification submissions on the basis of available resources. In fiscal year 2013, Aircraft Certification issued 3,496 design approvals, 57 production approvals, and 536 airworthiness certificates. In Flight Standards, approximately 4,000 inspectors issue certificates and approvals allowing individuals and entities to operate in the national airspace system. These include certificates to commercial air carriers, operators of smaller commercial aircraft, repair stations, and flight training schools and training centers. Flight Standards field office managers in over 100 field offices initiate certification projects within their offices on a first-come, first served basis. In fiscal year 2013, Flight Standards issued 259 air operator certificates and 159 air agency certificates. When FAA receives aviation industry submissions for certificates and approvals, it must determine whether or not resources are available to begin the project. According to FAA, the agency considers its highest priority to be overseeing the continued operational safety of the people and products already operating within the national airspace system. The same staff that provide this oversight are also tasked with other oversight activities, such as processing new certifications and approvals that FAA considers to be lower priority. FAA wait-lists new certification and approval projects when resources are not available to begin the work. Flight Standards, in particular, has historically had difficulty keeping up with its certification workload across its regions and offices, a problem that persists. FAA has considered ways to supplement its annual budget by expanding its sources of funding to deal with its increasing workload and staff shortages. However, FAA has limited options as it cannot levy fees on its customers for most of the services it provides to industry, including aviation product certifications and approvals. Attempts have been made to provide FAA with additional funding from industry stakeholders for processing certifications and approvals. In 2007, the administration submitted a reauthorization proposal to Congress that called for major changes to FAA's funding and budget structure. These changes were intended to provide a more stable, reliable basis for funding in the long term, in part by allowing FAA to impose fees on manufacturers for the various activities and costs related to aircraft certification and approval. Congress has previously authorized other agencies to charge these types of "user fees" for services rendered for processing product certification and approval. For example, the Medical Device User Fee and Modernization Act of 2002 authorized the Food and Drug Administration (FDA) to charge and retain a fee for providing services related to reviewing medical device products. However, this broad authority has not been granted to FAA. In May 2012, the Certification Process Committee made six recommendations to Aircraft Certification to streamline and reengineer the product certification and approval processes, improve efficiency and effectiveness within Aircraft Certification, and redirect resources for support of certification. The Certification Process Committee further recommended that FAA develop measures of effectiveness for its activities and a means of tracking its progress. In August 2012, FAA reported its plan to Congress for addressing the Certification Process Committee's recommendations, and, in July 2013, the agency issued an implementation plan with 14 initiatives. FAA updated this plan in January 2014 and plans to issue further updates on the status of the initiatives periodically. Since the January update, Aircraft Certification has continued its efforts to address the recommendations to improve its certification and approval processes and is implementing the 14 initiatives. These initiatives touch on various aspects of Aircraft Certification's work and, according to FAA several predate the committee's recommendations and were part of on- going continuous efforts to address long-standing certification issues and to improve the certification process. The initiatives range from developing a comprehensive road map for major change initiatives, to improving the project sequencing process, to reorganizing the small aircraft certification regulation. Figure 2, based on an interim May 2014 update that FAA provided to us, summarizes FAA's determination of the status of the 14 initiatives. According to the May 2014 update that FAA provided to us, 1 of the 14 initiatives has been completed, and 10 initiatives are on track for completion within planned time frames. FAA deployed a tracking system to monitor the implementation of the initiatives in June 2013, but the agency indicated it is still finalizing the mechanisms for authorizing staff with the appropriate level of review and approval rights in the system. Also, ten of the initiatives were on track for meeting their planned completion milestones. For example, the initiatives to expand the authority for approving aircraft emissions data and noise compliance under the organization designation authorization (ODA) program are on track to be completed in 2015. In addition, the initiative to expedite rulemaking by, among other things, adopting a rulemaking prioritization tool to update airworthiness standards for special conditions is scheduled to be completed in September of this year. Further, three of the initiatives were in danger of getting off track between 2011 and 2013 and are now back on schedule. Although most initiatives are on track, according to FAA's May 2014 interim update, 2 of the 14 initiatives will not meet planned milestones: Improve effectiveness of the ODA program: FAA and two aviation industry groups--the Aerospace Industries Association and General Aviation Manufacturers Association--developed a plan to improve the effectiveness of the ODA process, which is used to authorize organizations to act on behalf of FAA in conducting some safety certification work. In conjunction with the plan, FAA revised the order that outlines the new ODA procedures. However, this initiative was purposely delayed to provide industry with additional time to adapt to the changes in the ODA procedures. Representatives of three industry associations we interviewed for this testimony supported the use and expansion of ODA by FAA. In contrast, while the Professional Aviation Safety Specialists (PASS) agrees with the concept of ODA, it has concerns related to expanding the program because representatives contend that oversight of the program requires significant FAA resources. PASS also contends that due to current staffing shortages and increased workload, FAA does not have enough inspectors and engineers to provide the proper surveillance of the designees who would be granted this additional delegation authority. On May 14, 2014, the DOT OIG announced a review of FAA's oversight of the ODA program. The OIG plans to assess FAA's (1) process for determining staffing levels for ODA oversight and (2) oversight of delegated organizations' program controls. Update 14 C.F.R. Part 21: FAA chartered another aviation rulemaking committee in October 2012 to evaluate improvements to the effectiveness and efficiency of certification procedures for aircraft products and parts, along with incorporating new safety management system (SMS) concepts into the design and manufacturing environment. The committee submitted its report to FAA in July 2014. FAA indicated that the government shutdown in October 2013 delayed some of the actions that the agency had planned to move this effort into the rulemaking process, including submission of the application for rulemaking. According to FAA, however, this delay will have no effect on completion of the final rule, which is planned for 2017. According to FAA's May 2014 update, 1 of the 14 initiatives was at risk of not meeting planned milestones, which increases the risk that FAA will miss its established implementation time frames for the initiative for addressing its associated recommendation. Improve consistency of regulatory interpretations: The May 2014 interim update also indicated that the initiative for improving the consistency of regulatory interpretation is at risk of getting off track or off schedule. This initiative responds to the Regulatory Consistency Committee's recommendations for improving the consistency of regulatory interpretation within both Aircraft Certification and Flight Standards. However, Aircraft Certification is relying on Flight Standards to complete the implementation plan for addressing the recommendations. Therefore, Aircraft Certification has placed this initiative on hold. (The next section of this statement discusses in more detail FAA's response to the Regulatory Consistency Committee's recommendations.) As of May 2014, FAA had not developed metrics for measuring the effectiveness of 9 of the 14 initiatives it has undertaken, nor has it determined metrics to measure the effectiveness of its actions as a whole. According to FAA officials, they plan to develop these metrics in three phases. For the first phase, to be included in the July 2014 update of its implementation plan, FAA will include metrics to measure the progress of the implementation of the initiatives. For the second phase, FAA plans to subsequently develop metrics for measuring the outcomes of each initiative. For the third phase, working with the Aerospace Industries Association, FAA plans to develop metrics for measuring the global return on investment in implementing all of the initiatives, to the extent that such measurement is possible. We believe that this plan for establishing performance measures is reasonable. Unlike FAA's efforts to improve the certification process, although FAA has made some progress towards addressing the regulatory consistency recommendations, the details remain unclear about how FAA will structure its efforts. In November 2012, the Regulatory Consistency Committee made six recommendations to Aircraft Certification and Flight Standards to improve (1) the consistency in how regulations are applied and (2) communications between FAA and industry stakeholders. In July 2013, FAA reported to Congress on its plans for addressing the regulatory consistency recommendations, and included its preliminary plan for determining the feasibility of implementing these recommendations. The report also indicated that FAA would develop a detailed implementation plan that would include an implementation strategy, assign responsibilities to offices and staff, establish milestones, and measure effectiveness for tracking purposes. We found in February 2014 that FAA expected to publish such a detailed implementation plan by late June 2014, more than 6 months after its initial target date of December 2013. In June 2014, FAA officials told us that the implementation plan was under review within FAA and estimated that the agency would issue its detailed plan in August 2014. Until this detailed plan is released, the specific initiatives for addressing the recommendations are unknown; thus, we cannot analyze information on the status of any planned efforts similar to the information we provided above for the certification process initiatives. Further, FAA's July 2013 preliminary plan does not specify how FAA plans to measure the effectiveness of the initiatives. FAA indicated that "although there may not be any baseline for each recommendation against which to compare improvements, FAA intends to consider: (1) identifying metrics, (2) gathering and developing baseline data, and (3) periodically measuring any changes, positive or negative, in rates of completion." FAA officials provided the following information on how the agency is planning to respond to the six recommendations. The Regulatory Consistency Committee recommended that Aircraft Certification and Flight Standards (1) review all guidance documents and interpretations to identify and cancel outdated material and electronically link the remaining materials to its applicable rule, and (2) to consolidate Aircraft Certification's and Flight Standards' electronic guidance libraries into a master source guidance system, organized by rule, to allow FAA and industry users access to relevant rules and all active and superseded guidance material and related documents. This recommendation for creating the master source guidance system is the top priority of the Regulatory Consistency Committee. FAA officials indicated that establishing this system will require two main components: As a first step, for linking (mapping) all relevant guidance materials to the regulations, FAA plans to determine which "guidance" documents exist across regional and field offices--including orders, notices, and advisory circulars--outside FAA's electronic guidance libraries, which are being used to answer questions, interpret or analyze regulations, and provide guidance on regulatory matters. In December 2013, Flight Standards sent out a memorandum requesting that staff discontinue using any guidance documents outside those found in the guidance libraries, to be effective January 15, 2014. The memorandum also asked for the staff to submit any unofficial guidance worth preserving to FAA for review. Flight Standards then conducted a review to determine which of the unofficial guidance documents submitted should be added to the guidance libraries. Several members of the Regulatory Consistency Committee responded in an e-mail to FAA to express serious concerns about this approach and stated that the committee did not envision the cancellation of any guidance before FAA developed a methodology to include or exclude such guidance. The committee members further noted that FAA's memorandum provided no method to allow existing certificate holders to retain certifications that were based on any applied guidance that had been cancelled. Further, these members requested that FAA either withdraw the memorandum or address the issues they raised and extend the date for FAA staff to comply with the memorandum. However, two other Regulatory Consistency Committee members we interviewed considered FAA's actions to get staff to discontinue the use of unofficial guidance in the field to be an appropriate first step. Second, FAA plans to develop a master source guidance system with the capability to consolidate information from Aircraft Certification's and Flight Standards' electronic guidance libraries as well as legal interpretations from the Office of Chief Counsel into a master guidance system to allow FAA and industry users access. Specifically, the Regulatory Consistency Committee recommended that this system be searchable so that FAA and industry users can easily access relevant rules and find the relevant guidance for the rule. FAA officials assessed the possibility of using the existing Aviation Safety Information Management System, but determined that it is not adequate because (1) users cannot search for guidance by word and (2) it is not compatible with other FAA data systems. According to FAA officials, with about $750,000 in approved funding for this project, FAA's information technology division is in the process of developing a dynamic regulatory system that should provide the needed capabilities. Officials indicated that when users conduct a search for a particular topic in this system, the search results should bring up multiple entries for specific guidance. Initially, Flight Standards plans to use an Excel spreadsheet for storing the guidance and then transition to the new system once it is deployed. Flight Standards hopes to test out a first version of this system within calendar year 2014. However, the officials were unsure of the total cost of developing and deploying the system. Representatives from four of the committee stakeholders we interviewed for this testimony acknowledged that creating this system is a major effort for FAA because of the volume of FAA guidance that potentially exists across regional and field offices, some of which may not be in Aircraft Certification's and Flight Standards' electronic guidance libraries. Representatives of five industry stakeholders we interviewed provided insights on how FAA might devise a plan for creating and populating this system. Three of these noted that FAA will need to ensure that the various types of guidance--such as orders, notices, and advisory circulars--include links to the original federal aviation regulations. One of these stakeholders recommended that FAA develop the system to allow a user looking at FAA guidance to also see all relevant background information on related decisions, and the past actions related to the guidance in question and their relation to the original regulation. Because of the large volume of FAA guidance, some stakeholders also suggested that FAA begin by first choosing a starting date for which any new rules or other new guidance it issues would include links to the relevant original regulations. However, one stakeholder we interviewed noted that FAA should consider prioritizing its effort by first mapping the guidance materials for specific key regulations and then the guidance for less significant regulations. The Regulatory Consistency Committee noted multiple instances where FAA guidance appeared to have created inconsistent interpretation and application, and confusion; the Consistency Committee recommended that FAA develop a standardized decision-making methodology for the development of all policy and guidance material to ensure such documents are consistent with adopted regulations. In interviews for this testimony, FAA officials also provided some updates on how the agency will respond to the recommendation to develop instructional tools for its policy staff. FAA officials told us they had not initiated any efforts yet to address this recommendation, but would begin by focusing on developing instructions for policy staff to use for populating the master source guidance system. In August 2014, FAA plans to form an internal work group to establish a document management framework and work processes that can be used by Aircraft Certification's and Flight Standards' policy division staffs as they map existing guidance documents to applicable source regulations in the master source guidance system. The officials expected the work group would issue an internal directive for FAA personnel on work processes to be used in populating the guidance system by June of 2015. The Regulatory Consistency Committee recommended that FAA, in consultation with industry stakeholders, review and revise its regulatory training for applicable agency personnel and make the curriculum available to industry. FAA officials told us that FAA has begun to develop improved training for its field staff--the third recommendation of the Regulatory Consistency Committee--so that field inspector staffs are better equipped to answer routine compliance-related questions confidently and in a consistent manner. In addition, the officials told us starting in 2015, FAA plans to conduct a gap analysis of existing training for all FAA staff who are responsible for interpreting and applying certification and approval regulations. For this analysis, FAA plans to assess whether existing training can be modified to sufficiently address any gaps. FAA also plans to coordinate with industry to share the results of this review and analysis by the end of 2015. The Regulatory Consistency Committee made two similar recommendations for FAA to consider: (1) establish a Regulatory Consistency Communications Board comprising various FAA representatives that would provide clarification on questions from FAA and industry stakeholders related to the application of regulations and (2) determine the feasibility of establishing a full-time Regulatory Operations Communication Center as a centralized support center to provide real- time guidance to FAA personnel and industry certificate/approval holders and applicants. FAA officials also discussed the agency's conceptual approach and plans for establishing a board--likely by the end of calendar year 2014--to address these two recommendations. The purpose of the board would be to provide a neutral and centralized mechanism with a standardized process for addressing and resolving regulatory compliance issues between FAA and industry. According to the committee, this board would be comprised of representatives from the relevant headquarters policy divisions in FAA to help answer complex regulatory interpretation issues that arise between FAA inspectors and engineers, and industry during the certification and approval processes. FAA officials told us the board's process, once established, would use a modified version of the agency's current Consistency and Standardization Initiative (CSI), a process established as a means for industry to appeal FAA decisions and actions. As we found in 2010, resolution through the CSI can be a lengthy process, with the total length of the process depending on how many levels of appeal the industry stakeholder chooses. However, as we also found, industry stakeholders have generally been reluctant to use CSI for initiating appeals and raising concerns with the local field office for fear of retribution. FAA officials told us in interviews that the modified process would help address the retribution issue, because it would rely instead on multiple sources to raise issues--not just solely on industry--and would be the final arbiter for FAA and industry in disagreements on certification and approval decisions. According to FAA officials, the board could also serve the function of the proposed operations center recommended by the committee to be a resource for assisting FAA personnel and industry stakeholders with interpretation queries and establishing consistency in regulatory application. FAA officials indicated that the agency had decided not to establish the communications center because (1) the board could serve a similar function and (2) FAA has limited resources available to staff a communications center. Several industry stakeholders we spoke with told us they support FAA's preliminary plans to establish the board and modify the CSI process as part of this effort. For example, several stakeholders told us that they support FAA's plans to modify the current CSI process. One of these stakeholders noted that a modified process would be more effective if it allowed for industry stakeholders to raise issues anonymously. Also, another stakeholder noted the board would not be beneficial until after FAA has established the master source guidance system because the board should be able to refer to that guidance in demonstrating how it makes decisions. The Regulatory Consistency Committee recommended that FAA improve the clarity of its final rules by ensuring that each final rule contains a comprehensive explanation of the rule's purpose and how it will increase safety. FAA officials told us that this recommendation has been addressed through the work of the Aviation Rulemaking Advisory The officials told Committee's Rulemaking Prioritization Working Group.us that, as a result of this effort, all final rules, are now well-vetted across FAA. The industry representatives we interviewed had mixed opinions about whether FAA had addressed this recommendation as intended. For example, two stakeholders were in agreement with FAA that the agency had addressed it while two other stakeholders noted that FAA's new rules are still not as clear as they should be. Two stakeholders also said that it is often not the final rules but the guidance that accompanies or follows the final rules that is unclear and contributes to inconsistent interpretation and application among FAA staff. In our previous work on organizational transformations, we noted that implementing large-scale change management initiatives--like those the committees tasked FAA with--are not simple endeavors and require the concentrated efforts of both leadership and employees to realize intended synergies and accomplish new organizational goals. People are at the center of any serious change management initiative because people define the organization's culture, drive its performance, and embody its knowledge base. The best approach for these types of initiatives depends upon a variety of factors specific to each context, but there has been some general agreement on a number of key practices that have consistently been found at the center of successful change management initiatives. These include, among other things, securing organizational support at all levels, developing clear principles and priorities to help change the culture, communicating frequently with partners, and setting performance measures to evaluate progress. In this final section of this testimony, we discuss challenges for FAA in implementing the committees' certification and approval and regulatory consistency recommendations that relate to these key practices. FAA officials and industry representatives we spoke to noted that shifting priorities as well as declining resources may prohibit FAA from devoting the time and resources needed for completing the initiatives in the planned time frames. They agreed that a primary challenge for FAA will be having the dedicated resources that will be needed to successfully implement the committees' recommendations. We have previously found that successful organizational transformations and cultural changes require several years of focused attention from the agency's senior leadership. This lesson is consistent with our previous work on organizational transformation, which indicates that support from top leadership is indispensable for fundamental change. Top leadership's clear and personal involvement in the transformation represents stability for both the organization's employees and its external partners. Top leadership must set the direction, pace, and tone for the transformation. Additionally, buy-in and acceptance among the workforce will be critical to successful implementation of the initiatives to address the two committees' recommendations. Additionally, as we described in our 2010 report, FAA prioritizes ensuring the continued operational safety of the people and products already operating in the national airspace system over processing new certifications and approvals. We reported in the 2010 report that Flight Standards staff had little or no incentive to perform certification work under the system in which their pay grades are established and Other than inspectors involved with overseeing air carriers, maintained.Flight Standards inspectors are typically responsible for a variety of types of certificate holders. Each certificate is allocated a point value based on the complexity of the certificate or operation, and the combined point value for each inspector's oversight responsibilities must meet or exceed the points allocated for the inspector's grade. However, not all of the inspectors' duties--including certification work--receive points in this system, and inspectors are subject to a downgrade if entities in their portfolio relocate or go out of business. FAA and industry representatives also cited FAA's organizational culture as a primary challenge for FAA in successfully implementing these initiatives. They noted that many of the certification process and regulatory consistency initiatives FAA is attempting to implement represent cultural shifts for FAA staff in how regulations, policy, and guidance are applied, and ultimately how certification and approval decisions are made. As we have previously found, the implementation of recommendations that require a cultural shift for employees can be delayed if the workforce is reluctant in accepting such change. Further, industry representatives have identified the lack of communication with and involvement of stakeholders as a primary challenge for FAA in implementing the committees' recommendations, particularly the regulatory consistency recommendations. Successful agencies we have studied based their strategic planning, to a large extent, on the interests and expectations of their stakeholders, and stakeholder involvement is important to ensure agencies' efforts and resources are targeted at the highest priorities. However, representatives of two industry organizations we interviewed told us that FAA did not provide the opportunity for early input and that outreach is low regarding the certification process recommendations, and representatives of four industry organizations indicated that FAA has not sought their input in responding to the regulatory consistency recommendations. They reported that FAA had neither kept in contact with or advised them of its plans nor engaged the Regulatory Consistency Committee participants in the drafting of the detailed implementation plan that is expected to be published in August. As an example, as previously discussed, when Flight Standards published a memo in December 2013 calling for the cancellation of non-official guidance, several members of the Regulatory Consistency Committee were unaware of the change and expressed surprise and dissatisfaction with the action and offered their assistance. Representatives of one industry group noted that FAA sought their input on addressing the Certification Process Committee's recommendations for subsequent revisions of its implementation plan. FAA has not fully developed performance metrics to ensure that any initiatives it implements are achieving their intended outcomes. We have previously found that agencies that have been successful in assessing performance use measures that demonstrate results and provide useful information for decision making.that FAA had not completed developing performance measures for either the certification improvement or the regulatory consistency initiatives: Earlier in this testimony, we reported FAA had developed performance measures for 5 of the 14 certification process initiatives as of May 2014 and plans to further develop measures in three phases. In addition, most of the initiatives are scheduled to be implemented by 2017. Although we have assessed FAA's plan for developing these metrics as reasonable, the agency may miss an opportunity to gather early data for evaluating the effectiveness of its actions and making any needed corrections. There is no detailed plan for implementing initiatives addressing the consistency of regulatory interpretation recommendations and measuring their outcomes. In recent meetings, FAA officials told us they have had difficulty in determining how to measure the outcomes of its regulatory consistency initiatives and have not been able to determine what specific performance metrics could be used. Going forward, it is critically important that FAA develop outcome-based performance measures to determine what is actually being achieved through the current and future initiatives, thereby making it easier to determine the overall outcomes of each of the initiatives and to hold FAA's field and headquarters offices and employees accountable for the results. We are not making any new recommendations because the recommendation we made in 2010 for FAA to develop outcome-based performance measures and a continuous evaluative process continue to have merit related to this issue. To its credit, FAA has initiated some efforts and sound planning for addressing the committees' recommendations. However, it will be critical for FAA to follow through with its initiatives and plans for developing performance metrics to achieve the intended efficiencies and consistencies. As we noted in our October 2013 statement, however, some improvements to the certification and approval processes, will likely take years to implement and, therefore, will require a sustained commitment as well as congressional oversight. Chairwoman Cantwell, Ranking Member Ayotte, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions at this time. For further information on this testimony, please contact Gerald L. Dillingham, Ph.D., at (202) 512-2834 or [email protected]. In addition, contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony statement include Vashun Cole, Assistant Director; Andrew Von Ah, Assistant Director; Jessica Bryant-Bertail; Jim Geibel; Josh Ormond; Amy Rosewarne; and Pamela Vines. The following individuals made key contributions to the prior GAO work: Teresa Spisak, Assistant Director; Melissa Bodeau, Sharon Dyer, Bess Eisenstadt, Amy Frazier, Brandon Haller, Dave Hooper, Sara Ann Moessbauer, and Michael Silver. 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.
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Among its responsibilities for aviation safety, FAA issues certificates for new aircraft and parts, and grants approvals for changes to air operations and aircraft, based on federal aviation regulations. Various studies, GAO's prior work, and industry stakeholders have raised questions about the efficiency of FAA's certification and approval processes, as well as the consistency of its staff in interpreting aviation regulations. Over time, FAA has implemented efforts to address these issues, but they persist as FAA faces greater industry demand and its overall workload has increased. The 2012 FAA Modernization and Reform Act required FAA to work with industry to resolve these issues. In response, FAA chartered two committees--one to address certification processes and another to address regulatory consistency--which recommended improvements in 2012. In 2013, FAA published an implementation plan for addressing the certification process recommendations and promised to publish an implementation plan for addressing the regulatory consistency recommendations at a later date. This testimony provides information on FAA's progress in implementing the (1) certification and approval process recommendations and (2) regulatory consistency recommendations. It also discusses future challenges industry stakeholders believe FAA will face in implementing these recommendations. This testimony provides the same information as GAO-14-728T , which was based on GAO products issued from 2010 to 2014, updated in July 2014 through reviews of recent FAA documents and interviews of FAA officials and industry representatives. The Federal Aviation Administration's (FAA) Aircraft Certification Service (Aircraft Certification) is responsible for addressing the certification and approval process recommendations, and has made progress. Aircraft Certification is implementing and has set milestones for completing 14 initiatives, several of which were originally begun as part of earlier certification process improvement efforts. The initiatives range from developing a comprehensive road map for major change initiatives, to improving Aircraft Certification's process for prioritizing requests for certifications and approvals (project sequencing), to reorganizing the small aircraft certification regulation. According to an update prepared by FAA in May 2014, one initiative has been completed and most are on track to be completed within 3 years. However, according to this update, two initiatives will not meet planned milestones, including the one for improving FAA's program for delegating authority to organizations to carry out some certification activities. Also, a third initiative for improving consistency of regulatory interpretation was at risk of not meeting planned milestones. Two additional initiatives, while on track for meeting planned milestones in May 2014, faced challenges because of opposition by FAA's labor unions, including one for improving Aircraft Certification's project sequencing process. GAO found in October 2013 that Aircraft Certification continued to lack performance measures for many of these initiatives, a condition that persists. In 2010, GAO had previously recommended that FAA develop a continuous evaluative process with performance goals and measures. FAA agreed but has not yet fully addressed the recommendation. Aircraft Certification officials discussed plans to develop metrics in three phases, beginning in July 2014 and in the future, for measuring (1) the progress of implementing the initiatives throughout FAA, (2) the outcomes of each initiative, and (3) the return on investment for FAA and the industry resulting from implementing the initiatives as a whole. FAA's Flight Standards Service (Flight Standards) is responsible for addressing the regulatory consistency recommendations, and is finalizing plans to do so. FAA has not published a detailed plan with milestones and performance metrics, and officials told GAO that they intend to publish a plan by August 2014. Flight Standards officials said they were making progress in addressing the committee's top priority recommendation--mapping all FAA policy and guidance to relevant federal aviation regulations and developing an electronic system that maintains this information and that is accessible by FAA and industry users. As part of this effort, officials told GAO that Flight Standards has begun eliminating obsolete guidance and linking existing policy and guidance to the regulations. Going forward, Aircraft Certification's and Flight Standards' efforts may face challenges that could affect successful implementation of the committees' recommendations. Many of these recommendations represent a significant shift in how FAA normally conducts business, and if the workforce is reluctant to implement such changes, FAA's planned initiatives for addressing the recommendations could be delayed. Also, the fact that FAA has not yet implemented performance measures for most of the initiatives is a concern for both GAO and the industry. As GAO concluded in October 2013, without performance measures, FAA will be unable to gather the appropriate data to evaluate the success of current and future initiatives.
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S. 261 would change the cycle for the President's budget, for the budget resolution, for enactment of appropriations, and for authorizations to a biennial cycle. The President would be required to submit a 2-year budget at the beginning of the first session of a Congress; this budget would contain proposed levels for each of the 2 fiscal years in the biennium and planning levels for the 4 years beyond that. The budget resolution and reconciliation instructions would also establish binding levels for each year in a given biennium--and for the sum of the 6-year period. The bill requires appropriations to be enacted every 2 years. It contains a two-pronged mechanism to ensure this. First, it provides for a point of order against appropriation bills not covering 2 years. Second, if that does not work, S.261 provides for an automatic second-year appropriation at the level of the first year of the biennium. During the first year of the biennium, authorizations and revenue legislation would be expected to wait until completion of the budget resolution and appropriations bills. At the beginning of the second session of the Congress the President would submit a "mid-biennium review." This second year then would be devoted to authorizations, which would be required to cover at least 2 years; to revenue legislation, which also would be required to cover at least 2 years; and to oversight of federal programs. S. 261 would also change some reporting requirements in GPRA and add some new reports. Attached to this testimony are two illustrations of the proposed timelines for both budget and GPRA reports. As we read the legislation, it does not direct changes in the period of availability of appropriated funds. The bill consistently refers to each fiscal year within a biennium. Although appropriations bills must cover a 2-year period, the bill seems to require separate appropriations for each of the 2 fiscal years within the biennium. It would seem, therefore, that appropriations committees could--as they do today--provide funds available for one, 2 or more years. This serves to remind us that there is a distinction between the frequency with which the Congress makes appropriations decisions and the period for which funds are available to an agency. Even in today's annual appropriations cycle, the Congress has routinely provided multiple-year or no-year appropriations for accounts or for projects within accounts when it seemed to make sense to do so. As I noted in my previous testimony, about two-thirds of budget accounts on an annual appropriation cycle contain multiple-year or no-year funds. In addition, for those entities for which the Congress has recognized a programmatic need to have appropriations immediately available at the beginning of the fiscal year (such as grants to states for Medicaid), the Congress has accommodated this need with advance appropriations. The second year of the proposed biennium seems, in effect, to provide advance appropriations to all programs. Whether a biennial budget and appropriations cycle truly saves time for agency officials and reduces the time members of the Congress spend on budget and appropriations issues will depend heavily on how mid-biennium changes are viewed. Will there be a presumption against supplementals? Will changes in the second year be limited to responses to large and significant, unforeseen or unforeseeable events? Even with an annual cycle the time lag between making initial forecasts and budget execution creates challenges. Indeed, increased difficulty in forecasting was one of the primary reasons states gave for shifting from biennial to annual budget cycles. Even in this era of discretionary spending caps, the Congress has demonstrated the need to address changing conditions among the numerous budget accounts and program activities of the federal government. Although in the aggregate there may be little change, individual agencies or accounts have seen significant changes from year to year. Some statistics may give an indication of the extent of that change. While total current appropriations grew by only 0.9 percent between 1994 and 1995, more than half of all budget accounts that received current appropriations had net changes greater than plus or minus 5 percent. More recently, between 1996 and 1997, almost 55 percent of budget accounts with current appropriations experienced changes of more than plus or minus 5 percent although total current appropriations declined by about 0.5 percent. Because these are account-level statistics, it is possible that annual changes at the program activity level may have been even greater. Dramatic changes in program design or agency structure, such as those considered in the last Congress and those being considered now, will make budget forecasting more difficult. For biennial budgeting to exist in reality rather than only in theory, the Congress and the President will have to reach some agreement on how to deal with the greater uncertainty inherent in a longer budget cycle and/or a time of major structural change. You also asked me to review the information on state experiences with biennial budgeting and to comment on any issues I thought pertinent in considering S. 261, with particular attention to (1) the requirement directing that "during the second session of each Congress, the Comptroller General shall give priority to requests from Congress for audits and evaluations of Government programs and activities" and (2) issues involved in the integration of GPRA into a biennial budget cycle. Let me turn now to these areas. Advocates of biennial budgeting often point to the experience of individual states. In looking to the states it is necessary to disaggregate them into several categories. In 1996, when we last looked at this data, 8 states had biennial legislative cycles and hence necessarily biennial budget cycles.As the table below shows, the 42 states with annual legislative cycles present a mixed picture in terms of budget cycles: 27 describe their budget cycles as annual, 12 describe their budget cycles as biennial, and 3 describe their budget cycles as mixed. The National Association of State Budget Officers reports that those states that describe their system as "mixed" have divided the budget into two categories: that for which budgeting is annual and that for which it is biennial. Connecticut has changed its budget cycle from biennial to annual and back to biennial. In the last 3 decades, 17 other states have changed their budget cycles: 11 from biennial to annual, 3 from annual to mixed, and 3 from annual to biennial. Translating state budget laws, practices, and experiences to the federal level is always difficult. As we noted in our review of state balanced budget practices, state budgets fill a different role, may be sensitive to different outside pressures, and are otherwise not directly comparable. In addition, governors often have more unilateral power over spending than the President does. However, even with those caveats, the state experience may offer some insights for your deliberations. Perhaps most significant is the fact that most states that describe their budget cycles as biennial or mixed are small and medium sized. Of the 10 largest states in terms of general fund expenditures, Ohio is the only one with an annual legislative cycle and a biennial budget. According to a State of Ohio official, every biennium two annual budgets are enacted, and agencies are prohibited from moving funds across years. In addition, the Ohio legislature typically passes a "budget corrections bill." A few preliminary observations can be made from looking at the explicit design of those states that describe their budget cycles as "mixed" and the practice of those that describe their budget cycles as "biennial." Different items are treated differently. For example, in Missouri, the operating budget is on an annual cycle while the capital budget is biennial. In Arizona, "major budget units"--the agencies with the largest budgets--submit annual requests; these budgets are also the most volatile and the most dependent on federal funding. In Kansas, the 20 agencies that are on a biennial cycle are typically small, single-program or regulatory-type agencies that are funded by fees rather than general fund revenues. In general, budgeting for those items that are predictable is different from budgeting for those items subject to great volatility whether due to the economy or changes in federal policy. Section 8 of S. 261 directs that "During the second session of each Congress, the Comptroller General shall give priority to requests from Congress for audits and evaluations of Government programs and activities." GAO has long advocated regular and rigorous congressional oversight of federal programs. Such oversight should examine both the design and effectiveness of federal programs and the efficiency and skill with which they are managed. Indeed, much of GAO's work is undertaken with such oversight purposes in mind. For example, financial management is one area in which GAO assists the Congress with its oversight responsibilities. The Chief Financial Officers (CFO) Act of 1990, as amended, directs that 24 major agencies have audited annual financial statements beginning with fiscal year 1996. It also requires the preparation of annual governmentwide financial statements and calls for GAO to audit these statements beginning with fiscal year 1997. As you know, there have been serious problems with financial management processes in many agencies. We have been both auditing these agencies and working with them to improve the quality of their financial management. Careful management of taxpayer funds is critical to ensuring proper accountability and keeping the faith of the American people. These annual audited financial statements can serve as an important oversight tool. Good evaluation often requires a look at a program over some period of time or a comparison of several approaches. This means that in order for the results of audits and evaluations to be available for the second year of the biennium, it is important for the committees and GAO to work together in the first year--or even in the prior biennium--to structure any study. As part of our planning process, we strive to maintain an ongoing dialogue with Members and staff to identify areas of current and emerging interest so that the work is completed and we are ready to report when the results will be most useful. It is important to our ability to assist you that we understand your areas of concern and be able to accumulate a body of knowledge and in-depth analysis in those areas. Mr. Chairman, GAO stands eager to assist the Congress in the performance of its oversight responsibilities at all times. Many of you and your colleagues in the House and the Senate currently use us in this way. Let me note just a few examples. Our work on the Internal Revenue Service (IRS) Tax System Modernization program has uncovered major flaws, such as the lack of basic elements needed to bring it to a successful conclusion. We have worked closely with this Committee, other IRS oversight committees, and the Appropriations Committees in an effort to move IRS toward (1) formulating a much needed business strategy for maximizing electronic filings, (2) implementing a sound process to manage technology investments, (3) instituting disciplined processes for software development and acquisition, and (4) completing and enforcing an essential systems architecture including data and security subarchitectures. Our work regarding aviation safety and security has noted that serious vulnerabilities exist in both domestic and international aviation systems. Recent experiences during 1996 have served to raise the consciousness of the Congress, the Administration, and the public of the need to expand the existing margin of safety. Recent proposals have merit and would fundamentally reinvent the Federal Aviation Administration, but challenges remain, including key questions about how and when the recommendations would be implemented, how much it will cost to implement them, and who will pay the cost. GAO reviews of the Supplemental Security Income program have highlighted several long-standing problem areas: (1) determining initial and continuing financial eligibility for beneficiaries, (2) determining disability eligibility and performing continuing disability reviews, and (3) inadequate return-to-work assistance for recipients who may be assimilated back into the work force. We have reported on long-standing serious weaknesses in the Department of Defense's (DOD) financial operations that continue not only to severely limit the reliability of DOD's financial information but also have resulted in wasted resources and undermined its ability to carry out its stewardship responsibilities. No military service or other major DOD component has been able to withstand the scrutiny of an independent financial statement audit. These, and other areas included in our High-Risk Series, which we prepare for each new Congress, are examples of our efforts to assist the Congress in its oversight responsibilities. In fiscal year 1996, almost 80 percent of GAO's work was done at the specific request of the Congress. GAO testified 181 times before 85 committees and subcommittees, presented 217 formal congressional briefings, and prepared 908 reports to the Congress and agency officials. Existing provisions of law requiring GAO to assist the Congress are sufficiently broad to encompass requests such as those envisioned in Section 8 of S. 261. However, the decision about whether to modify the existing provisions to add a more specific requirement is appropriately a decision for the Congress to make. Before turning to the interrelationship of this proposal and GPRA, let me note a few BEA-related issues that would need to be addressed should S. 261 be enacted. The bill explicitly modifies the rules for the pay-as-you-go (PAYGO) scorecard in the Senate by specifying three time periods during which deficit neutrality is required: the biennium covered by the budget resolution, the first 6 years covered by the budget resolution, and the 4 fiscal years after those first 6 years. That is, it retains the form of the current rules. The bill, however, is silent on the existence of discretionary spending limits. It does specify that in the Senate, the joint explanatory statement accompanying the conference report on the budget resolution must contain an allocation to the Appropriations Committee for each fiscal year in the biennium. One might infer from this that if discretionary caps are to be extended, they will continue to be specified in annual terms. However, this bill does not extend the caps. Other issues regarding the interaction of S. 261 and BEA (assuming its extension) also need to be considered. Would biennial budgeting change the timing of BEA-required sequestration reports? How would sequestrations be applied to the 2 years in the biennium and when would they occur? For example, if annual caps are maintained and are exceeded in the second year of the biennium, when would the Presidential Order causing the sequestration be issued? Would the sequestration affect both years of the biennium? These questions may not necessarily need to be answered in this bill, but they will need to be considered if BEA is extended under a biennial budgeting schedule. There are a number of other smaller technical issues on which we would be glad to work with your staff should you wish. Let me turn now to the interaction between this proposal and the Government Performance and Results Act (GPRA). S. 261 makes a number of changes to GPRA--most designed to make the requirements of GPRA consistent with the proposed biennial budget cycle, but others that seek to make substantive revisions to GPRA. I'll discuss each separately. GPRA is part of a statutory framework for addressing long-standing management challenges and helping the Congress and the executive branch make the difficult trade-offs that the current budget environment demands. The essential elements of this framework include, in addition to GPRA, the CFO Act, as amended, and information technology reform legislation, including the Paperwork Reduction Act of 1995 and the Clinger-Cohen Act. These statutes collectively form the building blocks to improved accountability--both for the taxpayer's dollar and for results. GPRA, the centerpiece of this statutory framework, is intended to promote greater confidence in the institutions of government by encouraging agency managers to shift their attention from traditional concerns, such as staffing and workloads, toward a single overriding issue: results. GPRA requires agencies to set goals, measure performance, and report on their accomplishments. It also defines a set of interrelated activities and reporting requirements, which are designed to make performance information more consistently available for congressional oversight and resource allocation processes. Specifically, GPRA requires: strategic plans to be issued for virtually all executive agencies by September 30, 1997. The plans are to cover at least a 5-year period; be updated at least every three years; and describe the agency's mission, its outcome-related goals and objectives, and how the agency will achieve its goals through its activities and available resources. annual performance plans that include performance indicators for the outputs, service levels, and outcomes of each program activity in an agency's budget. The first performance plans are to cover fiscal year 1999 and will be submitted to the Congress in February 1998, along with a governmentwide plan prepared by the Office of Management and Budget (OMB). annual performance reports that compare actual performance to goals and indicators established in annual performance plans, and that explain the reasons for variance and what actions will be taken to improve performance. The first reports, covering fiscal year 1999, will be issued to the President and the Congress no later than March 31, 2000. The Congress recognized that implementing GPRA will not be easy. Accordingly, GPRA incorporates several critical design features--phased implementation, pilot testing, and iterative planning and reporting processes--designed to temper immediate expectations and allow for an orderly but well-paced transition. Following the completion in 1996 of about 70 pilot projects, OMB has been working with federal agencies to ensure that the first strategic plans are submitted to the Congress by the end of September and performance plans 5 months later with the President's fiscal year 1999 budget submission. S. 261 capitalizes on these initial GPRA implementation efforts by making the effective date of its proposed changes--March 31, 1998--after the first strategic plans and performance plans have been completed and submitted to the Congress. Other changes in timelines proposed in S. 261 also appear consistent with GPRA requirements. For example, S. 261 requires strategic plans in September 2000 consistent with its proposed biennial cycle. This should pose no problem for agencies, which under, current GPRA provisions, are expected to complete updates by this date of the plans submitted in September 1997. Similarly, changing the governmentwide performance plan to the year 2000 merely updates GPRA timelines to reflect the biennial timelines proposed by S. 261. S.261 also proposes several substantive changes to GPRA, including revised requirements for agency performance plans and new requirements for preliminary agency performance plans and governmentwide performance reports. Although it would be important to adjust the timelines in GPRA should the Congress shift to a biennial budget process, the proposals for substantive changes can be considered separately. As a group, they raise the question of whether the Congress wishes to make changes in GPRA during the first implementation cycle. Individually, they raise other issues--which I will discuss below. This bill proposes adding several new requirements to the annual agency performance plans currently required by GPRA beyond changing them to a biennial cycle, including (1) adding an executive summary focusing on the most important goals of an agency, but limited to a maximum of 10 goals and (2) requiring that the Congress be consulted during the preparation of these plans. The bill also adds a new reporting requirement for draft preliminary performance plans. While the change to a biennial cycle is consistent with the overall goals of S. 261, the bill is silent as to whether performance goals and indicators associated with each program activity would be required for each fiscal year. However, as I noted earlier, because the bill appears to require separate appropriations for each year of the biennium, annual performance goals and indicators, as now required for GPRA performance plans, would presumably still be required. Requiring an executive summary within annual performance plans makes sense. However, it is worth considering whether limiting an agency's performance goals to a fixed number--10 in S. 261--could prove unnecessarily restraining. OMB guidance to date has largely refrained from specifying form and content standards for GPRA documents, allowing agencies substantial discretion while emphasizing the need for clarity and completeness. We generally agree with that approach, at least in the formative years of GPRA. Further, we have endorsed OMB pilot projects on accountability reports, which seek to integrate a wide range of required reports. A decision to incorporate fixed form and content rules in statutory language might better be delayed until after several years' experience. While we agree with the premise of S. 261 that performance goals should be reduced to a "vital few," it may make sense to give agencies the flexibility to define the absolute number shown in their plans within the circumstances of their program activities. As noted above, S. 261 proposes two additional changes to GPRA's requirements regarding the preparation of performance plans. First, it adds a requirement that agencies consult the Congress in the preparation not only of their strategic plans but also of their performance plans. Second, it also adds a new reporting requirement: agencies would be required to submit preliminary drafts of performance plans for the upcoming biennium to their committees of jurisdiction in March of each even-numbered year. We have strongly endorsed the need for the Congress to be an active participant in GPRA and are currently assisting the Congress in its ongoing consultations on the development of agency strategic plans. Currently, GPRA requires congressional consultation for strategic plans but not for annual performance plans. As essential components of the President's budget development process, an Administration is likely to see biennial performance plans as documents captured under the established policy of administrative confidentiality prior to formal transmission of the President's budget to the Congress. Moreover, because these biennial plans would accompany the President's budget submission, they would likely become the basis for extensive discussions, both as authorizing committees prepare their views and estimates to submit to the Budget Committees and as part of the budget and appropriations process. The new requirement that agencies submit preliminary drafts of performance plans for the upcoming biennium to their committees of jurisdiction raises related but not identical issues. Currently, GPRA performance plans are expected to explicitly establish goals and indicators for each program activity in an agency's budget request, thus allowing the Congress to associate proposed performance levels with requested budget levels. The proposal in this bill appears to require a similar level of specification almost a year before the President submits a budget for that period. It is unlikely that agencies would be able to provide any degree of specificity with this draft plan. The lengthening of the budget cycle might raise one additional question about the cycle for performance plans: Should there be updates in mid-biennium? Currently, GPRA allows but does not require updated performance plans, but that decision was made on the assumption of an annual cycle. Whether performance plans should be updated is part of two larger issues: (1) What is Congress' view about changes in mid-biennium? and (2) Should GPRA be substantively changed during its initial phase-in cycle? Finally, S. 261 proposes that a biennial governmentwide performance report be submitted as part of the President's biennial budget request. This report would compare "actual performance to the stated goals" as expressed in previous governmentwide performance plans. This proposal raises both substantive and operational questions. The underlying premise of GPRA is that the day-to-day activities of an agency should be directly tied to its annual and strategic goals. GPRA performance reports are to be linked, just as the goals and indicators of performance plans are linked, to an agency's activities. A governmentwide performance report would need to be fundamentally different. If the Congress wishes to require such a report, careful consideration should be given both to its likely content and to its timing. As to content, the question arises: Would a governmentwide report become a report on selected national indicators, and how would they be selected? If the governmentwide performance report is envisioned not as a rollup of agency reports but rather as a broad report on how well government has performed, then the question arises as to whether it is tied most appropriately to the President's budget, as proposed in S. 261, or to a narrative discussion associated with the consolidated financial statement required by the CFO Act of 1990, as amended. Mr. Chairman, we have previously testified that the decision to change the entire budget process to a biennial one is fundamentally a decision about the nature of congressional oversight. Biennial appropriations would be neither the end of congressional control nor the solution to many budget problems. Whether a biennial cycle offers the benefits sought will depend heavily on the ability of the Congress and the President to reach agreement on how to respond to the uncertainties inherent in a longer forecasting period and on the circumstances under which changes should be made in mid-biennium. If biennial appropriations bills are changed rarely, the planning advantages for those agencies that do not now have multiyear or advance appropriations may be significant. Whether a biennial cycle would in fact reduce congressional workload and increase the time for oversight is unclear. A great many policy issues present themselves in a budget context--one thinks of welfare reform and farm policy. It will take a period of adjustment and experimentation and the results are likely to differ across programs. Finally, we are pleased to see so much thought go into the integration of GPRA into this process. GPRA represents a thoughtful approach to systematizing serious and substantive dialogue about the purposes of government programs and how they operate. Today, I have raised some issues that I think need careful attention should you decide to move to a biennial budget process while GPRA is being implemented. I have tried to differentiate between those changes necessary for consistency with a biennial cycle and those which represent substantive changes to GPRA independent of such a change. We, of course, stand ready to assist you as you proceed. Performance Budgeting: Past Initiatives Offer Insights for GPRA Implementation (GAO/AIMD-97-46, March 27, 1997). Managing for Results: Using GPRA to Assist Congressional and Executive Branch Decisionmaking (GAO/T-GGD-97-43, February 12, 1997). High-Risk Series: An Overview (GAO/HR-97-1, February 1997). High-Risk Series: Quick Reference Guide (GAO/HR-97-2, February 1997). Budget Process: Issues in Biennial Budget Proposals (GAO/T-AIMD-96-136, July 24, 1996). Budget Issues: History and Future Directions (GAO/T-.Al.MD-95-214, July 13, 1996). Budget Process: Evolution and Challenges (GAO/T-AIMD-96-129, July 11, 1996). Managing for Results: Key Steps and Challenges In Implementing GPRA In Science Agencies (GAO/T-GGD/RCED-96-214, July 10, 1996). Correspondence to Chairman Horn, Information on Reprogramming Authority and Trust Funds (GAO/AIMD-96-102R, June 7, 1996). Executive Guide: Effectively Implementing the Government Performance and Results Act (GAO/GGD-96-118, June 1996). Budget and Financial Management: Progress and Agenda for the Future (GAO/T-AIMD-96-80, April 23, 1996). Managing for Results: Achieving GPRA's Objectives Requires Strong Congressional Role (GAO/T-96-79, March 6, 1996). GPRA Performance Reports (GAO/GGD-96-66R, February 14, 1996). Financial Management: Continued Momentum Essential to Achieve CFO Act Goals (GAO/T-AIMD-96-10, December 14, 1995). Budget Process: Issues Concerning the Reconciliation Act (GAO/AIMD-95-3, October 7, 1995). Budget Account Structure: A Descriptive Overview (GAO/AIMD-95-179, September 18, 1995). Budget Issues: Earmarking in the Federal Government (GAO/AIMD-95-216FS, August 1, 1995). Budget Structure: Providing an Investment Focus in the Federal Budget (GAO/T-AIMD-95-178, June 29, 1995). Managing for Results: Status of the Government Performance and Results Act (GAO/T-GGD/AIMD-95-193, June 27, 1995). Managing for Results: Experiences Abroad Suggest Insights for Federal Management Reforms (GAO/GGD-95-120, May 2, 1995). Correspondence to Chairman Wolf, Transportation Trust Funds (GAO/AIMD-95-95R, March 15, 1995). Managing for Results: State Experiences Provide Insights for Federal Management Reforms (GAO/GGD-95-22, Dec. 21, 1994). Budget Policy: Issues in Capping Mandatory Spending (GAO/AIMD-94-155, July 18, 1994). Executive Guide: Improving Mission Performance Through Strategic Information Management and Technology (GAO/AIMD-94-115, May 1994). Budget Process: Biennial Budgeting for the Federal Government (GAO/T-AIMD-94-112, April 28, 1994). Budget Process: Some Reforms Offer Promise (GAO/T-AIMD-94-86, March 2, 1994). Budget Issues: Incorporating an Investment Component in the Federal Budget (GAO/AIMD-94-40, November 9, 1993). Budget Policy: Investment Budgeting for the Federal Government (GAO/T-AIMD-94-54, November 9, 1993). Correspondence to Chairmen and Ranking Members of House and Senate Committees on the Budget and Chairman of Former House Committee on Government Operations (B-247667, May 19, 1993). Performance Budgeting: State Experiences and Implications for the Federal Government (GAO/AFMD-93-41, February 17, 1993). 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.
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Pursuant to a congressional request, GAO discussed the provisions of S. 261, focusing on: (1) state experiences with biennial budgeting; and (2) provisions regarding GAO, the Budget Enforcement Act, and the Government Performance and Results Act (GPRA). GAO noted that: (1) in 1996, when GAO last looked at this data, 8 states had biennial legislative cycles and hence necessarily biennial budget cycles; (2) the 42 states with annual legislative cycles present a mixed picture in terms of budget cycles; (3) 27 describe their budget cycles as annual, 12 describe their budget cycles as biennial, and 3 describe their budget cycles as mixed; (4) perhaps significant is the fact that most states that describe their budget cycles as biennial or mixed are small and medium sized; (5) of the 10 largest states in terms of general fund expenditures, Ohio is the only with an annual legislative cycle and a biennial budget; (6) a few preliminary observations can be made from looking at the explicit design of those states which describe their budget cycle as "mixed" and the practice of those which describe their budget cycle as "biennial"; (7) in general, budgeting for those items which are predictable is different than for those items subject to great volatility whether due to the economy or changes in federal policy; (8) existing provisions of law requiring GAO to assist the Congress are sufficiently broad to encompass requests such as those envisioned in Section 8 of S. 261; (9) the bill explicitly modifies the rules for the pay-as-you-go scorecard in the Senate by specifying three time periods during which deficit neutrality is required: (a) the biennium covered by the budget resolution; (b) the first 6 years covered by the budget resolution; and (c) the 4 fiscal years after those first six; (10) S. 261 makes a number of changes to GPRA, most designed to make the requirements of GPRA consistent with the proposed biennial budget cycle, but others which seek to make substantive revisions to GPRA; (11) other changes in timelines proposed in S. 261 also appear consistent with GPRA requirements; (12) S. 261 also proposes several substantive changes to GPRA, including revised requirements for agency performance plans and new requirements for preliminary agency performance plans and governmentwide performance reports; (13) this bill proposes adding several new requirements to the annual agency performance plans currently required by GPRA beyond changing them to a biennial cycle, including: (a) adding an executive summary focusing on the most important goals of an agency, but limited to a maximum of 10 goals; and (b) requiring that the Congress be consulted during the preparation of these plans; and (14) the bill also adds a new reporting requirement for draft performance plans.
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As a result of a 1995 Defense Base Closure and Realignment Commission decision, Kelly Air Force Base, Texas, is to be realigned and the San Antonio Air Logistics Center, including the Air Force maintenance depot, is to be closed by 2001. Additionally, McClellan Air Force Base, California, and the Sacramento Air Logistics Center, including the Air Force maintenance depot, is to be closed by July 2001. To mitigate the impact of the closures on the local communities and center employees, in 1995 the administration announced its decision to maintain certain employment levels at these locations. Privatization-in-place was one initiative for retaining these employment goals. Since that decision, Congress and the administration have debated the process and procedures for deciding where and by whom the workloads at the closing depots should be performed. Central to this debate are concerns about the excess facility capacity at the Air Force's three remaining maintenance depots and the legislative requirement-- 10 U.S.C. 2469--that for workloads exceeding $3 million in value, a public-private competition must be held before the workloads can be moved from a public depot to a private sector company. Because of congressional concerns raised in 1996, the Air Force revised its privatization-in-place plans to provide for competitions between the public and private sectors as a means to decide where the depot maintenance workloads would be performed. The first competition was for the C-5 aircraft depot maintenance workload, which the Air Force awarded to the Warner Robins depot in Georgia on September 4, 1997. During 1997, Congress continued to oversee DOD's strategy for allocating workloads currently performed at the closing depots. The 1998 Defense Authorization Act required that we and DOD analyze various issues related to the competitions at the closing depots and report to Congress concerning several areas. First, within 60 days of its enactment, the Defense Authorization Act requires us to review the C-5 aircraft workload competition and subsequent award to the Warner Robins Air Logistics Center and report to Congress on whether (1) the procedures used provided an equal opportunity for offerors without regard to performance location; (2) are in compliance with applicable law and the FAR; and (3) whether the award results in the lowest total cost to DOD. Second, the act provides that a solicitation may be issued for a single contract for the performance of multiple depot-level maintenance or repair workloads. However, the Secretary of Defense must first (1) determine in writing that the individual workloads cannot as logically and economically be performed without combination by sources that are potentially qualified to submit an offer and to be awarded a contract to perform those individual workloads and (2) submit a report to Congress setting forth the reasons for the determination. Further, the Air Force cannot issue a solicitation for combined workloads until at least 60 days after the Secretary submits the required report. Third, the authorization act also provides special procedures for the public-private competitions for the San Antonio and Sacramento workloads. For example, total estimated direct and indirect cost and savings to DOD must be considered in any evaluation. Further, no offeror may be given preferential consideration for, or be limited to, performing the workload at a particular location. As previously stated, the act also requires that we review the solicitations and the competitions to determine if DOD has complied with the act and applicable law. We must provide a status report on the Sacramento and San Antonio competitions within 45 days after the Air Force issues the solicitations, and our evaluations of the completed competitions are due 45 days after the award for each workload. Finally, the act requires that DOD report on the procedures established for the Sacramento and San Antonio competitions and on the Department's planned allocation of workloads performed at the closing depots as of July 1, 1995. DOD issued these reports on February 3, 1998. We have had problems in gaining access to information required to respond to reporting requirements under the 1998 National Defense Authorization Act. Our lack of access to information is seriously impairing our ability to carry out our reporting responsibilities under this act. We experienced this problem in doing our work for our recent report to Congress concerning DOD's determination to combine individual workloads at the two closing logistics centers into a single solicitation. We originally requested access to and copies of contractor-prepared studies involving depot workloads at the Sacramento Air Logistics Center on December 18, 1997. The Air Force denied our request, citing concerns regarding the release of proprietary and competition-sensitive data. It was not until January 14, 1998, and only after we had sent a formal demand letter to the Secretary of Defense on January 8, 1998, that the Air Force agreed to allow us to review the studies. Even then, however, the Air Force limited our review to reading the documents in Air Force offices and required that without further permission, no notes, copies, or other materials could leave those premises. The limited access provided came so late that we were unable to review the documents adequately and still meet our statutorily mandated reporting deadline of January 20. As of this date, we have been provided only heavily redacted pages from two studies. These pages do not contain the information we need. Further, the Air Force did not provide us even limited access to the final phase of the studies, which were dated December 15, 1997. Although we were able, with difficulty, to complete our report, we simply cannot fulfill our responsibilities adequately and in a timely manner unless we receive full cooperation of the Department. To meet our remaining statutory requirements, we have requested several documents and other information related to the upcoming competitions for the closing depots' workloads. Air Force officials said they would not provide this information until the competitions are completed. However, we will need to review solicitation, proposal, evaluation, and selection documents as they become available. For example, we will need such things as the acquisition and source selection plans, the proposals from each of the competing entities, and documents relating to the evaluation of the proposals and to the selection decision. Appendix I to this statement contains our letter to this subcommittee detailing our access problems. Our basic authority to access records is contained in 31 U.S.C. 716. This statute gives us a very broad right of access to agency records, including the procurement records that we are requiring here, for the purpose of conducting audits and evaluations. Moreover, the procurement integrity provision in 41 U.S.C. 423 that prohibits the disclosure of competition-sensitive information before the award of a government contract specifies at subsection (h) that it does not authorize withholding information from Congress or the Comptroller General. We have told the Air Force that we appreciate the sensitivity of agency procurement records and have established procedures for safeguarding them. As required by 31 U.S.C. 716(e)(1), we maintain the same level of confidentiality for a record as the head of the agency from which it is obtained. Further, our managers and employees, like all federal officers and employees, are precluded by 18 U.S.C. 1905 from disclosing proprietary or business-confidential information to the extent not authorized by law. Finally, we do not presume to have a role in the selection of the successful offeror. We recognize the need for Air Force officials to make their selection with minimal interference. Thus, we are prepared to discuss with the Air Force steps for safeguarding the information and facilitating the Air Force's selection process while allowing us to meet statutory reporting responsibilities. In response to congressional concerns regarding the appropriateness of its plans to privatize-in-place the Sacramento and San Antonio maintenance depot workloads, the Air Force revised its strategy to allow the public depots to participate in public-private competitions for the workloads. In the 1998 Defense Authorization Act, Congress required us to review and report on the procedures and results of these competitions. The C-5 aircraft workload was the first such competition. We issued our required report evaluating the C-5 competition and award on January 20, 1998. After assessing the issues required under the act relating to the C-5 aircraft competition, we concluded that (1) the Air Force provided public and private offerors an equal opportunity to compete without regard to where work would be performed; (2) the procedures did not appear to deviate materially from applicable laws or the FAR; and (3) the award resulted in the lowest total cost to the government, based on Air Force assumptions and conditions at the time of award. Nonetheless, public and private offerors raised issues during and after the award regarding the fairness of the competition. First, the private sector participants noted that public and private depot competitions awarded on a fixed-price basis are inequitable because the government often pays from public funds for any cost overruns it incurs. Private sector participants also questioned the public depot's ability to accurately control costs for the C-5 workload. In our view, the procedures used in the C-5 competition reasonably addressed the issue of public sector cost accountability. Further, private sector participants viewed the $153-million overhead cost savings credit given to Warner Robins as unrealistically high and argued that the selection did not account for, or put a dollar value on, certain identified risks or weaknesses in the respective proposals. We found that the Air Force followed its evaluation scheme in making its overhead savings adjustment to the Warner Robins proposal and that the Air Force's treatment of risk and weaknesses represented a reasonable exercise of its discretion under the solicitation. Although the public sector source was selected to perform the C-5 workload, it questioned some aspects of the competition. Warner Robins officials stated that they were not allowed to include private sector firms as part of their proposal. Additionally, the officials questioned the Air Force requirement to use a depreciation method that resulted in a higher charge than the depreciation method private sector participants were permitted to use. Finally, they questioned a $20-million downward adjustment to its overhead cost, contending that it was erroneous and might limit the Air Force's ability to accurately measure the depot's cost performance. While the issues raised by the Warner Robins depot did not have an impact on the award decision, the $20-million adjustment, if finalized, may cause the depot problems meeting its cost objectives in performing the contract. The Air Force maintains that the adjustment was necessary based on its interpretation of the Warner Robins proposal. Depot officials disagree. At this time, the Air Force has not made a final determination as to how to resolve this dispute. DOD decided to issue a single solicitation combining multi-aircraft and commodity workloads at the Sacramento depot and a single solicitation for multi-engine workloads at the San Antonio depot. Under the 1998 Defense Authorization Act, DOD issued the required determinations that the workloads at these two depots "cannot as logically and economically be performed without combination by sources that are potentially qualified to submit an offer and to be awarded a contract to perform those individual workloads." As required, we reviewed the DOD reports and supporting data and issued our report to Congress on January 20, 1998.We found that the accompanying DOD reports and supporting data do not provide adequate information supporting the determinations. First, the Air Force provided no analysis of the logic and economies associated with having the workload performed individually by potentially qualified offerors. Consequently, there was no support for the Department's determination that the individual workloads cannot as logically and economically be performed without combination. Air Force officials stated that they were uncertain as to how they would do an analysis of performing the workloads on an individual basis. However, Air Force studies indicate that the information to make such an analysis is available. For example, in 1996 the Air Force performed six individual analyses of depot-level workloads performed by the Sacramento depot to identify industry capabilities and capacity. The workloads were hydraulics, software electrical accessories, flight instruments, A-10 aircraft, and KC-135 aircraft. As a part of the analyses, the Air Force identified sufficient numbers of qualified contractors interested in various segments of the Sacramento workload to support a conclusion that it could rely on the private sector to handle these workloads. Second, the reports and available supporting data did not adequately support DOD's determination. For example, DOD's determination relating to the Sacramento Air Logistics Center states that all competitors indicated throughout their workload studies that consolidating workloads offered the most logical and economical performance possibilities. This statement was based on studies performed by the offerors as part of the competition process. However, one offeror's study states that the present competition format is not in the best interest of the government and recommends that the workload be separated into two competitive packages. After DOD issued its determination and we completed our mandated review, the Air Force did additional analyses to support its determinations to combine the workloads at Sacramento and San Antonio. The Air Force briefed congressional staff on the interim results of these analyses on February 13, 1998, and at that time provided us copies of the briefing charts. Examples of the Air Force's analysis regarding the combination of the San Antonio engine workloads include the level of common backshop support for the F100, T56, and TF39 aircraft engines; the results of a market survey of potential offerors that shows more offerors would be attracted to a competition of combined workloads; and the potential delay in transition if the competition were restructured to compete individual engine workloads. Examples of the Air Force's analysis regarding the combination of the Sacramento workloads include the common skills among commodity and aircraft workers, which allows for increased staffing flexibility with combined workloads; the estimated delay resulting from competing the workload in five separate packages; and the added cost of conducting five competitions rather than one. The Air Force has not provided us the information supporting its briefing charts. Therefore, we cannot comment on the specific points. However, in general, this information still does not provide an adequate basis for DOD's determination that the depot maintenance workloads cannot as logically and economically be performed without combination. For example, the Air Force did not provide a comparative analysis considering other feasible workload combination alternatives. As part of our mandated review of the solicitations and awards for the Sacramento and San Antonio engine workloads, we reviewed DOD reports to Congress in connection with the workloads, draft requests for proposals, and other competition-related information. Further, we discussed competition issues with potential public and private sector participants. These participants raised several concerns that they believe may affect the competitions. Much remains uncertain about these competitions, and we have not had the opportunity to evaluate these issues, but I will present them to the Subcommittee. The 1998 Defense Authorization Act modifies 10 U.S.C. 2466 to allow the services to use up to 50 percent of their depot maintenance and repair funds for private sector work. However, the act also provides for a new section (2460) in title 10 to establish a statutory definition of depot-level maintenance and repair work, including work done under interim and contractor logistic support arrangements and other contract depot maintenance work and requires under 10 U.S.C. 2466, that DOD report to Congress on its public and private sector workload allocations and that we review and evaluate DOD's report. These changes, which will affect the assessment of public and private sector mix, are in effect for the fiscal year 1998 workload comparison, and DOD must submit its report to Congress for that period by February 1, 1999. Determining the current and future public-private sector mix using the revised criteria is essential before awards are made for the Sacramento and San Antonio workloads. Preliminary data indicates that using the revised criteria, about 47 to 49 percent of the Air Force's depot maintenance workload is currently performed by the private sector. However, the Air Force is still in the process of analyzing workload data to determine how much additional workload can be contracted out without exceeding the 50 percent statutory ceiling. In December 1996, we reported that consolidating the Sacramento and San Antonio depot maintenance workloads with existing workloads in remaining Air Force depots could produce savings of as much as $182 million annually. Our estimate was based on a workload redistribution plan that would relocate 78 percent of the available depot maintenance work to Air Force depots. We recommended that DOD consider the savings potential achievable on existing workloads by transferring workload from closing depots to the remaining depots, thereby reducing overhead rates through more efficient use of the depots. The Air Force revised its planned acquisition strategy for privatizing the workloads in place and adopted competitive procedures that included incorporation of an overhead savings factor in the evaluation. During the recent C-5 workload competition evaluation, the Air Force included a $153-million overhead savings estimate for the impact that the added C-5 workload would have on reducing the cost of DOD workload already performed at the military depot's facilities. The overhead savings adjustment, which represented estimated savings over the 7-year contract performance period, was a material factor in the decision to award the C-5 workload to Warner Robins. The private sector offerors questioned the military depot's ability to achieve these savings. In response to private sector concerns, the Air Force is considering limiting the credit given for overhead savings in the Sacramento and San Antonio competitions. For example, in the draft Sacramento depot workload solicitation, the Air Force states, "The first year savings, if reasonable, will be allowed. The second year savings, if reasonable, will be allowed but discounted. For years three and beyond, the savings, if defensible, will be subject to a risk assessment and considered under the best value analysis." Questions have been raised about the structure of the draft solicitations. One concerns the proposed use of best-value evaluation criteria. The draft solicitations contain selection criteria that differ from those used in the recent competition for the C-5 workload. They provide that a contract will be awarded to the public or private offeror whose proposal conforms to the solicitation and is judged to represent the best value to the government under the evaluation criteria. The evaluation scheme provides that the selection will be based on an integrated assessment of the cost and technical factors, including risk assessments. Thus, the selection may not be based on lowest total evaluated cost. For the C-5 solicitation, the public offeror would receive the workload if its offer conformed with the solicitation requirements and represented the lowest total evaluated cost. The questions concern the propriety of a selection between a public or private source on a basis other than cost. Other questions concern whether multiple workloads should be packaged in a single solicitation and whether the inclusion of multiple workloads could prevent some otherwise qualified sources from competing. As noted, the solicitations are still in draft form. As required by the 1998 act, we will evaluate the solicitations once issued, in the context of the views of the relevant parties to determine whether they are in compliance with applicable laws and regulations. Mr. Chairman, we are working diligently to meet the Committee's mandates and to safeguard sensitive Air Force information that is necessary to accomplish this work. We are prepared to discuss with the Air Force the steps that can be taken to safeguard the material and facilitate the source selection process while allowing us to carry out our statutory responsibility. However, we simply will be unable to meet our mandated reporting requirements unless we are provided timely access to this information. This concludes my prepared remarks. I will be happy to answer your questions at this time. 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.
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GAO discussed the public-private competitions for workloads at two maintenance depots identified for closure, focusing on: (1) the problems GAO is having in obtaining access to Department of Defense (DOD) information; (2) the recent competition for C-5 aircraft workload and GAO's assessment of it; (3) the adequacy of DOD's support for its determination that competing combined, rather than individual workloads of each maintenance depot is more logical and economical; and (4) concerns participants have raised about the upcoming competitions for the workloads at the air logistics centers in Sacramento, California, and San Antonio, Texas. GAO noted that: (1) its lack of access to information within DOD is seriously impairing its ability to carry out its reporting requirements; (2) GAO completed, with difficulty, its required report to Congress concerning DOD's determination to combine individual workloads at two closing logistics centers into a single solicitation at each location; (3) if DOD continues to delay and restrict GAO's access to information it needs to do its work, GAO will be unable to provide Congress timely and thorough responses regarding the competitions for Sacramento and San Antonio depot maintenance workloads; (4) in assessing the competition for the C-5 aircraft workloads, GAO found that: (a) the Air Force provided public and private sources an equal opportunity to compete for the workloads without regard to where the work could be done; (b) the Air Force's procedures for competing the workloads did not appear to deviate materially from applicable laws or the Federal Acquisition Regulation; and (c) the award resulted in the lowest total cost to the government, based on Air Force assumptions at the time; (5) much remains uncertain about the upcoming competitions for the Sacramento and San Antonio depot maintenance workloads; (6) potential participants have raised several concerns that they believe may affect the conduct of the competitions ; (7) one concern is the impact of the statutory limit on the amount of depot maintenance work that can be done by non-DOD personnel; (8) the Air Force has not yet determined the current and projected public-private sector workload mix using criteria provided in the 1998 Defense Authorization Act, but is working on it; (9) nonetheless, preliminary data indicates there is little opportunity to contract out additional depot maintenance workloads to the private sector; (10) another concern is the Air Force's proposed change in the overhead savings the Department may factor into the cost evaluations; (11) for the C-5 workload competition, overhead savings were considered for the duration of the performance period; and (12) however, for the Sacramento and San Antonio competitions, the Air Force is considering limiting overhead savings to the first year and possibly reducing the savings for the second year.
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In May 2001, the Subcommittee's predecessor held a hearing on USAID financial management. Using that hearing as a baseline, we evaluated, using primarily USAID IG reports, the progress made to improve USAID's financial management systems, processes, and human capital (people) in the past 2 years. At the time of the May 2001 hearing, USAID was one of three federal agencies subject to the CFO Act that had such significant problems that they were unable to produce financial statements that auditors could express an opinion on. The hearing focused on actions needed to resolve USAID's financial management issues. At that time, the Acting Assistant Administrator for the Bureau of Management told the Subcommittee that actions to correct reported material weaknesses in financial management were completed or in process and that all reported weaknesses would be resolved by 2002. While USAID has made progress in its financial management since that hearing, it has not achieved the success that it had expected. Rather, its progress relates primarily to improved opinions on USAID's financial statements. Table 1 below shows that USAID has been able to achieve improved opinions on its financial statements over the past 3 years. Fiscal year 2001 marked the first time that the USAID IG was able to express an opinion on three of USAID's financial statements--the Balance Sheet, Statement of Changes in Net Position, and Statement of Budgetary Resources. However, as noted above, the opinions were qualified and achieved through extensive efforts to overcome material internal control weaknesses. Further, the IG remained unable to express an opinion on USAID's Statement of Net Cost and Statement of Financing. Fiscal year 2002 marked additional improvements in the opinions on USAID's financial statements. All but one of USAID's financial statements received unqualified opinions. The Statement of Net Cost received a qualified opinion. The IG reported that "...on the Statement of Net Cost, the opinion was achieved only through extensive effort to overcome material weaknesses in internal control" and "lthough these efforts resulted in auditable information, did not provide timely information to USAID management to make cost and budgetary decisions throughout the year." Compounding USAID's systems difficulties has been the lack of adequate financial management personnel. Since the early 1990s, we have reported that USAID has made limited progress in addressing its human capital management issues. A major concern is that USAID has not established a comprehensive workforce plan that is integrated with the agency's strategic objectives and ensures that the agency has skills and competencies necessary to meet its emerging foreign assistance challenges. While a viable financial management system is needed, and offers the capacity to achieve reliable data, it is not the entire answer for improving USAID's financial management information. Qualified personnel must be in place to implement and operate these systems. In addition to the improved opinions for fiscal year 2002, the IG reported that while USAID had made improvements in its processes and procedures, a substantial number of material weaknesses, reportable conditions, and noncompliance with laws and regulations remain. The report also noted that USAID's financial management systems do not meet federal financial system requirements. Table 2 shows that while USAID's opinions on its financial statements improved, reported material weaknesses, reportable conditions, and noncompliance increased. The increase in reported material weaknesses, reportable conditions, and noncompliance is, in part, due to the full scope audits that were not possible in prior years. As financial information improved over the years, it has assisted the USAID IG in identifying additional internal control and system weaknesses. Identifying these additional weaknesses is constructive in that they highlight areas that management needs to address in order to improve the overall operations of the agency and provide accurate, timely, and reliable information to management and the Congress. Several of the weaknesses reported by the USAID IG are chronic in nature and resolution has been a challenge. For example, similar to the USAID fiscal year 2002 material weakness, in 1993 we reported that USAID did not promptly and accurately report disbursements. At that time, USAID could not ensure that disbursements were made only against valid, preestablished obligations and that its recorded unliquidated obligations balances were valid. Additionally, we reported USAID did not have effective control and accountability over its property. The chronic nature of the reported weaknesses at USAID reflect challenges with people (human capital), processes, and financial management systems. USAID management represented to us that, over time, they have lost a significant number of staff in this area and face challenges recruiting and retaining financial management staff. Further, according to IG representatives, many of the individuals that financial managers must depend on to provide the data that are used for financial reports are not answerable to the financial managers and often do not have the background or training necessary to report the data accurately. Also contributing to the challenge are USAID's nonintegrated systems that require data reentry, supplementary accounting records, and lengthy and burdensome reconciliation processes. Transforming USAID's financial and business management environment into an efficient and effective operation that is capable of providing management and the Congress with relevant, timely, and accurate information on the results of operation will require a sustained effort. Improved financial systems and properly trained financial management personnel are key elements of this transformation. While these challenges are difficult, they are not insurmountable. Without sustained leadership and oversight by senior management, the likelihood of success is diminished. In its fiscal year 2002 Performance and Accountability Report, USAID noted that it was in the process of implementing an agencywide financial management system. USAID reported that the system has been successfully implemented in Washington. In June 2003, USAID awarded a contract for the implementation of the system overseas. According to USAID officials, they anticipate this effort to be completed by fiscal year 2006. While we are encouraged by USAID's progress toward implementing an integrated system, it should be noted that this is the second attempt in the past 10 years to implement an agencywide integrated financial management system. To provide reasonable assurance that the current effort is successful, top management must be actively involved in the oversight of the current project. Management must have performance metrics in place to ensure the modernization effort is accomplished on time, within budget, and provides the planned and needed capabilities. In this regard, in fiscal year 2002, USAID redesigned its overall governance structure for the acquisition and management of information technology. Specifically, USAID created the Business Transformation Executive Committee, chaired by the Deputy Administrator and with membership including key senior management. The committee's purpose is to provide USAID-wide leadership for initiatives and investments to transform USAID business systems and organizational performance. The committee's roles and responsibilities include: Guiding business transformation efforts and ensuring broad-based cooperation, ownership, and accountability for results. Initiating, reviewing, approving, monitoring, coordinating, and evaluating projects and investments. Ensuring that investments are focused on highest pay-off performance improvement opportunities aligned with USAID's programmatic and budget priorities. Active, substantive oversight by this committee over USAID's information technology investments, including its agencywide integrated financial management system initiative, will be needed for business reform efforts to succeed. In addition to improved business systems, it is critical that USAID have sustained financial management leadership and the requisite personnel and skill set to operate the system in an efficient and effective manner once it is in place. We have reported for years and USAID acknowledges that human capital is one of the management challenges that must be overcome. As previously noted, since the early 1990s we have reported that USAID has made limited progress in addressing its human capital management issues. Within the area of financial management, progress in this area has also been slow, with no specific plan of action on how to address shortages of trained financial managers. USAID represented to us that as part of its agencywide human capital strategy, it plans to specifically address its financial management personnel challenges. In addition to addressing systems and human capital challenges, USAID is working to improve its processes and internal controls. Effective processes and internal controls are necessary to ensure that whatever systems are in place are fully utilized and that its operations are as efficient and effective as possible. USAID is working to eliminate the material weaknesses, reportable conditions, and noncompliance reported by the USAID IG in fiscal year 2002. For fiscal year 2003, the Administrator of USAID and the IG agreed to work together to provide for the issuance of audited financial statements by November 15, 2003, in line with the Office of Management and Budget's accelerated timetable for reporting. To meet this tight timeframe, the CFO must provide timely and reliable information that can withstand the test of audit with little to no needed adjustment. However, given the continued financial management system, process, and human capital challenges, meeting this goal will be difficult. USAID appears to be making a serious attempt to reform its financial management, as evidenced by initiatives to improve its human capital, internal controls, and business systems. However, progress to date is most evident in the improvement in the opinions on its financial statements, which reflect USAID's ability to generate reliable information one time a year, rather than routinely for purposes of management decision making. Through fiscal year 2002 these improved opinions reflect a significant "heroic" effort to overcome human capital, internal control, and systems problems. Although these improved opinions represent progress, the measures of fundamental reform will be the ability of USAID to provide relevant, timely, reliable financial information and sound internal controls to enable it to operate in an efficient and effective manner. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions you or other members of the Subcommittee may have at this time. For further information about this testimony, please contact Gregory D. Kutz at (202) 512-9095 or [email protected] or John Kelly at (202) 512-6926 or [email protected]. Other key contributors to this testimony include Stephen Donahue, Dianne Guensberg, and Darby Smith. 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.
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GAO has long reported that the U.S. Agency for International Development (USAID) faces a number of performance and accountability challenges that affect its ability to implement its foreign economic and humanitarian assistance programs. These major challenges include human capital, performance measurement, information technology, and financial management. Effective financial management as envisioned by the Chief Financial Officers Act of 1990 (CFO Act) and other financial management reform laws is an important factor to the achievement of USAID's mission. USAID is one of the federal agencies subject to the CFO Act. In light of these circumstances, the Subcommittee on Government Efficiency and Financial Management, House Committee Government Reform asked GAO to testify on the financial management challenges facing USAID, as well as the keys to reforming USAID's financial management and business practices and the status of ongoing improvement efforts. USAID has made some progress to improve financial management, primarily in achieving audit opinions on its financial statements. Through the rigors of the financial statement audit process and the requirements of the Federal Financial Management Improvement Act of 1996 (FFMIA), USAID has gained a better understanding of its financial management weaknesses. However, pervasive internal control weaknesses continue to prevent USAID management from achieving the objective of the CFO Act, which is to have timely, accurate financial information for day-to-day decision making. USAID's inadequate accounting systems make it difficult for the agency to accurately account for activity costs and measure its program results. Compounding USAID's systems difficulties has been the lack of adequate financial management personnel. Since the early 1990s, we have reported that USAID has made limited progress in addressing its human capital management issues. While some improvements have been made over the past several years, significant challenges remain. Transforming USAID's financial and business environment into an efficient and effective operation that is capable of providing timely and accurate information will require a sustained effort. USAID has acknowledged the challenges it faces to reform its financial management problems and has initiatives underway to improve its systems, processes, and internal controls. USAID has also recognized the need for a specific human capital action plan that addresses financial management personnel shortfalls.
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Since 1986, VBA has been trying to modernize its old, inefficient information systems. It reportedly spent an estimated $294 million on these activities between October 1, 1986, and February 29, 1996. The modernization program can have a major impact on the efficiency and accuracy with which about $20 billion in benefits and other services is paid annually to our nation's veterans and their dependents. Software development is a critical component of this modernization effort. Also, a mature software development capability will provide added assurance that software developers will be able to effectively make changes to the software needed to address the Year 2000 computing problem. To evaluate VBA's software development processes, in 1996, we applied the Software Engineering Institute's (SEI) software capability evaluation methodology to those projects identified by VBA as using the best development processes. This evaluation compares agencies' and contractors' software development processes against SEI's five-level software capability maturity model, with 5 being the highest level of maturity and 1 being the lowest. In June 1996, we reported that VBA was operating at a level 1 capability. At this level, VBA cannot reliably develop and maintain high-quality software on any major project within existing cost and schedule constraints, which places VBA software development projects at significant risk. Accordingly, VBA must rely on the various capabilities of individuals rather than on an institutional process that will yield repeatable, or level 2, results. VBA did not satisfy any of the criteria for a repeatable or level 2 capability, the minimum level necessary to significantly improve productivity and return on investment. For example, VBA is extremely weak in the requirements management, software project planning, and software subcontract management areas, with no identifiable strengths or improvement activities. Because of VBA's software development weaknesses, we recommended that the Secretary of Veterans Affairs obtain expert advice to improve VBA's ability to develop high-quality develop and expeditiously implement an action plan that describes a strategy for reaching the repeatable (level 2) level of process maturity; ensure that any future contracts for software development require the contractor to have a software development capability of at least level 2; and delay any major investment in new software development--beyond what is needed to sustain critical day-to-day operations--until the repeatable level of process maturity is attained. In commenting on a draft of the June 1996 report, VBA agreed with three of our recommendations but disagreed with delaying major investments in software development. VBA stated that while it agreed that a repeatable level of process maturity is a goal that must be attained, it disagreed that "all software development beyond that which is day-to-day critical must be curtailed." VBA stated that the payment system replacement projects, the migration of legacy systems, and other activities to address the change of century must continue. In our response to VBA's comments, we agreed that the change of century and changes to legislation must be continued, and we characterized these changes as sustaining day-to-day operations. However, for those projects that do not meet this criterion, we continue to believe that VBA should delay software development investments until a maturity of level 2 is reached. To assess actions taken by VBA to improve its software capability, we reviewed VBA documents, such as its "Software Process Improvement Initiative Strategic Plan," dated March 1997; the Best Practices Round Up Method; and the Interagency Agreement with the Air Force, dated September 1996, to obtain expert software process improvement assistance. We also reviewed SEI's IDEALSM: A User's Guide for Software Process Improvement, dated February 1996, and technical report on Best Training Practices Within the Software Engineering Industry, dated November 1996. In addition, we reviewed VBA contracts, correspondence to contractors, and supporting documents to determine what VBA has done to ensure that VBA's software development contractors are at the repeatable level. We interviewed VBA officials and contractor personnel involved with the software process improvement effort to determine what actions VBA has taken to improve its software capability. We also interviewed selected VBA project managers involved in new systems development on their knowledge of the software process improvement initiative. We performed our work from October 1996 through August 1997 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Secretary-Designate of Veterans Affairs. The Secretary-Designate provided us with written comments, which are discussed in the "Agency Comments and Our Evaluation" section and reprinted in appendix I. VBA has initiated several actions to improve its software development capability. For example, in response to our recommendation that it obtain expert assistance, VBA has hired a contractor--SEI--to (1) assist it in developing an integrated set of software practices that will position VBA for successful, lasting improvements, (2) help formulate a software improvement program, and (3) provide expertise in executing software improvement activities. SEI is also expected to provide expertise in strategic and tactical planning, training, policy preparation, and action planning. In addition, in response to our recommendation that it develop and implement an action plan describing a strategy for reaching the repeatable level, VBA launched a software process improvement initiative in June 1996 to lay the foundation and build the context for sustainable, measurable improvements to its software development capability. It has developed a strategic plan that describes the purpose and goals of this improvement initiative. One of the plan's goals is to establish organization policies and guidelines for the management, planning, and tracking of software projects that will enable VBA to repeat earlier successes on projects with similar applications. VBA has also recently initiated two software process improvement projects. The first project, called "Best Practices Round Up," will identify software development practices that VBA software development teams are doing correctly. VBA believes that there are "pockets of excellence" within its organization not identified in our June 1996 report that it can build upon. The Best Practices Round Up project team started its review in April 1997 and briefed VBA's chief information officer on its results in August 1997. The second project, called "Standards, Policies, and Procedures," will assess whether VBA's software development teams are following current software development policies, procedures, and standards. This project was initiated in June 1997 and is expected to be completed by the end of September 1997. The project team is expected to make recommendations to ensure compliance with standards. Although VBA has launched a software process initiative and an accompanying strategic plan, VBA has not yet clearly presented how it intends to move from an ad hoc and chaotic level of software development capability to a repeatable level. SEI's IDEALSM: A User's Guide for Software Process Improvement requires that a plan be developed that includes a schedule for initial activities, basic resource requirements, and benefits to the organization. VBA's current plan contains no milestones--beginning, interim, or completion dates--by which to measure the agency's progress and to identify problems. The plan also contains no analysis or information on costs, benefits, or risks. VBA officials stated that they recognize that the agency's strategic plan for software process improvement lacks this specificity. At the conclusion of our review, these officials said that VBA intends to address this area in an upcoming action plan for the software process improvement initiative. VBA has also not yet established a baseline from which to measure its software process improvements. According to the SEI IDEALSM: A User's Guide for Software Process Improvement, an organization needs to understand its current software process baseline so that it can develop a plan to achieve the business changes necessary to reach its software process improvement goals. At the conclusion of our review, VBA officials told us that they plan to use as their baseline the results of our June 1996 report, along with the results from their Best Practices Round Up and Standards, Policies, and Procedures projects. They stated that the baseline should be established by September 1997. Training of key staff is critical to achieving level 2 repeatability. According to SEI's technical report entitled, Best Practices Within the Software Engineering Industry, best training practices include defining a process for software engineering education. Although VBA has provided process improvement training to many of the managers in its software engineering process group and management steering group, key software personnel--software developers, project managers, and line managers--have not been trained in the process improvement methodology, the principles behind it, and the key process areas. VBA's software process improvement project manager explained that these key people had not yet been trained because VBA did not want to train them too long before implementing the process improvement projects. The project manager said that VBA plans to train these staff during fiscal years 1998 and 1999. However, VBA does not have a documented training plan to help ensure that these personnel receive training. Unless these individuals are trained in the process improvement methodology, its principles, and the key process areas, it will be difficult for them to implement the new policies and procedures required to reach the repeatable level. At the conclusion of our review, VBA officials stated that a training plan is now under development and will be made part of the software process improvement initiative action plan. In responding to our recommendation that it ensure that contractors have a repeatable software development capability, VBA intends to use a new provision in future software development contracts. This provision, however, does not require potential contractors to submit supporting documentation to VBA certifying their level of maturity. Validation of potential contractors' software development capability maturity level should be a key factor in VBA's software contracting decisions. The Internal Revenue Service, for example, recently started requiring that all current, in-process, and future contract solicitations for software development services require that contractors submit documentation to verify how their software development practices and processes satisfy the repeatable key process areas specified by SEI's capability maturity model. The Internal Revenue Service plans to use this information when selecting software development services. Also, the Department of the Air Force's acquisition policy states that software capability evaluations should be used for selecting software contractors. Although VBA has asserted that two of its current contractors are at the repeatable level, VBA could not provide documentation to support this. VBA subsequently requested the documentation from the contractors, but the information the contractors provided did not clearly show that they were at the repeatable level. In one case, the contractor presented information on how it assisted federal agencies in achieving the repeatable and/or higher levels of software development capability but did not provide documentation that the contractor was certified. In the second case, a component of the contractor's organization asserted that it was at the repeatable level but did not provide documentation supporting this assertion. Recognizing the importance of a mature software development capability, VBA has initiated actions to address the weaknesses identified in our June 1996 report. These actions will help it move toward a repeatable software capability maturity level, but additional efforts are needed. Specifically, VBA has not (1) developed a detailed strategy for how VBA plans to achieve a repeatable level of software development capability, (2) established a baseline to measure performance improvements, (3) trained its software development teams in the process improvement methodology, and (4) established a process for ensuring that its software development contractors are at the repeatable level. Recognizing that these deficiencies need to be addressed, VBA has efforts underway to do so. If these deficiencies are not sufficiently addressed, VBA's software development capability will remain ad hoc and chaotic, subjecting the agency to continuing risk of cost overruns, poor quality software, and schedule delays. We recommend that the Secretary of Veterans Affairs direct the Under Secretary for Benefits, in conjunction with VBA's chief information officer, to define the milestones, costs, tasks, and risks of the software process improvement initiative in order to provide a clear strategy for how VBA plans to improve its software development capability to a repeatable level; develop and use a baseline showing VBA's current software development capability from which to measure VBA's software improvement effort; ensure that a training plan is developed and implemented that will provide key software development staff training in the software process improvement methodology, its principles, and key process areas; and establish a source selection process to ensure that VBA's software development contractors have the mature processes necessary for timely, high-quality software development, including evaluating and validating documentation provided by potential contractors establishing that they are at the repeatable level or higher. In comments on a draft of this report, VA concurred with our recommendations. VA also agreed that a repeatable level of process maturity is a goal that VBA must attain and described a number of activities underway to improve its software development capability. For example, VBA has developed a draft action plan to define a strategy to reach the repeatable level and specify the activities/tasks, milestones, costs, and timeliness associated with the process improvement effort. VBA also was reviewing and revising the draft plan to fully address the issues raised in our report. VA added that a significant amount of work still remains before this plan is finalized. We are encouraged by VBA's response and will continue to monitor the agency's progress in implementing its software improvement effort. We are sending copies of this report to the Ranking Minority Member of the Subcommittee on Oversight and Investigations and the Chairman and Ranking Minority Member of the Subcommittee on Benefits, House Committee on Veterans' Affairs. We will also provide copies to the Chairmen and Ranking Minority Members of the House and Senate Committees on Veterans' Affairs and the House and Senate Committees on Appropriations; the Secretary-Designate of Veterans Affairs; and the Director of the Office of Management and Budget. Copies will also be made available to other parties upon request. Please contact me at (202) 512-6253 or by e-mail at [email protected] if you have any questions concerning this report. Major contributors to this report are listed in appendix II. The following is GAO's comment on the Department of Veterans Affairs letter dated September 4, 1997. 1. Enclosure (2) has not been included. Helen Lew, Assistant Director Leonard J. Latham, Technical Assistant Director K. Alan Merrill, Technical Assistant Director David Chao, Senior Technical Advisor Tonia L. Johnson, Senior Information Systems Analyst The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. 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Pursuant to a congressional request, GAO conducted a follow-up review to determine the actions taken by the Veterans Benefits Administration (VBA) to address management and technical weaknesses identified in the June 19, 1996, hearing on the agency's modernization effort, focusing on the agency's actions to improve its software development capability. GAO noted that: (1) VBA has taken action to improve its software development capability; (2) among other things, it has launched a software process improvement initiative, chartered a software engineering process group, and obtained the services of an experienced contractor to assist in developing and implementing a software process improvement effort; (3) although it has made progress, VBA has not yet fully addressed needed software development improvements; (4) these include a need for: (a) a defined strategy to reach the repeatable level and a baseline to measure improvements; (b) a process improvement training program for its software developers; and (c) a process to ensure that VBA's software development contractors are at the repeatable level; (5) VBA generally agrees that these issues need to be addressed and has efforts under way to do so; and (6) until these deficiencies are sufficiently addressed, VBA's software development capability remains ad hoc and chaotic, subjecting the agency to continuing risk of cost overruns, poor quality software, and schedule delays in software development.
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Like financial institutions, credit card companies, telecommunications firms, and other private sector companies that take steps to protect customers' accounts, CMS uses information technology to help predict or detect cases of improper claims and payments. For more than a decade, the agency and its contractors have used automated software tools to analyze data from various sources to detect patterns of unusual activities or financial transactions that indicate payments could be made for fraudulent charges or improper payments. For example, to identify unusual billing patterns and support investigations and referrals for prosecutions of cases, analysts and investigators access information about key actions taken to process claims as they are filed and the specific details about claims already paid. This would include accessing information on claims as they are billed, adjusted, and paid or denied; check numbers on payments of claims; and other specific information that could help establish provider intent. CMS uses many different means to store and manipulate data and, since the establishment of the agency's program integrity initiatives in the 1990s, has built multiple disparate databases and analytical software tools to meet individual and unique needs of various programs within the agency. In addition, data on Medicaid claims are scattered among the states in multiple systems and data stores, and are not readily available to CMS. According to agency program documentation, these geographically distributed, regional approaches to storing and analyzing data result in duplicate data and limit the agency's ability to conduct analyses of data on a nationwide basis. CMS has been working for most of the past decade to consolidate its disparate data and analytical tools. The agency's efforts led to the IDR and One PI programs, which are intended to provide CMS and its program integrity contractors with a centralized source of Medicare and Medicaid data and a web-based portal and set of analytical tools by which these data can be accessed and analyzed to help detect cases of fraud, waste, and abuse. In 2006, CMS officials expanded the scope of a 3-year-old data modernization strategy to not only modernize data storage technology, but also to integrate Medicare and Medicaid data into a centralized repository so that CMS and its partners could access the data from a single source. They called the expanded program IDR. According to program officials, the agency's vision was for IDR to become the single repository for CMS's data and enable data analysis within and across programs. Specifically, this repository was to establish the infrastructure for storing data related to Medicaid and Medicare Parts A, B, and D claims processing, as well as a variety of other agency functions, such as program management, research, analytics, and business intelligence. CMS envisioned an incremental approach to incorporating data into IDR. Specifically, it intended to incorporate data related to paid claims for Medicare Part D by the end of fiscal year 2006, and for Medicare Parts A and B by the end of fiscal year 2007. The agency also planned to begin to incrementally add all Medicaid data for the 50 states in fiscal year 2009 and to complete this effort by the end of fiscal year 2012. Initial program plans and schedules also included the incorporation of additional data from legacy CMS claims-processing systems that store and process data related to the entry, correction, and adjustment of claims as they are being processed, along with detailed financial data related to paid claims. According to program officials, these data, called "shared systems" data, are needed to support the agency's plans to incorporate tools to conduct predictive analysis of claims as they are being processed, helping to prevent improper payments. Shared systems data, such as check numbers and amounts related to claims that have been paid, are also needed by law enforcement agencies to help with fraud investigations. CMS initially planned to have all the shared systems data included in IDR by July 2008. Table 1, presented in our prior report, summarized CMS's original planned dates and actual dates for incorporating the various types of data into IDR as of the end of fiscal year 2010. Also in 2006, CMS initiated the One PI program with the intention of developing and implementing a portal and software tools that would enable access to and analysis of claims, provider, and beneficiary data from a centralized source. The agency's goal for One PI was to support the needs of a broad program integrity user community, including agency program integrity personnel and contractors who analyze Medicare claims data, along with state agencies that monitor Medicaid claims. To achieve its goal, CMS officials planned to implement a tool set that would provide a single source of information to enable consistent, reliable, and timely analyses and improve the agency's ability to detect fraud, waste, and abuse. These tools were to be used to gather data from IDR about beneficiaries, providers, and procedures and, combined with other data, find billing aberrancies or outliers. For example, an analyst could use software tools to identify potentially fraudulent trends in ambulance services by gathering the data about claims for ambulance services and medical treatments, and then use other software to determine associations between the two types of services. If the analyst found claims for ambulance travel costs but no corresponding claims for medical treatment, it might indicate that further investigation could prove that the billings for those services were fraudulent. According to agency program planning documentation, the One PI system was also to be developed incrementally to provide access to IDR data, analytical tools, and portal functionality. CMS planned to implement the One PI portal and two analytical tools for use by program integrity analysts on a widespread basis by the end of fiscal year 2009. The agency engaged contractors to develop the system. IDR had been in use by CMS and its contractors who conduct Medicare program integrity analysis since September 2006 and incorporated data related to claims for reimbursement of services under Medicare Parts A, B, and D. According to program officials, the integration of these data into IDR established a centralized source of data previously accessed from multiple disparate system files. However, although the agency had been incorporating data from various data sources since 2006, our prior report noted that IDR did not include all the data that were planned to be incorporated by the end of 2010 and that are needed to support enhanced program integrity initiatives. For example, IDR did not include the Medicaid data that are critical to analysts' ability to detect fraud, waste, and abuse in this program. While program officials initially planned to incorporate 20 states' Medicaid data into IDR by the end of fiscal year 2010, the agency had not incorporated any of these data into the repository. Program officials told us that the original plans and schedules for obtaining Medicaid data did not account for the lack of funding for states to provide Medicaid data to CMS, or the variations in the types and formats of data stored in disparate state Medicaid systems. Consequently, the officials were not able to collect the data from the states as easily as they expected and did not complete this activity as originally planned. In December 2009, CMS initiated another agencywide program intended to, among other things, identify ways to collect Medicaid data from the many disparate state systems and incorporate the data into a single data store. As envisioned by CMS, this program, the Medicaid and Children's Health Insurance Program Business Information and Solutions (MACBIS) program, was to include activities in addition to providing expedited access to current data from state Medicaid programs. According to agency planning documentation, as a result of efforts to be initiated under the MACBIS program, CMS would incorporate Medicaid data for all 50 states into IDR by the end of fiscal year 2014. However, program officials had not defined plans and reliable schedules for incorporating these data into IDR. Until the agency does so, it cannot ensure that current development, implementation, and deployment efforts will provide the data and technical capabilities needed to enhance efforts to detect potential cases of fraud, waste, and abuse. In addition to the Medicaid data, initial program integrity requirements included the incorporation of the shared systems data by July 2008; however, all of these data had not been added to IDR. According to IDR program officials, the shared systems data were not incorporated as planned because funding for the development of the software and acquisition of the hardware needed to meet this requirement was not approved until the summer of 2010. Subsequently, IDR program officials developed project plans and identified user requirements. In updating us on the status of this activity, the officials told us in November 2011 that they began incorporating shared systems data in September 2011 and plan to make them available to program integrity analysts in spring 2012. Beyond the IDR initiative, CMS program integrity officials had not taken appropriate actions to ensure the use of One PI on a widespread basis for program integrity purposes. According to program officials, the system was deployed to support Medicare program integrity goals in September 2009 as originally planned and consisted of a portal that provided web-based access to software tools used by CMS and contractor analysts to retrieve and analyze data stored in IDR. As implemented, the system provided access to two analytical tools--a commercial off-the-shelf decision support tool that is used to perform data analysis to, for example, detect patterns of activities that may identify or confirm suspected cases of fraud, waste, or abuse, and another tool that provides users extended capabilities to perform more complex analyses of data. For example, it allows the user to customize and create ad hoc queries of claims data across the three Medicare plans. However, while program officials deployed the One PI portal and two analytical tools, the system was not being used as widely as planned because CMS and contractor analysts had not received the necessary training. In this regard, program planning documentation from August 2009 indicated that One PI program officials had planned for 639 analysts to be trained and using the system by the end of fiscal year 2010, including 130 analysts who conduct reviews of Medicaid claims. However, CMS confirmed that by the end of October 2010, only 42 Medicare analysts who were intended to use One PI had been trained, with 41 actively using the portal and tools. These users represented fewer than 7 percent of the users originally intended for the program. Further, no Medicaid analysts had been trained to use the system. While the use of One PI cannot be fully optimized for Medicaid integrity purposes until the states' Medicaid claims data are incorporated into IDR, the tools provided by the system could be used to supplement data currently available to Medicaid program integrity analysts and to enhance their ability to detect payments of fraudulent claims. For example, with training, Medicaid analysts may be able to compare data from their state systems to Medicare claims data in IDR to identify duplicate claims for the same service. Program officials responsible for implementing the system acknowledged that their initial training plans and efforts had been insufficient and that they had consequently initiated activities and redirected resources to redesign the One PI training plan in April 2010; they began to implement the new training program in July of that year. As we reported in June, One PI officials stated that 62 additional analysts had signed up to be trained in 2011, and that the number of training classes for One PI had been increased from two to four per month. Agency officials, in commenting on our report, stated that since January 2011, 58 new users had been trained; however, they did not identify an increase in the number of actual users of the system. Nonetheless, while these activities indicated some progress toward increasing the number of One PI users, the number of users reported to be trained and using the system represented a fraction of the population of 639 intended users. Moreover, One PI program officials had not yet made detailed plans and developed schedules for completing training of all the intended users. Agency officials concurred with our conclusion that CMS needed to take more aggressive steps to ensure that its broad community of analysts is trained, including those who conduct analyses of Medicaid claims data. Until it does so, the use of One PI may remain limited to a much smaller group of users than the agency intended and CMS will continue to face obstacles in its efforts to deploy One PI for widespread use throughout its community of program integrity analysts. Because IDR and One PI were not being used as planned, CMS officials were not in a position to determine the extent to which the systems were providing financial benefits or supporting the agency's initiatives to meet program integrity goals and objectives. As we have reported, agencies should forecast expected benefits and then measure actual financial benefits accrued through the implementation of IT programs. Further, the Office of Management and Budget (OMB) requires agencies to report progress against performance measures and targets for meeting them that reflect the goals and objectives of the programs. To do this, performance measures should be outcome-based and developed with stakeholder input, and program performance must be monitored, measured, and compared to expected results so that agency officials are able to determine the extent to which goals and objectives are being met. In addition, industry experts describe the need for performance measures to be developed with stakeholders' input early in a project's planning process to provide a central management and planning tool and to monitor the performance of the project against plans and stakeholders' needs. While CMS had shown some progress toward meeting the programs' goals of providing a centralized data repository and enhanced analytical capabilities for detecting improper payments due to fraud, waste, and abuse, the implementation of IDR and One PI did not yet position the agency to identify, measure, and track financial benefits realized from reductions in improper payments as a result of the implementation of either system. For example, program officials stated that they had developed estimates of financial benefits expected to be realized through the use of IDR. Their projection of total financial benefits was reported to be $187 million, based on estimates of the amount of improper payments the agency expected to recover as a result of analyzing data provided by IDR. With estimated life cycle program costs of $90 million through fiscal year 2018, the resulting net benefit expected from implementing IDR was projected to be $97 million. However, as of March 2011, program officials had not identified actual financial benefits of implementing IDR. Further, program officials' projection of financial benefits expected as a result of implementing One PI was reported to be approximately $21 billion. This estimate was increased from initial expectations based on assumptions that accelerated plans to integrate Medicare and Medicaid data into IDR would enable One PI users to identify increasing numbers of improper payments sooner than previously estimated, thus allowing the agency to recover more funds that have been lost due to payment errors. However, the implementation of One PI had not yet produced outcomes that positioned the agency to identify or measure financial benefits. CMS officials stated at the end of fiscal year 2010--more than a year after deploying One PI--that it was too early to determine whether the program had provided any financial benefits. They explained that, since the program had not met its goal for widespread use of One PI, there were not enough data available to quantify financial benefits attributable to the use of the system. These officials said that as the user community expanded, they expected to be able to begin to identify and measure financial and other benefits of using the system. In addition, program officials had not developed and tracked outcome- based performance measures to help ensure that efforts to implement One PI and IDR would meet the agency's goals and objectives for improving the results of its program integrity initiatives. For example, outcome-based measures for the programs would indicate improvements to the agency's ability to recover funds lost because of improper payments of fraudulent claims. However, while program officials defined and reported to OMB performance targets for IDR related to some of the program's goals, they did not reflect the goal of the program to provide a single source of Medicare and Medicaid data that supports enhanced program integrity efforts. Additionally, CMS officials had not developed quantifiable measures for meeting the One PI program's goals. For example, performance measures and targets for One PI included increases in the detection of improper payments for Medicare Parts A and B claims. However, the limited use of the system had not generated enough data to quantify the amount of funds recovered from improper payments. Moreover, measures of One PI's program performance did not accurately reflect the existing state of the program. Specifically, indicators to be measured for the program included the number of states using One PI for Medicaid integrity purposes and decreases in the Medicaid payment error rate; however, One PI did not have access to those data because they were not yet incorporated into IDR. Because it lacked meaningful outcome-based performance measures and sufficient data for tracking progress toward meeting performance targets, CMS did not have the information needed to ensure that the systems were useful to the extent that benefits realized from their implementation could help the agency meet program integrity goals. Until the agency is better positioned to identify and measure financial benefits and establishes outcome-based performance measures to help gauge progress toward meeting program integrity goals, it cannot be assured that the systems will contribute to improvements in CMS's ability to detect and prevent fraud, waste, and abuse, and improper payments of Medicare and Medicaid claims. Given the critical need for CMS to reduce improper payments within the Medicare and Medicaid programs, we included in our June 2011 report a number of recommended actions that we consider vital to helping the agency achieve more widespread use of IDR and One PI for program integrity purposes. Specifically, we recommended that the Administrator of CMS finalize plans and develop schedules for incorporating additional data into IDR that identify all resources and activities needed to complete tasks and that consider risks and obstacles to the IDR program; implement and manage plans for incorporating data in IDR to meet schedule milestones; establish plans and reliable schedules for training all program integrity analysts intended to use One PI; establish and communicate deadlines for program integrity contractors to complete training and use One PI in their work; conduct training in accordance with plans and established deadlines to ensure schedules are met and program integrity contractors are trained and able to meet requirements for using One PI; define any measurable financial benefits expected from the implementation of IDR and One PI; and with stakeholder input, establish measurable, outcome-based performance measures for IDR and One PI that gauge progress toward meeting program goals. In commenting on a draft of our report, CMS agreed with the recommendations and indicated that it planned to take steps to address the challenges and problems that we identified during our study. In conclusion, CMS's success toward meeting goals to enhance program integrity efforts through the use of IDR and One PI depends upon the incorporation of all needed data into IDR, and effective use of the systems by the agency's broad community of Medicare and Medicaid program integrity analysts. It is also essential that the agency identify measurable financial benefits and performance goals expected to be attained through improvements in its ability to prevent and detect fraudulent, wasteful, and abusive claims and resulting improper payments. In taking these steps, the agency will better position itself to determine whether these systems are useful for enhancing CMS's ability to identify fraud, waste, and abuse and, consequently, reduce the loss of billions of dollars to improper payments of Medicare and Medicaid claims. Chairmen Platts and Gowdy, Ranking Members Towns and Davis, and Members of the Subcommittees, this concludes my prepared statement. I would be pleased to answer any questions that you may have. If you have questions concerning this statement, please contact Valerie C. Melvin, Director, Information Management and Technology Resources Issues, at (202) 512-6304 or [email protected]. Other individuals who made key contributions include Teresa F. Tucker (Assistant Director), Amanda C. Gill, and Lee A. McCracken. 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.
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The Centers for Medicare and Medicaid Services (CMS) is responsible for administering and safeguarding its programs from loss of funds. As GAO reported in June 2011, CMS utilizes automated systems and tools to help improve the detection of improper payments for fraudulent, wasteful, and abusive claims. To integrate claims information and improve its ability to detect fraud, waste, and abuse in these programs, CMS initiated two information technology system programs: the Integrated Data Repository (IDR) and One Program Integrity (One PI). GAO was asked to testify on its earlier report that examined CMS's efforts to protect the integrity of the Medicare and Medicaid programs through the use of information technology. In that prior study, GAO assessed the extent to which IDR and One PI have been developed and implemented, and CMS's progress toward achieving its goals and objectives for using these systems to detect fraud, waste, and abuse. GAO previously reported that CMS had developed and begun using both IDR and One PI, but had not incorporated into IDR all data as planned. IDR is intended to be the central repository of Medicare and Medicaid data needed to help CMS and states' program integrity staff and contractors prevent and detect improper payments. Program integrity analysts use these data to identify patterns of unusual activities or transactions that may indicate fraudulent charges or other types of improper payments. IDR has been operational and in use since September 2006 but did not include all the data that were planned to be incorporated by fiscal year 2010. For example, IDR included most types of Medicare claims data, but not the Medicaid data needed to help analysts detect improper payments of Medicaid claims. According to program officials, these data were not incorporated because of obstacles introduced by technical issues and delays in funding. Until the agency finalizes plans and develops reliable schedules for efforts to incorporate these data, CMS may face additional delays in making available all the data that are needed to support enhanced Medicare and Medicaid program integrity efforts. Additionally, CMS had not taken steps to ensure widespread use of One PI to enhance efforts to detect fraud, waste, and abuse. One PI is a web-based portal that is to provide CMS staff and contractors, and Medicaid analysts with a single source of access to data contained in IDR, as well as tools for analyzing those data. While One PI had been developed and deployed to users, no Medicaid analysts and only a few Medicare program integrity analysts were trained and using the system. Specifically, One PI program officials planned for 639 program integrity analysts, including 130 Medicaid analysts, to be using the system by the end of fiscal year 2010; however, as of October 2010, only 41--less than 7 percent--were actively using the portal and tools. According to program officials, the agency's initial training plans were insufficient and, as a result, they were not able to train the intended community of users. Until program officials finalize plans and develop reliable schedules for training users and expanding the use of One PI, the agency may continue to experience delays in reaching widespread use of the system. While CMS had made progress toward its goals to provide a single repository of data and enhanced analytical capabilities for program integrity efforts, the agency was not yet positioned to identify, measure, and track benefits realized from its efforts. As a result, it was unknown whether IDR and One PI as implemented had provided financial benefits. According to IDR officials, they did not measure benefits realized from increases in the detection rate for improper payments because they relied on business owners to do so; One PI officials stated that, because of the limited use of that system, there were not enough data to measure and gauge the program's success toward achieving the $21 billion in financial benefits that the agency projected. GAO is not making new recommendations at this time. GAO recommended in June 2011 that CMS take actions to finalize plans and schedules for achieving widespread use of IDR and One PI, and to define measurable benefits. CMS concurred with GAO's recommendations.
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Authorized by the Title XVIII of the Social Security Act, Medicare is the nation's largest health insurance program. In 2006, Medicare provided medical services to 43.2 million beneficiaries and paid claims totaling $402 billion in 2006. CMS, an operating division of the Department of Health and Human Services (HHS), administers the Medicare program. Medicare benefits are divided into four parts: (1) Part A consists of inpatient hospital care, skilled nursing facility care, qualified home health care, and hospice care; (2) Part B includes physicians' services, outpatient hospital services, treatment for end-stage renal disease, laboratory services, durable medical equipment, certain elements of home health care, and other medical services and supplies; (3) Part C, the Medicare Advantage program, includes traditional health maintenance organizations, preferred provider organizations, and private fee-for-service plans; and (4) Part D offers beneficiaries an outpatient prescription drug benefit through private plans that contract with Medicare. For Medicare Parts A and B, also known as fee-for-service, CMS Medicare contractors are responsible for screening Medicare providers prior to enrollment into the Medicare program. Medicare contractors also process and pay Medicare fee-for-service claims and are reimbursed by CMS through the Medicare Trust Fund. Our analysis found that over 27,000 Medicare providers had over $2 billion in unpaid federal taxes as of September 30, 2006. This represented over 6 percent of the approximately 436,000 Medicare providers paid during calendar year 2006. This represented over 6 percent of the approximately 436,000 Medicare providers paid during calendar year 2006. The amount of unpaid federal taxes we identified among Medicare providers was substantially understated because (1) we intentionally limited our scope to providers with agreed-to federal tax debt for tax periods prior to 2006; (2) the IRS taxpayer data reflected only the amount of unpaid taxes either reported by the taxpayer on a tax return or assessed by IRS through its various enforcement programs and thus the unpaid tax debt amount did not include entities that did not file tax returns or underreported their income; and (3) our analysis does not include Medicare providers that owed taxes under separate TINs from those that received the Medicare payments. As shown in figure 1, 73 percent of the approximately $2 billion in unpaid taxes comprised individual income and payroll taxes. The other 27 percent of taxes included corporate income, excise, unemployment, and other types of taxes. As shown in figure 1, Medicare providers owed $896 million in 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 responsibility to hold these amounts "in trust" for the federal government until the employer makes a federal tax deposit in that amount. When 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 within the business (e.g., corporate 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 (TFRP). Failure to remit payroll taxes can also be a criminal felony offense punishable by imprisonment of not more than 5 years, while the failure to properly segregate payroll taxes can be a criminal misdemeanor offense punishable by imprisonment of up to a year. The law imposes no penalties on 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 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. A substantial amount of the unpaid federal taxes shown in IRS records owed by Medicare providers had been outstanding for several years. As reflected in figure 2, about 54 percent of the $2 billion in unpaid taxes were for tax periods from calendar year 2000 through calendar year 2004, and approximately 32 percent of the unpaid taxes were for tax periods prior to calendar year 2000. Our previous work has shown that as unpaid taxes age, the likelihood of collecting all or a portion of the amounts owed decreases. This is, in part, because of the continued accrual of interest and penalties on the outstanding tax debt, which, over time, can dwarf the original tax obligation. The amount of unpaid federal taxes reported above does not include all tax debts owed by Medicare providers because of statutory provisions that give IRS a finite period under which it can seek to collect unpaid taxes. Generally, there is a 10-year statutory collection period beyond which IRS is prohibited from attempting to collect tax debt. Consequently, if the Medicare providers owe federal taxes beyond the 10- year statutory collection period, the older tax debt may have been removed from IRS's records. We were unable to determine the amount of tax debt that had been removed. As shown in figure 3, Medicare providers did not disclose to IRS a significant amount of taxes owed instead the taxes were discovered through IRS examination or investigation. Specifically, $784 million, or about 39 percent of the $2 billion in unpaid taxes, was assessed by an IRS examination or investigation. Medicare providers did report about $857 million of the tax debt amount. These amounts were generally reported on tax returns filed but containing a balance due. Although the over $2 billion in unpaid federal taxes owed by Medicare providers as of September 30, 2006, is a significant amount, it likely substantially understates the full extent of unpaid taxes owed by these or other businesses and individuals. The IRS tax database reflected only the amount of unpaid federal taxes either reported by the individual or business on a tax return or assessed by IRS through its various enforcement programs. The IRS database does not reflect amounts owed by businesses and individuals that have not filed tax returns and for which IRS has not assessed tax amounts due. For example, during our audit, we identified several instances from our 25 case studies in which Medicare providers failed to file tax returns for a particular tax period and IRS had not assessed taxes for these tax periods. Consequently, while these providers had unpaid federal taxes, they were listed in IRS records as having no unpaid taxes for those periods. Further, our analysis did not attempt to account for businesses or individuals 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. Finally, our analysis did not attempt to identify Medicare providers that owed taxes under separate TINs from those that received the Medicare payments. For example, sole proprietors and certain LLCs may file Medicare claims under their employer identification numbers. If these Medicare providers owe personal income taxes the analysis will not capture the amount of the personal income taxes owed. Consequently, the full extent of unpaid federal taxes for Medicare providers is not known. For all 25 cases involving Medicare providers with outstanding tax debt that we audited and investigated, we found abusive activity, potentially criminal activity, or both related to the federal tax system. All of these cases involved Medicare providers that had unpaid payroll taxes, many dating as far back as the early 1990s. Rather than fulfill their role as "trustees" of this money and forward it to IRS as required by law, these Medicare providers diverted the money for other purposes. IRS had TFRPs in effect for 11 of the 25 business cases at the time of our review. In addition, as discussed previously, willful failure to remit payroll taxes is a criminal felony offense punishable by imprisonment up to 5 years. Our review of selected Medicare providers revealed significant challenges that IRS faces in its enforcement of tax laws, a continuing high-risk area for IRS. Although the nation's tax system is built upon voluntary compliance, when businesses and individuals fail to pay voluntarily, IRS has a number of enforcement tools, including the use of levies, to compel compliance or elicit payment. Our review of the 25 Medicare providers found that IRS attempted to work with the businesses and individuals to achieve voluntary compliance, pursuing enforcement actions later rather than earlier in the collection process. Our review of IRS records with respect to the 25 cases showed that IRS did not issue paper levies to the Medicare contractors to levy the payments of Medicare providers for 10 of the 25 cases. As a result, many of the Medicare providers in our case studies continued to receive Medicare payments while failing to pay their federal taxes. Our investigations revealed that despite owing substantial amounts of federal taxes to IRS, some owners of Medicare providers had substantial personal assets--including multimillion-dollar homes and luxury cars. For example, the auditor for one Medicare provider found that the owner misappropriated assets for personal gain. At the same time as owing taxes, the owner was building a multimillion-dollar residence and had over $1.5 million in home furnishings and artwork. In addition to failure to pay taxes, our investigations also revealed that certain Medicare providers had significant quality-of-care and other problems. For example, several cases involved quality-of-care problems, including patient neglect, for example, losing track of a patient in the provider's care who has not been found and not taking appropriate actions to prevent a patient's suicide. In addition, a couple of nursing homes were cited by regulators for violating patient health and safety regulations. In another case, an owner of one Medicare provider was excluded from the Medicare program for submitting false Medicare claims, and in another case a provider continued to receive Medicare payments even though it was barred from receiving government contracts. In yet another case, the owner used funds from the business to fund the owner's statewide political campaign during the time the business was not paying its payroll taxes. Table 1 highlights 10 of the 25 cases of Medicare providers with unpaid taxes. IRS has collection actions during 2007 on 18 of 25 cases. Appendix II provides details on the other 15 cases we examined. We are referring all 25 cases we examined to IRS for further collection activity and criminal investigation. The following provides illustrative detailed information on four of the cases we examined. Case 4: The nursing home consists of several companies that received over $15 million in Medicare payments while owing more than $7 million in tax debts. IRS records indicated that the company owners attempted to conceal assets through questionable business entities such as trusts, partnerships, LLCs, and other fictitious entities. While the nursing home owed taxes, the owner possessed a $1 million personal residence and an additional $1 million piece of real estate. IRS records also showed that the owner purchased luxury cars and other personal items from money funneled through a charitable foundation. Specifically, the company owner donated large sums of money to the foundation then claimed the deductions on their personal tax return while purchasing expensive personal items. Case 5: The nursing home has a history of tax noncompliance since the late 1990s. The nursing home received over $1 million in Medicare payments while owing more than $11 million in tax debt. IRS records indicated that the nursing home owner has attempted to shield income through partnerships, tiered agreements, and leasehold agreements. In addition, the owner has various companies using over 100 bank accounts, wire transfers, an overseas billing company, and a large financial transaction to an overseas bank account. The nursing home has been sanctioned by regulators for quality-of-care deficiencies so serious that the home was barred from accepting new admissions. Case 6: The nursing home received over $4 million in Medicare payments and hundreds of thousands of dollars in federal government contracts while simultaneously owing over $4 million in tax debt. Although the owners of the nursing home claimed an inability to pay delinquent taxes because of lack of resources, one owner constructed a $4 million home while the other owner lived in a multimillion-dollar home while owing taxes. IRS records indicated that the owners also underreported income on their personal tax returns and received financial compensation, such as salary and bonuses, from another company to disguise reporting of income. IRS records indicated that one company owner may relocate overseas to avoid paying taxes. Case 10: The company received over $21 million in Medicare payments while simultaneously owing over $15 million in tax debt. The company was under investigation for underreporting income, bankruptcy fraud, and submitting false claims to Medicare. The company's owner also owns a multimillion-dollar residence. CMS does not prevent Medicare providers with tax debts from becoming Medicare providers or receiving payments from the Medicare program. Neither Medicare regulations nor CMS implementing guidance require CMS or its contractors to screen Medicare providers for tax debts prior to enrollment. Even if such requirements did exist, absent taxpayer consent, federal law generally prohibits IRS from disclosing taxpayer data, and consequently, CMS and its contractors have no access to tax data directly from IRS. In addition, CMS has not fully participated in the continuous levy program. Specifically, CMS has not incorporated Medicare fee for service payments in the continuous levy program. As a result, the federal government potentially lost opportunities to collect over $140 million in unpaid taxes during calendar year 2006. CMS Medicare contractors are generally responsible for screening Medicare providers prior to enrollment into the Medicare program. However, as part of the screening process, neither CMS policies nor CMS regulations require Medicare contractors to consider the tax debts or tax- related abuses of prospective Medicare providers or conduct any criminal background checks on these individuals. Medicare contractors are required to review the HHS Office of Inspector General (OIG) exclusion list and the GSA debarment list; however, these lists do not include all individuals or businesses that have abused the federal tax system. Exclusion of certain individuals and entities from participation in Medicare programs is made by statute. The statute provides for both mandatory and permissive exclusions. Mandatory exclusions are confined to health-related criminal offenses, while permissive exclusions concern primarily non-health-related offenses. The Federal Acquisition Regulation cites conviction of tax evasion as one of the causes for debarment; indictment on tax evasion charges is cited as a cause for suspension. Moreover, while a felony offense, the deliberate failure to remit taxes, in particular payroll taxes, will likely not result in an individual or entity being placed on the OIG exclusion or GSA debarment lists unless the taxpayer is convicted. Based on our work, we believe that it is unlikely that companies will be excluded or debarred for failure to pay delinquent payroll taxes. Even if a taxpayer is convicted of tax evasion or other tax-related crime, the individual or business still may not be placed on the OIG exclusion or GSA debarment lists. To place them on these lists, federal agencies must identify those individuals and businesses and provide them with due process. As part of due process, the agency must determine whether the exclusion or debarment is in the government's interest. For example, in our March 2007 testimony, we noted several cases involving conviction of tax-related crimes where the providers were not reported on the OIG exclusion or GSA debarment lists. Further complicating CMS decision making on the consideration of tax debts for Medicare, federal law does not permit IRS to disclose taxpayer information, including tax debts, to CMS or Medicare contractor officials unless the taxpayer consents, which CMS does not currently require. Thus, certain tax debt information can only be discovered from public records if IRS files a federal tax lien against the property of a tax debtor or a record of conviction for tax offense is publicly available. Consequently, CMS and its contractors do not have ready access to information on unpaid tax debts to consider in making decisions on Medicare providers. Further, CMS has not implemented a process for continuously levying payments made by Medicare contractors. As a result, IRS does not capture at least a portion of payments made to Medicare providers that owe federal tax debts. Thus, none of the 25 providers on which we performed a detailed review had their Medicare fee-for-service payments subject to the continuous levy program. As stated earlier, federal law allows IRS to continuously levy federal vendor payments until the tax debt is paid. IRS implemented this authority by creating a continuous levy program that utilizes FMS's Treasury Offset Program system. In July 2001, we reported that CMS did not have any plan to participate in the continuous levy program and we recommended that the Commissioners of IRS and FMS work with CMS to develop plans to include Medicare payments in the continuous levy program. In July 2006, IRS began to pursue HHS participation in the continuous levy program through the Federal Contractor Tax Compliance (FCTC) Task Force, a multiagency group dedicated to improving the continuous levy process. In response to IRS's request, and a month before your subcommittee's hearing on Medicare physicians, health professionals, and suppliers that owe federal taxes, CMS began to participate in the FCTC Task Force meetings in February 2007. According to CMS officials, CMS plans to incorporate all payments made through HIGLAS, Medicare's central accounting system, into the levy program by October 2008. CMS officials stated that this will cover about 60 percent of all Medicare fee-for-service payments. CMS officials said that the remaining 40 percent will be implemented into the continuous levy program in the next several years as the Medicare contractors convert their systems to HIGLAS. If there was an effective levy program in place, we estimate that CMS through its Medicare contractors potentially could have collected over $140 million of unpaid federal taxes during fiscal year 2006. This estimate was based on those debts that IRS reported to the Treasury Offset Program as of September 30, 2006. As federal deficits continue to mount, the federal government must take all effective measures to collect the billions of dollars of unpaid taxes. Because payroll taxes fund the Medicare program, Medicare providers should especially pay their fair share of taxes owed, especially payroll taxes. However, with respect to the continuous levy program, the federal government continues to fail to reach its potential. A substantial amount of Medicare payments to delinquent taxpayers will continue to go uncollected until CMS can establish a process to incorporate its payments into the continuous levy program. The failure to enforce tax laws against Medicare providers has a detrimental affect on compliance. We recommend that the Administrator of CMS take the following two actions: To enhance program integrity, consider (1) issuing guidance requiring Medicare contractors to determine to the extent feasible if prospective Medicare providers (including any Medicare providers that reenroll into Medicare) have delinquent federal taxes, including obtaining applicant consent to inquire as to tax debt status from IRS, and (2) using the results of those inquiries in determining whether to enroll such providers into the Medicare program. In making this determination, CMS could also build in consideration of the potential adverse effect that this requirement may have on Medicare's ability to provide health care to the elderly and other Medicare beneficiaries. Incorporate all Medicare payments into the continuous levy program as expeditiously as possible. We provided a draft of our report to FMS, CMS, and IRS for review and comment. FMS did not have any comments on the draft. We received written comments on a draft of this report from the Commissioner of Internal Revenue (see app. III). We also received comments from the Acting Administrator of CMS on our draft, who did not disagree with our two recommendations (see app. IV). The Commissioner of Internal Revenue stated that he understood the importance and potential benefits of considering unpaid federal tax debt in the Medicare screening process and will support CMS in addressing our recommendations to CMS. Further, the Commissioner of Internal Revenue stated that if CMS established a process by which Medicare providers supply their TINs to IRS, IRS would be able to provide CMS a historical record of the taxpayers' accounts, which would indicate any periods of unpaid taxes. The Commissioner of Internal Revenue stated that IRS is currently working with CMS and FMS on a pilot program to levy CMS Medicare payments through the continuous levy program. In its response to the draft of the report, the Acting Administrator of CMS stated that CMS has taken some actions and is planning other actions to address our recommendations. Specifically, in response to our first recommendation, CMS stated that it issued proposed rules that would require prospective durable medical equipment, prosthetic, and orthotic suppliers to be free of federal or state tax debt. CMS stated that it will consider whether to use its authority to establish a similar requirement for the other provider and supplier types. CMS also stated that it will carefully consider public policy implications of balancing the interests of denying or revoking Medicare program participation with Medicare's responsibility for paying for the health care needs of the Medicare beneficiaries. In response to our second recommendation, CMS stated that it is scheduled to begin subjecting its Medicare fee-for-service payments to the levy program in October 2008. We are pleased that both CMS and IRS have shown the willingness to improve the process of utilizing available tax information to prevent providers with tax problems from participating in Medicare and collecting tax debts. As discussed in our draft report, we agree with CMS that in determining whether to require the screening of prospective Medicare providers for delinquent federal taxes, CMS should consider the potential adverse effect that this requirement may have on Medicare's ability to provide health care to the elderly and other Medicare beneficiaries. Further, as also discussed in our draft report, we also believe that the incorporation of Medicare fee-for-service payments into the levy program will significantly improve collections of outstanding federal taxes owed by Medicare providers. As agreed with your offices, unless you publicly release its contents earlier we plan no further distribution of this report until 30 days from its date. At that time, we will send copies of this report to the Secretary of the Treasury, the Commissioner of the Financial Management Service, the Commissioner of Internal Revenue, the Acting Administrator of Centers for Medicare & Medicaid Services, and other interested parties. The report is also available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions concerning this report, please contact either 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 report. To identify the magnitude of unpaid federal taxes owed by Medicare providers, we obtained and analyzed the Internal Revenue Service (IRS) tax debt data as of September 30, 2006. We also obtained and analyzed calendar year 2006 Medicare payments to providers from the Centers for Medicare & Medicaid Services (CMS). Our analysis included all Medicare providers (i.e., Parts A, B, C and D) that were paid during calendar year 2006. We matched the Medicare payment data to the IRS unpaid assessment data using the taxpayer identification number (TIN) field. To avoid overestimating the amount owed by Medicare providers with unpaid tax debts and to capture only significant tax debts, we excluded from our analysis tax debts and paid claims meeting specific criteria to establish a minimum threshold in the amount of tax debt and in the amount of paid claims to be considered when determining whether a tax debt is significant. The criteria we used to exclude tax debts are as follows: tax debts that IRS classified as compliance assessments or memo accounts for financial reporting, tax debts from calendar year 2006 tax periods, and total unpaid taxes and Medicare paid claims of less than $100. The criteria above were used to exclude tax debts that might be under dispute or generally duplicative or invalid and tax debts that are recently incurred. Specifically, compliance assessments or memo accounts were excluded because these taxes have neither been agreed to by the taxpayers nor affirmed by the court, or these taxes could be invalid or duplicative of other taxes already reported. We excluded tax debts from calendar year 2006 tax periods to eliminate tax debt that may involve matters that are routinely resolved between the taxpayer and IRS, with the taxes paid or abated within a short period. We excluded tax debts and Medicare paid claims of less than $100 because they are insignificant for the purpose of determining the extent of taxes owed by Medicare providers. To identify indications of abuse or potentially criminal activity, we selected 25 Medicare providers for a detailed audit and investigation. The 25 providers were chosen using a nonrepresentative selection approach based on our judgment, data mining, and a number of other criteria. Specifically, we narrowed the 25 providers with unpaid taxes based on the amount of unpaid taxes, number of unpaid tax periods, amount of payments reported by Medicare, and indications that owner(s) might be involved in multiple companies with tax debts. For these 25 cases, we obtained copies of automated tax transcripts and other tax records (for example, revenue officer's notes) from IRS and performed additional searches of criminal, financial, and public records. In cases where record searches and IRS tax transcripts indicate that the owners or officers of a business are involved in other related entities that have unpaid federal taxes, we also reviewed the related entities and the owner(s) or officer(s), in addition to the original business we identified. Because our investigations were generally limited to publicly available information, our audit of the 25 cases may not have identified all related parties, criminal activity or significant assets (such as personal bank data, companies established to hide assets, etc.) related to these Medicare providers. To determine the potential levy collections on Medicare payments during calendar year 2006, we used 15 percent of the total paid claim or total tax debt amount reported to the TOP per IRS records, whichever was less. A gap will exist between what could be collected and the maximum levy amount calculated because (1) tax debts in TOP may not be eligible for immediate levy because IRS has not completed due process notifications and (2) tax debts may become ineligible for levy because of a change in collection status (e.g., tax debtor filed for bankruptcy). To determine the extent to which Medicare payments to providers are continuously levied to pay tax debts, we examined the statutory and regulatory authorities that govern the continuous levy program and interviewed officials from CMS, IRS, and the Financial Management Service (FMS) to determine whether any legal barriers exist. To determine the potential levy collections on Medicare payments during calendar year 2006, we used 15 percent of the total paid claim or total tax debt amount reported to the Treasury Offset Program (TOP) per IRS records, whichever is less. A gap will exist between what could be collected and the maximum levy amount calculated because (1) tax debts in TOP may not be eligible for immediate levy because IRS has not completed due process notifications and (2) tax debts may become ineligible for levy because of a change in collection status (e.g., tax debtor filed for bankruptcy). To determine the reliability of the IRS unpaid assessments data, we relied on the work we performed during our annual audits of IRS's financial statements. While our financial statement audits have identified some data reliability problems associated with the coding of some of the fields in IRS's tax records, including errors and delays in recording taxpayer information and payments, we determined that the data were sufficiently reliable to address this report's objectives. Our financial audit procedures, including the reconciliation of the value of unpaid taxes recorded in IRS's masterfile to IRS's general ledger, identified no material differences. For the Medicare payment databases and FMS's TOP databases, we interviewed CMS and FMS officials responsible for their respective databases. In addition, we performed electronic testing of specific data elements in the databases that we used to perform our work. Based on our discussions with agency officials, our review of agency documents, and our own testing, we concluded that the data elements used for this testimony were sufficiently reliable for our purposes. We conducted this forensic audit from July 2007 to June 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. We performed our investigative work in accordance with standards prescribed by the President's Council on Integrity and Efficiency. This appendix presents summary information on the abusive or potentially criminal activity associated with 15 of our 25 case studies. Table 2 summarizes the abuse or potentially criminal activity related to the federal tax system for these 15 Medicare providers. The cases involving businesses primarily involved unpaid payroll taxes. The following are GAO's comments on CMS's letter dated May 29, 2008. 1. IRS Form 1099 is an annual information report of income to IRS. However, this report cannot be used to continuously levy Medicare payments because they reflect prior calendar year payments that have already been made to the provider. 2. We have revised the report to state that CMS reported that it received 970 paper levies from IRS revenue officers totaling $109 million. We also noted that while CMS did not report the amount it actually collected from these paper levies, we do not believe paper levies are a significant source of revenue collection. 3. We have revised the report to include the amount of Medicare payments that are subject to the continuous levy program. 4. IRS provided documentation that showed that in July 2006 IRS began to pursue Department of Health and Human Services participation in the continuous levy program through the Federal Contractor Tax Compliance Task Force. 5. The IRS/CMS/SSA data match program is not used to collect delinquent federal taxes. Therefore, a discussion of this program is not relevant to our report. 6. We have revised the report to clarify that the 27,000 Medicare providers with unpaid federal taxes encompasses all Medicare providers that have received payments during calendar year 2006. This includes all Medicare providers for Parts A, B, C, and D. Our analysis only included Medicare providers that had TINs that received Medicare payments greater than $100. As our draft report states, we believe that our estimate is substantially understated because, among other things, our analysis does not include Medicare providers that owed taxes under separate TINs from those that received the Medicare payments. 7. In our draft report, we stated that we believe that it is unlikely that companies will be excluded or debarred for failure to pay delinquent payroll taxes. Although we appreciate CMS's solicitation, we are not making any recommendations on the use of the existing debarment system to collect unpaid taxes at this time. 8. In our draft report, we state that to determine the potential levy collections on Medicare payments during calendar year 2006, we used 15 percent of the total paid claim or total tax debt amount reported to TOP per IRS records, whichever was less. A gap will exist between what could be collected and the maximum levy amount calculated because (1) tax debts in TOP may not be eligible for immediate levy because IRS has not completed due process notifications and (2) tax debts may become ineligible for levy because of a change in collection status (e.g., tax debtor filed for bankruptcy). We plan to follow up on our recommendation to CMS in incorporating Medicare payments into the continuous levy program; however, we do not believe that a revision to the estimate in this report is necessary. 9. In our draft report, we state that our analysis only included tax debts and Medicare paid claims of $100 or more because they are significant for the purpose of determining the extent of taxes owed by Medicare providers.
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Under the Medicare program, the Centers for Medicare & Medicaid Services (CMS) and its contractors paid over $400 billion in Medicare benefits in calendar year 2006. GAO was asked to determine if Medicare providers have unpaid federal taxes and, if so, to (1) determine the magnitude of such debts, (2) identify examples of Medicare providers that have engaged in abusive or potentially criminal activities, and (3) determine whether CMS prevents delinquent taxpayers from enrolling in Medicare or levies payments to pay taxes. To determine amount of unpaid taxes owed by Medicare providers, GAO compared claim payment data from CMS and tax debt data from the Internal Revenue Service (IRS). In addition, GAO reviewed policies, procedures, and regulations related to Medicare. GAO also performed additional investigative activities. Our analysis of data provided by CMS and IRS indicates that over 27,000 health care providers (i.e., about 6 percent of all such providers) paid under Medicare during calendar year 2006 had payroll and other agreed-to federal tax debts totaling over $2 billion. The $2 billion in unpaid tax debts only includes those debts reported on a tax return or assessed by IRS through its enforcement programs. This $2 billion figure is understated because some of these Medicare providers owed taxes under separate tax identification numbers (TIN) from the TINs that received the Medicare payments or they did not file their tax returns. We selected 25 Medicare providers with significant tax debt for more in-depth investigation of the extent and nature of any abusive or potentially criminal activity. Our investigation found abusive and potentially criminal activity, including failure to remit to IRS payroll taxes withheld from their employees. Rather than fulfill their role as "trustees" of this money and forward it to IRS as required by law, these Medicare providers diverted the money for other purposes. Willful failure to remit payroll taxes is a felony under U.S. law. Furthermore, individuals associated with some of these providers at the same time used payroll taxes withheld from employees for personal gain. Some of these individuals accumulated substantial wealth and assets, including million-dollar houses and luxury vehicles, while failing to pay their federal taxes. In addition, some providers received Medicare payments even though they had quality-of-care issues, such as losing track of a patient in their care who has not been found. CMS has not developed a policy to require contractors (1) to obtain consent for IRS disclosure of federal tax debts and (2) to screen providers for unpaid taxes. Further complicating this issue, absent consent by the taxpayer, which CMS does not require, federal law generally prohibits the disclosure of taxpayer data to CMS or its contractors. IRS can continuously levy up to 15 percent of each payment made to a federal payee--for example, a Medicare hospital--until that tax debt is paid. However, CMS has not incorporated most of its Medicare payments into the continuous levy program. As a result, for calendar year 2006, the government lost opportunities to potentially collect over $140 million in unpaid taxes.
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The study by five DOE national laboratories was prepared in response to a growing recognition that any national effort to reduce the growth of greenhouse gas emissions must consider ways of increasing energy productivity. According to DOE laboratory officials, project discussions began in the summer of 1996, a peer review committee was formed in November 1996, and official authorization and a budget of $500,000 were provided in December 1996 to "analyze the impact of energy efficiency technology on energy demand growth in the United States." Requested by DOE's Office of Energy Efficiency and Renewable Energy, the five-lab study had a central goal of quantifying the potential for energy-efficient and low-carbon technologies to reduce carbon emissions in the United States by 2010 for four sectors of the U.S. economy--buildings, industry, transportation, and electricity production. The building sector includes residential and commercial buildings, where energy is used for heating and cooling, lighting, refrigeration, cooking, heating water, and operating electrical appliances. The industrial sector includes all manufacturing, as well as agriculture, mining, and construction activities. The transportation sector includes passenger cars and light-duty trucks, freight trucks, railroads, aircraft, and marine vessels. The electricity-producing sector includes electric power produced from coal, oil, natural gas, nuclear energy, hydroelectric systems, wind, solar energy, and biomass. Initially, the study's focus was on energy efficiency from technology and the carbon savings that may accrue from such technologies. Subsequently, DOE laboratory officials said that the study's objectives were expanded about March 1997 to include not only the potential for carbon savings from energy efficiency, but also carbon savings from switching fuel supply options for electric power generation, such as from coal to natural gas. Because it was recognized that few low-carbon technologies would be implemented by the electricity sector without some type of external incentive or regulation, the officials told us that the study's objectives were also expanded to include an assessment of the impact of increasing the price of carbon-based fuels by $25 and $50 per ton. The officials noted that it is not unusual for a study to evolve over time and that the expansion of the study's objectives was in large part due to early comments from peer reviewers. In calculating the carbon savings that could be achieved for each of the four sectors of the U.S. economy, the study uses three different, increasingly more aggressive, scenarios: (1) an efficiency scenario that assumes the United States takes an active role in public and private efforts to promote energy efficiency through enhanced research and development and market transformation activities; (2) a high-efficiency/low-carbon scenario that assumes a more aggressive national commitment to energy efficiency coupled with a $25 per ton carbon fee; and (3) a high-efficiency/low-carbon scenario that, in addition to the aggressive national commitment to energy efficiency, assumes a $50 per ton carbon fee. As shown in table 1, the study's estimate of carbon savings for the most aggressive scenario is more than 200 percent greater than its estimate for the first scenario. It is important to note that, at numerous points, the five-lab study qualifies its 2010 estimates by noting, among other things, that the calculations generally represent an "optimistic but feasible potential" for carbon savings. In some cases, particularly transportation, major breakthroughs in technologies would be needed to achieve these savings. DOE laboratory officials noted that, with the exception of the transportation sector, they believe the majority of the study's 394 million metric tons of emissions reductions come from technologies that exist now or are near the end of their development phase. For example, the officials said that the 62 million metric tons of carbon emissions reductions estimated for the building sector can be achieved solely from technologies that exist today. Additionally, the officials emphasized that the study was not a projection of what would happen by 2010 but of what could happen if the nation embarked on a path to reduce carbon emissions that included aggressive federal policies and programs, strengthened state programs, and very active private sector involvement, beginning in 2000 and being progressively phased in by 2010. The five-lab study is an important step in evaluating the role that energy-efficient and low-carbon technologies can play in the nation's efforts to reduce global warming gases, according to several groups that we contacted; however, the study's scope and methodology may limit its usefulness. For example, the study does not identify the type of policies that would be needed to get consumers and businesses to reduce carbon emissions by 394 million metric tons by 2010, and it does not indicate how these policies would be implemented. Additionally, the study does not address the broader economic effects on the nation's economy, such as how the $50 per ton carbon fee may affect energy prices, energy consumption; and, eventually, economic activity and employment levels in the rest of the economy. "shed much light on what government can or should do to enhance the role technology will play in mitigating the growth of carbon emissions. In particular, the contribution of the report is to document energy savings and emissions reductions that would accrue if U.S. consumers and businesses move closer to the current (and, in some cases, reasonably anticipated) technology frontier. Despite its efforts to justify these moves as 'cost-effective,' the report does not address the policies that would be needed to actually get consumers and businesses to adopt the technologies described in the report, nor does it present a rigorous assessment of the societal costs that would accrue if they did." In its August 1997 peer review comments to DOE, the Council of Economic Advisors was also critical of the study's failure to present the specific policies that would stimulate the adoption of these technologies. Similarly, according to an October 1997 study, the kinds of policies implemented to achieve any particular target for reducing greenhouse gas emissions "will have a significant impact on the costs." While acknowledging that the types of policies chosen can have an impact, officials of DOE's Office of Energy Efficiency and Renewable Energy noted that, in their view, the main point of the October 1997 study is that there are many policies that could be implemented and have a low, if any, net cost. DOE laboratory officials agreed that the study does not discuss the policies needed to achieve carbon savings by 2010 but explained that this was not a study objective or task from DOE. However, the officials also noted that there is fairly recent historic precedent for the types of behavior by consumers and industry modeled under the study's most aggressive scenario. For example, the officials said the growth in the demand for energy assumed under this scenario (0.13 percent annually through 2010) is more conservative than the actual growth in demand from 1973 through 1986 when the nation's economy grew by about 35 percent while primary energy demand remained unchanged. Additionally, the American Council for an Energy-Efficient Economy (ACEEE) indicated that the study's message is clearer because its focus on technology is unencumbered by policy discussions. The study does not address the various broader economic effects on the nation's economy. The study employed a methodology that, in essence, involved adding together the estimated net cost or savings to the economy for the adoption and use of each individual energy-efficient, carbon-reducing technology, with the savings based on the direct cost of adopting these technologies compared to the study's estimated energy savings over the life of these technologies. However, this methodology focuses on one aspect of the economy--energy--and does not consider the broader impacts on other non-energy related aspects of the U.S. economy. Without considering the interrelationships between the changes that the five-lab study proposes--such as imposing a $50 per ton carbon fee--and other sectors of the economy, the full effects of these changes are not known. For example, the study does not include any analysis of the impacts of a $50 per ton carbon fee on energy consumption or economic activities elsewhere in the U.S. economy, including the impacts of these fees on energy prices and energy demand, as well as potential employment impacts. Several of the groups we contacted, such as the Global Climate Coalition and the International Project for Sustainable Energy Paths, believe the lack of an economic "feedback effect" in the study's methodology limits the usefulness of the study's results. DOE laboratory officials recognized that the study does not address these broader economic feedback effects. In their opinion, these impacts would be minor because only one sector--electricity generation--relies primarily on the increased price of carbon as an economic stimulus to achieve significant carbon reductions. The officials noted that the study assumes that the estimated carbon reductions for two sectors--buildings and industry--rely primarily on more aggressive policies, and for another sector--transportation--the estimated carbon reductions rely on technological breakthroughs. Regarding increased prices for electricity generation, the officials envisioned that the overall net impact of the most aggressive scenario on the nation's economy would be small.Additionally, the officials acknowledged that the study does not provide a quantitative analysis to support their view that the broader effects would be minor. Officials of DOE's Office of Energy Efficiency and Renewable Energy agreed that the full costs to the nation's economy are not considered in the study but emphasized that neither are the full range of benefits from energy-efficient technologies, such as the lower cost of state compliance with Clean Air Act regulations or the decreases in the costs for oil imports. The study's calculations of carbon savings depend, in large measure, on the assumptions made about a host of factors in four sectors of the U.S. economy, including assumptions about consumers' purchasing behavior, loan rates, appliance standards, industrial capital constraints, the commercialization of near-term technologies, technological breakthroughs, future costs, and future benefits. Comments from interested and affected parties about the reasonableness of selected assumptions illustrated disparities in their views on some key assumptions, including those on discount rates, capital recovery factors, the rate of adoption of new technologies, the timing of technological breakthroughs, and the impact of changing the electricity-generating sector by 2010. The choice of a discount rate is a key assumption because it can affect whether an investment is viewed as cost-beneficial or not. In the five-lab study, the discount rate is used to value the stream of future benefits, such as estimated energy savings, accruing throughout the lifetime of an investment. Once these accumulated benefits have been calculated, they are used to determine the cost-effectiveness of a technology (energy savings less added investment cost). The study assumes that only cost-effective technologies will be adopted to achieve the level of carbon reductions estimated for each scenario. Assuming a higher discount rate will, among other things, cause fewer technologies to be viewed as cost-beneficial, whereas a lower discount rate means that more long-term investments with higher initial costs will be viewed as cost-beneficial. The study evaluates costs and benefits from two perspectives. The first, or more optimistic, case uses real discount rates of 7 percent for buildings, 10 percent for transportation, and 12.5 percent for industry. The second case uses higher discount rates--15 percent for buildings and 20 percent for transportation and industry, thus reducing the value of energy savings. According to DOE laboratory officials, the technologies included in the study are cost-effective even with the higher discount rates, and these rates are higher than those recommended by the Office of Management and Budget (OMB) for evaluating the costs and benefits of public policies. The study's assumed discount rates for the transportation sector were not a significant issue among the groups we contacted; however, some groups were skeptical of the assumption of a 7-percent real discount rate for the building sector. For example, the Association of Home Appliance Manufacturers told us that the consumer discount rate for most replacement appliances, such as refrigerators, clothes washers, clothes dryers, and dishwashers, ranges from 12 to 15 percent. Similarly, officials from the Energy Information Administration (EIA) noted that consumers often charge such items on credit cards where the discount rate would range from about 12 to 16 percent, or more. Representatives of the Global Climate Coalition, National Association of Home Builders, and others also found the study's assumption of a 7 percent discount rate for the building sector too optimistic. Some noted, however, that the 7 percent would be reasonable for appliances included in new home purchases. EIA officials and others also noted that some replacement appliances--such as hot water heaters--are often purchased without regard to energy efficiency or cost-effectiveness. The officials explained that, although water heaters are a significant energy item in most homes, when water heaters fail, consumers rarely calculate a life cycle cost analysis, choosing instead to take what the plumber or local appliance store has most readily available. Representatives of other groups considered the 7-percent rate for the building sector reasonable and pointed out that rebates and low-interest financing, such as past utility-administered energy-efficiency programs, could lower the effective discount rate on building sector purchases to 7 percent. DOE laboratory officials explained that the 7-percent rate for the building sector would be consistent with a scenario in which the nation embarked on a path to reduce carbon emissions that included aggressive federal policies and programs. Additionally, the officials noted that the higher discount rates that some groups were more comfortable with are still within the range of discount rates that the study's most aggressive scenario concludes are still cost-effective. A key assumption for the industrial sector involves the length of time expected for a capital investment to recover its costs--known as the payback period. The study assumes that, for investment planning purposes, industry can be persuaded to change the length of time expected for a capital investment to recover its costs for energy-efficiency investments from about 3 years to nearly 7 years. Under this scenario, the study assumes industry would install new energy-efficient technologies on twice as many operations as they would normally. Most of the representatives of seven industries that used about 80 percent of the manufacturing energy consumed in the United States in 1994 indicated that the capital recovery factor assumed for the industrial sector may not realistically consider the capital constraints, market conditions, and existing manufacturing processes these industries operate under today. For example, in a November 1997 letter to the Secretary of Energy, the Chemical Manufacturers Association noted that the study's assumption that the industry could double the rate of capital stock turnover is "impossible or at a minimum, highly improbable." Representatives of the American Petroleum Institute explained that, in a business investment, (1) there is nothing special about energy-efficiency investments; (2) such investments have to compete directly with other investments for limited capital assets; and (3) the longer the payback period, the greater the risk and the uncertainty associated with an investment. Most of the representatives of the seven industries indicated that they would not be able to accept more than a 4-year payback; several said 3 years or less would remain their industry's normal payback period. Generally, the representatives said that a 7-year payback is not realistic because of the higher risks and uncertainties associated with longer investments, the competing demands within their firms for investment capital, and their increasingly global competition. On the other hand, the Director of ACEEE believed that industry could achieve this goal with little difficulty, and pointed out that this is consistent with the Council's 1997 report, which noted that industry often does not fully account for all the savings (both energy and nonenergy) in its financial analyses of such projects. DOE laboratory officials also believed that, given an aggressive package of federal policies promoting low-carbon technologies, along with federal research and development funds, industries would begin to look at such investments more favorably. They noted that for some larger investments--known as strategic investments--industry has been willing in the past to look at payback over a longer period of time. This is consistent, they noted, with a 1986 study which found that the capital budgeting practices of 12 large manufacturers varied based on the size of the project, with large projects having capital recovery rates ranging from 15 to 25 percent (paybacks ranging from about 7 to 4 years, respectively), and small- and medium-sized projects having capital recovery rates ranging from 35 to 60 percent (paybacks ranging from about 3 to less than 2 years, respectively). Many energy-efficiency projects in the industrial sector would be viewed as large projects. One of the study's key assumptions involves the choice of "penetration rates," or the rates of adoption and use of energy-efficient technologies within a certain time frame. For the building sector, the study assumes a 65-percent penetration rate for its most aggressive scenario. This means that 65 percent of the energy savings achievable from maximum cost-effective energy-efficiency improvements are realized in residential and commercial buildings constructed or renovated from 2000 to 2010 and in the equipment subject to replacement during this time period. Among the groups we contacted, we found a disparity of views on the reasonableness of the assumed 65-percent penetration rate. Several were skeptical of this level of penetration and questioned its reasonableness for some categories of new and retrofitted structures--such as low-cost, or entry-level, housing and rental properties. For example, the National Association of Home Builders told us that the entry-level housing market is extremely cost-sensitive and questioned whether builders of these structures would install the higher initial cost but more energy-efficient technologies described in the five-lab study. They were also skeptical that such homes would be equipped with higher initial cost, but more energy-efficient appliances. Similarly, the Air-Conditioning and Refrigeration Institute noted that the study's assumption of a 65-percent penetration rate is unrealistic, noting that generally "the people making the purchasing decision of air conditioning equipment are usually not the ones who will be paying the energy bills, so first cost becomes more important than operating cost." Conversely, officials from the Alliance to Save Energy and ACEEE said that, in their view, the study's assumptions for the building sector are probably conservative. The officials said that, in the building sector, such things as aggressive national codes and standards over the home building industry and significantly higher energy-efficiency standards for appliance manufacturers could achieve the level of carbon emissions reductions estimated in the study. DOE laboratory officials noted that the 65-percent penetration rate was based on retrospective studies and their judgment of the percentage of cost-effective technologies that can reasonably be adopted over time with strong policy incentives. Additionally, the officials said that the 65-percent penetration rate for the building sector is conservative in their opinion because their analysis of this sector does not rely on any technological breakthroughs. Some industry groups we talked with questioned the study's assumptions about the feasibility of some technologies being available by the 2010 time frame, noting that, in a few cases, the study's description of these technologies as "incremental" is incorrect because they still require fundamental breakthroughs. For example, according to officials of The Aluminum Association, the study's assumption that the aluminum industry will be able to use inert anode technology to cost effectively smelt aluminum by 2010 is overly optimistic, with a more realistic time frame for implementing this breakthrough technology being 2020. To be cost-effective, the officials explained, anodes must last for 8 to 10 years, but anode life in ongoing experiments has ranged from a matter of hours to several weeks. Similarly, some groups were skeptical that the breakthrough technologies envisioned for the transportation sector will be forthcoming soon enough to substantially reduce carbon emissions by 2010. According to representatives of the American Automobile Manufacturers Association (AAMA), the technology relied on for much of the carbon savings envisioned for light-duty vehicles is not expected to be available as quickly as the study assumes, and even if the technologies are demonstrated as viable, the benefits will probably not be realized until after 2010. For example, a substantial amount of the assumed reduction in light-duty vehicles' carbon emissions is expected to come from lean-burn engines that improve fuel economy but produce excessive amounts of nitrogen oxide, a Clean Air Act-regulated pollutant and an ozone precursor. According to AAMA officials, these engines still require significant technological development before they can be used in the U.S. market. They said that U.S. automotive manufacturers have been working on this type of engine for over 20 years, and--while it is technically feasible--it is still a question of technological cost-effectiveness today. They also pointed out that the median expected lifetimes of passenger cars and light-duty trucks--now about 14 and 16 years, respectively--are increasing, making it more difficult to achieve part of the carbon reductions estimated for the transportation sector by 2010. Officials of DOE's Office of Energy Efficiency and Renewable Energy noted that longer vehicle lifetimes will slow the pace of technological change but emphasized that the study scenarios consider these extended lifetimes. "because the outcomes postulated in the high-efficiency/low-carbon scenario require technological breakthroughs, they require a certain degree of luck to be achieved by 2010. There are no credible methods to accurately gauge the probability of such breakthroughs; we believe they stand a decent chance of occurring with an intensification of research efforts, but we stop short of claiming that they are a likely outcome of such an intensification." DOE laboratory officials acknowledged that, in some areas such as the transportation sector, technological breakthroughs will be needed but noted that it is plausible that additional funding for research and development activities could accelerate such breakthroughs. Additionally, officials of DOE's Office of Energy Efficiency and Renewable Energy noted that the study's most aggressive scenario does not anticipate that fuel cell vehicles will enter the market until 2007, yet, according to DOE, a number of manufacturers, including Daimler Benz, have announced that they plan to have such vehicles on the road before 2007. Also, according to DOE, Toyota has announced that it plans to introduce a hybrid vehicle in the U.S. market in 2000, several years ahead of the entry year assumed in the study's most aggressive scenario. Furthermore, officials from the American Forest and Paper Association said the assumptions about some breakthrough technologies for their industry, such as impulse drying, multiport cylinder drying, and on-machine sensors, are reasonable. Some groups believed the study's assumptions about changes that would occur in the electricity sector may be too optimistic. For example, the study's cost-benefit analysis assumes that a large segment of the electricity-generating sector can change from coal to natural gas without causing the price of natural gas to increase. However, officials from EIA, the American Petroleum Institute, and the Edison Electric Institute said that it is optimistic to assume that significant switching from coal to natural gas can occur without resulting in an increase in gas prices. DOE laboratory officials explained that this could happen due partly to the study's assumed reduction in overall energy demand for the building sector, after this sector adopts more energy-efficient technologies, such as highly efficient windows, doors, and appliances. One group questioned whether the assumed carbon savings would occur. A June 1998 American Petroleum Institute report asserts that a $50 increase in the price of carbon-based fuels would not cause coal plants to convert to natural gas, and that--in order to achieve such conversions--the five-lab study further assumes that coal plants incur an additional environmental compliance cost of $1,400 per ton for nitrogen oxides and $100 per ton for sulfur dioxides. DOE laboratory officials disagreed with this report and emphasized that the five-lab study's analysis of opportunities to convert coal plants to natural gas was based on a detailed plant-by-plant assessment of conversion costs. In October 1997, the administration announced key elements of its proposal to reduce the emissions of greenhouse gases to the levels they were in 1990 by no later than 2012, with additional reductions below the 1990 levels in the ensuing 5-year period. Among other things, this proposal provided the framework for the level of greenhouse gas emissions reductions that the United States would commit to achieve in the next international negotiation to be held in December 1997 in Kyoto, Japan. Unlike the 1992 international climate change agreement that had called for voluntary reductions, the Kyoto conference was to establish binding commitments for reductions in greenhouse gases. In the administration's October 1997 proposal, the five-lab study was cited as illustrating how greater use of many existing technologies could reduce carbon emissions. Also, the OMB Associate Director of Natural Resources, Energy and Science, told us that the administration relied on several key studies, including the five-lab study, in determining which activities should be a part of the administration's climate change initiatives. According to the five-lab study, the estimated amount of carbon that the United States would need to reduce in order to meet 1990 levels by 2010 is 390 million metric tons per year. The study found that, for its most aggressive scenario, the United States could reduce its emissions by 394 million metric tons by 2010 with a low to no net cost to the economy. According to the Principal Deputy Assistant Secretary for Energy Efficiency and Renewable Energy, the five-lab study increased in its importance as support for the administration's climate change proposal when, in June 1997, a major study dealing with the economic effects of global climate change policies could not be finalized. In its December 1997 Kyoto Protocol negotiations, the United States agreed--subject to Senate ratification--to reduce the emissions of six greenhouse gases to 7 percent below 1990 levels. However, one greenhouse gas--carbon dioxide--is by far the largest contributor to total U.S. greenhouse gas emissions, constituting more than 80 percent of total U.S. emissions in 1990 and projected to represent more than 80 percent in 2010. With its technological focus on the ability of the nation to significantly reduce carbon emissions, the five-lab study was also one of the key documents cited as support for the December 1997 Kyoto Protocol's emission-reduction commitments for the United States, according to DOE's Assistant Secretary for Energy Efficiency and Renewable Energy. We provided a draft of this report to the Department of Energy (DOE) for review and comment. The agency generally agreed with the overall message of the report, noting that it showed reasonable balance and was consistent with information DOE had received following publication of the five-lab study. DOE suggested several changes to clarify information in the report. For example, the agency suggested that we note in the section on other economic effects that, while the five-lab study did not consider the full range of costs to the nation, it also did not consider the full range of benefits of employing these energy-efficient and low carbon technologies, such as a lower cost of compliance with Clean Air Act regulations. We made this change and incorporated DOE's other comments where appropriate. The agency expressed concern with the section on the study's limitations. While noting that the agency did not disagree with the two principal limitations presented in our report, DOE suggested that we state in that section that these limitations do not invalidate the conclusions of the five-lab study, most notably the study's essential conclusion that "a vigorous national commitment to develop and deploy energy efficient and low-carbon technologies has the potential to restrain the growth of U.S. energy consumption and carbon emissions . . . and can produce energy savings that are roughly equal to or exceed costs." We did not make this change, however, because the types of policies that might be needed to actually get consumers and businesses to adopt the technologies described in the report are not specified, and some have expressed concerns about the costs of these policies. For example, the Treasury Department questioned the study's conclusion that carbon emissions can be reduced in ways that reduce energy costs more than they increase other societal costs, noting that in its view the study "substantially understates the costs of government policies to promote technology." Additionally, as noted in the section on key assumptions, the study's finding that a widespread adoption of energy-efficient technologies can be achieved with a low to no net cost to the nation is heavily dependent on the assumptions made, and we found a disparity of views on some of the key assumptions that may have influenced the study's results. DOE also suggested that we include in our report that, since publication of the five-lab study, the administration has provided many of the elements of the policy roadmap in its announcement of a Climate Change Technology Initiative, which is a combination of higher budgets for technology research and tax incentives to accelerate the use of energy-efficient and low-carbon technologies. We did not include this in our report, however, since this initiative was outside the scope of our review. Also, in our April 1998 report Department of Energy: Proposed Budget in Support of the President's Climate Change Technology Initiative (GAO/RCED-98-147, Apr. 10, 1998), we raised several questions regarding DOE's proposed budget that the Congress may want DOE to address before the agency implements this initiative. Additionally, uncertainties regarding the lack of specific performance goals associated with this initiative were discussed in our June 1998 testimony Global Warming: Administration's Proposal in Support of the Kyoto Protocol (GAO/T-RCED-98-219, June 4, 1998). DOE also questioned the relevancy of including comments from organizations that criticized some assumptions of the five-lab study as optimistic when compared to current conditions. We believe the viewpoints of these organizations are relevant and appropriately reflect their opinions of the reasonableness of certain key assumptions used in the study, taking into consideration current conditions and historical trends. Appendix III contains the full text of the agency's written comments and our responses. We conducted our review from December 1997 through August 1998 in accordance with generally accepted government auditing standards. A detailed discussion of our scope and methodology is provided in appendix I. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 15 days after its date. At that time, we will send copies of the report to the Secretary of Energy and other interested parties. We will also make copies available to others upon request. Please call me at (202) 512-6111 if you or your staff have any questions. Major contributors to this report are listed in appendix IV. In view of the Department of Energy's (DOE) five-lab study's potential influence on U.S. climate change policy, Senators Larry Craig, Chuck Hagel, Jesse Helms, and Frank Murkowski asked us to provide information on (1) how the study's scope and methodology may limit its usefulness, (2) key assumptions that may have influenced the study's results, and (3) the study's role in the formulation of the October 1997 climate change proposal and the Kyoto Conference's emission-reduction goals for the United States. To obtain information on the study's limitations and assumptions, we obtained and reviewed the final study, drafts of the study, and intramural and extramural peer reviewers' comments on drafts of the study. We also reviewed DOE's Energy Information Administration's (EIA) 1997 Annual Energy Outlook, which served as the principal basis for the estimated 2010 carbon emission levels under the five-lab study's business-as-usual case,and we discussed various assumptions in the study with EIA officials associated with the development of the 1997 Annual Energy Outlook, as well as EIA's more recent 1998 Annual Energy Outlook. Additionally, we interviewed officials and obtained documents from Oak Ridge National Laboratory and Lawrence Berkeley National Laboratory, the two key laboratories in developing the study. We also contacted 52 organizations that we selected as being interested and affected parties, many with energy-efficiency expertise or able to offer informed opinions about the study's assumptions and limitations based on a particular field of expertise. In selecting these representatives, we contacted potentially interested and affected parties that were identified as being knowledgeable of the study, as well as energy-efficiency, industry, and environmental experts and other groups we identified from Internet searches, discussions with energy-efficiency experts, and our previous experiences. We selected organizations that represent different aspects of the four sectors of the U.S. economy discussed in the study--buildings, industry, transportation, and electricity production--as well as environmental groups. Not all of the representatives we contacted had read the study or wanted to express their views on it. Others had read and analyzed only those parts of the study that related to their sector, and they limited their comments accordingly. Of the 52 groups contacted, 31 commented on one or more aspects of the study. A list of the groups commenting appears in appendix II. Additionally, while we discussed some aspects of the assumptions associated with the engineering-economic modeling approach used in some parts of the study, we did not attempt to verify the adequacy of these models or the alterations made to them for analyzing various study scenarios, such as the alterations of EIA's National Energy Modeling System model. To describe the extent to which the final report's results were reflected in the October 1997 climate change proposal and the December 1997 Kyoto Conference's greenhouse gases emission-reduction goals for the United States, we relied on interviews, memorandums, press, and other briefings by the administration that cited the study as partial support for these proposals, the proposal and conference documents themselves, and testimony before the U.S. Senate. We conducted our review from December 1997 through August 1998 in accordance with generally accepted government auditing standards. The following are GAO's comments on the Department of Energy's letter dated July 27, 1998. 1. We agreed with this comment and have revised the report accordingly. 2. See comment 1. 3. See comment 1. 4. The statement suggested by DOE has not been included because this section of our report only addresses the building sector and because the adoption rate of new technologies for the transportation sector was questioned by officials of the American Automobile Manufacturers Association. 5. This sentence was clarified to note that, because the entry-level housing market is so cost-sensitive, the National Association of Homebuilders questioned whether builders of entry level housing would install the higher-initial-cost but more energy-efficient technologies described in the study. 6. The study in question does not use the term "strategic investments" to describe the capital budgeting practices of firms, as suggested by DOE. The study does indicate that the capital budgeting practices of firms varied based on the size of the project, with large projects having capital recovery rates ranging from 15 to 25 percent, medium-sized projects, from 25 to 40 percent, and small projects, from 35 to 60 percent. We have added a clarifying note that DOE's interpretation of the study in question is that, under the most aggressive scenario, investments in energy-efficient technologies would be on the lower end of the range (according to DOE, about 15 percent for large projects and 35 percent for small- and medium-sized projects). 7. DOE's views have been added to this section of the report. 8. Due to a typographical error in the draft sent to DOE, the words "resulting in" were omitted, which distorted the meaning of the sentence. We have revised the report accordingly. 9. The information suggested by DOE has been added to this section of the report. 10. Although our draft report already noted that DOE laboratory officials disagreed with the American Petroleum Institute report, we added DOE's suggested language about the analyses supporting the five-lab study's assessment of conversion costs. 11. We agreed with this comment and have added a clarifying note to this section of our report. William F. McGee, Assistant Director Mehrzad Nadji, Assistant Director, Economic Analysis Group James R. Beusse, Evaluator-in-Charge Philip L. Bartholomew, Evaluator Hamilton C. Greene, 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. 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Pursuant to a congressional request, GAO provided information on the study conducted by five Department of Energy (DOE) national laboratories on reducing U.S. emissions through energy-efficient and low-carbon technologies, focusing on: (1) how the study's scope and methodology may limit its usefulness; (2) key assumptions that may have influenced the study's results; and (3) the study's role in the formulation of the October 1997 climate change proposal and the Kyoto Conference's emission-reduction goals for the United States. GAO noted that: (1) the five-lab study is an important step in evaluating the role that energy-efficient and low-carbon technologies can play in the nation's efforts to reduce global warming gases; (2) however, the study's usefulness is limited because it does not discuss the specific policies needed to achieve its estimate of 394 million metric tons of carbon reductions by 2010 and does not fully consider the costs to the nation's economy of reaching this goal; (3) according to DOE laboratory officials, specifying the types of policies needed to achieve such significant reductions by 2010 was not one of the study's objectives; (4) furthermore, the study assumes a fee of $50 per ton for carbon emissions, which would increase the cost of energy; however, the study does not evaluate the broader impacts that this cost may have on the economy; (5) DOE officials acknowledge that the study does not examine the broader economic impacts of such a carbon fee on the U.S. economy but said that, in their opinion, these broader economic impacts would be minor; (6) the study's finding that the widespread adoption of energy-efficient technologies can be achieved with low to no net cost to the nation is heavily dependent on the assumptions made for four sectors of the U.S. economy--buildings, industry, transportation, and electricity production; (7) among the groups that GAO interviewed, GAO found a disparity of views on key assumptions that may have influenced the study's results; (8) several of the groups questioned some of these assumptions as being too optimistic, such as those about the payback period, rate of adoption of new technologies, or timing of technological breakthroughs; (9) however, most of the representatives of the seven industries that used about 80 percent of the manufacturing energy consumed in the United States in 1994 indicated this assumption may be too optimistic given their current capital constraints, market conditions, and existing manufacturing processes; (10) on the other hand, some groups believed that certain assumptions in the study appear reasonable; (11) the study has been cited as one of many documents considered in formulating the administration's October 1997 climate change proposal; and (12) according to the Department's Assistant Secretary for Energy Efficiency and Renewable Energy, the study was one of the documents considered in formulating the emission-reduction goals for the United States at the December 1997 Kyoto Conference.
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DOE's missions encompass energy resources, scientific and technological development, environmental cleanup, and nuclear security. DOE established EM in 1989 to carry out the mission to clean up radioactive wastes, spent nuclear fuel, excess plutonium and uranium, contaminated facilities, and contaminated soil and groundwater that resulted from nuclear weapons production and government-sponsored nuclear energy research. NNSA, a separately organized agency within DOE, has primary responsibility for ensuring the safety, security, and reliability of the nation's nuclear weapons stockpile, including life extension programs for multiple weapon types in the U.S. stockpile, for promoting nuclear nonproliferation, and for naval reactor programs. In fiscal year 2013, EM and NNSA received about $17 billion to support these programs and related activities, which is approximately 60 percent of DOE's total budget. Figure 1 shows the fiscal year 2013 funding for EM, NNSA, and other DOE programs and activities. Contractors operate DOE sites and often conduct their work under management and operating (M&O) contracts. These contracts provide the contractor with discretion in carrying out the mission of the particular contract. Currently, DOE spends 90 percent of its annual budget on contracts, making it the largest non-Department of Defense contracting agency in the government. As we have reported in the past decade, DOE continues to face challenges managing its major projects and programs, which have incurred significant cost increases and schedule delays in several instances. Some recent examples include: As we reported earlier this month, NNSA estimates that the project to build the Uranium Processing Facility (UPF) at the Y-12 National Security Complex in Oak Ridge, Tennessee, will cost between five and seven times more than previously thought and will be completed over a decade behind schedule. NNSA estimated in 2004 that the UPF would cost from $600 million to $1.1 billion to construct and would start operating in 2012. As of June 2012, estimates were revised to a cost range from $4.2 billion to $6.5 billion and a 2023 date for the start of operations. In June 2012, the Deputy Secretary of Energy approved the latter cost range and schedule and deferred significant portions of the original project scope. Two months later, the UPF contractor concluded that UPF's roof would have to be raised 13 feet and that the start of construction would be further delayed, resulting in approximately $540 million in additional costs. As we reported, these problems occurred because the contractor did not adequately manage and integrate the design work subcontracted to four other contractors. Given these additional costs and DOE's stated plan to pay for these additional costs from its contingency fund, it is unclear if the cost range estimate approved in June 2012 remains valid. In March 2013, we reported preliminary observations from our ongoing review of NNSA's Plutonium Disposition Program that highlight the need for continued efforts by DOE to improve contract and project management. We reported DOE is currently forecasting an increase in the total project cost for the MOX Fuel Fabrication Facility at the Savannah River Site in South Carolina from $4.9 billion to $7.7 billion and a delay in the start of operations from October 2016 to November 2019. According to NNSA officials and the contractor for the MOX facility, inadequately designed critical system components, such as the gloveboxes to be used for handling plutonium and the infrastructure needed to support these gloveboxes, are among the primary reasons for the proposed cost increase and schedule delay. The performance baseline for the MOX facility was set several years before NNSA issued guidance in 2012 to set cost and schedule baselines only after design work is 90 percent complete. As part of our ongoing review of NNSA's Plutonium Disposition Program, we are evaluating whether such guidance would have been useful for NNSA to apply to the MOX facility, as well as the potential impact this guidance might have had on mitigating cost increases and schedule delays. In December 2012, we reported that the estimated cost to construct the Waste Treatment and Immobilization Plant in Hanford, Washington, had tripled to $12.3 billion since its inception in 2000 and that the scheduled completion date had slipped by nearly a decade to 2019. We reported that DOE's incentives and management controls were inadequate for ensuring effective project management, and DOE had in some instances prematurely rewarded the contractor for resolving technical issues and completing work. DOE generally agreed with the several recommendations we made to improve Waste Treatment and Immobilization Plant projects and contract management. In May 2013, we reported that significant technical challenges at the Waste Treatment Plant remained unresolved, contributing to uncertainty as to whether the project will operate safely and effectively. We also reported in December 2012 on progress by EM and NNSA in managing nonmajor projects (i.e., those costing less than $750 million). We found that of the 71 nonmajor projects that EM and NNSA completed or had under way from fiscal years 2008 to 2012, 21 met or are expected to meet their performance targets for scope, cost, and completion date. However, 23 projects did not meet or were not expected to meet one or more of those three performance targets. We also noted that, for 27 projects, many had insufficiently documented performance targets for scope, cost, or completion date, which prevented us from determining whether they met their performance targets. As a result, we recommended, among other things, that EM and NNSA clearly define, document, and track the scope, cost, and completion date targets for each of their nonmajor projects. EM and NNSA agreed with our recommendations. As we noted in our February 2013 high-risk update, we have shifted our focus to major contracts and projects, but we will continue to monitor the performance of nonmajor projects. In April 2010, we reported that weak management by DOE and NNSA had allowed the cost, schedule, and scope of ignition-related activities at the National Ignition Facility to increase substantially. We reported that, since 2005, ignition-related costs have increased by around 25 percent--from $1.6 billion in 2005 to over $2 billion in 2010--and that the planned completion date for these activities had slipped from the end of fiscal year 2011 to the end of fiscal year 2012 or beyond. We made several recommendations to address program management weaknesses--which NNSA agreed with--and we are currently monitoring their implementation. Ten years earlier, in August 2000, we had reported that poor management and oversight of the National Ignition Facility construction project at Lawrence Livermore National Laboratory had increased the facility's cost by $1 billion and delayed its scheduled completion date by 6 years. In March 2009, we reported that NNSA and the Department of Defense had not effectively managed cost, schedule, and technical risks for the B61 nuclear bomb and the W76 nuclear warhead refurbishments. For the B61 life extension program, NNSA was only able to stay on schedule by significantly reducing the number of weapons undergoing refurbishment and abandoning some refurbishment objectives. We made a number of recommendations to improve the management of the nuclear weapons refurbishment process. NNSA agreed with these recommendations, and we are monitoring their implementation. We are currently assessing DOE cost estimating policies and practices and plan to issue a report based on this work later this year. DOE's actions to improve project management appear promising, but their impact on meeting cost and schedule targets may not be clear. Because all ongoing major projects have been in construction for several years, neither EM nor NNSA has a major project that can yet demonstrate the impact of DOE's recent reforms. As we testified before this Subcommittee in March 2013, reviews of the July 2012 security breach at the Y-12 National Security Complex identified numerous, long-standing, and systemic security issues across the nuclear security enterprise, and significant safety problems remain at DOE sites that have not been fully addressed. Some examples from our recent work include: With regard to security, as we testified in March 2013, investigations of the security breach at the Y-12 National Security Complex performed by NNSA, the DOE Office of Inspector General, and the DOE Office of Independent Oversight found problems with NNSA's and its contractors' performance, including problems with the complex's physical security systems, such as alarms, and the training and response of the heavily armed guards supplied by NNSA's protective force contractor. In addition, both a NNSA Security Task Force and an independent panel convened at the request of the Secretary of Energy and composed of three former executives from federal agencies and the private sector found systemic security issues across the nuclear security enterprise. Both the Secretary's panel and the NNSA Security Task Force's leader found deficiencies in DOE's security culture and oversight, with some of these being closely matched to issues we identified a decade earlier. DOE took a number of actions in response to the security breach and the findings of the panel and task force. These actions included, among other things, immediate actions to repair security equipment, as well as longer-term actions that aim to improve NNSA and DOE oversight of security. As we testified in March 2013, in assessing DOE's actions regarding security and NNSA's new security oversight process, a central question will be whether they lead to sustained improvements in security at the Y-12 National Security Complex and across the nuclear security enterprise. We have ongoing work assessing DOE security reforms and plan to issue a report based on this work later this year. With regard to safety, in September 2012 we testified before this Subcommittee about NNSA management weaknesses that have contributed to persistent safety problems at NNSA sites, including lax attitudes toward safety procedures, inadequacies in identifying and addressing safety programs with appropriate corrective actions, and inadequate oversight by NNSA site offices. We stated in our testimony that in March 2010, in an effort to address safety problems across the nuclear security enterprise, the Secretary of Energy announced a reform effort aimed at modifying DOE's oversight approach in order to "provide contractors with the flexibility to tailor and implement safety and security programs without excessive federal oversight or overly prescriptive departmental requirements." As we noted in the testimony, DOE's safety reforms did not fully address continuing safety concerns and, in fact, may have actually weakened independent oversight. We noted, for example, that DOE's Office of Independent Oversight staff must coordinate its assessment activities with NNSA site office management to maximize the use of resources, raising concerns about whether Office of Independent Oversight staff would be sufficiently independent from site office management. In our April 2012 report, we recommended that DOE analyze the costs and benefits of its safety reform effort and identify how the effort will help address safety concerns. DOE agreed with our recommendations. Moreover, since our September 2012 testimony, DOE's Office of Independent Oversight has raised concerns about ongoing safety issues, including reluctance by workers at NNSA's Pantex Plant to raise safety problems for fear of retaliation and a perception that cost took priority over safety, as well as inadequate controls to protect workers or the public in the case of earthquake, fires, or radiation exposures at the Y-12 National Security Complex. In addition, a March 2013 independent evaluation of safety culture at DOE's Office of Health, Safety, and Security (HSS)--which generally provides policy direction and independent oversight of safety and security at DOE sites--found that HSS staff raised concerns that the shift in recent years toward a more collaborative oversight relationship with site management had weakened HSS's effectiveness in providing independent oversight and enforcement. For more than a decade, we have reported that DOE has not produced reliable enterprise-wide management data needed to, among other things, prepare its budget requests, identify the costs of its activities and ensure the validity of its cost estimates. Some recent examples include: In June 2013, we reported that NNSA's M&O contractors differ in how they classify and allocate indirect costs at NNSA laboratories. Although different approaches are allowed by Cost Accounting Standards, these differences limit NNSA's ability to assess cost data and meaningfully compare cost management performance across laboratories, potentially impeding NNSA's efforts to oversee M&O contractors' costs. This work built on the report we issued in June 2010, in which we found that NNSA could not accurately identify the total costs to operate and maintain weapons facilities and infrastructure because of differences among contractors' accounting practices. We concluded that, without the ability to consistently identify program costs, NNSA did not have the ability to adequately justify future presidential budget requests and risked being unable to identify both the return on investment of planned budget increases and opportunities for cost savings. As a result, we recommended that NNSA require M&O contractors report to NNSA annually on the total costs (i.e., both direct and indirect costs) to operate and maintain weapons facilities and infrastructure. In July 2012, we reported that NNSA did not comply with DOE's order that defines budget formulation because the agency believed the order expired in 2003 and no longer applied to NNSA budget activities. DOE's order on budget formulation outlines the requirements for the department's annual budget formulation process, including that budget requests shall be based on cost estimates that have been thoroughly reviewed and deemed reasonable. However, we found that NNSA is guided by its own policy for its planning, programming, budgeting, and evaluation (PPBE) process and its associated activities, and found significant deficiencies in NNSA's implementation of the process. For example, we found that NNSA did not have a thorough, documented process for assessing the validity of its budget estimates prior to their inclusion in the President's budget submission to Congress, thereby limiting the reliability and credibility of the budget submission, but rather conducted informal, undocumented reviews of contractor-submitted budget estimates. In addition, we found that NNSA's annual budget validation review process occurred too late in the budget cycle to inform agency or congressional budget development or appropriations decisions. As a result, we made a number of recommendations to DOE and NNSA to improve the budget review process. The agencies agreed with most of these recommendations. In January 2012, we reported that costs for contractor-provided support functions at NNSA and DOE Office of Science sites--such as procuring goods, managing human resources, and maintaining facilities--were not fully known for fiscal years 2007 through 2011 because DOE changed its data collection approach beginning in 2010 to improve its data and, as a result, did not have complete and comparable cost data for all years. We reported that the data for fiscal year 2011 were more complete but that changes to DOE's definitions for support functions made it difficult to compare costs across all years. We recommended several actions to streamline contractor-provided support functions at NNSA and DOE sites. NNSA and DOE agreed with these recommendations. In conclusion, while DOE's management challenges are significant, we have noted in our recent work areas of progress. We have made numerous recommendations in our reports to address challenges such as those identified in this testimony, and DOE has agreed with and implemented most of them. In addition, our work has recognized steps that DOE has taken to address these challenges. For example, in the most recent update of our high-risk series in February 2013, we narrowed the focus of the high-risk designation of DOE's contract management to EM's and NNSA's major contracts and projects. We did so to acknowledge progress made in managing EM's and NNSA's nonmajor projects, noting that DOE continued to demonstrate strong commitment and top leadership support for improving contract and project management in EM and NNSA. We also noted that DOE had taken steps to enhance oversight, such as requiring peer reviews and independent cost estimates for projects with values of more than $100 million, as well as to improve the accuracy and consistency of data in DOE's central repository for project data. Over the past several years, management challenges such as those discussed here have prompted some to call for removing NNSA from DOE and either move it to another department or establish it as an independent agency. However, as we have previously stated for the record, it is our view that few, if any, of NNSA's management challenges stem from the organizational relationship between NNSA and DOE. As the new Secretary of Energy considers needed reforms in these areas, we note that DOE's management of projects and programs, security and safety, and enterprise-wide data must improve--regardless of the department's structure. We will continue to monitor DOE's implementation of actions to resolve its long-standing management challenges, including actions that we have recommended to facilitate the resolution of these challenges. Chairman Murphy, Ranking Member DeGette, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions you may have at this time. If you or your staff have any questions about this testimony, please contact me at (202) 512-3841 or [email protected]. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony are Jonathan Gill, Assistant Director, and Rob Grace, Nancy Kintner-Meyer, Michelle Munn, Cheryl Peterson, Jeff Rueckhaus, Rebecca Shea, and Kiki Theodoropoulos. The following is a selection of GAO's recent work assessing the Department of Energy's management efforts. National Nuclear Security Administration: Laboratories' Indirect Cost Management Has Improved, but Additional Opportunities Exist, GAO-13-534 (Washington, D.C.: June 28, 2013). Department of Energy: Observations on Project and Program Cost Estimating in NNSA and the Office of Environmental Management, GAO-13-510T (Washington, D.C.: May 8, 2013). Modernizing the Nuclear Security Enterprise: Observations on DOE's and NNSA's Efforts to Enhance Oversight of Security, Safety, and Project and Contract Management, GAO-13-482T (Washington, D.C.: Mar. 13, 2013). High-Risk Series: An Update, GAO-13-283 (Washington, D.C.: February 2013). Recovery Act: Most DOE Cleanup Projects Are Complete, but Project Management Guidance Could Be Strengthened, GAO-13-23 (Washington, D.C.: Oct. 15, 2012). Department of Energy: Better Information Needed to Determine If Nonmajor Projects Meet Performance Targets, GAO-13-129 (Washington, D.C.: Dec. 19, 2012). Hanford Waste Treatment Plant: DOE Needs to Take Action to Resolve Technical and Management Challenges, GAO-13-38 (Washington, D.C.: Dec. 19, 2012). Modernizing the Nuclear Security Enterprise: Observations on the National Nuclear Security Administration's Oversight of Safety, Security, and Project Management, GAO-12-912T (Washington, D.C.: Sept. 12, 2012). Modernizing the Nuclear Security Enterprise: Observations on the Organization and Management of the National Nuclear Security Administration, GAO-12-867T (Washington, D.C.: June 27, 2012). Modernizing the Nuclear Security Enterprise: NNSA's Reviews of Budget Estimates and Decisions on Resource Trade-offs Need Strengthening, GAO-12-806 (Washington, D.C.: July 31, 2012). Spent Nuclear Fuel: Accumulating Quantities at Commercial Reactors Present Storage and Other Challenges, GAO-12-797 (Washington, D.C.: Aug. 15, 2012). Nuclear Safety: DOE Needs to Determine the Costs and Benefits of Its Safety Reform Effort, GAO-12-347 (Washington, D.C.: Apr. 20, 2012). Modernizing the Nuclear Security Enterprise: New Plutonium Research Facility at Los Alamos May Not Meet All Mission Needs, GAO-12-337 (Washington, D.C.: Mar. 26, 2012). Department of Energy: Additional Opportunities Exist to Streamline Support Functions at NNSA and Office of Science Sites, GAO-12-255 (Washington, D.C.: Jan. 31, 2012). Nuclear Fuel Cycle Options: DOE Needs to Enhance Planning for Technology Assessment and Collaboration with Industry and Other Countries, GAO-12-70 (Washington, D.C.: Oct. 17, 2011). High-Risk Series: An Update, GAO-11-278 (Washington, D.C.: February 2011). Commercial Nuclear Waste: Effects of a Termination of the Yucca Mountain Repository Program and Lessons Learned, GAO-11-229 (Washington, D.C.: Apr. 8, 2011). Nuclear Weapons: National Nuclear Security Administration's Plans for Its Uranium Processing Facility Should Better Reflect Funding Estimates and Technology Readiness, GAO-11-103 (Washington, D.C.: Nov. 19, 2010). Recovery Act: Most DOE Cleanup Projects Appear to Be Meeting Cost and Schedule Targets, but Assessing Impact of Spending Remains a Challenge, GAO-10-784 (Washington, D.C.: July 29, 2010). Nuclear Weapons: Actions Needed to Identify Total Costs of Weapons Complex Infrastructure and Research and Production Capabilities, GAO-10-582 (Washington, D.C.: June 21, 2010). Department of Energy: Actions Needed to Develop High-Quality Cost Estimates for Construction and Environmental Cleanup Projects, GAO-10-199 (Washington, D.C.: Jan. 14, 2010). Nuclear Weapons: Actions Needed to Identify Total Costs of Weapons Complex Infrastructure and Research and Production Capabilities, GAO-10-582 (Washington, D.C.: June 21, 2010). Nuclear Waste Management: Key Attributes, Challenges, and Costs for the Yucca Mountain Repository and Two Potential Alternatives, GAO-10-48 (Washington, D.C.: Nov. 4, 2009). Information Security: Actions Needed to Better Manage, Protect, and Sustain Improvements to Los Alamos National Laboratory's Classified Computer Network, GAO-10-28 (Washington, D.C.: Oct. 14, 2009). Nuclear Security: Better Oversight Needed to Ensure That Security Improvements at Lawrence Livermore National Laboratory Are Fully Implemented and Sustained, GAO-09-321 (Washington, D.C.: Mar. 16, 2009). Nuclear Weapons: NNSA and DOD Need to More Effectively Manage the Stockpile Life Extension Program, GAO-09-385 (Washington, D.C.: Mar. 2, 2009). Nuclear and Worker Safety: Actions Needed to Determine the Effectiveness of Safety Improvement Efforts at NNSA's Weapons Laboratories, GAO-08-73 (Washington, D.C.: Oct. 31, 2007). Nuclear Safety: Department of Energy Needs to Strengthen Its Independent Oversight of Nuclear Facilities and Operations, GAO-09-61 (Washington, D.C.: Oct. 23, 2008). National Nuclear Security Administration: Additional Actions Needed to Improve Management of the Nation's Nuclear Programs, GAO-07-36 (Washington, D.C.: Jan.19, 2007). This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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DOE missions encompass energy resources, scientific and technological development, environmental cleanup, and nuclear security. Management of major projects and contracts within EM and NNSA, a separately organized agency within DOE, remain on GAO's list of areas at high risk of waste, fraud, abuse, and mismanagement, where they have been listed since 1990. Progress has been made, but GAO continues to identify management problems related to cost and schedule overruns on major environmental cleanup and nuclear projects and safety problems at DOE sites that have not been fully addressed. This testimony discusses DOE's management challenges in (1) managing major projects and programs, (2) managing security and safety at DOE sites, and (3) producing reliable enterprise-wide information, including budget and cost data. Over the past decade, GAO has made numerous recommendations in its reports to address challenges such as those identified in this testimony. DOE agreed with most of them and is taking steps toward implementing them. GAO's work has also recognized some of the steps that DOE has taken to address these challenges. For example, in the most recent update of GAO's high-risk series, GAO narrowed the focus of the high-risk designation of DOE's contract management to EM's and NNSA's major contracts and projects (i.e., those costing $750 million or more). GAO will continue to monitor DOE's implementation of actions to resolve long-standing management challenges, including actions taken in response to GAO's recommendations. As GAO has reported over the last decade, the Department of Energy's (DOE) management of major projects and programs, security and safety at DOE sites, and reliable enterprise-wide management information, including budget and cost data, are among the most persistent management challenges the department faces. * Challenges managing major projects and programs . The Office of Environmental Management (EM) and the National Nuclear Security Administration (NNSA) continue to face challenges managing major projects and programs, which have incurred significant cost increases and schedule delays. For example, GAO reported in July 2013 that the cost estimate range for a project to construct a modern Uranium Processing Facility (UPF) at DOE's Y-12 National Security Complex in Oak Ridge, Tennessee, had increased five- to seven-fold to up to $6.5 billion since the project's inception in 2004. Furthermore, the most recent cost estimate range may no longer be valid after the contractor reported in August 2012 that the UPF's roof would have to be raised 13 feet. GAO is currently assessing DOE cost estimating policies and practices and plans to issue a report based on this work later this year. DOE's actions to improve project management appear promising, but their impact on meeting cost and schedule targets may not be clear. Because all ongoing major projects have been in construction for several years, neither EM nor NNSA has a major project that can yet demonstrate the impact of DOE's recent reforms. * Challenges managing security and safety . Reports about the July 2012 security breach at the Y-12 National Security Complex identified numerous, long-standing and systemic security issues across the nuclear security enterprise and significant safety problems at DOE sites that have not been fully addressed. A NNSA Security Task Force and an independent panel convened at the request of the Secretary of Energy also found systemic security issues across the nuclear security enterprise, and found deficiencies in DOE's security culture and oversight, which closely matched issues GAO identified a decade earlier. GAO has ongoing work assessing DOE security reforms and plans to issue a report based on this work later this year. GAO has also found that DOE management weaknesses have contributed to persistent safety problems at NNSA sites. * Challenges in producing reliable enterprise-wide management information . GAO has reported that DOE does not have reliable enterprise-wide management data needed to, among other things, prepare its budget requests, identify the costs of its activities, and ensure the validity of its cost estimates. For example, in June 2013, GAO reported that while different approaches are allowed by Cost Accounting Standards, NNSA's management and operations contractors differ in how they classify and allocate indirect costs at NNSA laboratories, which limits NNSA's ability to assess cost data and meaningfully compare cost management performance across laboratories. In addition, GAO reported in June 2010 that NNSA could not accurately identify the total costs to operate and maintain weapons facilities and infrastructure because of differences among contractors' accounting practices. GAO is currently monitoring DOE's ongoing efforts to improve its capability to produce reliable enterprise-wide information.
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Madam Chairman and Members of the Subcommittee: We are pleased to be here today to participate in the Subcommittee's inquiry into the Internal Revenue Service's (IRS) financial condition for 1996, the status of the 1996 filing season, and the administration's fiscal year 1997 budget request for IRS. Our statement is based on work we have been doing for the Subcommittee and our past reviews of filing season activities, Tax Systems Modernization (TSM), and compliance initiatives. July 1995 report. Although IRS has initiated actions in response to these weaknesses, those efforts provide little assurance that the weaknesses will be corrected in the near term. As a result, we believe that additional investments in TSM are at risk. The largest program increase in IRS' fiscal year 1997 budget request is $359 million for certain compliance programs. Our past work on compliance initiatives identified several problem areas, including (1) IRS' inability to fully implement past initiatives, (2) the inaccuracy of IRS' tracking of the revenue from such initiatives, and (3) the focus of past collection initiatives on hiring revenue officers instead of more productive collection staff. Although IRS has taken some actions to address our concerns, some issues remain, particularly in terms of the reliability of IRS' data. IRS' fiscal year 1996 appropriation was $7.3 billion. That amount was about $860 million less than the President requested for fiscal year 1996 and about $160 million less than IRS' fiscal year 1995 appropriation. In June 1995, anticipating possible reductions from the amount the President had requested for fiscal year 1996, IRS began taking steps to reduce its staffing levels. On June 30, 1995, IRS announced a hiring freeze. Earlier in 1995, IRS had announced an early-out program without incentives for employees affected by its district office and regional office consolidations. After enactment of its final appropriation, IRS reopened the early-out program through February 3, 1996, and made it available to all employees. About 1,690 staff retired as a result of this program. implement a RIF for fiscal year 1996, the cost would have exceed the savings. As of March 1, 1996, according to IRS officials, IRS had about $140 million in unfunded mandatory nonlabor costs for fiscal year 1996. Some of those unfunded costs were for telecommunications, postage, and rent. IRS officials said that they are hoping to resolve these unfunded costs without having to resort to furloughs. Part of the $140 million shortfall stems from lower user-fee receipts than expected. IRS' fiscal year 1996 appropriation assumed a receipt of $119 million from user fees. IRS now expects to receive from $60 to $70 million in such fees for fiscal year 1996. As noted earlier, IRS' actions to reduce labor costs involved steps directed at seasonal and nonpermanent staff. Most of IRS' seasonal and non-permanent staff (1) help process tax returns during the filing season, (2) assist taxpayers either at walk-in offices or over the telephone, and (3) work in compliance programs that do not require face-to-face interaction with taxpayers. IRS officials told us that in deciding which areas to cut, IRS wanted to ensure that it could process tax returns and issue refunds in a timely manner. As a result, most of IRS' staffing cuts affected its compliance programs, with some cuts in the taxpayer service area. According to IRS officials, the two compliance programs that employ the largest number of seasonal and term staff are (1) the Document Matching program, through which IRS identifies taxpayers that either underreport their income or do not file required tax returns, and (2) the Automated Collection System (ACS), through which IRS staff try to contact delinquent taxpayers or nonfilers by telephone and resolve the delinquency. Because IRS' cost-cutting measures for fiscal year 1996 focused on seasonal and nonpermanent staff, these two programs were significantly affected. Through the Document Matching program, IRS matches income reported on tax returns with information provided by third parties, such as wage information from employers and interest and dividend information from financial institutions. Those matches are to identify taxpayers that underreported their income (underreporters) and those that did not file required tax returns (nonfilers). According to IRS, it spent about 1,950 staff years on underreporter activities in fiscal year 1995 and closed 4.1 million cases with recommended tax assessments of $1.7 billion. Because of staff reductions, IRS estimates that it will spend about 1,300 staff years on underreporter activities in 1996--about a 33-percent reduction--and close about 1.5 million fewer cases. IRS estimates that its assessments from closed cases will be $1.4 billion, $300 million less than in 1995. IRS' matching program also identifies taxpayers who have not claimed refunds to which they are entitled. In fiscal year 1995, IRS issued $120 million in refunds through that program. IRS expects that amount to drop to $95 million in 1996 because of staff reductions. Also under the Document Matching program, IRS creates returns for nonfilers using information documents provided by third parties. According to IRS, it spent about 600 staff years on that effort in fiscal year 1995, closed about 810,000 cases, and assessed $1.9 billion. Because of staff reductions, IRS estimates that it will spend about 370 staff years on this effort in fiscal year 1996--about a 38-percent reduction--and close about 180,000 fewer cases. IRS estimates that assessments from closed cases will be $1.3 billion, $650 million less than in 1995. Once a tax delinquency or delinquent return is identified, IRS uses a three-stage process to collect the tax or secure the return. In the first stage, taxpayers are mailed a series of notices. If the case is not resolved at this point and meets certain criteria, it is transferred to ACS. At this stage, IRS staff in call sites contact the taxpayer or nonfiler by telephone. If the case remains unresolved at this point and meets certain criteria, it is transferred to a revenue officer, who is to visit the taxpayer or nonfiler or take other steps to secure the delinquent return and/or collect the delinquent tax. Because of various factors discussed in the appendix, ACS had a significant number of seasonal, term, and other than full-time permanent staff at the end of fiscal year 1995--66 percent more than it had at the end of fiscal year 1994. As a result, ACS was targeted for a significant staff reduction when IRS decided to reduce the number of hours for seasonal staff and not extend appointments for term employees. other compliance staff to ACS. These details are to remain in effect for at least 1 year. IRS officials said that they plan to revisit this agreement with the union once IRS knows its budget situation for fiscal year 1997. On the basis of our past filing season reviews, we had several questions going into the 1996 filing season: How will IRS' staffing reductions for fiscal year 1996 affect its ability to process returns and assist taxpayers? Will last year's drop in the number of electronic filings be reversed? What can taxpayers expect in the way of refund delays in 1996? Will the steady decline in the accessibility of IRS' telephone assistance over the past several years continue? Has the performance of IRS' Service Center Recognition/Image Processing System (SCRIPS) improved? As discussed below, preliminary information addressing these questions indicates that, in certain key respects, the 1996 filing season is progressing more smoothly than did the 1995 season. As also discussed below, however, there are still several concerns that we will be monitoring during our continuing assessment of filing season activities. Specifically, (1) although telephone accessibility is up, it is still very low; (2) IRS closed many walk-in sites this year that had provided assistance to taxpayers in the past; and (3) SCRIPS is still not meeting its original expectations. In deciding where to make the staffing cuts for fiscal year 1996, IRS wanted to make sure it had enough staff to do its most critical functions--process returns and issue refunds--in a timely manner. Available data indicate that IRS has been successful in that regard. As of March 15, 1996, IRS' 10 service centers had processed 71 percent of the paper individual income tax returns they had received (the same percent as last year), and the centers were processing that workload in about the same cycle time as last year (within an average of 8 to 13 days, depending on the type of individual income tax return filed). were unable to verify whether the refund cycle time has changed because the data we use to track refund timeliness were not available at the time we prepared this statement. Although IRS has apparently been able to process returns and issue refunds this year without any significant problems, staffing cuts in other areas could be affecting its ability to serve taxpayers and identify questionable refund claims. In the taxpayer service area, IRS closed 93 walk-in assistance sites, reduced the operating hours of some of the 442 sites that remained open, and eliminated free electronic filing at 195 of the sites. According to IRS, the closed sites were selected on the basis of their historical volume of work and their proximity to other walk-in sites. As an indication of the effect of these closures and cutbacks, IRS data show that walk-in sites served about 1.7 million taxpayers from January 1 through March 9, 1996--about 16 percent fewer taxpayers than were served at the same time last year. Walk-in sites provide various free services, including copies of the more commonly used forms and publications, help in preparing returns, and answers to tax law questions. There are other ways taxpayers can obtain those services free, although maybe not as easily. Taxpayers needing forms and publications, for example, might find them at their local library or can get them by calling IRS' toll-free forms-ordering number. Our reviews of past filing seasons showed that taxpayers were generally able to get through to IRS when they called the forms-ordering number, and the forms distribution centers did a good job accurately filling orders. However, according to IRS, it will generally take from 7 to 15 workdays to receive what you order, if it is in stock. Taxpayers with access to a computer can download forms from Internet or the FedWorld computer bulletin board. Forms are also available on CD-ROM and through IRS' "fax on demand" service. Taxpayers who need help preparing their returns and do not want to pay for that help might be able to take advantage of the tax preparation services offered at sites around the country that are part of the Volunteer Income Tax Assistance and Tax Counseling for the Elderly programs. which has prerecorded information on about 150 topics. As of March 16, 1996, the number of tax law calls to TeleTax had increased by about 10 percent over last year (4.5 million this year compared with 4.1 million last year). Still another option for free assistance is IRS' World Wide Web site on the Internet. Among other things, IRS' site includes copies of forms, information similar to that on TeleTax, and some interactive scenarios that taxpayers can use to help them answer some commonly asked questions. IRS reported on March 18, 1996, that its World Wide Web site had been accessed more than 25 million times since January 8, 1996. IRS' primary program for detecting questionable refund claims also absorbed staffing cuts in 1996. According to IRS data, the 10 service centers have been allocated a total of about 379 full-time equivalents for that program in fiscal year 1996 compared with 551 full-time equivalents in 1995--a decrease of 31 percent. IRS officials told us that, because of the staff reduction, program procedures were changed in an attempt to better target the staffs' efforts. We do not know the initial impact of these changes because we have not yet seen any statistics on the number of questionable refund claims detected in 1996. In an attempt to recoup most of those staff reductions, IRS' budget request for fiscal year 1997 includes $21 million and 230 full-time equivalent positions for the questionable refund detection program. That request is part of the revenue protection initiative discussed later. As of March 15, 1996, the number of individual income tax returns filed in ways other than the traditional paper format has increased substantially compared to the same time last year. That is true even though the overall number of returns filed as of March 15 was down slightly from last year. As shown in table 1, most of the growth in alternative filings is due to 1040PC and TeleFile. Growth in the use of 1040PC is due, in part, to the largest user rejoining the program after dropping out in 1995. The growth in TeleFile is due primarily to its expanded availability. It is now available nationwide; it was only available to taxpayers in 10 states in 1995. IRS' budget request for fiscal year 1997 includes $7 million to allow expansion of TeleFile to other forms and taxpayers. Although IRS has made substantial progress in expanding the use of TeleFile and further expansion seems logical, it is important to note that only about 12 percent of the more than 20 million 1040EZ taxpayers who IRS estimated would be eligible to use the system in 1996 had actually used it as of March 15. In past reports, we have discussed the benefits of TeleFile to taxpayers (e.g., reduced filing time, fewer errors, and quicker refunds) and the presumed benefit to IRS in reduced processing costs. In addition to expanding TeleFile, it seems that IRS could increase participation in the program by (1) determining why many currently eligible users are not participating and (2) taking steps to address any identified barriers to their fuller participation. alleviating impediments, such as the program's cost, that inhibit those groups from participating. Last year, IRS took several steps in an attempt to better ensure that persons were entitled to the refunds, dependents, and Earned Income Credits they were claiming. The most visible of those efforts involved the delay of millions of refunds to allow IRS time to verify SSNs and do compliance checks. Although those efforts appeared to have had a significant deterrent effect (e.g., preliminary information indicates that 1.9 million fewer dependents were claimed in 1995 than were in 1994), they were not without problems. IRS (1) identified many more missing, invalid, and duplicate SSNs than it was able to pursue and ended up releasing the refunds without resolving the problems and (2) delayed millions of refunds for taxpayers whose returns had valid SSNs to check for duplicate SSNs but ended up releasing those refunds after several weeks without doing the checks. Many taxpayers and practitioners were surprised that IRS delayed some refunds even if all of the SSNs on the return were good. They were also upset that IRS split some refunds--issuing part of the refund and delaying the rest--but only honored a taxpayer's direct deposit request for the first part of the refund. As we noted in our report to the Subcommittee on the 1995 filing season, IRS identified fewer fraudulent returns during the first 9 months of 1995 than it did during the same period in 1994, and the percentage of fraudulent refunds it stopped before issuance declined. Neither we nor IRS know whether those decreases were due to a decline in the incidence of fraud or a decline in the effectiveness of IRS' detection efforts. The Director of IRS' Office of Refund Fraud expressed the belief that there were fewer fraudulent returns to be identified in 1995. He opined that the additional controls IRS implemented in 1995 and knowledge of those actions had deterred persons from filing fraudulent returns. refunds to delay this year--trying to focus its resources on the most egregious cases and minimize the burden on honest taxpayers. Statistics on the number of notices sent to taxpayers in 1996 concerning SSN problems and refund delays indicate that IRS is indeed delaying fewer refunds. As of March 9, 1996, IRS had mailed about 56-percent fewer refund-delay notices than at the same time last year. Another indicator that fewer refunds are being delayed in 1996 is the decrease in the number of "where is my refund" calls to IRS. Taxpayers wanting to know the status of their refunds can call TeleTax and get information through the use of an interactive telephone menu. This filing season, as of March 16, 1996, IRS reported receiving 26.5 million such calls--a decrease of about 15 percent from the 31.0 million it reported receiving as of the same time last year. For the past several years, taxpayers have had difficulty reaching IRS by telephone. As we reported to the Subcommittee in December 1995, IRS data showed that (1) an estimated 46.9 million callers made 236 million call attempts to IRS for tax assistance between January 1 and April 15, 1995 and (2) IRS was able to respond to only 19.2 million of those attempts--an accessibility rate of 8 percent. Accessibility has improved this year, although it is still low. IRS data for January 1 through March 9, 1996, showed 63.3 million call attempts, of which 12.7 million were answered--an accessibility rate of about 20 percent. As of the same time last year, IRS reported receiving about 107 million call attempts, of which 11.7 million were answered--an accessibility rate of about 11 percent. As the data indicate, a major reason for the improved accessibility is the significant drop in call attempts. IRS attributed that drop to (1) fewer refund delay notices being issued, as discussed earlier; (2) a slippage in the number of returns filed; and (3) IRS efforts to publicize other information sources, such as Internet. process Forms 1040EZ. As a result, IRS had to redirect more of the Form 1040EZ processing workload to its manual data entry system. After the 1995 filing season, IRS identified hardware and software upgrades that would be needed to correct the SCRIPS performance problems. IRS made some of those changes for the 1996 filing season. Our discussions with IRS officials and our review of processing rate data indicate that SCRIPS' performance has improved in 1996. Specifically, SCRIPS is processing at faster rates in three of the five centers and operating with less system downtime in all five centers. However, the two centers that stopped using SCRIPS to process Forms 1040EZ last year are experiencing slower processing rates than those of last year. Despite the improved performance, SCRIPS is far from the level of performance IRS had originally expected. For example, IRS originally planned to be processing all Forms 1040EZ on SCRIPS by 1996; it now expects to process about 50 percent of the Forms 1040EZ received in 1996 on SCRIPS. The remaining forms are being processed through IRS' manual data entry system. Although IRS made changes to SCRIPS and performance has improved, we are concerned that IRS did not establish more specific performance expectations for SCRIPS this filing season. IRS specified volume expectations by form type, but it did not establish expectations for improvements in processing rates or reductions in system down time that should result from the enhancements made for the 1996 filing season. Without those expectations, it will be difficult for IRS to determine which enhancements were cost beneficial. We are currently reviewing SCRIPS and plan to report our results later this year. TSM, which began in 1986, is key to IRS' vision of a virtually paper-free work environment in which taxpayer account updates are rapid and taxpayer information is readily available to IRS employees to respond to taxpayer inquiries. IRS' fiscal year 1997 request for TSM is $850 million, a $155 million increase from IRS' proposed operating level for fiscal year 1996. We continue to believe that TSM is a high risk and are concerned about how effectively IRS can use the requested funds until it corrects some fundamental technical and managerial weaknesses. IRS' progress in responding to the recommendations we made in a July 1995 report on TSM. Many of our recommendations were intended to correct critical IRS management and technical weaknesses by December 31, 1995. Without these corrections, IRS will not have the sound management and technical practices it needs to successfully meet TSM objectives in a cost effective and expeditious manner. A recent National Research Council report on TSM had a similar message. The Council's recommendations parallel the 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. In our March 14, 1996, testimony before the Subcommittee on Treasury, Postal Service and General Government, House Committee on Appropriations, we assessed IRS' progress in responding to our recommendations. Because IRS' progress report on implementing our recommendations was not finalized, our assessment was based on several follow-up meetings with IRS officials and a review of various planning documents. According to the Deputy Secretary of the Treasury, the Department is currently reviewing IRS' progress report and plans to submit it to Congress "as soon as possible." 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. 1996. However, the information provided raises additional concerns. In this regard, IRS is requesting an additional $29 million for Cyberfile, an electronic filing system. Earlier this week, we testified that Cyberfile is a poorly developed system that does not adequately address the security requirements needed to protect taxpayer data. In every year but one from 1990 through 1995, Congress has appropriated IRS funds for various compliance initiatives aimed at increasing IRS' enforcement staff with the expectation that the increase would produce more revenue. For fiscal year 1995, Congress appropriated $405 million for compliance initiatives. In estimating the revenue that would be generated from those initiatives--$9.2 billion--IRS assumed that Congress would continue to provide $405 million for the additional staffing over the next 4 years. However, Congress did not provide the second-year funding installment for fiscal year 1996. more accurate picture of IRS' total compliance program. IRS revised its tracking approach for fiscal year 1995. Although IRS revised its tracking approach, we cannot yet comment on the accuracy of the revenue figures in IRS' tracking reports. Until recently, IRS had to estimate the amount of revenue derived from its compliance efforts because it was unable to track actual revenue--regardless of whether it was generated from compliance initiative staff or base staff. For the last several years, IRS has been implementing an Enforcement Revenue Information System (ERIS) that is intended to report the actual revenue from various compliance programs. In the past, we have discussed concerns about the reliability of ERIS data, and IRS has been working to resolve those problems. We plan to test the reliability of ERIS data as part of our audit of IRS' fiscal year 1996 financial statements. Although we generally supported the fiscal year 1995 compliance initiatives, we did not support hiring more revenue officers. For several years, we have encouraged IRS to shift its collection focus from revenue officers, who generally collect delinquent taxes through face-to-face contact with taxpayers, to more productive processes like ACS, that emphasize early telephone contact. Although IRS subsequently reduced the number of revenue officers for that initiative, it still planned to hire about 750 in fiscal year 1995. As noted earlier, IRS is now diverting some revenue officers --who are paid at higher rates than ACS staff--to ACS to mitigate the impact of ACS staffing reductions. The $359 million included in IRS' fiscal year budget request for the revenue protection initiatives is expected to fund 3,820 additional compliance staff. According to IRS, most of those staff are for areas, such as ACS and Document Matching, that were significantly affected by fiscal year 1996 staffing cuts. the lion's share of IRS enforcement efforts, they also represent, on the margin, the least efficient use of IRS resources." According to IRS officials, these staff reductions will be achieved through attrition. Thus, one effect of the increases and decreases in IRS' compliance staffing for fiscal year 1997, if IRS' budget request is approved and is implemented as IRS has described, would be to alter the mix of that staffing. IRS would have fewer revenue officers, for example, and more ACS staff--the kind of mix that we have advocated in the past. In conclusion, although IRS has made some changes, there are certain questions that remain appropriate in discussing the revenue protection initiatives: (1) will IRS spend the additional funds for additional compliance staff? (2) does IRS have reliable data on the revenue generated by its enforcement activities? and (3) will IRS be able to achieve the new staffing mix? That concludes my statement. We welcome any questions that you may have. Factors surrounding IRS' organizational and business restructuring led to ACS having a large number of seasonal, term and other than full-time permanent staff at the end of fiscal year 1995. As a result, ACS was targeted for a significant staff reduction given IRS' cost-cutting approach for fiscal year 1996. IRS' customer service vision calls for combining into 23 customer service sites the work of at least 70 organizational units that employ staff who do not have face-to-face interactions with taxpayers. These centers are to employ staff who will work primarily by telephone to assist taxpayers, collect delinquent taxes, and adjust taxpayer accounts. As part of this consolidation, IRS is to close 10 of its 20 ACS sites. After IRS announced which 10 sites would be closed, two things happened. First, ACS employees who could find other positions left ACS. Some of these employees were hired for revenue officer positions that became available as part of the fiscal year 1995 compliance initiatives. Second, the 10 ACS sites that were scheduled to close could hire only term and seasonal staff, according to an IRS official. Therefore, at the end of fiscal year 1995, ACS had 448 seasonal, term, and other than full-time permanent staff--66 percent higher than the number at the end of fiscal year 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 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.
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GAO examined the Internal Revenue Service's (IRS) financial condition, focusing on the: (1) status of the 1996 filing season; and (2) IRS fiscal year (FY) 1997 budget request. GAO found that: (1) the FY 1996 appropriation for IRS was $7.3 billion, $860 million less than the President requested and $160 million less than the FY 1995 IRS appropriation; (2) to mitigate the funding shortfall, IRS initiated a hiring freeze and reduced its travel and overtime costs, cash awards, hours for seasonal staff, and nonpermanent staff; (3) IRS is delaying fewer refunds in 1996 and validating taxpayers' social security numbers and earned income credit claims; (4) taxpayers are having an easier time contacting IRS by telephone, with the accessibility rate increasing 9 percent over 1995; (5) IRS is requesting a budget increase of $647 million for FY 1997 to develop certain compliance initiatives and correct weaknesses in the Tax Systems Modernization Program (TSM); and (6) IRS is having problems ensuring data accuracy for revenue generated by its enforcement activities and correcting TSM managerial and technical weaknesses.
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In 1995, the District of Columbia faced the worst financial crisis in its history. Unable to pay its employees or its contractors, the District was running a significant operating deficit, carrying a large accumulated deficit, and relying on the U.S. Treasury for help in funding its operations. The District's ordinary services, such as motor vehicle inspections and building permits, were difficult to obtain, and the District could not sell its bonds at market rates. In short, as we testified in February 1995, the District was without the cash to pay its bills. Since then, aided by a strong local economy and through the combined and cooperative efforts of the Authority, the District government, Congress, and the citizens of the District, the District has experienced a remarkable turnaround in its financial condition. For example, in fiscal year 1996, the District ended the year with a $33 million operating deficit and a $518 million accumulated deficit. In contrast, for fiscal years 1997, 1998, 1999, and 2000, the District generated operating surpluses. The District has eliminated its accumulated deficit and at the end of fiscal year 2000 had a positive fund balance of over $465 million--a turnaround of almost a billion dollars from its accumulated deficit in September 1996. As shown in figure 1, in looking at the trends in the District's general fund balance from 1990 through 2000, its financial situation has improved remarkably since fiscal year 1997. Prior to fiscal year 1997, the District had experienced operating deficits in 4 out of 7 years, and the surplus in 1991 reflected a one-time sale of $331 million of "deficit reduction bonds" that were designed to eliminate the District's accumulated deficit at the time. In addition, the surplus it showed in 1993 included a "windfall" of $173 million in real estate taxes due to a change in the tax year--recognizing 15 months' worth of taxes in a 12-month period. These transactions masked the financial crisis that was brewing in the District. In 1994, the District's financial crisis became apparent, and the District experienced 3 consecutive years of significant operating deficits. Once the District's financial situation began to turn around in 1997, the District reported an operating surplus of $186 million. Currently, the District has achieved its fourth consecutive balanced budget, showing a $241 million surplus for fiscal year 2000--a major achievement for a city that had been struggling to recover from financial difficulties for years. The District expects this trend to continue through 2001 with a projected surplus of $65 million. During 1995, the District's general obligation (GO) bond ratings were lowered by Standard and Poor's Corporation, Moody's Investors Service, and Fitch IBCA to levels that were considered to be below investment grade. The bond ratings were lowered because of the District's financial deterioration and its lack of a short- or long-term plan for resolving its budget problems. In 1998, after the District's financial situation had turned around, all three rating agencies began to increase the rating on the District's GO bonds, a trend that has continued through the most recent bond ratings. In February 2001, Standard and Poor's upgraded the District's bond rating from BBB to BBB+, citing the District's improved financial operations due to substantial operating surpluses and its enhanced debt position. In March of this year, Moody's also upgraded the District's bond rating from Baa3 to Baa1, citing, among other things, the District's fourth consecutive budget surplus in fiscal year 2000. Also in March 2001, Fitch IBCA upgraded the District's bond rating from BBB to BBB+ because of the District's positive financial performance and strengthening economic indicators. The District was unable to achieve unqualified, or "clean," opinions on its fiscal years 1995 and 1996 financial statements and received qualified opinions. The reasons for the qualified opinions included the District's inability to provide evidence to support business tax receivables and credit balances in the tens of millions of dollars and the related impact on revenues, expenditures, and fund balances as a result of business system inadequacies. The auditors also cautioned that the District experienced increases in its accumulated deficit and declines in its pooled cash. Then, in fiscal year 1997, the District began to turn its financial reporting around and was able to receive a clean opinion on its financial statements. The District continued its recovery and, most recently, in fiscal year 2000, also received a clean opinion on its financial statements. While the District has made significant progress over the last 6 years, it still faces short- and long-term challenges to its financial situation. For example, the District's current projection for its fiscal year 2001 surplus is approximately $65 million. This represents a fairly tight financial margin for a budget of approximately $4.9 billion. In order to ensure that the District does not experience unexpected deficits, constant monitoring of actual revenues and expenditures is needed throughout the year. As budget pressures are identified, the District needs to take quick, decisive actions in order to address the budget pressures and avoid running deficits. Over the longer term, as Authority Chair Rivlin noted in her February 14, 2001, statement, significant challenges still facing the District are securing its financial future for the longer run and addressing the structural imbalance of a jurisdiction caught between the need for greatly improving services and a narrow tax base. Moreover, the bond rating companies also have issued cautions about future factors that could affect the District. For instance, Moody's cautions that the District could be vulnerable in two areas: (1) potential costs and obstacles to improving the quality and efficiency of public services and (2) whether elected officials will have the ability and will to produce results to continue to build stakeholder confidence. Standards and Poor's cautions that financial pressures will come from the District's limited revenue flexibility, significant amount of capital needs, and risks associated with the District's unique economic profile. Fitch cautions that the District still faces challenges including a high debt load, funding of health care, and deferred capital and operating needs, in addition to the possibility of an economic downturn, which is beginning to be felt in other parts of the country. A sound financial management system is critical in helping the District address the continuing pressures that it faces. As we noted in our April 30, 2001 report and our May 16, 2001, testimony, the District continues to face significant challenges in its efforts to put in place a financial management framework that ensures timely and reliable financial data on the cost of the District's operations. Almost 4 years after the District's acquisition of its core financial management system, that system and related elements are in various stages of implementation. The current mix of components involves duplication of effort and, in some cases, requires cumbersome manual processing. As a result, the system does not produce certain types of financial information on a timely and reliable basis, such as the cost of services at the program level. In our report, we made several recommendations related to the District's completion of its financial management system implementation and the District's need to ensure that the system effectively and efficiently meets the District's information requirements. We are pleased that the CFO and other District leaders are already taking action on some of our recommendations and plan to implement the recommendations remaining from our prior reports. It is also important to note that the District has internal control weaknesses that were identified by its independent auditor during the course of its annual financial statement audits. The weaknesses reported by the District's independent auditor as a result of its 2000 audit include issues related to reconciliation of bank accounts and cash management, accounting for payroll transactions, transaction processing for the Public Benefit Corporation and the University of the District of Columbia, lack of timely entry of transactions into the District's core general ledger System of Accounting and Reporting (SOAR), failure to monitor expenditures against open procurements, accounting and reporting for intra-District transactions, and timely reporting of budgetary revisions. Similar to its response to our report, the District has shown a commitment to addressing these problems and is taking action accordingly. At the time of the District's financial crisis, concerns were raised that Congress did not have the oversight mechanisms in place and the information it needed to identify the nature and scope of the District's problems before they became a full-blown crisis and to help the District respond effectively to those problems. Since then, Congress has added new reporting requirements that, if effectively implemented, could provide Congress with critical financial and performance information to help Congress in its oversight and decision-making. We believe that two of the requirements in place may be especially helpful in providing information and perspective that Congress needs to make decisions. Since 1997, the CFO has been required to submit a quarterly report to Congress on the District's financial and budgetary status. This quarterly financial report, which must be submitted no later than 15 days after the end of each calendar quarter, is to contain a comparison between the actual and forecasted cash receipts and disbursements for each month of the quarter. Within the report, the CFO is required to explain any differences between the actual and forecasted cash amounts, any changes that would need to be made to the remaining months' cash forecasts, any impact these changes would have on the budget or supplemental budget request, or if these changes would necessitate any reduction in any agency's expenditures. Provided that this financial information is timely, reliable, and objective, this quarterly financial report could be useful to Congress and others in monitoring the District's financial condition. Since 1998, the Mayor has been required to develop and submit to Congress a performance accountability plan for each fiscal year, including a statement of measurable, objective performance goals for all of the District's significant activities. After each fiscal year, the Mayor is to develop and submit a performance report that includes (1) the level of performance achieved in relation to each of the goals in the performance plan, (2) the title of the management employee most directly responsible for achieving each goal and the title of the employee's immediate supervisor or superior, and (3) the status of any applicable court orders and the steps taken to comply with such orders. This law's general approach of establishing performance goals and reporting on performance is similar to the requirements for executive branch federal agencies under the Government Performance and Results Act of 1993. In reviewing the District's fiscal year 2000 performance report, we found that performance management remains very much a work in progress for the District, and the performance report reflects that fact. The District's goals and measures were in a state of flux during fiscal year 2000, changing as the District introduced new plans, goals, and measures into its performance management process. These changes were part of its ongoing efforts to further develop and improve the performance management process. Nevertheless, these significant and continuing revisions to the District's performance goals limit the usefulness of the performance report for oversight, transparency, accountability, and decision-making. District officials recognize that much work remains in its goal setting, performance measurement, and accountability efforts, and they have important initiatives under way. For example, the Deputy Mayor/City Administrator recently outlined the District's performance-based budgeting initiative that, if effectively implemented, should help improve the transparency and accountability of District agencies by clearly showing the relationship among dollars spent and activities undertaken and services provided. In addition to these two requirements, there are other permanent and temporary reporting requirements that are intended to provide Congress with specific information regarding the state of the District's finances.(See appendix I for a sample of these reporting requirements, most of which were included in the 2001 D.C. Appropriations Act.) While the reporting requirements enacted since 1995 are to provide Congress with important information and perspective on the financial condition, plans, and program performance of the District--information that was sorely lacking in the past--Congress may wish to consider the need for additional mechanisms to help it and the District ensure that they have the information needed to help the District maintain its financial viability. One option that Congress may wish to consider is requiring the District to notify it if certain predefined "reportable events" occur that require the prompt attention of Congress and the District to ensure that financial viability is maintained. Under the Financial Responsibility Act, an Authority could be reestablished if any number of a specific set of major events occur, such as the District's default on any loans, bonds, notes, or other forms of borrowing or the District's failure to meet its payroll for any pay period. The major events that could lead to the reestablishment of the Authority are clearly to be avoided at nearly all costs. But to do so, Congress and the District need pertinent information in time to act before a crisis occurs that would necessitate the return of the Authority. A reportable event notification system could be designed to provide just such information and include some or all of the following types of information: cash flow pressures that show-- projected difficulties in meeting any of the District's financial responsibilities, including debt service, payroll, pension payments, payments under interstate agreements, or any other financial obligations of the District; projected difficulties in meeting any of the District's operational, program, and service obligations to its citizens; a need for increased short-term borrowings to cover the District's budget gap pressures that could indicate-- tight operating margins or potential future operating deficits; that certain major programs or services within the District are experiencing difficulties in meeting their missions within their current structures and levels of resources; pressures or questions from the bond rating organizations regarding the District's credit ratings; and cash projections that indicate a future need for Treasury borrowings. A reportable events notification system for the District would be generally consistent with the approaches that have been taken in other local jurisdictions that have had experiences similar to the District's. For example, the Office of the New York State Comptroller has an ongoing program to assess cities and townships that experience trouble generating sufficient revenues on a continuing basis while maintaining adequate service levels. The assessment program uses nine financial indicators, such as the jurisdiction's fund balance, the liquidity of its cash and investments, and its current liabilities as a percent of net operating revenues. These factors are used as ratios to facilitate comparisons with comparable local jurisdictions. The program also uses nonfinancial indicators, such as the locality's reliance on intergovernmental revenues, the jurisdiction's management ability (measured by the timeliness of annual reports and stability of key management positions), and economic activity measures (for example, the per capita income and number of building permits issued). After determining the causes for the local jurisdiction's financial distress, the State Comptroller offers a wide range of services to address the problem. Similarly, the Ohio Auditor of State uses various financial indicators that could result in a "fiscal watch" of local governments under financial stress. To determine if a local government qualifies for a fiscal watch, the Auditor of State conducts an initial review of the jurisdiction's accounts payable, deficits, cash, and marketable investments. While under a fiscal watch, local governments can receive technical assistance ranging from advice on budget formulation to developing performance audits. A key element of Ohio's fiscal intervention system is providing local officials the opportunity to respond to a fiscal crisis prior to the establishment of an oversight commission. Another notable example is the ongoing transition to local control from the Miami Financial Emergency Oversight Board to the City of Miami, during which a set of financial integrity principles and policies have been developed and codified into city ordinances. Among the 10 financial integrity principles is a provision for financial oversight and reporting, which includes monthly financial reports issued to city departments, the Mayor, and the city commission on any potentially adverse fiscal trends or conditions including comparing the city's budgeted revenues and expenditures. The experiences of these governments, our work at the District, and our related work on reportable events notification systems, suggest that such a system would be most useful to Congress and the District if, in crafting the system, the following considerations are kept in mind. The District and Congress should seek to reach broad agreement on the reportable events that would warrant notification to Congress. Such an agreement would help to ensure that the notification system serves the common needs of the District and Congress in ensuring that the District maintains its financial viability. The reportable events should focus squarely on those current financial pressures that have the potential of developing into a triggering event requiring the re-establishment of the Authority if not promptly and adequately corrected. The reportable events should be selected so that, in the event they occur, enough time is available for Congress and the District to take any needed remedial action to address the matter before it leads to a crisis or triggers the return of the Authority. The reportable events should be clearly defined and transparent so as to limit the possibility of unproductive debate about whether or not a reportable event has actually occurred. The reportable events should be well documented; that is, the notification of a reportable event should include discussion of what happened and why, an assessment of the risk to the District's financial situation, and a discussion of needed actions, if any, to address the reportable event. Such a system should include a "vital few" set of reportable events. Reportable events are not intended to be a substitute for more comprehensive periodic reporting of financial and program performance, but rather are to draw attention to specific events needing immediate attention. The system should seek, as much as possible, to build on financial information already collected, monitored, and used by the District. This would help to minimize the reporting burden and, more importantly, help to ensure that reportable events are valid and reliable indicators of fiscal performance. In that regard, much of the financial information needed to support a reportable events notification system likely is already processed and monitored by the District's CFO. For example, the CFO produces quarterly Financial Status Reports, which provide consolidated summaries of the District's financial status and describe the current status of revenues and expenditures, as well as any developing budget gaps and pressures. The reports also provide updated information about projected revenues and expenditures for the remainder of the fiscal year. At the request of Congress, we would be pleased to work with the District and Congress to develop a reportable events notification system that meets the common needs of the District and Congress. As I noted at the outset of my statement, in crafting the Financial Responsibility Act, Congress established an independent Office of the Chief Financial Officer within the District government with full authority over all financial offices of the District. Congress recognized that it was critical for timely, reliable, and objective financial information to be available to the District and Congress. Congress also recognized that the CFO's independence and authority is vital to its effectiveness. It is important to note, however, that certain powers and functions granted to the OCFO by the Financial Responsibility Act during a control period will change under current law, as the District moves into a noncontrol period. For example: In a control period, all budgeting, accounting, and financial management personnel of the executive branch of the District government (including the independent agencies) are appointed by, serve at the pleasure of, and act under the direction and control of the CFO. This authority will cease during a noncontrol period. In a control period, the CFO employs its own legal counsel. The CFO's legal counsel is independent of the District's Office of the Corporation Counsel, which mainly serves the Mayor, and is under the direct administrative control of the Mayor. Current law does not provide the OCFO with authority to employ its own legal counsel during a noncontrol period. In a control period, the CFO is appointed and removed with the approval of the Authority. However, in a noncontrol period, the CFO can be removed by the Mayor for cause, with the approval of two-thirds of the Council. The law does not define "cause." In a control period, the CFO has the authority to contract for services. This authority will revert to the District's central procurement process during a noncontrol period. During a control period, the CFO's budget request is not subject to revision but is subject to comment by the Mayor and Council as part of the District's annual appropriation request. During a noncontrol period, the CFO's budget would be included in the District's regular budget process. As the District and Congress consider options for ensuring the independence and authority of the CFO, they may wish to consider whether the requirement that the CFO certify the availability of funds for contracts should be amended to expressly include leases and collective bargaining agreements, which can involve significant expenditures but are not currently subject to the CFO's certification. Currently, these items are not expressly included in the CFO's legal responsibility for certification, thereby leaving the certification of funds process subject to disagreement. In addition, Congress and the District may want to consider whether the CFO's budget, once it is appropriated by Congress, should be exempt from being reduced by the Mayor. A similar exemption is currently in place for the City Council. Earlier this week, the Chair of the District City Council submitted a legislative proposal to the City Council to specifically address issues related to the CFO's independence and the scope of the CFO's duties. While we have not had a chance to analyze the proposal in detail, we support efforts by the District to continue or strengthen the independence and authority of the District's CFO in a post-Authority environment. Our Executive Guide: Creating Value Through World-class Financial Management, notes that one of the essential elements of a successful finance organization is clear, strong executive leadership. Once the Authority suspends its activities, it is important to consider whether the CFO will be able to continue to operate and perform its ongoing fiscal and financial activities in an independent manner, without encroachment by others, especially if the District faces difficult choices caused by financial downturn. The IG is now appointed to a 6-year term and may be removed by the Mayor only with Authority approval during a control period. In 1995, around the time of the passage of the Financial Responsibility Act, the OIG had seven authorized full-time equivalents (FTE). Since 1995, the OIG has substantially built its operations, staffing, and audit capabilities. Currently, the OIG has authorized staffing of 105 FTEs. The current responsibilities of the IG include the following: conducting independent fiscal and management audits of District government operations; contracting and overseeing the contract with an outside auditor to perform the annual audit of the District's CAFR; conducting other special audits, assignments, and investigations; annually conducting an operational audit of procurement activities of the District government; forwarding to the appropriate authorities evidence of criminal wrongdoing that is discovered during the course of its audits, inspections, or investigations; and submitting to the appropriate congressional committees and subcommittees an annual report summarizing its activities from the preceding fiscal year. Each year, the IG establishes an audit plan, in consultation with the Mayor, City Council, and Authority (during a control period) 30 days prior to the beginning of the fiscal year. The IG's criteria for selecting audit areas to be included in the plan include the following: (1) materiality of the programs, (2) activities and functions considered for audit, (3) vulnerability of operations to fraud, waste, and mismanagement, and (4) whether there is a legislative or regulatory audit requirement. As with the CFO, the key is to ensure the IG's independence and authority, which are vital to its effectiveness. During a control period, the IG is appointed and removed with the approval of the Authority. During a noncontrol period, the IG can be removed by the Mayor for "cause," although the law does not define "cause." In addition, Congress and the District may want to examine whether the IG has personnel authorities needed to maintain and assure independence. Finally, as with the CFO, Congress and the District may want to consider whether the IG's budget, once it is appropriated by Congress, should be exempt from being reduced by the Mayor. One of the IG's key responsibilities is identifying and reporting to the Mayor, the District Council, and District department and agency heads any problems in the administration of District programs and operations and the need for corrective action. The IG's role in a post-Authority environment is critical because of its mandate to audit and report on the economy, efficiency, and effectiveness of District programs and operations. As such, Congress, the Mayor, and the District Council should consider how to best use the IG's financial and performance-related audits and reporting in order to provide critical oversight and early warnings of any potential problems. Audit committees have long been recognized as a key component of the corporate governance system for private sector companies. Generally, audit committees play an important role in corporate governance by providing an independent view of management's financial reporting and by facilitating communication between management and its internal and external auditors. Typical responsibilities of audit committees include assessing the processes related to the company's risks and control environment, overseeing financial reporting, and evaluating the internal and independent audit processes. The importance of audit committees has also come to be recognized as increasingly important in the public sector. In 1997, the Government Finance Officers Association (GFOA) recommended that every government establish an audit committee or its equivalent. The GFOA also stated that each audit committee should be formally established by charter and that the members of the audit committee should collectively possess the expertise and experience in accounting, auditing, and financial reporting needed to understand and resolve issues raised by the independent audit of the financial statements. The GFOA stated that the primary responsibility of the audit committee should be to oversee the independent audit of the government financial statements from the selection of the independent auditor to the resolution of audit findings. The GFOA also stated that the audit committee should have access to internal audit reports and plans. Finally, the GFOA recommended that the audit committee present annually to the governing board and management a written report on how it has discharged its duties. The District's IG has established a CAFR Oversight Committee, which oversees the progress on the annual financial audit. While not an audit committee, the CAFR Oversight Committee provides an excellent opportunity for District financial management staff, OIG staff, and representatives from the Mayor's office, the D.C. Council, and the Authority to be updated on the status of the audit and any issues being encountered by the auditors. Consequently, issues affecting the audit could be addressed in an effective and timely manner so the auditor's progress towards timely completion of the CAFR would not be impeded. This process has been key in assuring that the District was able to compensate for current issues and avoid many of the past problems that resulted in the late issuance of the fiscal year 1999 CAFR. The CAFR Oversight Committee, however, does not have the full scope of roles and responsibilities typical of an audit committee, nor does it follow the organizational requirements of a traditional audit committee. Congress and the District may want to consider forming an audit committee or variation of an audit committee based on the objectives of audit committees described above, and/or strengthening and further defining the current CAFR Oversight Committee already in place. In summary, the District and its citizens, the Authority, and Congress have jointly achieved an enormous accomplishment in restoring the District to financial viability. At the same time, many of the challenges the District faced in the past continue, requiring difficult decisions now and in the future. The District and Congress must have reliable, accurate, and timely financial, program cost, and performance information if they are to confidently make these hard decisions. Specifically, the District and Congress need current, reliable information about the District's financial condition and developing trends in order to promptly respond to any pressures or warning signs that could indicate that future difficulties lie ahead. District officials and Congress could thereby take an active and prospective role in dealing with issues, rather than finding themselves in a position of reacting to a crisis. Such information and oversight will also be helpful to the District in providing confidence that the District is well managed, providing needed services to its citizens, and maintaining its financial solvency. We have a very constructive relationship with the District and we look forward to continuing to work with Congress, your Subcommittees, and District officials as the District government continues to strive to provide the services that its residents expect and deserve. Madam Chairwoman and Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions you or other members of the Subcommittees may have. For further information, please contact Jeanette Franzel, Acting Director, Financial Management and Assurance, at (202) 512-9406 or J. Christopher Mihm, Director, Strategic Issues, at (202) 512-6806. Major contributors to this testimony included Richard Cambosos, Sharon Caudle, Doug Delacruz, Molly Gleeson, Steven Lozano, Meg Mills, Susan Ragland, and Norma Samuel. Since the financial crisis precipitating establishment of the Authority, Congress has enacted a number of reporting requirements for various entities within the District of Columbia government. Some of the reports are required by permanent law while others are temporary. A sample of the permanent reporting requirements is listed in table 1.
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Although the District of Columbia, the Financial Responsibility and Management Assistance Authority, and Congress have achieved an enormous accomplishment in restoring the District to financial viability, many of the challenges the District faced in the past continue. The District and Congress need current, reliable information about the District's financial condition and developing trends in order to promptly respond to any pressures or warning signs that could indicate that future difficulties lie ahead. Toward that end, the District must ensure that its new financial management system is effectively implemented and provides decision makers with reliable and timely data. In addition, since 1995, Congress has put in place a number of reporting requirements to help provide the financial, planning, and performance information that it needs to conduct effective oversight and make decisions. Congress may wish to consider additional mechanisms to ensure that it and the District have the information needed to help the District maintain its financial viability and address its current and emerging challenges. Such mechanisms must be considered and implemented within a context that seeks to balance two sets of values: the overriding importance of Home Rule and respect for the District's democratic institutions and Congress' oversight and decision making responsibilities for the nation's capital.
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All local staff who work for U.S. diplomatic missions overseas are eligible to apply for an SIV that allows them to immigrate to the United States, provided they meet certain conditions, such as having 15 years of employment with the U.S. government abroad. Congress has enacted a series of laws since 2006 to enable certain Afghan nationals who have worked as translators or interpreters for the U.S. government in Afghanistan to be eligible for SIVs. In 2009, Congress authorized Afghan employees of the U.S. government in Afghanistan who meet certain criteria to be eligible for SIVs. The first of these SIV programs is permanent and provides SIVs to eligible Afghans who have worked directly with the U.S. armed forces or under chief of mission authority for at least 1 year as translators or interpreters. A maximum of 50 SIVs are currently granted annually for principal applicants, excluding their dependents, under this program. The second program is temporary and was created through Section 602(b) of the Afghan Allies Protection Act of 2009 and provides SIVs to eligible Afghans who worked for at least 1 year in Afghanistan for the U.S. government, or for the International Security Assistance Force (ISAF), who provided "faithful and valuable service" to the U.S. government or ISAF that has been documented by a supervisor, and who have experienced or are experiencing an ongoing serious threat as a consequence of employment by the U.S. government. As the Congressional Research Service has reported, the program initially authorized no more than 1,500 principal applicants to be granted special immigrant status annually for fiscal year 2009 through fiscal year 2013, with a provision to carry forward any unused numbers from 1 fiscal year to the next. Congress subsequently amended the program to authorize up to 3,000 principal applicants for fiscal year 2014 with an additional 1,000 through the end of calendar year 2014, and up to 7,000 for fiscal years 2015, 2016, and 2017. If the numerical limitation is not reached in a fiscal year, the balance of principal applicants who may be provided special immigrant status carries over to the following fiscal year. Principal applicants must apply to the chief of mission for special immigrant status by December 31, 2016, and the authority to issue visas under this program is scheduled to terminate on the date that such visas are exhausted. Though this report focuses on Afghan SIV recipients who were employed by State or USAID, Afghan nationals eligible for SIVs include current or former employees of the Department of Defense, other U.S. government agencies, and U.S.-funded contractors or implementing partners. More than 70 percent of SIV recipients have worked as translators, mostly for the U.S. military in Afghanistan. From fiscal years 2010 through 2012, 73 SIVs were issued to principal Afghan applicants. Issuances of SIVs began accelerating in 2013, with 652 visas issued to principal applicants, and the annual total of SIVs issued to principal Afghan applicants rose to 3,441 in 2014. As of August 28, 2015, 2,372 principal applicants had applications pending in the initial stage of the SIV application process. Applications for 2,873 principal applicants were undergoing administrative processing, which is one of the final steps in the process. See figure 1 for more information on the various steps in the SIV issuance process. State and USAID rely on local staff to assist in accomplishing U.S. diplomatic objectives and in implementing and monitoring U.S. assistance programs in Afghanistan (see fig. 2). According to officials from State and USAID, staffing conditions in Afghanistan include the frequent turnover among American staff, who generally serve 1-year tours there and, as a result, may have limited institutional knowledge about their roles. Furthermore, the security situation in Afghanistan is dangerous and unpredictable, a fact that creates challenges for the international community and Afghan government to implement programs throughout the country. For example, in June 2015, we found that local staff (1) provide programmatic continuity, local knowledge, and language ability at posts where American officers may have short or interrupted tours of duty, and (2) often provide security and programmatic support in locations where American officials cannot safely or easily travel. As of April 2015, the U.S. diplomatic mission in Afghanistan had 882 positions occupied by Afghan staff and 502 positions occupied by direct hire American personnel. Of that total, State and USAID combined had 869 positions occupied by Afghan staff and 471 by Americans. From 2010 to 2015, a total of 378 Afghan local staff resigned from their positions at State and USAID in Afghanistan after receiving SIVs (see fig. 3). State and USAID had a high of 243 SIV-related resignations in 2014, but the number of resignations will likely be lower in 2015 than in 2014, based on both the number of such resignations as of August 2015 and the number of Afghan staff who have currently completed an initial step in the SIV application process. Furthermore, resignations have had varied effects on institutional knowledge at State and USAID. Average tenure among both agencies' Afghan workforces decreased slightly. In addition, embassy officials said that local staff attrition has affected some program coordination with the Afghan government. Nonetheless, officials reported that recruiting qualified applicants to replace those local staff has not posed a problem. From 2010 through 2012, 6 State and no USAID Afghan staff resigned after receiving an SIV. Prior to 2012, State and USAID issued relatively few employment certification letters, which verify Afghan staff eligibility for the SIV program. The employment certification letter is the first step in the SIV application process; therefore the number of Afghan local staff receiving SIVs will likely be smaller than the number of these letters provided. State and USAID issued 6 letters in 2010 and 37 in 2011. Additionally, agency officials have noted that SIV processing was relatively slow during the early years of the program. State officials acknowledged that, prior to 2013, as a result of delays in administrative processing, relatively few SIVs were issued. In 2013, the number of SIV-related resignations began to increase substantially and reached its highest level in 2014. A total of 81 State and USAID Afghan local staff resigned after receiving SIVs in 2013, and 243 in 2014. In 2013 and 2014, State reported that SIV-related resignations became the single largest cause of attrition among all Afghan local staff employed at the Kabul embassy. From 2010 to 2012, security clearance revocation had been the primary cause of attrition among Afghan staff. The following factors may help explain the increase in SIV-related resignations in 2013 and 2014. In December 2013, changes to the law authorizing SIVs for Afghan nationals altered eligibility requirements for the SIV program. Previously, Afghan local staff who had experienced or were experiencing an ongoing serious threat as a consequence of their U.S. government employment qualified for the visa. While this standard still applies, the 2013 amendment to the law allowed credible sworn statements depicting dangerous country conditions to be a factor in determining the threat to local staff. According to State officials, this enabled all Afghans who met U.S. government employment requirements to be considered eligible. State officials noted that this change allowed the broad threat environment to be used to consider individual cases, alleviating the need for applicants to demonstrate any specific threat incident to determine eligibility. State officials said that these changes helped speed up SIV processing. In fiscal year 2013, State dedicated additional resources to help process SIVs at the Kabul embassy, including creating a position for a U.S. direct hire at post to help administer and address accumulated backlogs in the initial approval stage of the process, and four additional staff positions. The number of employment certification letters issued to Afghan staff increased after 2011. In 2012, State and USAID issued 303 letters (see fig. 4). Given, in part, visa-processing times, this increase in employment certification letters would lead to an increase in SIV- related resignations beginning in 2013. State and USAID are likely to experience fewer SIV-related resignations in 2015 than in 2014. From January to August 2015, a total of 48 Afghan local staff resigned from State and USAID after receiving an SIV. State officials indicated that it is difficult to determine whether SIV issuances for the rest of the calendar year are expected to continue at the same pace as in prior months. However, the number of employment certification letters issued to State's and USAID's Afghan local staff have remained lower than the high of 303 letters in 2012. State and USAID issued 174 letters in 2013, 178 in 2014, and 100 from January to August 2015. State and USAID officials provided several explanations for why some Afghan local staff may forgo the SIV program altogether. In 2014, as part of a worldwide adjustment to salaries of local staff at U.S. diplomatic missions, State raised salaries for all Afghan local staff by 45 percent. State reported this salary increase has helped the embassy retain local staff. Additionally, State and USAID officials stated that Afghan SIV recipients who have relocated to the United States often face challenges integrating and obtaining adequate work opportunities and have communicated those challenges to Afghan staff employed at the embassy in Afghanistan. According to our assessment of changes to average tenure and grade level of Afghan staff, Afghan staff attrition, including SIV-related resignations, has had varied effects on State's and USAID's institutional knowledge. The average tenure of each agency's Afghan staff, one measure of institutional knowledge, has decreased slightly since the SIV program began, while average grade level, another measure, has remained relatively stable. From 2010 to June 2015, average tenure among both agencies' Afghan workforces decreased slightly (see table 1). During this period, average tenure among State's Afghan local staff has decreased by less than 3 months, while average tenure among USAID'S Afghan local staff has decreased by approximately 5 months. Afghan staff attrition, including SIV-related resignations, has also had no substantial effect on average grade levels among USAID'S Afghan local staff. From 2010 to June 2015, the average grade level among USAID's local staff in Afghanistan has remained consistent over time at the level that includes management and technical positions. Additionally, the grade levels from which State and USAID had the most SIV-related resignations differed from the grade levels that agency human resources officers reported difficulty filling in 2013. State and USAID officials also identified a number of other effects that Afghan staff attrition, including SIV-related attrition, may have on operations in Afghanistan. USAID officials noted that it can take several years for local staff to build effective relationships with Afghan government officials. When Afghan local staff resign, these contacts are often lost, a result that may affect operations by slowing down program coordination with the Afghan government. Attrition can also affect program management. For example, State has reported that experienced staffing in grants management is needed to ensure accountability and proper oversight. Likewise, USAID officials said that the ability of American staff to perform some aspects of the agency's work, such as program monitoring and evaluation, can be affected by increased demands on their time caused by local staff attrition. Attrition can lead to American supervisors' taking on additional responsibilities that they would not be expected to perform at other posts. For example, State and USAID officials said that American personnel spend significant amounts of time training and bringing replacement staff up to speed on embassy processes and operations as a result of attrition. These officials stated that these additional responsibilities can present challenges for maintaining adequate management controls and program oversight in some areas. Attrition, including SIV-related attrition, may also affect the training and productivity of Afghan local staff. State officials said that Afghan staff may need up to 2 years to receive the necessary training and skills to perform their jobs at a high level. However, the period of highest productivity can be short because these staff are eligible to apply for an SIV after 1 year of employment with the U.S. government. For example, according to USAID officials, the agency invests in the training and certification process for contracting officer representatives. When these Afghan staff resign, USAID fills the vacancies and goes through the process of recertifying replacement staff. Embassy managers have reported hesitation about investing in training because they may not see an adequate return on their investment. In July 2014, State's Office of Inspector General reported that, at that time, only one Afghan staff member in the embassy's Consular Affairs office had received supervisory or advanced consular training, and none of the Afghan staff in the information management section had received supervisory training. State and USAID reported they were successful in identifying qualified replacements to fill vacancies for local staff positions. State officials reported receiving applications from qualified candidates to staff all but three vacancies from 2010 through 2014. State and USAID officials provided several insights that may help explain the availability of qualified Afghan workers. These officials stated that the U.S. government drawdown and the reduction in civilian organizations' staffing levels have increased the availability of qualified applicants because fewer potential applicants are now employed by the U.S. government and international organizations. In addition, officials from both agencies report that the SIV program is often perceived as a recruitment incentive for qualified applicants. State officials said that some Afghans may be willing to take comparable or even lower salaries to have the potential benefit of the SIV program. State and USAID have taken a number of actions to help mitigate the effects of attrition among Afghan local staff, including local staff who resigned their positions after receiving an SIV. State and USAID officials said they conduct recruitment to fill positions that have been vacated as a result of SIV-related resignations and for other reasons, such as dismissal due to losing a security clearance. State and USAID officials said they temporarily assign American personnel and local staff from other diplomatic missions overseas to Afghanistan in order to fill staffing gaps and provide experienced staff who can train and supervise Afghan staff. USAID also assigns local staff from other diplomatic missions for longer- term assignments that can last up to several years. Both agencies' headquarters have provided additional administrative support to their missions in Afghanistan beyond what is generally provided to other overseas missions. Both State and USAID are considering moving additional functions from the U.S. embassy in Kabul to other diplomatic missions in the region. State and USAID officials said they sometimes fill one position with two employees in anticipation of an SIV-related resignation. In 2014, as part of State's worldwide effort to normalize salaries for local staff, the embassy in Kabul raised salaries for all Afghan local staff by 45 percent, and State and USAID officials said this has helped to retain local staff. Despite 243 resignations in 2014 as a result of receiving an SIV, State and USAID officials said they were able to recruit and hire personnel to replace those lost because of attrition. These officials stated they have to constantly advertise and fill vacant positions within the local workforce as a result of relatively high local staff attrition in Afghanistan, including SIV- related resignations. In 2014, State posted 219 job vacancy announcements and received an average of 555 applications for each vacancy announcement that was posted. From June 2014 through May 2015, State reported it had hired about 120 Afghan staff. USAID officials reported they posted 130 vacancy announcements from April 2014 to April 2015, and USAID officials said they have not had difficulty recruiting qualified replacements. State and USAID officials said that one of the biggest challenges to the recruitment process is the amount of time needed to conduct security screenings for new employees, and typically it may take 6 to 8 months to fill a position. USAID officials said efforts have been made to shorten the security screening process, and State human resources officials said the embassy maintains a queue of qualified applicants in an effort to speed up the hiring process. Similarly, USAID officials said they prescreen applications in Washington, D.C., in order to alleviate some aspects of the recruitment process for USAID in Afghanistan. In addition, USAID officials said the agency streamlined its hiring strategies in 2014, and reduced the amount of time to hire a new employee by 60 days, from 10 months to 8 months. State and USAID officials said they send U.S. direct hire employees to Afghanistan on a temporary basis to fill staffing gaps caused by Afghan staff attrition or to provide additional support to American personnel. Temporarily assigned personnel may work for a few days or several months. According to State and USAID officials, these employees can help to supervise and train Afghan staff recently placed in new positions. The number of these temporarily assigned personnel in Afghanistan anytime varies by the needs of individual offices, as well as security concerns and available housing and office space. The embassy at times restricts these personnel from entering Afghanistan because of security concerns, according to State officials. In fiscal year 2014, the embassy's Consular Affairs office received approximately 600 staff days' worth of temporary assignments from U.S. consular officers and local staff from other diplomatic missions. State and USAID officials also reported they recruit local staff from U.S. missions in other countries, referred to as third country nationals (TCN), to fill key positions at the U.S. embassy in Afghanistan. TCNs are experienced State and USAID employees who have expertise in key areas and are able to build capacity among Afghan staff and provide training. According to State and USAID officials, TCNs tend to have a high level of experience and are familiar with State and USAID policies and procedures, and therefore can work more independently than newer Afghan staff. According to USAID officials, USAID employs TCNs on a short-term basis, typically 6 months, and also utilizes a TCN program where local staff from other diplomatic missions work in Afghanistan for at least 1 year with the option to renew. USAID had 34 TCNs supporting the USAID mission as of September 2015. State also uses TCNs on a short- term basis, and has proposed a TCN program similar to the USAID program, where local staff from other diplomatic missions work for 1 year or longer in Afghanistan. State has identified 20 key positions for TCNs that would provide the continuity, expertise, and training lacking in several offices within the embassy. State and USAID officials noted TCNs are more expensive for the mission than Afghan staff because they receive higher salaries, incur travel expenses associated with deployment to Afghanistan, and have other benefits and costs not associated with Afghan staff. In addition, the diplomatic missions from which TCNs are transferred have expressed concerns regarding their own workforce needs. Short-term TCNs create temporary vacancies at the diplomatic missions that send them, and TCNs who accept long-term positions must resign their positions at their current diplomatic missions, creating vacancies that must be filled. State currently performs some administrative functions outside of Afghanistan on behalf of the embassy in Kabul. For example, State headquarters in Washington, D.C., performs financial and security in- processing functions for American personnel who are going to Afghanistan. Officials said that these are functions usually performed at an overseas mission. In addition, the embassy has started to conduct procurements from the U.S. embassy in Amman, Jordan, and State's Regional Procurement Support Office in Frankfurt, Germany. USAID's Afghan Hands program supports the mission in Afghanistan with 20 available U.S. direct hire positions at USAID headquarters in Washington, D.C. The Afghan Hands personnel work directly on USAID programs and projects in Afghanistan, and provide management and oversight to USAID implementing partners. According to USAID officials, Afghan Hands personnel are expected to travel frequently to Afghanistan for short-term assignments. As of May 2015, 17 of the positions were filled, according to USAID officials. Many of the Afghan Hands personnel have previously served at the USAID mission in Afghanistan and have institutional knowledge of USAID programs and procedures in Afghanistan. Afghan Hands personnel perform functions that are often performed by American personnel or Afghan staff in Afghanistan. State and USAID have proposed to offshore additional administrative functions to other U.S. missions in the region. In August 2014, USAID proposed to offshore 9 positions in Almaty, Kazakhstan, in order to provide dedicated support for USAID's financial management, acquisitions, and the economic growth and infrastructure team. The USAID proposal notes that Afghan staff attrition has created a continuous need for training of newly hired Afghan employees, which could be provided by offshore staff on temporary assignment in Afghanistan. Furthermore, in this proposal, USAID estimated the total annual costs for a fully staffed Afghanistan Support Team in Kazakhstan. According to State officials, State is considering offshoring some procurement functions to provide continuous support, similar to what is provided in Amman, Jordan. However, State officials said that other diplomatic missions may find it difficult to reassign their local staff to provide functions for the U.S. mission in Afghanistan or may be limited in the amount of available office space. According to State and USAID officials, these agencies sometimes double-encumber positions when a local employee reports that he or she is in the process of applying for an SIV. Double-encumbering occurs when agencies fill one position with two employees in anticipation of an SIV-related resignation. As of September 2015, State had 36 positions that were double-encumbered, and USAID had 11 as of May 2015, according to State and USAID officials. State and USAID officials reported that the embassy allows for agencies to start recruiting for a currently filled Afghan position when the Afghan staff person occupying that position informs his or her supervisor that an application for an SIV has been initiated. State and USAID officials said the employee expecting to depart an embassy can train his or her replacement. State officials said that sometimes this practice results in two employees filling the same position if the original employee's application is delayed or rejected. As previously mentioned, the U.S. mission in Afghanistan provided a 45 percent salary increase to all agencies' Afghan staff in July 2014, as part of State's effort to raise the salaries of local staff worldwide to better reflect the median wage rate of similar and comparable organizations. State officials said the salary increase was part of a State effort to update salaries at diplomatic missions worldwide, and was not in response to the SIV program. However, State and USAID officials said higher salaries help to recruit and retain well-qualified employees. Human resources officials at the embassy in Kabul reported that the pay increase was a strong incentive for Afghan staff to postpone SIV applications and remain employed by the U.S. government. The U.S. mission provides 25 percent additional compensation for local staff in Afghanistan given the extra measures they may take to avoid or endure terrorist threats or harassment. State provides local staff at selected diplomatic missions additional compensation as a percentage of their salary because of potential harassment or threats of violence related to their U.S. government employment. In 2015, State designated 21 posts, including Afghanistan, as offering such allowances. While State and USAID have made a number of efforts to mitigate the effects of Afghan staff attrition, according to officials, agencies have not formally evaluated the extent to which these actions have addressed effects on the workforce or programs. Key principles of human capital management call for agencies to evaluate the success of human capital strategies, such as actions taken to mitigate attrition among staff, by using performance measures to assess the extent to which these activities contribute to achieving programmatic goals. An evaluation of actions taken to mitigate effects related to local staff attrition can help determine if an agency has effectively filled gaps in institutional knowledge from attrition among Afghan staff, and identify reasons for any performance shortfalls resulting from those gaps. Without such evaluations, agencies will be limited in having information to determine the costs, benefits, and relative effectiveness of actions taken. Further, in August 2014, State's Office of Inspector General (OIG) noted that mission operations may be negatively affected without a programmatic approach to addressing attrition among Afghan staff. State and USAID officials have also noted that American personnel's 1-year tours in Afghanistan create challenges with institutional knowledge. Evaluations can provide critical information to enable knowledge transfer among American staff in Afghanistan and minimize duplication of efforts that have already proven to be ineffective or resource intensive. For example, agencies can measure whether actions such as hiring, training, and retention have changed the skill level of the workforce or affected the U.S. mission's capabilities related to maintaining its overseas presence in Afghanistan. In its draft proposal to employ TCNs in Afghanistan, State noted that if the program were to proceed, the agency would need to demonstrate the benefits associated with the employment of TCNs and justify increased costs. However, in its proposal, State did not identify any potential measurements to evaluate the benefits of using TCNs or the additional costs that would be incurred to attract these individuals to long-term positions in Afghanistan. USAID identified cost information that could be utilized to evaluate human capital efforts in its strategic staffing document for Afghanistan, which outlines a number of proposals to potentially address staffing challenges there. The document includes examples of resources required and cost analyses of some of the proposals to mitigate the effects of attrition, such as the option to offshore positions that may be vacated by Afghan staff to another embassy in the region. However, USAID officials also said they were not aware of any completed evaluations of actions taken related to mitigating the effects of attrition. State and USAID officials noted that agencies operate in a reactive state and face resource constraints managing a large diplomatic mission in a dangerous and unpredictable environment such as Afghanistan. Accordingly, agencies may not fully document or evaluate certain efforts. Key principles for human capital management note that evaluations of human capital strategies may help agencies determine if they met human capital goals and whether those strategies helped or hindered the agencies from reaching their programmatic goals. While the State OIG has reported that increased security risks in Afghanistan hinder employees' ability to assess programs, inadequacies with such assessments can impair program performance. Nonetheless, State's evaluation policy calls for evaluations to improve programs, projects, and management processes. USAID's evaluation policy also notes that though security concerns can pose challenges to conducting evaluations, creative approaches can be utilized to measure achievements in such environments. Local staff are a vital component of the success of U.S. diplomatic missions overseas. The U.S. mission in Afghanistan faces a number of uncertainties and challenges that make the presence of its Afghan staff all the more important, including an unpredictable security situation, relatively short tours among U.S. personnel, and an evolving diplomatic presence that relies on the U.S. military for security support. State and USAID have taken a number of actions to mitigate the effects of Afghan staff attrition, including SIV-related resignations, such as increasing recruiting efforts and augmenting staff with experienced local staff from other U.S. missions overseas. However, State and USAID have not evaluated their actions to address the effects of Afghan staff attrition to assess the costs or effectiveness of these actions. Information gained from such evaluations could inform agencies' workforce planning efforts, including strategies related to hiring, training, and staff development and could improve how agencies manage attrition of Afghan staff in the future, whether because of SIVs or other reasons. Agencies could also share information learned from these evaluations with one another, particularly if an agency conducted evaluations on resource-intensive efforts to mitigate the effects of attrition. For example, USAID has a program in which third country nationals from U.S. missions in other countries are employed for periods of 1 year or longer to help mitigate the effects of attrition among local staff in Afghanistan--a practice that is more costly than employing Afghan staff and one that can pose challenges for the U.S. missions that send them. If USAID had evaluated its program, USAID could have informed State's assessment of a similar proposal. Furthermore, without evaluation of mitigating actions that agencies have previously undertaken, agencies may be unable to weigh the costs and benefits of actions being implemented, and may be unable to identify the strategies that are most effective for handling future workforce-related needs in challenging environments. To better understand the costs and effectiveness of actions to mitigate the effects of Afghan staff attrition, and to inform future workforce planning efforts, we recommend that the Secretary of State evaluate these actions, and the Administrator of USAID evaluate these actions. We provided a draft of this report for review and comment to State and USAID. In written comments, summarized below and reproduced in appendix II and III, respectively, State and USAID agreed with the recommendation to evaluate actions to mitigate the effects of Afghan staff attrition. In its written comments, State agreed with the recommendation. State noted that the Afghanistan SIV program has had considerable impact on mission staffing levels and SIV-related resignations are currently the largest contributing factor for increased attrition among local staff. However, State wrote that many elements should be taken into consideration when looking at sustaining a workforce capable of meeting U.S. goals and objectives in Afghanistan. Further, State noted that strategically approaching workforce planning is complicated by, among other things, the unpredictable nature of events in a dangerous environment. State said that it evaluates staffing levels as part of its regular agency-wide review processes, and that a specific analysis of actions taken to mitigate attrition among Afghan staff would be reactive in nature and have minimal value added in a more complex staffing picture. Nevertheless, as we note in this report, an evaluation of the relative costs and effectiveness of specific actions taken to mitigate effects related to local staff attrition could help determine if State has effectively filled gaps in institutional knowledge from attrition among Afghan staff, and enable knowledge transfer among American staff in Afghanistan. In its written comments, USAID agreed with the recommendation. USAID noted that it proactively tracks staffing levels in Afghanistan, and has taken steps to develop and implement creative approaches to staffing. For example, USAID said that, in addition to weekly and monthly staffing reports, from January to October 2015 it conducted seven ad hoc analyses regarding locally employed staff for internal and external audiences. In addition, USAID said it regularly discusses staff retention and recruitment and staffing mechanisms at strategic management meetings. According to USAID, these meetings serve as a venue to discuss, evaluate, and iterate strategies and other efforts to mitigate the effects of local staff resignations. We will continue to work with USAID in monitoring the implementation of the recommendation. State and USAID also provided technical comments that we incorporated, as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of State, the Administrator of USAID, and other interested parties. In addition, the report is available at no charge on GAO's website at http://www.gao.gov. If you or your staff have any questions about this report, please contact Michael J. Courts at (202) 512-8980 or at [email protected]. Contact points for our Office of Congressional Relations and Office of Public Affairs can be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. In this report, we evaluated (1) special immigrant visa (SIV)-related resignations, including how, if at all, the Department of State's (State) and U.S. Agency for International Development's (USAID) workforces in Afghanistan have been affected in recent years; (2) the actions, if any, State and USAID have taken to mitigate any effects related to the attrition of Afghan staff, including SIV recipients; and (3) the extent to which State and USAID have evaluated mitigating actions related to the attrition of Afghan staff, including SIV recipients. We interviewed agency officials at State and USAID in headquarters and at the U.S. diplomatic mission in Afghanistan, including consular officers, human resource officers, USAID mission executive officers, and State management officials to address all three objectives. We reviewed background on the SIV program for Afghan nationals, including relevant legislation and a report from the Congressional Research Service. In order to provide background information on the SIV program for Afghan nationals, we also utilized reports published by State and the Department of Homeland Security on the SIV program for Afghan nationals, primarily data on visa issuances and general processing times. To assess SIV-related resignations, and how, if at all, State's and USAID's workforces in Afghanistan have been affected by the resignations of SIV recipients in recent years, we obtained and analyzed data for each calendar year, 2010 through 2014, and for January to June or August 1, 2015. We performed longitudinal analysis of the data in order to identify the initial extent of SIV effects, significant trends or changes over time, and any correlation between variables. We assessed data on Afghan staff for the following categories: the number of SIV- related resignations at State and USAID, the number of employment certification letters State and USAID issued to Afghan staff, average tenure of State's and USAID's current staff, and average grade levels of USAID's current staff. We analyzed data on SIV-related resignations related to the special category of SIVs created by the Afghan Allies Protection Act of 2009. State and USAID provided these data, which included only Afghan staff who departed their positions after receiving an SIV and did not include those who departed employment for other reasons. These data were relevant to Afghan local staff but did not include third country nationals or other staff working in Afghanistan on a temporary duty basis. Agencies provided data on start and end dates of employment for those Afghan staff who resigned after receiving SIVs. We utilized data on average tenure and grade level of Afghan local staff as rough indicators of institutional knowledge. Both agencies provided start and end dates of employment, from which we calculated average tenure. While average tenure provides an overall summary of yearly trends, a relatively small drop in average tenure can be associated with a relatively larger increase in the number of newly hired Afghan staff. Agency data demonstrated this increase in the number of newly hired Afghan staff. For example, in June 2015, USAID had 92 Afghan staff with less than a year's tenure, representing about 46 percent of the agency's local staff, compared with 65 in December 2012, representing about 30 percent of the agency's local staff. In addition to calculating averages, we also calculated and examined yearly median tenure levels and considered the distribution of length of tenure. USAID provided staff grade levels but State could not provide similar data for its Afghan staff. We analyzed average tenure and grade level for a single-month slice of each year within the scope of our analysis (i.e., May 2015 and December for all other years). Accordingly, the data do not represent all Afghan local staff who worked for State or USAID over the course of any particular year. Average tenure rates were also affected by local staff separating from mission employment for reasons other than SIVs, such as retirements or terminations. The data the agencies provided did not report whether newly hired local staff had previously been agency employees and may therefore understate the actual experience these staff brought to their agencies. We also utilized data related to recruitment of local staff from the 2010 through 2014 local compensation questionnaires for Afghanistan. This annual questionnaire gathers input from all U.S. agencies at an overseas mission across a range of topics related to the local workforce. To assess the reliability of State's and USAID's data and responses to the local compensation questionnaires, we interviewed knowledgeable human resources officials from State in Kabul and solicited input from both agencies on their internal controls, potential data vulnerabilities, and any incidence of missing data. We determined the data to be sufficiently reliable for our purposes. To assess the actions, if any, State and USAID have taken to mitigate any effects related to the attrition of Afghan staff, including SIV recipients, we reviewed agency documents that described these efforts, including any analyses agencies had undertaken. To assess the extent to which State and USAID have evaluated mitigating actions related to the attrition of Afghan staff, including SIV recipients, we reviewed criteria for key principles in strategic human capital management, State's and USAID's evaluation policies, and agency documents that included workforce-related planning and analyses. We also reviewed State's August 2014 Office of Inspector General Inspection of Embassy Kabul, Afghanistan, for the recommendations it made to address challenges associated with attrition in the Afghan workforce. We compared State's and USAID's efforts against key principles in strategic human capital management. We conducted this performance audit from January 2015 to December 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Hynek Kalkus (Assistant Director), Jon Fremont, Farhanaz Kermalli, and Owen Starlin made key contributions to this report. Ashley Alley, Tina Cheng, Martin De Alteriis, Katie Bernet, Karen Deans, Thomas Gilbert, and Michael Silver provided additional support.
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Congress established an SIV program in 2009 for Afghan nationals with at least 1 year of U.S. government service, given the risk these employees face. Local staff at the U.S. diplomatic mission in Afghanistan are key to implementing U.S. policies and programs because of their institutional knowledge, language skills, and local relationships. A high rate of Afghan staff resigning after receiving an SIV could diminish the U.S. government's capacity to carry out its mission. GAO was asked to review State's and USAID's efforts to mitigate the loss of Afghan staff. GAO evaluated (1) SIV-related resignations, including how, if at all, State's and USAID's workforces in Afghanistan have been affected in recent years; (2) the actions, if any, State and USAID have taken to mitigate any effects related to attrition of Afghan staff, including SIV recipients; and (3) the extent to which State and USAID have evaluated mitigating actions related to the attrition of Afghan local staff, including SIV recipients. GAO analyzed data from 2010 to 2015, reviewed documents regarding the Afghan workforce, and interviewed State and USAID officials. Resignations of Afghan local staff at the Department of State (State) and the U.S. Agency for International Development (USAID) after receiving a special immigrant visa (SIV) reached their highest level in 2014, and have had varied effects on the agencies' institutional knowledge (fig.). Resignations increased as more Afghan staff began the SIV application process than in the initial years of the program, and as State addressed delays that had previously slowed visa issuances. Afghan staff resignations are likely to be lower in 2015 than in previous years based on the number of current staff that have initiated the SIV process. Based on GAO's assessment of changes to average tenure and grade level of Afghan staff from 2010 until June 2015, and insights from agency officials, the effects of SIV-related resignations on State's and USAID's institutional knowledge is varied. For example, average tenure among both agencies' Afghan workforces decreased slightly. In addition, embassy officials said that local staff attrition may affect some program coordination with the Afghan government. Nonetheless, despite this attrition, agency officials reported that they were successful in identifying qualified replacements to fill positions. Agencies have taken a number of actions to mitigate the effects of Afghan staff attrition, including SIV-related resignations. For example, State and USAID temporarily transfer experienced local staff from other diplomatic missions to Afghanistan, and the agencies sometimes fill one position with two employees in anticipation of an SIV-related resignation. In addition, the agencies provide additional administrative support from Washington, D.C., beyond what is generally provided to other U.S. missions, and send U.S. personnel to Afghanistan on a temporary basis to fill staffing gaps caused by attrition. State and USAID officials said that these agencies have not evaluated actions taken to mitigate the effects of Afghan staff attrition. Officials said agencies have not conducted such assessments because of resource constraints and the reactive nature of operations in such an unpredictable environment. Key principles of human capital management that GAO identified call for agencies to evaluate the contribution that such activities make toward achieving programmatic goals, including those related to the workforce. Without these assessments, it will be difficult for agencies to have information to determine the costs and benefits of actions taken and handle workforce-related needs in challenging environments in the future. GAO recommends that State and USAID evaluate actions intended to mitigate the effects of Afghan local staff resignations. State and USAID agreed with the recommendations.
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Our review of the pilot test identified several challenges related to pilot planning, data collection, and reporting, which affected the completeness, accuracy, and reliability of the results. DHS did not correct planning shortfalls that we identified in our November 2009 report. We determined that these weaknesses presented a challenge in ensuring that the pilot would yield information needed to inform Congress and the card reader rule and recommended that DHS components implementing the pilot--TSA and USCG--develop an evaluation plan to guide the remainder of the pilot and identify how it would compensate for areas where the TWIC reader pilot would not provide the information needed. DHS agreed with the recommendations; however, while TSA developed a data analysis plan, TSA and USCG reported that they did not develop an evaluation plan with an evaluation methodology or performance standards, as we recommended. The data analysis plan was a positive step because it identified specific data elements to be captured from the pilot for comparison across pilot sites. If accurate data had been collected, adherence to the data analysis plan could have helped yield valid results. However, TSA and the independent did not utilize the data analysis plan. According to officials test agentfrom the independent test agent, they started to use the data analysis plan but stopped using the plan because they were experiencing difficulty in collecting the required data and TSA directed them to change the reporting approach. TSA officials stated that they directed the independent test agent to change its collection and reporting approach because of TSA's inability to require or control data collection to the extent required to execute the plan. We identified eight areas where TWIC reader pilot data collection, supporting documentation, and recording weaknesses affected the completeness, accuracy, and reliability of the pilot data 1. Installed TWIC readers and access control systems could not collect required data on TWIC reader use, and TSA and the independent test agent did not employ effective compensating data collection measures. The TWIC reader pilot test and evaluation master plan recognizes that in some cases, readers or related access control systems at pilot sites may not collect the required test data, potentially requiring additional resources, such as on-site personnel, to monitor and log TWIC card reader use issues. Moreover, such instances were to be addressed as part of the test planning. However, the independent test agent reported challenges in sufficiently documenting reader and system errors. For example, the independent test agent reported that the logs from the TWIC readers and related access control systems were not detailed enough to determine the reason for errors, such as biometric match failure, an expired TWIC card, or that the TWIC was identified as being on the list of revoked credentials. The independent test agent further reported that the inability to determine the reason for errors limited its ability to understand why readers were failing, and thus it was unable to determine whether errors encountered were due to TWIC cards, readers, or users, or some combination thereof. 2. Reported transaction data did not match underlying documentation. A total of 34 pilot site reports were issued by the independent test agent. According to TSA, the pilot site reports were used as the basis for DHS's report to Congress. We separately requested copies of the 34 pilot site reports from both TSA and the independent test agent. In comparing the reports provided, we found that 31 of the 34 pilot site reports provided to us by TSA did not contain the same information as those provided by the independent test agent. Differences for 27 of the 31 pilot site reports pertained to how pilot site data were characterized, such as the baseline throughput time used to compare against throughput times observed during two phases of testing. However, at two pilot sites, Brownsville and Staten Island Ferry, transaction data reported by the independent test agent did not match the data included in TSA's reports. Moreover, data in the pilot site reports did not always match data collected by the independent test agent during the pilot. 3. Pilot documentation did not contain complete TWIC reader and access control system characteristics. Pilot documentation did not always identify which TWIC readers or which interface (e.g., contact or contactless interface) the reader used to communicate with the TWIC card during data collection.different readers were tested. However, the pilot site report did not identify which data were collected using which reader. For example, at one pilot site, two 4. TSA and the independent test agent did not record clear baseline data for comparing operational performance at access points with TWIC readers. Baseline data, which were to be collected prior to piloting the use of TWIC with readers, were to be a measure of throughput time, that is, the time required to inspect a TWIC card and complete access-related processes prior to granting entry. However, it is unclear from the documentation whether acquired data were sufficient to reliably identify throughput times at truck, other vehicle, and pedestrian access points, which may vary. 5. TSA and the independent test agent did not collect complete data on malfunctioning TWIC cards. TSA officials observed malfunctioning TWIC cards during the pilot, largely because of broken antennas. If a TWIC with a broken antenna was presented for a contactless read, the reader would not identify that a TWIC had been presented, as the broken antenna would not communicate TWIC information to a contactless reader. In such instances, the reader would not log that an access attempt had been made and failed. 6. Pilot participants did not document instances of denied access. Incomplete data resulted from challenges documenting how to manage individuals with a denied TWIC across pilot sites. Specifically, TSA and the independent test agent did not require pilot participants to document when individuals were granted access based on a visual inspection of the TWIC, or deny the individual access as may be required under future regulation. This is contrary to the TWIC reader pilot test and evaluation master plan, which calls for documenting the number of entrants "rejected" with the TWIC card reader system operational as part of assessing the economic impact. Without such documentation, the pilot sites were not completely measuring the operational impact of using TWIC with readers. 7. TSA and the independent test agent did not collect consistent data on the operational impact of using TWIC cards with readers. TWIC reader pilot testing scenarios included having each individual present his or her TWIC for verification; however, it is unclear whether this actually occurred in practice. For example, at one pilot site, officials noted that during testing, approximately 1 in 10 individuals was required to have his or her TWIC checked while entering the facility because of concerns about causing a traffic backup. Despite noted deviations in test protocols, the reports for these pilot sites do not note that these deviations occurred. Noting deviations in each pilot site report would have provided important perspective by identifying the limitations of the data collected at the pilot site and providing context when comparing the pilot site data with data from other pilot sites. 8. Pilot site records did not contain complete information about installed TWIC readers' and access control systems' design. TSA and the independent test agent tested the TWIC readers at each pilot site to ensure they worked before individuals began presenting their TWIC cards to the readers during the pilot. However, the data gathered during the testing were incomplete. For example, 10 of 15 sites tested readers for which no record of system design characteristics were recorded. In addition, pilot reader information was identified for 4 pilot sites but did not identify the specific readers or associated software tested. According to TSA, a variety of challenges prevented TSA and the independent test agent from collecting pilot data in a complete and consistent fashion. Among the challenges noted by TSA, (1) pilot participation was voluntary, which allowed pilot sites to stop participation at any time or not adhere to established testing and data collection protocols; (2) the independent test agent did not correctly and completely collect and record pilot data; (3) systems in place during the pilot did not record all required data, including information on failed TWIC card reads and the reasons for the failure; and (4) prior to pilot testing, officials did not expect to confront problems with nonfunctioning TWIC cards. Additionally, TSA noted that it lacked the authority to compel pilot sites to collect data in a way that would have been in compliance with federal standards. In addition to these challenges, the independent test agent identified the lack of a database to track and analyze all pilot data in a consistent manner as an additional challenge to data collection and reporting. The independent test agent, however, noted that all data collection plans and resulting data representation were ultimately approved by TSA and USCG. As required by the SAFE Port Act and the Coast Guard Authorization Act of 2010, DHS's report to Congress on the TWIC reader pilot presented several findings with respect to technical and operational aspects of implementing TWIC technologies in the maritime environment. However, DHS's reported findings were not always supported by the pilot data, or were based on incomplete or unreliable data, thus limiting the report's usefulness in informing Congress about the results of the TWIC reader pilot. For example, reported entry times into facilities were not based on data collected at pilot sites as intended. Further, the report concluded that TWIC cards and readers provide a critical layer of port security, but data were not collected to support this conclusion. Because of the number of concerns that we identified with the TWIC pilot, in our March 13, 2013, draft report to DHS, we recommended that DHS not use the pilot data to inform the upcoming TWIC card reader rule. However, after receiving the draft that we sent to DHS for comment, on March 22, 2013, USCG published the TWIC card reader notice of proposed rulemaking (NPRM), which included results from the TWIC card reader pilot. We subsequently removed the recommendation from our final report, given that USCG had moved forward with issuing the NPRM and had incorporated the pilot results into the proposed rulemaking. In its official comments on our report, DHS asserted that some of the perceived data anomalies we cited were not significant to the conclusions TSA reached during the pilot and that the pilot report was only one of multiple sources of information available to USCG in drafting the TWIC reader NPRM. We recognize that USCG had multiple sources of information available to it when drafting the proposed rule; however, the pilot was used as an important basis for informing the development of the NPRM, and the issues and concerns that we identified remain valid. Given that the results of the pilot are unreliable for informing the TWIC card reader rule on the technology and operational impacts of using TWIC cards with readers, we recommended that Congress should consider repealing the requirement that the Secretary of Homeland Security promulgate final regulations that require the deployment of card readers that are consistent with the findings of the pilot program; and that Congress should consider requiring that the Secretary of Homeland Security complete an assessment that evaluates the effectiveness of using TWIC with readers for enhancing port security. This would be consistent with the recommendation that we made in our May 2011report. These results could then be used to promulgate a final regulation as appropriate. Given DHS's challenges in implementing TWIC over the past decade, at a minimum, the assessment should include a comprehensive comparison of alternative credentialing approaches, which might include a more decentralized approach, for achieving TWIC program goals. Chairman Mica, Ranking Member Connolly, and members of the subcommittee, this concludes my prepared statement. I would be happy to respond to any questions that you may have. For questions about this statement, please contact Steve Lord at (202) 512-4379 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this statement include Dave Bruno, Assistant Director; Joseph P. Cruz; and James Lawson. Key contributors for the previous work that this testimony is based on are listed within each individual product. 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.
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This testimony discusses GAO's work examining the Department of Homeland Security's (DHS) Transportation Worker Identification Credential (TWIC) program. Ports, waterways, and vessels handle billions of dollars in cargo annually, and an attack on our nation's maritime transportation system could have serious consequences. Maritime workers, including longshoremen, mechanics, truck drivers, and merchant mariners, access secure areas of the nation's estimated 16,400 maritime-related transportation facilities and vessels, such as cargo container and cruise ship terminals, each day while performing their jobs. The TWIC program is intended to provide a tamper-resistant biometric credential to maritime workers who require unescorted access to secure areas of facilities and vessels regulated under the Maritime Transportation Security Act of 2002 (MTSA). TWIC is to enhance the ability of MTSA-regulated facility and vessel owners and operators to control access to their facilities and verify workers' identities. Under current statute and regulation, maritime workers requiring unescorted access to secure areas of MTSA-regulated facilities or vessels are required to obtain a TWIC, and facility and vessel operators are required by regulation to visually inspect each worker's TWIC before granting unescorted access. Prior to being granted a TWIC, maritime workers are required to undergo a background check, known as a security threat assessment. This statement today highlights the key findings of a report GAO released yesterday on the TWIC program that addressed the extent to which the results from the TWIC reader pilot were sufficiently complete, accurate, and reliable for informing Congress and the TWIC card reader rule. For the report, among other things, GAO assessed the methods used to collect and analyze pilot data since the inception of the pilot in August 2008. GAO analyzed and compared the pilot data with the TWIC reader pilot report submitted to Congress to determine whether the findings in the report are based on sufficiently complete, accurate, and reliable data. Additionally, we interviewed officials at DHS, TSA, and USCG with responsibilities for overseeing the TWIC program, as well as pilot officials responsible for coordinating pilot efforts with TSA and the independent test agent (responsible for planning, evaluating, and reporting on all test events), about TWIC reader pilot testing approaches, results, and challenges.
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DOD provides active duty servicemembers with a comprehensive compensation package that includes a mix of cash, such as basic pay; noncash benefits, such as health care; and deferred compensation, such as retirement pension. The foundation of each servicemember's compensation is regular military compensation, which consists of basic pay, housing allowance, subsistence allowances, and federal income tax advantage. The amount of cash compensation that a servicemember receives varies according to rank, tenure of service, and dependency status. For example, a hypothetical servicemember with 1 year of service at the rank of O-1 and no dependents would currently receive an annual regular military compensation of $54,663, whereas a hypothetical servicemember with 4 years of service at the rank of E-5 and one dependent would receive an annual regular military compensation of $52,589. In addition to cash compensation, DOD offers current and retired servicemembers a wide variety of noncash benefits. These range from family health care coverage and education assistance to installation- based services, such as child care, youth, and family programs. While many studies of active duty military compensation have attempted to assess the value of the compensation package, most did not consider all of the components of compensation offered to servicemembers. CBO, RAND, and CNA have assessed military compensation using varying approaches. All of their studies include some components of compensation--for example, cash compensation beyond basic pay, which includes housing and subsistence allowances, the federal income tax advantage, and, when possible, special and incentive pay. However, these studies did not assess all components of compensation offered to servicemembers. Thus, the results of these studies differ based on what is being assessed, the methodology used to conduct the assessment, and the components of compensation included in the calculations. The most recent study, a 2008 DOD-sponsored study performed by CNA, assessed military compensation using regular military compensation and some benefits (specifically, health care, the military tax advantage, and retirement benefits). In particular, the results of this study state that in 2006, average enlisted servicemembers' compensation ranged from approximately $40,000 at 1 year of service to approximately $80,000 at 20 years of service. Additionally, in 2006 the average officers' compensation ranged from approximately $50,000 at 1 year of service to approximately $140,000 at 20 years of service. Our analysis of CNA's 2008 study found that overall, CNA used a reasonable approach to assessing military compensation; however, we provided comments on two issues. In general, we agree that when assessing military compensation for the purpose of comparing it with civilian compensation, it is appropriate to include regular military compensation and benefits (as many as can be reasonably valued from the servicemembers' perspective). For example, in order to value health care, CNA estimated the difference in value between military and civilian health benefits, because servicemembers receive more comprehensive health care than most civilians. As mentioned previously, we identified two areas for comment with regard to CNA's approach. First, with regard to retirement, health care, and tax advantage, CNA's methodology makes various assumptions that allow the study to calculate approximate values for these benefits. While the assumptions are reasonable, we note that other, alternative assumptions could have been made, and thus, in some cases, could have generated substantially different values. Second, the CNA study omits the valuation of retiree health care, which is a significant benefit provided to servicemembers. Nevertheless, we note that CNA's study and other studies of military compensation illustrate that valuing total military compensation from a servicemember's perspective is challenging, given the variability across the large number of pays and benefits, the need to make certain assumptions to estimate the value of various benefits, and the utilization of benefits by servicemembers or their dependents, among other reasons. In comparing military and civilian compensation, CNA's study as well as a 2007 CBO study, found that military pay generally compares favorably with civilian pay. CNA found that in 2006, regular military compensation for enlisted personnel averaged $4,700 more annually than comparable civilian earnings. Similarly, CNA found that military officers received an average of about $11,500 more annually than comparable civilians. Further, CNA found that the inclusion of three military benefits--health care, retirement, and the additional tax advantage for military members-- increased the differentials by an average of $8,660 annually for enlisted servicemembers and $13,370 annually for officers. A 2007 CBO study similarly found that military compensation compares favorably with civilian compensation. For example, CBO's report suggested that DOD's goal to make regular military compensation comparable with the 70th percentile of civilian compensation has been achieved. We note that the major difference between the two studies lies in their definitions of compensation. CNA asserted, and we agree, that the inclusion of benefits allows for comparisons of actual levels of compensation and provides some useful comparison points for determining whether servicemembers are compensated at a level that is comparable to that of their civilian peers, although the caveats that we discuss below should be considered. CBO also noted, and we agree, that including benefits can add another level of complexity to such analytical studies. However, while these studies and comparisons between military and civilian compensation in general provide policymakers with some insight into how well military compensation is keeping pace with overall civilian compensation, we believe that such broad comparisons are not sufficient indicators for determining the appropriateness of military compensation levels. For example, the mix of skills, education, and experience can differ between the comparison groups, making direct comparisons of salary and earnings difficult. While some efforts were made by CNA to control for age (as a proxy for years of experience) and broad education levels, CNA did not control for other factors, such as field of degree or demographics (other than age), that we feel would be needed to make an adequate comparison. As another example, one approach that is sometimes taken to illustrate a difference, or "pay gap," between rates of military and civilian pay is to compare over time changes in the rates of basic pay with changes in the Employment Cost Index. We do not believe that such comparisons demonstrate the existence of a pay gap or facilitate accurate comparisons between military and civilian compensation because they assume that military basic pay is the only component of compensation that should be compared to changes in civilian pay and exclude other important components of military compensation, such as the housing and subsistence allowances. We note that CBO also previously discussed three other shortcomings of making such comparisons in a 1999 report. Specifically, CBO noted that such comparisons (1) select a starting point for the comparison without a sound analytic basis, yet the results of the pay gap calculation are very sensitive to changes in that starting point; (2) do not take into account differences in the demographic composition of the civilian and military labor forces; and (3) compare military pay growth over one time period with a measure of civilian pay growth over a somewhat different period. The 10th QRMC's recommendation to include regular military compensation and select benefits when comparing military and civilian compensation appears reasonable to us because it provides a more complete measure of military compensation than considering only cash compensation. Given the large proportion of servicemember compensation that is comprised of in-kind and deferred benefits, the 10th QRMC emphasized that taking these additional components of compensation into account shows that servicemember compensation is generous relative to civilian compensation--more so than traditional comparisons of regular military compensation suggest. The 10th QRMC also recommended that in order to maintain the standard established by the 9th QRMC's 70th percentile (which includes only regular military compensation), DOD adopt the 80th percentile as its goal for military compensation when regular military compensation and the value of some benefits, such as health care, are included in the analysis. In general, when comparing military and civilian compensation, a more complete or appropriate measure of compensation should include cash and benefits. When considering either a military or a civilian job, an individual is likely to consider the overall compensation--to include pay as well as the range and value of the benefits offered between the two options. The challenge with this approach, as mentioned previously, lies in determining how to "value" the benefits, and which benefits to include in the comparison. Prior to issuing our report earlier this month the Deputy Under Secretary of Defense for Military Personnel Policy provided us with oral comments on a draft of the report. The Deputy Under Secretary generally agreed with our findings, noting that numerous studies have attempted to estimate the value military members place on noncash and deferred benefits and that each study has found that identifying relevant assumptions, valuing these benefits, and finding appropriate benchmarks and comparisons are significant challenges. Noting the variation in the results of these studies, the Deputy Under Secretary stated that further study is necessary before DOD is willing to consider measuring and benchmarking military compensation using a measurement that incorporates benefits. While comparisons between military and civilian compensation are important management measures, they alone do not necessarily indicate the appropriateness or adequacy of compensation. Another measure is DOD's ability to recruit and retain personnel. We have reported in the past that compensation systems are tools used for recruiting and retention purposes. Similarly, in 2009, CBO stated that ultimately, the best barometer of the effectiveness of DOD's compensation system is how well the military attracts and retains high-quality, skilled personnel. Since 1982, DOD has only missed its overall annual recruiting target three times--in 1998 during a period of very low unemployment, in 1999, and most recently in 2005. Given that (1) the ability to recruit and retain is a key indicator of the adequacy of compensation and (2) DOD has generally met its overall recruiting and retention goals for the past several years, it appears that regular military compensation is adequate at the 70th percentile of comparable civilian pay as well as at the 80th percentile when additional benefits are included. We note that although the services have generally met their overall recruiting goals in recent years, certain specialties, such as medical personnel, continue to experience recruiting and retention challenges. As a result, permanent, across-the-board pay increases may not be seen as the most efficient recruiting and retention mechanism. In fact, our previous work has shown that use of targeted bonuses may be more appropriate for meeting DOD's requirements for selected specialties where DOD faces challenges in recruiting and retaining sufficient numbers of personnel. In closing, we note that comparisons between military and civilian compensation are important management tools--or measures--for the department to use to assess the adequacy and appropriateness of its compensation. However, such comparisons present both limitations and challenges. For example, data limitations and difficulties valuing nonmonetary benefits prevent exact comparisons between military and civilian personnel. Moreover, these comparisons represent points in time and are affected by other factors, such as the health of the economy. To illustrate, it is not clear the degree to which changes in the provision of civilian health care or retirement benefits affect the outcome of comparing military and civilian compensation. In addition, valuing military service is complicated. While serving in the military offers personal and professional rewards, such service also requires many sacrifices--for example, frequent moves and jobs that are arduous and sometimes dangerous. Ultimately, DOD's ability to recruit and retain personnel is an important indicator of the adequacy--or effectiveness--of its compensation. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or members of the subcommittee may have at this time. For further information about this testimony, please contact Brenda S. Farrell, Director, Defense Capabilities and Management, at (202) 512-3604, or [email protected]. Key contributors to this statement include Marion A. Gatling, Assistant Director; K. Nicole Harms; Wesley A. Johnson; Susan C. Langley; Charles W. Perdue; Jennifer L. Weber; and Cheryl A. Weissman. Other contributors include Natalya Barden, Margaret Braley, Timothy J. Carr, and Patrick M. Dudley. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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This testimony discusses our most recent report on military and civilian pay comparisons and the challenges associated with those types of comparisons. The Department of Defense's (DOD) military compensation package, which is a myriad of pays and benefits, is an important tool for attracting and retaining the number and quality of active duty servicemembers DOD needs to fulfill its mission. Since DOD transitioned to an all-volunteer force in 1973, the amount of pay and benefits that servicemembers receive has progressively increased. When it is competitive with civilian compensation, military compensation can be appropriate and adequate to attract and retain servicemembers. However, comparisons between the two involve both challenges and limitations. Specifically, as we have previously reported, no data exist that would allow an exact comparison between military and civilian personnel with the same levels of work experience. Also, nonmonetary considerations complicate such comparisons, because their value cannot be quantified. For example, military service is unique in that the working conditions for active duty service carry the risk of death and injury during wartime and the potential for frequent, long deployments, unlike most civilian jobs. In addition, there is variability among past studies in how compensation is defined (for example, either pay or pay and benefits) and what is being compared. Most studies, including those done by the Congressional Budget Office (CBO) and RAND Corporation, have compared military and civilian compensation but limit such comparisons to cash compensation--using what DOD calls regular military compensation--and do not include benefits. The National Defense Authorization Act for Fiscal Year 2010 required that we conduct a study comparing the pay and benefits provided by law to members of the Armed Forces with those of comparably situated private-sector employees, to assess how the differences in pay and benefits affect recruiting and retention of members of the Armed Forces. Earlier this month, we issued our report. This testimony today summarizes the findings of that report. Comparisons between military and civilian compensation are important management tools--or measures--for the department to use to assess the adequacy and appropriateness of its compensation. However, such comparisons present both limitations and challenges. For example, data limitations and difficulties valuing nonmonetary benefits prevent exact comparisons between military and civilian personnel. Moreover, these comparisons represent points in time and are affected by other factors, such as the health of the economy. To illustrate, it is not clear the degree to which changes in the provision of civilian health care or retirement benefits affect the outcome of comparing military and civilian compensation. In addition, valuing military service is complicated. While serving in the military offers personal and professional rewards, such service also requires many sacrifices--for example, frequent moves and jobs that are arduous and sometimes dangerous. Ultimately, DOD's ability to recruit and retain personnel is an important indicator of the adequacy--or effectiveness--of its compensation.
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In the current environment of making government work better and cost less, there are high expectations of information technology to change old, inefficient ways of running programs and delivering taxpayer services. Most federal agencies are largely dependent on information systems to deliver services, maintain operations, track outlays and costs, manage programs, and support program decisions. Technology offers government a means to revolutionize the way it interacts with citizens to streamline service, improve quality, and curtail unnecessary costs. Demonstrating these critical linkages to top government executives is paramount to achieving the necessary attention, understanding, and support necessary for long-term success. Several facts are well known. The expectations for technology are set in a challenging federal environment. Increasingly, pressure is being brought to bear on shrinking the size of the federal deficit, not only by reducing spending but by getting better service for lower ongoing costs. IT-related obligations in the federal budget, exceeding $25 billion annually, may be put under increasing scrutiny as part of overall discretionary spending. Further, technology itself is evolving at a rapid pace. The industry reports on this issue are consistent. Every few years, the performance-to-price ratio of computer hardware doubles. New product cycles in the information technology industry now average months rather than years. This rapid evolution produces new challenges--such as the security of global networks--before current problems can be fully resolved--such as the replacement of aging, legacy systems that can no longer meet requirements. In this environment of demanding requirements, close scrutiny, and rapid change, more attention needs to be focused on what is not known about the government's technology investments. First, the government really does not know exactly how much it is spending on IT. The $25 billion figure represents specific IT obligations reported to OMB by federal agencies through a special budget exhibit. This information is not comprehensive or collected on a governmentwide basis; therefore, the total amount of annual spending for IT is unknown. For example, agencies are not required to report IT obligations under $50 million. The legislative and judicial branches of government are not required to report IT obligation data to OMB. Additionally, IT obligations embedded in weapon systems and federally funded research on computers are also not part of the reporting requirement. If included, these figures could significantly alter the size of the governmentwide IT investment portfolio. The Department of Defense, for example, has estimated it spends $24 billion to $32 billion annually for software embedded in weapon systems. Second, most agencies do not capture or maintain reliable information on projected versus actual costs and benefits of IT investments. Without this type of information, it is virtually impossible to construct a return on investment calculation as a way of demonstrating positive net gains in cost reductions, improvements in quality, and reduced cycle time for service delivery. The promise of new information technologies is compelling in the federal environment where aging systems prevail that are often ill-designed for changing business or mission requirements. There are inherent risks associated with not acting to address these technology deficiencies, including potential operational disruptions to vital government services such as air traffic control, income tax collection, and benefit payments to recipients of health care or social security. The opportunities for using technology to improve cost effectiveness and service delivery in government are immense. While the return of these investments are not yet proven, examples of how technology can be a powerful tool include: reducing public burden, such as IRS' Telefile project that allows taxpayers to file 1040EZ tax returns via touch-tone phones; reducing operating costs, such as data center and telecommunications consolidation projects being conducted by the Department of Defense and now OMB on a governmentwide basis, as well as post-FTS 2000 implementation, and governmentwide E-mail; creating choices and alternatives for the delivery of government services, such as electronic benefit transfer payments, information Kiosks, agency home pages on the Internet, and electronic data interchange between government vendors and agencies; increasing the responsiveness and timeliness of services, such as the Social Security's highly rated telephone customer service program. improving the value and impact of government information, such as the international trade and environmental data index projects being conducted under the auspices of the National Performance Review; and increasing the integrity and reliability of government information systems, such as reducing health care fraud through better software detection methods and enhancing the security of federal data through implementation of better internal controls. But there are also risks associated with taking action to implement new information systems. Our reviews of major modernization efforts have shown that the introduction of newer, faster, cheaper technology is not a panacea for flawed management practices or poorly designed business processes. Business needs must dictate the requirements and justification for the type of technology to be used. To ensure this occurs, program units in agencies must carefully analyze the processes or procedures that are being modernized. When processes are reengineered in concert with the power of information technology, significant results can be achieved. Let me illustrate with a few select examples from both the public and private sector. Liberty Mutual reports that cycle time for the issuance of insurance policies averaged 62 days, even though the actual determination time took less than 3 days. Upon close inspection, management discovered inherent process and support inefficiencies, such as up to 24 different handoffs of the policy paperwork, separate appeals processes for both sales and underwriting, and separate computer systems for each department. By combining process redesign with a more powerful, integrated information system, Liberty was able to reduce cycle times by one-half, eliminated virtually all policy handoffs, and was able to significantly reduce appeals to policy denials. IBM Credit Corporation reports that the process to approve credit for IBM customers of computers, software, and services was redesigned from five steps and an average cycle time of seven days to a one-person, four hour process -- a 90 percent improvement in cycle time and hundredfold improvement in productivity. Again, better designed and integrated information systems were part of the total solution. Eastman Chemical found that maintenance staff were spending as much as 50 percent of their time finding and ordering equipment parts. By combining process redesign with a computerized maintenance information system, Eastman Chemical reports it was able to cut by 80 percent the time needed to find and order materials. As a result, maintenance productivity has risen sharply and the company is saving more than $1 million every year in duplicate inventory costs. The Department of Interior's Bureau of Reclamation has concluded that mission rescoping has resulted in a focus on water resources management rather than building large public works projects. The Bureau reports that reengineering and better use of technology has resulted in a grants approval process being reduced from 15 steps over 6 months to 5 steps and one week. Similarly, fish ladder design and funding approval processes have been streamlined from 21 steps taking over 3 years to eight steps taking just 6 months. Nonetheless, just as technology can help produce impressive success stories, it can also become the focus of costly business failures. Dramatic, captured results can be few and far between. A recent research study conducted by The Standish Group on private and public sector organizations in the United States confirms this troubling trend.According to the research, IT executives report that one-third of all systems development projects are cancelled before they are ever completed. This statistic highlights the reality of the complexity in planning, designing, and managing successful IT projects. IT executives participating in the Standish Group research also reported that only 16 percent of all IT projects were considered successful--that is, judged to have accomplished what was expected within the budget anticipated at the outset. In addition, of those IT projects that are completed, only about 42 percent of the largest companies are successful in meeting their initial objectives. In addition, the study's participants reported that over 50 percent of IT projects exceed their original cost estimates by almost 200 percent. These statistics serve as a stark reminder that information systems projects carry high risks of failure if not carefully managed and controlled. Although no comparable data is available that focuses exclusively on the federal government, our work on specific systems projects has found a cascade of problems--ranging from poorly defined requirements, poor contractor oversight, and inadequate system design to managerial and technical skill deficiencies--have led to project terminations, delays, or suspensions of procurement authority. In addition, three agencies with oversight responsibility--GAO, OMB, and GSA--have identified problems that selected systems development efforts or IT operations are having. Each agency has constructed a corresponding "high-risk" list to help focus top management attention on the problems and implement effective remedial actions. Of the 18 agencies and departments representing over 90 percent of total federal spending on information management and technology, nine have IT projects or areas of IT management on one or more of these high risk lists. Table 1 lists the eleven agencies and projects that are currently on high risk lists. GAO has testified regularly on the urgent need for basic management reforms in the federal government. Systems development efforts often fail due to inadequate management attention and controls. Despite the visibility and oversight focus on many large systems development efforts, agency management has often been ineffective in reducing the risks associated with large, multi-year projects. For example, in our July 1995 review of IRS' Tax System Modernization, we found an absence of effective information management practices--such as IT investment selection, control, and evaluation processes--which were placing selected modernization projects at risk of failing to meet critical business needs.The absence of these practices places executive level understanding and support of the technology project in jeopardy and reduces accountability for project success. Inadequate project management, poor contractor oversight, and a shortage of staff with appropriate technical skills have also contributed greatly to systems development problems. After investing over 12 years and more than $2.5 billion, the Federal Aviation Administration (FAA) chose to cut its losses in its problem-plagued $6-billion Advanced Automation System (AAS) by either cancelling or extensively restructuring elements of this effort to modernize our nation's air traffic control system. Our work showed that AAS' problems were attributable to FAA's failure to (1) accurately estimate the technical complexity and resource requirements for the effort, (2) stabilize system requirements, and (3) adequately oversee contractor activities. We are also finding that agencies have not instituted a well-defined investment control process to manage the quality of systems development efforts and monitor progress and problems at an executive level. Our recent analysis of the potential risks associated with the Health Care Financing Administration's (HCFA) Medicare Transaction System (MTS) illustrates this problem. MTS, though small in comparison to larger modernization efforts in other agencies, is one of the most critical new claims-processing systems being put into government today. When the system becomes operational in 1999, HCFA expects it to process over 1 billion claims annually and be responsible for paying $288 billion in benefits per year. Although MTS is in its early development stages, our work last November found that HCFA is experiencing a series of problems related to requirements definition, project schedule, and project cost. Some of these are classic symptoms associated with the fate of other large, complex systems projects--extensive delays and schedule compression early in the project along with ill-defined systems requirements and objectives. It is important that federal executives learn from leading organizations that have been successful in applying and managing technology to thorny business problems as well as opportunities for change. To help federal agencies improve their chances of success, we completed a study of how successful private and public organizations designed and implemented information systems that significantly improved their ability to carry out their missions. Our report describes an integrated set of fundamental management practices that are instrumental in producing success. The active involvement of senior managers, focusing on minimizing project risks and maximizing return on investment, are essential. To accomplish these objectives, senior managers in successful organizations consistently follow these practices to ensure that they receive information needed to make timely and appropriate decisions. Executives in leading organizations manage through three fundamental areas of practices. First, they decide to work differently by quantitatively assessing performance against leading organizations and recognizing that program managers and stakeholders need to be held accountable for using information technology well. Second, they direct their scarce resources toward high-value uses by reengineering critical functions and carefully controlling and evaluating IT spending through specific performance and cost measures. Third, they support major cost reduction and service improvement efforts with the up-to-date professional skills and organizational roles and responsibilities required to do the job. Table 2 illustrates the set of management practices we found in the leading organizations we studied. The power and the attraction of these practices is that they are intuitive and straightforward. And when used, they can help produce repeatable success. Some of our case study organizations experienced dramatic improvements, such as the proportion of IT projects completed on-time, within budget, and according to specified requirements going from 50 percent to 85 percent in two years, a 158 percent increase in workload being handled with the same level of staffing because of redesigned processes and modern, integrated information systems, and a 14-fold increase in benefits returned from information systems projects--from 9 percent of that projected to 133 percent of that projected. But, as experience shows us, the challenge lies in the discipline and rigor with which they are consistently applied by organizations. Rather than discuss each practice individually, let me focus on a few key ones and highlight their importance in the context of an overall strategic management framework. In the information age, top executives have the responsibility not only to define business goals, but also to initiate, mandate, and facilitate major changes in information management to support the achievement of these goals. Top executives must get personally involved in understanding the relative costs, benefits, risks, and returns associated with information technology investments they are making decisions about and allocating resources to. Unless top executives make these linkages, meaningful change can be slow and sometimes impossible. Driven by budget constraints, one chief executive in our case study sample benchmarked existing systems development capabilities against industry standards. The CEO discovered that the company was getting only a small fraction of expected benefits from systems investments, while taking twice as long and spending four times the resources compared to an industry standard. To correct this, the CEO fostered partnerships between business unit managers and IT professionals that focused on building information systems with measurable benefits. Within 3 years, some tangible payoffs from this approach were occurring. Returns on IT investments rose from $2 million to $20 million per year, applications development and productivity improvements increased steadily, and staff resources were moved from maintaining existing computer applications to more strategic reengineering development and support. New technology alone will not improve performance or solve operational problems. It is merely a tool--albeit a powerful one--that supports work processes and the decisions surrounding those processes. If the work processes are inherently inefficient, then technology will not have substantive impact. Accomplishing dramatic improvements in performance usually requires streamlining or fundamentally redesigning existing work processes. Information technology projects must then become focused on improving the way work is done rather than simply automating existing, outmoded processes. As we have seen in the federal government, initiating information systems development projects to replace old technology or automate processes in and of itself is often a poor project justification. In one company we examined, long customer waits and unacceptable error and rework rates were threatening successful business growth. Business unit executives and information technology professionals worked together to redesign existing work processes and systems. As a result, a customer process that used to involve 55 people, 55 procedural steps, and a 14-day service delivery was reduced to one person, one phone call, and one step with a 3-day service delivery. Applying technology to new business processes cannot be done in an organizational vacuum. It requires careful consideration of the technical platform, or architecture, of the information systems. If several process improvement efforts are pursued in an unintegrated fashion, they may result in the creation of many new information systems that are isolated from each other. Such fragmentation can seriously inhibit the organization's ability to share information assets or leverage the benefits of new technology across the organization. The importance of developing and managing an integrated information architecture is one reason why sound strategic information planning is so critical. Strategic planning often is depicted as "visionary" thinking or "where we want to go, whether we can get there or not." In the federal government, strategic management at the enterprise level is often a well-orchestrated paper chase responding to bureaucratic requirements and short-term crises, rather than an integrated, institutionalized process that focuses on producing results for the public. Conversely, in the leading organizations we visited, strategic business and information systems plans were always grounded in explicit, high-priority customer needs. Planning, budgeting, program execution, and evaluation are conducted in a seamless fashion, with the outputs of one process a direct input into the other. Most importantly, strategic goals, objectives, and direction are used to actually manage and evaluate the performance of the organization. In one state revenue collection agency we examined, they decided to use the external customer--the taxpayer--as the focus for rethinking and redesigning its services. Using customer focus groups, comprised of individual taxpayers, small businesses, and large corporations, they redesigned the revenue collection process. Information systems and technology were used to maintain customer profiles to assist the agency in responding to questions, problems, and special situations for each taxpayer. Getting the most out of scarce resources available to spend on IT is another key to success. Executives expect meaningful bottom-line improvements in the outcomes of key business process changes and applications of information systems and related technologies. For this reason, leading organizations carefully measure the performance of their processes, including the contribution that technology makes to their improvement. Senior management is personally involved in project selection, control, and evaluation and uses explicit decision criteria for assessing the mission benefits, risks, and costs of each project. One leading organization we studied uses a "portfolio" investment process--based on decision criteria for assessing costs, benefits, and risks--to select, control, and evaluate information systems projects. As a consequence of more carefully scrutinizing proposed benefits and measuring actual performance results, the company realized a 14-fold increase in the return on investment from IT projects within 3 years. The key to this investment approach is the ability to identify early--and avoid--investments in projects with low potential to provide improvements in program outcomes. Without this focus, organizations can easily become entangled in a web of difficult problems, such as unmanaged development risks, low-value or redundant IT projects, and an overemphasis on maintaining old systems at the expense of using technology to redesign outmoded work processes. Leading organizations have found that one important means for establishing a clear organizational focus for information management is to position a Chief Information Officer (CIO) as a senior partner with the organization's top executives. The position itself is not the solution. What matters is the influence that the right person can bring to bear on strategic management issues and IT's role in both helping resolve existing performance problems and capturing potential from new opportunities. An effective CIO should: serve as a bridge between top executives, line management, support staff, advise top executives and senior managers on the worthiness of major technology decisions and investments, work with managers to understand and define the role of IT in helping achieve expected business or program outcomes, creating a joint partnership with line management to achieve successful project outcomes, design and manage the system architecture supporting the business needs and decision-making processes of the organization, and set and enforce appropriate technical standards to facilitate the effective use of information resources throughout the entire organization. In one of our case study organizations, prior to establishing a CIO, the cost of maintaining and enhancing existing systems consumed nearly all the organization's IT budget. There was no one to focus senior management attention on critical information management and technology decisions. Once an experienced CIO was put in place, technology investment decisions became highly visible and line executives were held accountable for the business case underlying these decisions. The CIO focused on improving the speed, productivity, and quality of IT products and services. A key CIO responsibility is to promote a productive relationship between the users of technology and the information management and systems staff who support them. Managers in leading organizations recognize that they are customers of IT products and services. They assert control over the funding of IT projects and take responsibility for understanding and helping to define the technology needed to support their work. The IT professionals then act as suppliers, working to support efforts to meet clearly defined management objectives, make critical decisions, and solve business problems. This requires facilitation, mediation, balance, and consensus--particularly when weighing the needs of individual business units with the corporate needs of the organization. The CIO can help make this process work smoothly. If the management focus of leading organizations who are successful at applying technology to business needs and problems are compared with typical management practices found in federal departments and agencies, major differences appear. Table 3 summarizes some of the primary discrepancies. Congress has provided clear direction to move the debate from whether to change information management practices in the government to what exactly to change and how to do it. Significant changes in law have already occurred that represent major, positive steps forward in pushing for greater top management responsibility and accountability for successful IT outcomes and provide the impetus for improvements in agency management approaches. Last year, the Paperwork Reduction Act was revised to include many of the fundamental management practices endorsed by our research. For example, strategic IT planning provisions explicitly call for linkages between agency business plans and IT projects. This strategic planning is to be anchored in customer needs and mission goals. Moreover, the agency head is now directly responsible for ensuring that IT-related activities directly support the mission of the agency. Additionally, IT projects are to be managed as investments, with a process put in place to maximize the value and assess and manage the risks of major IT initiatives. In addition, OMB has revised its Circular A-130--the primary governmentwide policy guidance for strategic information management planning--to require agencies to (1) improve the effectiveness and efficiency of government programs through work process redesign and appropriate application of information technology, (2) conduct benefit-cost analyses to support ongoing management oversight processes that maximize return on investment, and (3) conduct post-implementation systems reviews to validate estimated benefits and costs. Most notable is the Information Technology Management Reform Act of 1996 that has been passed as an amendment to the Fiscal Year 1996 DOD Authorization Act. Not only does this legislation effectively build upon management and strategic planning themes in the Government Performance and Results Act and the Paperwork Reduction Act, it also contains some of the most significant changes made to IT planning, management, and procurement in decades. Agencies are required to use capital planning and investment processes for reaching decisions about IT spending, rigorously measure performance outcomes of IT projects, and appoint Chief Information Officers to ensure better accountability for technology investments. In addition, the procurement process has been streamlined to allow agencies more flexibility in buying commercially available products and awarding contracts. Collectively, these changes in law and regulation should make it clear to agency leaders what the Congress and the Administration intend to be done differently in investing and managing information and technology. Just as important as the "what to do" is the "how to make it happen." Agency managers need new methods and tools that will help facilitate fact-based discussions and analyses of proposed IT investments. Toward this end, we have developed a strategic information management assessment guide used in five agencies and departments to date--Housing and Urban Development, Coast Guard, IRS, Pension Benefit Guaranty Corporation, and the Bureau of Economic Analysis. This analysis has been used to identify management strengths and weaknesses and to construct corrective action plans. Several of these agencies have reported that the implementation of new management processes in concert with our best practices framework has helped save several millions of dollars by consolidating systems with business function redundancies, and cancelling questionable low-value IT investments. Other agencies have conducted self-assessments on their own, and we are in the process of obtaining feedback on their results. OMB has also published an IT investment analysis guide, which provides agencies with a structured management process for reaching decisions about selecting, controlling, and evaluating IT investment projects. Finally, we are developing more detailed management assessment guides for business process reengineering and IT performance measurement which we expect to distribute in the near future. Mr. Chairman, two key factors will inevitably affect changes to the government's approach to information technology management. First, government leaders must facilitate success. Never before has there been such a sense of urgency to improve how the government is managing and acquiring its information and technology assets. Where possible, success stories both inside and outside of the federal government must be shared and senior agency managers must learn from them. The second key factor affecting long-term improvement to IT management in government is reinforcing accountability for results. In this regard, focused and consistent direction, advice, and oversight is needed from the Congress, the Executive Branch, and central oversight agencies. It is essential that the federal government's IT portfolio be visibly monitored in the oversight process. Agencies should be required to produce performance baselines, report on all IT obligations and expenses, show projected versus actual project results, and establish a proven track record in managing and acquiring systems technologies. Oversight flexibility should be increasingly earned as demonstrated capability to deliver increases. With proper incentives and encouragement, agency managers can be expected to surface problems early and move towards management resolution before huge sums of money are expended. Budget and appropriations decisions as well as oversight hearings can focus on anticipated risks and returns of IT projects, interim performance results, and final evaluations of long-term improvements to program outcomes, service delivery, and cost effectiveness. This Subcommittee can play an important role in promoting new, effective management practices throughout the government by: providing oversight and guidance to federal agencies in implementing the IT-management related provisions of the Paperwork Reduction Act and the Information Technology Management Reform Act--similar to the very effective role you have played in overseeing the implementation of the Chief Financial Officers Act; focusing oversight attention on high risk IT projects and initiatives, such as your upcoming hearing planned on IRS's financial management reforms and Tax System Modernization project; identifying and focusing agency attention on new systems development efforts that are demonstrating signs of managerial or technical problems early in their life cycle before huge sums of money have been spent, such as your recent hearing on HCFA's Medicare Transaction System; and highlighting the importance of emerging information technologies and management techniques that can be effectively applied to the federal government. Mr. Chairman, this concludes my prepared testimony. We look forward to working with you and the Subcommittee in your efforts to improve the public's return on investment in information technology. I would be glad to answer any questions you or other members of the Subcommittee may have at this time. 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. 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GAO discussed how leading organizations' best practices can be effectively used to improve information technology (IT) management in the federal government. GAO noted that: (1) federal IT-related expenditures total over $25 billion per year, but the benefits from IT are unknown; (2) IT can be used to improve organizational performance, but risks of failure must be carefully managed to ensure successful decisions and project completions; (3) organizations that have successfully implemented IT projects have found that with rapidly changing technological power and choices, sustainable and effective management practices are needed to achieve consistent success; and (4) federal agencies must facilitate success by implementing improved IT management processes and reinforce accountability to produce noticeable results with IT investments.
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About two-thirds of all Medicare beneficiaries live in areas where they can choose among traditional fee-for-service and one or more managed care plans. Although approximately 82 percent of beneficiaries are in the fee-for-service program, the percentage of beneficiaries enrolled in managed care plans is growing. Over the last 3 years, Medicare managed care enrollment has nearly doubled to almost 7 million members, as of March 1999. Most Medicare managed care enrollees are members of plans that receive a fixed monthly fee for each beneficiary they enroll. In enacting BBA, the Congress sought to widen beneficiaries' health plan options. BBA permitted new types of organizations--such as provider-sponsored organizations and preferred provider organizations--to participate in Medicare. It also changed Medicare's payment formula to encourage the wider availability of health plans. provide some basic comparative information about the various health care options available. HCFA is also required to mail basic comparative and other information to all beneficiaries. However, for detailed information about specific managed care plans, all of these resources direct beneficiaries to the MCOs that offer those plans--the only source for specific plan information. To inform Medicare beneficiaries--both those interested in enrolling and those already enrolled--about plan-specific information, MCOs distribute membership literature--packets of information that describe plan benefits, fees, and coverage restrictions. Membership literature may be mailed to interested beneficiaries or distributed directly by sales agents who work for the MCO. HCFA requires MCOs to include certain explanations in their member materials, such as provider restrictions; but otherwise, MCOs have wide latitude in what information is included and how it is presented. However, HCFA reviews all materials that MCOs distribute to beneficiaries. In addition to membership literature, HCFA reviews enrollment forms; administrative letters, such as those notifying beneficiaries of benefit changes; all advertising; and other informational materials. The review process is intended to help ensure that the information is correct and conforms to Medicare requirements. MCOs must submit these materials to HCFA, which has 45 days to conduct its review. If the agency does not disapprove of the materials within that period, the MCOs can distribute them. Medicare beneficiaries enrolled in a managed care plan have the right to appeal if their plan's MCO refuses to provide health services or pay for services already obtained. If an MCO denies a beneficiary's request for services--such as skilled nursing care or a referral to a specialist--it must issue a written notice that explains the reason for the denial and the beneficiary's appeal rights. Such notices must also tell beneficiaries where and when the appeal must be filed and that they can submit written information to support the appeal. dissatisfied with CHDR's decision have additional appeal options, provided certain requirements are met. A member who loses an appeal is responsible for the cost of any disputed health care services that were obtained. HCFA reviews each MCO's plan appeals process as part of its biennial evaluation of each organization's compliance with HCFA regulations. Our review of 16 Medicare MCOs found various types of flaws in the membership literature they distributed. The documents we examined were used by MCOs to inform prospective enrollees and members about covered services, fees, and restrictions. Although HCFA had reviewed and approved the documents, some incorrectly described plan benefit packages. In several instances, the information was outdated or incomplete. Some MCOs provided beneficiaries with detailed benefit information only after they had enrolled in a plan. We also found it difficult to compare benefit packages because MCOs are not required to follow common formats or use standard terms when describing their benefits. In contrast, each MCO that participates in FEHBP is required to distribute a single, comprehensive booklet that describes its benefit package using a standard format and standard terminology. Most MCOs' plan documents contained errors or omitted information about the three benefits we reviewed--prescription drugs, mammography, and ambulance services. Problems ranged from minor inaccuracies to major errors. For example, documents from five MCOs we reviewed erroneously stated that beneficiaries needed a referral to obtain a routine annual mammogram--a Medicare-covered service. HCFA policy clearly states that plans cannot require a referral for annual mammograms and must inform beneficiaries of this policy. (See fig. 1 for HCFA policy and excerpts from Medicare plan materials.) We also found serious problems with plan information regarding coverage for outpatient prescription drugs--a benefit that attracts many beneficiaries to Medicare managed care plans. For example, a large, experienced MCO specified in its Medicare contract that its plan would provide brand name drug coverage of at least $1,200 per year. However, the plan's membership literature indicated lower coverage limits--in some areas as low as $600 per year. Based on 1998 enrollment data, we estimate that over 130,000 plan members may have been denied part of the benefit to which they were entitled and for which Medicare paid. Another MCO, which used the same documents to promote its four plans, stated in its handbook that all plan members were entitled to prescription drug coverage. However, only two of the MCO's four plans provided such coverage. A third MCO provided conflicting information about its drug coverage. Some documents stated that the plan would pay for nonformulary drugs, while other documents said it would not. Some MCOs distributed outdated information, which could be misleading. HCFA allows this practice if MCOs attach an addendum updating the information. HCFA officials believe this policy is reasonable because beneficiaries can figure out a plan's coverage by comparing the changes cited in the addendum with the outdated literature. However, we found that some MCOs distributed outdated literature without the required addendum and that when MCOs included the addendum, it often did not clearly indicate that the addendum superseded the information contained in other documents. In addition, some MCOs did not put dates on the literature they distributed, which obscured the fact that the literature was no longer current. provided general descriptions of their plans' ambulance coverage but did not explain the extent of the coverage. constitutes only a summary of the . . . . The contract between HCFA and the [MCO] must be consulted to determine the exact terms and conditions of coverage. HCFA officials responsible for Medicare contracts, however, said that if a beneficiary were to request a copy of the contract, the agency would not provide it due to the proprietary information included in an MCO's contract proposal. Furthermore, an MCO is not required to provide beneficiaries with copies of its Medicare contract. MCO officials with whom we spoke differed in their responses about whether their organizations would provide beneficiaries with copies of their Medicare contracts. Some MCOs we reviewed provided detailed benefit information only after beneficiaries had enrolled. The information packages distributed by several MCOs we reviewed stated that beneficiaries would receive additional, detailed descriptions of plan benefits, costs, and restrictions following enrollment. In addition, four MCOs did not provide 1998 benefit details until several months after the new benefits took effect. In fact, one MCO did not distribute its detailed benefit information until August--8 months after the benefit changes had taken effect. The membership literature we reviewed varied considerably in terminology, depth of detail, and format. These variations are similar to those that we encountered in previous reviews undertaken for this Committee and greatly complicated benefit package comparisons. The lack of clear and uniform benefit information likely impedes informed decisionmaking. HCFA officials in almost every region noted that a standard format for key membership literature, along with clear and standard terminology, would help beneficiaries compare their health plan options. To illustrate this problem, we identified the location in each MCO's plan literature where enrollees would find answers to basic questions regarding coverage of the three benefits we studied. This information was often difficult to find; enrollees would have to read multiple documents to answer the basic coverage questions. For example, to understand the three plans' prescription drug benefits, we had to review 12 different documents: 2 from Plan A, 5 from Plan B, and 5 from Plan C. (See fig. 2.) Medicare+Choice: HCFA Actions Could Improve Plan Benefit and Appeal Information Plan documents contradict one another as to whether the plan will cover a nonformulary drug. It was also not easy to know where to look for the information. For example, the answer to our question about whether a plan used a drug formulary was found in Plan A's summary of benefits, in Plan B's Medicare prescription drug rider, and in Plan C's contract amendment. Plan C's materials required more careful review to answer the question because the membership contract indicated the plan did not provide drug coverage. However, an amendment--included in the member contract as a loose insert--listed coverage for prescription drugs and the use of a formulary. To avoid the types of problems found in Medicare MCOs' membership literature, OPM requires each participating health plan to describe, in a single document, its benefit package--that is, covered benefits, limitations, and exclusions--and to include a benefit summary in a standardized language and in OPM's prescribed format. OPM officials update the mandatory language each year to reflect changes in the FEHBP requirements and to respond to organizations' requests for improvements. Finally, OPM requires health plans to distribute plan brochures prior to the FEHBP annual open enrollment period so that prospective enrollees have complete information on which to base their decisions. OPM officials told us that all participating plans publish brochures that adhere to these standards. Plan membership literature is required to contain information on beneficiaries' appeal rights. In addition, beneficiaries are supposed to be informed of their appeal rights when they receive a plan's written notice denying a service or payment. HCFA requires denial notices to contain information telling beneficiaries where and how to file an appeal. Furthermore, denial notices are required to state the specific reason for the denial because vaguely worded notices may hinder beneficiary efforts to construct compelling counterarguments. Vague notices may also leave beneficiaries wondering whether they are entitled to the requested services and should appeal. Finally, HCFA regulations state that whenever MCOs discontinue plan services, such as skilled nursing care, they must issue timely denial notices to beneficiaries. Substantial evidence indicates, however, that many beneficiaries did not receive the required information when their MCOs denied services or payment for services. Denial notices were frequently incomplete or never issued, and many notices did not indicate the specific basis for the denial. Furthermore, beneficiaries often received little advance notice when their MCO discontinued plan services. studies by the OIG, using different methodologies, provide additional evidence that beneficiaries are not always informed of their appeal rights.In one study, the OIG surveyed beneficiaries who were enrolled or had recently disenrolled from a managed care plan. According to the survey results, 41 respondents (about 10 percent) said that their health plans had denied requested services. Of these, 34 (83 percent) of the respondents said that they had not received the required notice explaining the denial and their appeal rights. Most notices that we reviewed contained general, rather than specific, reasons for the denial. In 53 of the 74 CHDR cases that contained the required denial notices (notices were missing in 32 other cases), the notices simply said that the beneficiary did not meet the coverage requirements or contained some other vague reason for the denial. Likewise, representatives from several advocacy groups told us that in cases brought to their attention, the denial notices were often general and did not clearly explain why the beneficiary would not receive, or continue to receive, a specific service. HCFA regulations state that whenever MCOs discontinue plan services, they must issue timely denial notices to beneficiaries. The regulations, however, do not specify how much advance notice is required before coverage is discontinued. Beneficiaries who receive little advance notice may not be able to continue to receive services because of their potential financial liability. If the beneficiary appeals and loses, he or she is responsible for the cost associated with the services received after the date specified in the denial notice. In three of the MCOs we visited, the general practice was to issue the denial notices the day before the services were discontinued. We found that many skilled nursing facility (SNF) discharge notices were mailed to the beneficiary's home instead of being delivered to the facility. In other cases, it appeared that the beneficiary or his or her representative received the notice a few days after the beneficiary had been discharged from the SNF or the SNF coverage had ended. Ten of the 25 SNF discharge cases we reviewed at CHDR also involved the receipt of a notice after the patient had been discharged. The fourth MCO we visited issued SNF discharge notices 3 days prior to the discharge date. This lead time helped ensure that a beneficiary received the notice before the discharge date. It also allowed more time for the beneficiary to file an expedited appeal and receive a decision from the plan. Consequently, beneficiaries in this MCO's plan who appeal and lose are less exposed to the SNF costs incurred during the appeals process. Officials from all the MCOs we visited said that, in almost every instance, the decision to discharge a beneficiary from a SNF is made days in advance and that discharge notices could be issued several days prior to discharge. Although HCFA reviews and approves all materials that MCOs distribute to beneficiaries, weaknesses in the agency's review practices and information standards allowed the plan information problems we observed to go uncorrected. One weakness is that HCFA reviewers must rely on a faulty document to determine whether plan member materials are correct. In addition, HCFA review practices are sometimes inadequate to detect or correct the problems we found. Finally, HCFA has not used its authority to require that MCOs use a common format and terminology to describe their plans' benefit packages. To ensure the accuracy of membership literature, HCFA reviewers are instructed to compare each MCO's membership literature to its Medicare contract. Specifically, HCFA reviewers are expected to rely on one particular contract document--the Benefit Information Form--which summarizes plan benefits and member fees. Reviewers told us, however, that this contract document often does not provide the detail they need. Consequently, they sometimes rely on benefit summaries provided by the MCOs to verify the accuracy of plan information. This practice is contrary to HCFA policy, which requires an independent review of MCOs' plan literature. The reviewer who approved the plan literature advertising a $600 annual drug benefit, instead of the contracted $1,200 annual limit, said that the mistake was caused by her reliance on a benefit summary provided by the MCO. copies of the printed documents, they are often unaware as to whether MCOs have made the required corrections. Shortcomings in HCFA's monitoring procedures also limit the agency's ability to ensure that beneficiaries know that plans' service and payment decisions can be appealed. For example, to determine whether MCOs informed beneficiaries of their appeal rights, HCFA's monitoring protocol requires agency staff to review a sample of appeal case files. HCFA staff check these files to determine whether each contains a copy of the required denial notice. However, it seems reasonable to assume that beneficiaries who appeal are more likely to have been informed of their rights than those who do not appeal. Yet, HCFA does not generally check cases where services or payment for services were denied but not appealed. Furthermore, when MCOs contract with provider groups to perform certain administrative functions, such as issuing denial notices, HCFA staff generally do not check to see that the delegated duties were carried out in accordance with Medicare requirements. HCFA has the authority to set standards for the format, content, and timing of the plan information that MCOs distribute to beneficiaries. Unlike OPM, however, HCFA has made little use of its authority. Instead, each MCO decides on the format--and to large extent, content and timing--of the plan information it distributes. In addition to making plan comparisons more difficult, the lack of common information standards has adversely affected HCFA's review process. First, the lack of standards has resulted in inconsistent review practices and misleading comparisons. For example, one MCO representative told us that several MCOs' plans in its market area required a copayment for ambulance services if a beneficiary was not admitted to a hospital, but not every MCO was required to disclose that fact. Consequently, although the plans had similar benefit restrictions, the MCOs that were required to disclose the plan restrictions appeared to offer less generous benefits than the other MCOs' plans. considerable amount of time reviewing plan documents that could be standard administrative forms--such as member enrollment applications--and thus had less time to spend reviewing important documents describing plan benefits. HCFA is moving to address some of the problems and systemwide shortcomings we identified during our recent reviews. For example, HCFA is working to revise the contract document that agency reviewers use to verify the accuracy of plan information. The proposed new contract document will help ensure that HCFA collects the same information from each plan and presents the information in a consistent format and in greater detail than the current document. The agency expects to test this new document later this year and fully implement it in 2000. HCFA officials believe that the Office of Management and Budget's clearance process for the proposed new contract document must begin no later that August 1999 to meet this timetable. Otherwise, full implementation could be delayed. Agency officials recognize the importance of more uniform membership literature and have articulated their intent to standardize key documents in future years. As a first step, the agency established a work group--consisting of representatives from HCFA, MCOs, senior citizen advocacy groups, and other relevant entities--to develop a standard format and common language for MCOs' plan benefit summaries. HCFA hopes to establish these new standards by next month so MCOs' fall 1999 benefit summary brochures can follow the new standards. HCFA's long-term goals involve the establishment of standards for other key documents. However, the agency has not yet developed a strategy for its long-term efforts or decided whether the information standards it sets will be voluntary or mandatory. HCFA officials said they have also undertaken several initiatives to help ensure that beneficiaries are informed of their appeal rights and the steps necessary to file an appeal. Sometime this year, HCFA intends to publish additional instructions regarding the content of denial notices. The agency will also revise its monitoring protocol to better ensure that MCOs issue the required denial notices. Finally, HCFA is working to develop timeliness requirements for the issuance of notices when MCOs reduce or discontinue services, such as skilled nursing care, home health care, or physical therapy. As the Medicare+Choice program grows and more health plan options become available, the need for reliable, complete, and useful information will increase. In our recent reviews, however, we found major problems in the plan information that some MCOs provided to beneficiaries. In several instances the information was incorrect or incomplete; in other cases, the problem was poor timing--important information was distributed long after the benefit package had changed or only after beneficiaries had enrolled in a plan. None of the information was provided in a format that facilitated comparisons among plans. We also found that some MCOs did a poor job informing beneficiaries about their appeal rights and the appeals process. HCFA has both the authority and the responsibility to ensure that Medicare MCOs distribute information that helps beneficiaries make informed decisions. To date, however, its policies and practices have fallen short of that mark. HCFA's review of plan information has been inadequate and has not prevented plans from distributing incorrect and incomplete information. Furthermore, unlike OPM, HCFA has not set standards for plan information that could facilitate informed decisions. The agency is taking some steps to address the problems we identified. We believe, however, that these problems will not be fully addressed until HCFA implements our past and current recommendations by setting information standards for MCOs and requiring them to adhere to those standards. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions you or other 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 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.
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Pursuant to a congressional request, GAO discussed the: (1) accuracy, completeness, and usefulness of the information Medicare managed care organizations (MCO) distribute about their plans' benefit packages; (2) extent to which MCOs inform beneficiaries of their plan appeal rights and the appeals process; and (3) Health Care Financing Administration's (HCFA) review, approval, and oversight of the plan information that MCOs distribute. GAO noted that: (1) it found problems with the benefit information distributed by all of the 16 MCOs it reviewed; (2) although HCFA had reviewed and approved all of the information GAO examined, some MCOs misstated the coverage they were required by Medicare or their contracts to offer; (3) one MCO advertised a substantially less generous prescription drug benefit than it had specified in its Medicare contract; (4) some MCOs provided complete benefit information only after a beneficiary enrolled; (5) others never provided full descriptions of benefits and restrictions; (6) as GAO has reported previously, it is difficult to compare available options using literature provided to beneficiaries because MCOs use different formats and terminology to describe the benefit packages being offered; (7) the variation in Medicare plan literature contrasts sharply with the uniformity of plan information distributed by MCOs that participate in the Federal Employees Health Benefits Program (FEHBP); (8) MCOs participating in FEHBP are required to provide prospective enrollees with a single, comprehensive, and comparable brochure to facilitate informed choice; (9) in GAO's study of the appeals process, GAO found that when MCOs deny plan services or payment, they do not always inform beneficiaries of their appeal rights; (10) sometimes MCOs issue denial notices that do not contain all the information that HCFA requires; (11) GAO also found that some MCOs delay issuing denial notices until the day before discontinuing services, such as skilled nursing care; (12) this delay can increase a beneficiary's potential financial liability should the beneficiary appeal the plan's decision and lose; (13) many of the information problems GAO identified regarding plan benefit packages and beneficiaries' appeal rights went uncorrected because of shortcomings in HCFA's review practices; (14) in addition, HCFA has not exercised its authority to require MCOs to distribute plan information that is more complete, timely, and comparable; (15) agency officials recognize many of the shortcomings GAO identified and are beginning efforts to address them; and (16) however, GAO believes that the agency could do more.
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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 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. The Army has also instituted plans to spin out selected FCS technologies and systems to current Army forces throughout the program's system development and demonstration phase. The FCS program is recognized as being high risk and needing special oversight. Accordingly, in 2006, Congress mandated that the Department of Defense (DOD) hold a milestone review following its preliminary design review. Congress directed that the review include an assessment of whether (1) the needs are valid and can best be met with the FCS concept, (2) the FCS program can be developed and produced within existing resources, and (3) the program should continue as currently structured, be restructured, or be terminated. Congress required the Secretary of Defense to review and report on specific aspects of the program, including the maturity of critical technologies, program risks, demonstrations of the FCS concept and software, and a cost estimate and affordability assessment. This statement is based on work we conducted between March 2007 and March 2008 and is 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. Ideally, the Army should have entered development in 2003 with firm requirements and mature technologies. However, the FCS program will be challenged to meet these markers by the time of the preliminary design review in 2009. The Army has only recently formed an understanding of what will be expected of the FCS network. Complementary programs, necessary to the success of the FCS, are not yet fully synchronized with the FCS schedule and face funding and technical challenges. By 2009, the Army will have spent 6 years and $18 billion on these initial efforts, with the costlier components of a development program still to come. It will be years before demonstrations validate that the FCS will provide needed capabilities. While the Army should have firmed requirements at the outset of its development program, it now faces a daunting task in completing this work by the preliminary design review and subsequent milestone review in 2009--6 years into a 10-year development schedule. Many of FCS's thousands of requirements are almost certain to be modified as the program approaches these reviews. The Army's decision to restructure the program in early 2007, reducing the set of systems from 18 to 14, resulted in requirements modifications, deferrals, and redistributions that affected the requirements balance among the remaining systems. As this program adjustment is implemented, further requirements changes to the systems, as well as to the network, could be required. The Army also continues to make design trade-offs to accommodate restrictions such as space, weight, and power constraints; affordability; and technical risks, such as transport requirements for manned ground vehicles. FCS software development is hampered by incomplete requirements and designs for the information network. While the Army's user community expects that FCS will deliver capabilities that are as good as or better than current forces, this position is based on the results of modeling and simulation activities--it will be several years before field demonstrations validate the user community's position. FCS's critical technologies remain at low maturity levels. According to the Army's latest technology assessment, only two of FCS's 44 critical technologies have reached a level of maturity that, based on best practice standards, should have been demonstrated at program start. Even applying the Army's less rigorous standards, only 73 percent can be considered mature enough to begin system development today. The technological immaturity, coupled with incomplete requirements, is a mismatch that has prevented the Army from reaching the first critical knowledge point for this program--a precursor for cost growth. Many of these immature technologies may have an adverse cumulative impact on key FCS capabilities such as survivability. In addition, the Army is struggling to synchronize the schedules and capabilities of numerous essential complementary programs with the overall FCS program. The Army has identified problems that raise concerns about the likelihood that many complementary systems will deliver the required capabilities when needed. In some cases, complementary programs have been adversely affected by FCS demands, and in others, lack of coordination between FCS and complementary program officials has stalled efforts aimed at synchronizing programs and resolving cost, schedule, and technical issues. It is not yet clear if or when the information network that is at the heart of the FCS concept can be developed, built, and demonstrated by the Army and lead system integrator (LSI). Significant management and technical challenges--owing more to the program's complexity and immaturity than to the approach to software--have placed development of the network and software at risk. These risks include network performance and scalability, immature network architecture, and synchronization of FCS with Joint Tactical Radio System (JTRS) and Warfighter Information Network-Tactical programs that have significant technical challenges of their own. The amount of estimated software code required for the FCS network and platforms has recently increased to 95.1 million lines. This is nearly triple the size of the original estimate in 2003, and the largest software effort by far for any weapon system. Software code is difficult to estimate, and underestimation is not unique to FCS. Compounding this inherent difficulty on FCS were the program's poorly defined requirements, indicative of its immaturity. Lines of code have grown as requirements have become better understood. The Army believes the latest increases will not substantially increase software development costs, but updated Army and independent cost estimates will not be available until next year. Previously, the independent estimates have differed sharply from the Army's in the area of FCS software development costs. Although several disciplined practices are being used to develop FCS's network and software, the program's immaturity and aggressive pace during development have delayed requirements development at the software developer level. For example, software developers for five major software packages that we reviewed report that high-level requirements provided to them were poorly defined, omitted, or late in the development process. These caused the software developers to do rework or defer functionality to future builds. In turn, these poor or late requirements had a cascading effect that caused other software development efforts to be delayed. It is unclear when or how it can be demonstrated that the FCS network will work as needed, especially at key program junctures. For example, in 2009, network requirements, including software, may not be well defined nor designs completed at the preliminary design review; and at the FCS milestone review later that year, network demonstration is expected to be very limited. The Army and LSI have identified and need to address numerous areas of high risk such as network performance and scalability. The first large scale FCS network demonstration--the limited user test in 2012--will take place at least a year after the critical design review and only a year before the start of FCS production. That test will seek to identify the impact of the contributions and limitations of the network on the ability to conduct missions. This test will be conducted after the designs have been set for the FCS ground vehicles, a situation that poses risks because the designs depend on the network's performance. A full demonstration of the network with all of its software components will not be demonstrated until at least 2013 when the fully automated battle command system is expected to be ready. When FCS reaches its planned preliminary design review in 2009, the Army will have expended over 60 percent of its development funds and schedule. However, much will still need to be done in terms of technology maturation, system integration and demonstration, and preparing for production--all three knowledge points fundamental to a successful acquisition. Large scale demonstrations of the network will not occur until after manned ground vehicles, which depend on the performance of the network, are already designed and prototyped. The Army does not plan to demonstrate that the FCS system of systems performs as required until after the production decision for the core program in 2013. That would preclude opportunities to change course if warranted by test results and increasing the likelihood of costly discoveries in late development or during production. The cost of correcting problems in those stages is high because program expenditures and schedules are less forgiving than in the early stages of a program. Conversely, the test standards we apply reflect the best practice of having production-representative prototypes tested prior to a low rate production decision. This approach demonstrates the prototypes' performance and reliability as well as manufacturing processes--in short, that the program is ready to be manufactured within cost, schedule, and quality goals. While the FCS production decision for the core FCS program is to be held in fiscal year 2013, production commitments will begin in fiscal years 2008 and 2009 with production for the first of a series of three planned spin out efforts and the early versions of the NLOS-C vehicle. When considering these activities, along with long-lead and facilitization investments associated with the production of FCS core systems, a total of $11.9 billion in production money will have been appropriated and another $6.9 billion requested by the time of the production decision for the FCS core systems in 2013. When development funds are included, $39 billion will have been appropriated and another $8 billion requested. As noted previously, key demonstrations will not yet have taken place by this time. Also, in April 2007, the Army announced its intention to contract with the LSI for the production for the first three brigade combat teams of FCS systems, the production of the FCS spin out items, and the early production of NLOS-C vehicles. This decision makes an already unusually close relationship between the Army and the LSI even closer, and heightens the oversight challenges FCS presents. In 2004, the Army revised its acquisition strategy to bring selected technologies and systems to current forces via spin outs while development of the core FCS program is underway. The first of these spin out systems will be tested and evaluated in the coming year, and a production decision is planned in 2009. However, the testing up to that point will feature some surrogate subsystems rather than the fully developed subsystems that would ultimately be deployed to the current forces. For example, none of the tests will include fully functional JTRS radios or associated software. The Army believes this strategy is adequate; however, testing of surrogates may not provide quality measurements to gauge system performance, and the Army may have to redesign if JTRS radios have different form, fit, and function than expected. Taken together, these spin out 1 capabilities serve as a starting point for FCS but represent only a fraction of the total capability that the Army plans for FCS to provide. The Army has general plans for a second and third set of spin out items but, according to the Army, these have not yet been funded. Responding to congressional direction, the Army will begin procuring long lead production items for the NLOS-C vehicle in 2008. The Army will deliver six units per year in fiscal years 2010 through 2012; however, these early NLOS-C vehicles will not meet threshold FCS requirements and will not be operationally deployable without significant modifications. Rather, they will be used as training assets for the Army Evaluation Task Force. To meet the early fielding dates, the Army will begin early production of the NLOS-C vehicles with immature technologies and designs. Several key technologies will not be mature for several years, and much requirements and design work remains on the manned ground vehicles, including the NLOS-C. Significant challenges involving integrating the technologies, software, and design will follow. To the extent these aspects of the manned ground vehicles depart from the early production cannons, costly rework of the cannons may be necessary. The Army is planning a seamless transition between NLOS-C production and core FCS production. However, beginning the production of NLOS-C vehicles 5 years before the start of FCS core production could create additional pressure to proceed with FCS core production. Moreover, to the extent that beginning NLOS-C production in 2008 starts up the manned ground vehicle industrial base, it could create a future need to sustain the base. If decision makers were to consider delaying FCS core production because it was not ready, a gap could develop when early NLOS-C production ends. Sustaining the industrial base could then become an argument against an otherwise justified delay. The Under Secretary of Defense for Acquisition, Technology, and Logistics recently took steps to keep the decisions on the NLOS-C early production separate from FCS core production. In approving procurement of long lead items for the NLOS-C vehicles in 2008, the Under Secretary designated the 18 early prototypes as a separate, special interest program for which he will retain authority for making milestone decisions. The Under Secretary will make a second decision in 2009 whether to approve NLOS-C production and has put a cost limit of $505.2 million (fiscal year 2003 dollars) on production of these vehicles. He also added that specific requirements be met at that time, such as a capability production document, technology readiness assessment, test plan, independent estimate of costs, and an approved acquisition program baseline. This is a positive step in ensuring that the Army's efforts to meet Congressional direction do not result in unfavorable consequences. The Army's April 2007 decision to contract with the LSI for FCS production makes an already close relationship closer, represents a change from the Army's original rationale for using an LSI, and may further complicate oversight. The specific role the LSI will play in production of spin outs, NLOS-C, and FCS core production are unclear at this point. According to program officials, the statements of work for the long lead items contracts for spin outs and NLOS-C have not yet been worked out. The statements of work for the production contract will also be negotiated later. The work the LSI does in actual production of FCS is likely to be small compared to the other hardware suppliers and assemblers. Thus, the production role of the LSI is likely to be largely in oversight of the first tier subcontractors. From the outset of the program, the LSI was to focus its attention on development activities that the Army judged to be beyond what it could directly handle. Army leadership believed that by using an LSI that would not necessarily have to be retained for production, the Army could get the best effort from the contractor during the development phase while at the same time making the effort profitable for the contractor. Nonetheless, the LSI's involvement in the production phase has been growing over time. The current LSI development contract for the core FCS systems extends almost 2 years beyond the 2013 production decision. The Army does not expect the initial brigades outfitted by FCS will meet the upper range of its requirements and has made the LSI responsible for planning future FCS enhancements during the production phase. Combined with a likely role in sustainment, the LSI will remain indefinitely involved in the FCS program. By committing to the LSI for early production, the Army effectively ceded a key point of leverage it had held--source selection--and is perhaps the final departure from the Army's initial efforts to keep the LSI's focus solely on development. This decision also creates a heightened burden of oversight in that there is now additional need to guard against the natural incentive of production from creating more pressure to proceed through development checkpoints prematurely. As we have previously reported, this is a burden that will need to be increasingly borne by the Office of the Secretary of Defense. The Army's $160.9 billion cost estimate for the FCS program is largely unchanged from last year's estimate despite a program adjustment that reduced the number of systems from 18 to 14. This may mean a reduction in capabilities of the FCS program and thus represents a reduction in the Army's buying power on FCS. Further, two independent cost estimates-- from DOD's Cost Analysis Improvement Group (CAIG) and the other from the Institute for Defense Analyses (IDA), a federally funded research and development center--are significantly higher than the Army's estimate. Both assessments estimate higher costs for software development, to which a recent increase in lines of code adds credence. The Army has not accepted either of the independent estimates on the grounds that they each include additional work scope, particularly in the later years of the development phase. Also, the CAIG and IDA both use historical growth factors in their estimates, based on the results of previous programs. It is reasonable to include such growth factors, based on our own analysis of weapon systems and the low level of knowledge attained on the FCS program at this time. Given the program's relative immaturity in terms of technology and requirements definition and demonstrations of capabilities to date, there is not a firm foundation for a confident cost estimate. The Army has not calculated confidence levels on its estimates, though this is a best practice and could reduce the probability of unbudgeted cost growth. Under its current structure, the Army will make substantial investments in the FCS program before key knowledge is gained on requirements, technologies, system designs, and system performance, leaving less than half its development budget to complete significantly expensive work, such as building and testing prototypes, after its preliminary design review. The Army maintains that if it becomes necessary, FCS content will be further reduced, by trading away requirements or changing the concept of operations, to keep development costs within available funding levels. As the Army begins a steep ramp-up of FCS production, FCS costs will compete with other Army funding priorities, such as the transition to modular organizations and recapitalizing the weapons and other assets that return from current operations. Together, the program's uncertain cost estimate and competing Army priorities make additional reductions in FCS scope and increases in cost likely. The deficiencies we cite in areas such as requirements and technology are not criticisms of progress in the sense that things should have gone smoother or faster. At issue, rather, is the misalignment of the program's normal progress with the events used to manage and make decisions on such acquisitions--key decisions are made well before sufficient knowledge is available. The decision in 2009 will provide an opportunity to realign the progress of knowledge in FCS with events such as the critical design review and tests of prototypes before the production decision. The 2009 decision may also be the government's last realistic opportunity to safeguard its ability to change course on FCS, should that be warranted. The first decision, as we see it, will have to determine whether FCS capabilities have been demonstrated to be both technically feasible and militarily worthwhile. If they have not, then DOD and the Army will need to have viable alternatives to fielding the FCS capability as currently envisioned. Depending on the results of the first decision, the second decision is to determine how to structure the remainder of the FCS program so that it attains high levels of knowledge before key commitments. Other aspects of the FCS program warrant attention that should not wait until the 2009 decision. Primary among these is the Army's decision to extend the role of the LSI into FCS production. This is a decision that will necessarily heighten the role the Office of the Secretary of Defense will have to play in overseeing the program and departs from the Army's philosophy of having the LSI focus on development without the competing demands and interests that production poses. A second aspect of the program warranting attention is the Army's approach to spin outs. It will be important for the Army to clearly demonstrate the military utility of the spin outs to current Army forces, based on testing high-fidelity, production-representative prototypes, before a commitment is made to their low rate production. This is not the current plan, as the Army plans to use some surrogate equipment in the testing that will support the production decision for spin out 1. Finally, it is important that the production investments in the spin outs and NLOS-C do not create undue momentum for production of the FCS core systems. As noted above, commitment to production of the FCS core systems must be predicated on attaining high levels of knowledge, consistent with DOD policy. In our March 2008 reports, we made several recommendations to ensure that the 2009 FCS milestone review is positioned to be both well-informed and transparent. Specifically, we recommended that the Secretary of Defense establish objective and quantitative criteria that the FCS program will have to meet in order to justify its continuation and gain approval for the remainder of its acquisition strategy. The criteria should be set by at least July 30, 2008, in order to be prescriptive, and should be consistent with DOD acquisition policy and best practices. At a minimum, the criteria should include, among other things, the completion of the definition of all FCS requirements including those for the information network and the synchronization of FCS with all essential complementary programs. We also recommended that the Secretary of Defense, in advance of the 2009 milestone review, identify viable alternatives to FCS as currently structured that can be considered in the event that FCS does not measure up to the criteria set for the review. As we have previously reported, an alternative need not be a rival to the FCS, but rather the next best solution that can be adopted if FCS is unable to deliver the needed capabilities. For example, an alternative need not represent a choice between FCS and the current force, but could include fielding a subset of FCS, such as a class of vehicles, if they perform as needed and provide a militarily worthwhile capability. We further recommended that the Secretary of Defense (1) closely examine the oversight implications of the Army's decision to contract with the LSI for early production of FCS spin outs, NLOS-C, and low rate production for the core FCS program; (2) take steps to mitigate the risks of the Army's decisions, including the consideration of the full range of alternatives for contracting for production; and (3) evaluate alternatives to the LSI for long-term sustainment support of the FCS system of systems. Finally, regarding the FCS network and software development and demonstration efforts, we recommended that the Secretary of Defense (1) direct the FCS program to stabilize network and software requirements on each software build to enable software developers to follow disciplined software practices; (2) establish a clear set of criteria for acceptable network performance at each of the key program events; and (3) in setting expectations for the 2009 milestone review, include a thorough analysis of network technical feasibility and risks, synchronization of network development and demonstration with that of other FCS elements, and a reconciliation of the differences between independent and Army estimates of network and software development scope and cost. DOD concurred with our recommendations and stated that criteria for the 2009 FCS Defense Acquisition Board review will be established and will be reviewed and finalized at the 2008 Defense Acquisition Board review. The results of the analyses and assessments planned to support the 2009 review will inform DOD's acquisition and budget decisions for FCS. These are positive steps toward informing the 2009 Defense Acquisition Board review. 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 on (202) 512- 4841 or [email protected]. Individuals making key contributions to this statement include William R. Graveline, Assistant Director; Martin G. Campbell; Ronald N. Dains; Tana M. Davis; Marcus C. Ferguson; John A. Krump, John M. Ortiz; 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.
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The Future Combat System (FCS) program--which comprises 14 integrated weapon systems and an advanced information network--is the centerpiece of the Army's effort to transition to a lighter, more agile, and more capable combat force. The substantial technical challenges, the Army's acquisition strategy, and the cost of the program are among the reasons why the program is recognized as needing special oversight and review. This testimony is based on GAO's two March 2008 reports on FCS and addresses (1) how the definition, development, and demonstration of FCS capabilities are proceeding, particularly in light of the go/no-go decision scheduled for 2009; (2) the Army's plans for making production commitments for FCS and any risks related to the completion of development; and (3) the estimated costs for developing and producing FCS. Today, the FCS program is about halfway through its development phase, yet it is, in many respects, a program closer to the beginning of development. This portends additional cost increases and delays as FCS begins what is traditionally the most expensive and problematic phase of development. In the key areas of defining and developing FCS capabilities, requirements definition is still fluid, critical technologies are immature, software development is in its early stages, the information network is still years from being demonstrated, and complementary programs are at risk for not meeting the FCS schedule. It is not yet clear if or when the information network that is at the heart of the FCS concept can be developed, built, and demonstrated. Yet, the time frame for completing FCS development is ambitious; even if all goes as planned, the program will not test production-representative prototypes or fully demonstrate the system of systems until after low rate production begins. Even though the development of FCS will finish late in its schedule, commitments to production will come early. Production funding for the first spinout of FCS technologies and the early version of the FCS cannon begin in fiscal years 2008 and 2009. Production money for the core FCS systems will be requested beginning in February 2010, with the DOD fiscal year 2011 budget request--just months after the go/no-go review and before the stability of the design is determined at the critical design review. In fact, by the time of the FCS production decision in 2013, a total of about $39 billion, which comprises research and development and production costs, will already have been appropriated for the program, with another $8 billion requested. Also, the Army plans to contract with its lead system integrator for the initial FCS production, a change from the Army's original rationale for using an integrator. This increases the burden of oversight faced by the Army and the Office of the Secretary of Defense. While the Army's cost estimates for the FCS program remain about the same as last year--$160.9 billion--the content of the program has been reduced, representing a reduction in buying power for the Army. The level of knowledge for the program does not support a confident estimate, and cost estimates made by two independent organizations are significantly higher. Competing demands from within the Army and DOD limits the ability to fund higher FCS costs. Thus, the Army will likely continue to reduce FCS capabilities in order to stay within available funding limits. Accordingly, FCS's demonstrated performance, the reasonableness of its remaining work, and the resources it will need and can reasonably expect will be of paramount importance at the 2009 milestone review for the FCS program.
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The Subcommittee's November 1997 oversight hearing on DCIA's implementation underscored the need for progress in referring delinquent nontax debts to Treasury for offset. At about the time of the hearing, agencies had referred $9.4 billion of nontax debt over 180 days delinquent to Treasury for administrative offset. Initially, agencies had been slow to refer delinquent nontax debt for administrative offset under DCIA largely because of uncertainty as to the delinquent nontax debt that should be referred. Also, Treasury had not made a concerted effort to identify delinquent nontax debt that could be offset or to develop time frames for agencies to refer the debt for offset. In January 1998, Treasury began actively working with agencies to reach agreement on the outstanding nontax debts over 180 days delinquent that can be referred for administrative offset and to obtain commitments from the agencies on referral of those debts. Treasury initially met with the five major credit agencies--the Departments of Agriculture, Education, Housing and Urban Development, and Veterans Affairs (VA) and the Small Business Administration. Later, Treasury expanded its work to include the other CFO Act agencies. As of April 1998, the CFO Act agencies had referred about $16.7 billion of delinquent nontax debt to Treasury for administrative offset--a 78 percent increase over about 7 months. Most of this increase resulted from Treasury's work with the agencies to bring the nontax delinquent debts they submitted for the Internal Revenue Service's (IRS) tax refund offset program into Treasury's administrative offset database. Debts that agencies normally would have referred to IRS for tax refund offsets in calendar year 1998 were, instead, referred to Treasury's Financial Management Service. These debts were incorporated into the database Treasury uses for matching debts for administrative offset and then referred to IRS, which maintains a separate database. In addition to the delinquent nontax debt that has been referred for offset, the CFO Act agencies also hold considerable delinquent nontax debt that has not been referred to Treasury. According to Treasury reports, in April 1998, these agencies held $43.1 billion of nontax debt over 180 days delinquent, including the $16.7 billion of referred debt. Treasury and the CFO Act agencies have determined that $19.4 billion, or almost 75 percent, of the $26.4 billion in unreferred nontax delinquent debt would not be referred for administrative offset, at least not in the near term, for the following reasons: about $12.3 billion relates to nontax delinquent debts that are involved with bankruptcies, foreclosures, statutory forbearance, or formal appeals. An automatic stay that generally prevents the government from pursuing collection against debtors in bankruptcy is provided by 11 U.S.C. Section 362. In addition, debts in foreclosure are governed by state laws that may preclude the government from pursuing foreclosure if collection is attempted through offset. Further, debts subject to forbearance generally are not legally enforceable, thus precluding collection of the debt until the forbearance process is completed. Also, agencies generally cannot certify debts under appeal as valid and legally enforceable until the appeal process is completed. Consequently, Treasury has agreed with agencies that these types of debts should be excluded from referral for offset. about $3.6 billion involves delinquent foreign debts. Treasury has stated that, for the most part, collecting these delinquent debts through administrative offsets is infeasible primarily due to foreign diplomacy considerations and affairs of state. about $3 billion of delinquent nontax debt has been referred by agencies to DOJ for litigation. (See footnote 3.) These debts are no longer under the control of the agencies and, therefore, Treasury does not hold the agencies responsible for referring such debt for administrative offset. Rather, DOJ is to determine if, and when, such debt is referred for offset. about $525 million of delinquent nontax debt owed to HUD, much of which will be scheduled for sale, is not being required to be referred for administrative offset at this time. In addition to these categories of unreferred debt, about $7 billion of outstanding nontax debt over 180 days delinquent remains. Most of this debt involves circumstances that may delay or preclude offset. For example, the vast majority of the Department of Education's approximate $3.1 billion of unreferred nontax delinquent debt consists primarily of debts related to student loans, most of which were being serviced by state or private guaranty agencies. According to Education officials, although delinquent debt serviced by guaranty agencies is subject to referral for administrative offset, many referrals have not yet been made because the required due process for the debtors has not been completed. Another example involves delinquent debts related to the Department of Agriculture's (USDA) state-administered food stamp program and farm loans. According to USDA officials, the food stamp program's delinquent debts, which totaled about $775 million, must be further reviewed by the states to determine whether these debts are in repayment status or whether the debtors have been afforded due process. Also, according to USDA officials, statutory servicing rights normally require that the farm loan debtors be offered workout alternatives prior to collection by offset. As such, this debt, which totaled about $420 million, will not be made available for offset until this statutory process has been completed. Finally, according to a DOD official, DOD delinquent debts totaling about $2 billion are primarily in protest or dispute. Accordingly, these debts have not yet been referred to Treasury for offset. While referring all legally enforceable delinquent nontax debts for offset is an essential element of an effective administrative offset program, the program's objectives cannot be achieved in the absence of another equally essential element--payments that can be offset. As discussed later, systems development problems have hampered Treasury's ability to attempt to bring additional payments into its administrative offset program. Currently, payments that are available for administrative offset are limited to (1) vendor payments disbursed by Treasury and (2) retirement payments made by the Office of Personnel Management (OPM). These types of payments have been in the administrative offset program since 1996. Further, they comprised about 5 percent of the total number of disbursements made, and about 21 percent of the total dollars paid, by Treasury disbursing offices during fiscal year 1997. In addition, although almost all of the vendor payments disbursed by Treasury are currently available for administrative offset, many of these payments cannot be matched against debtor information in Treasury's delinquent debtor database because the vendor records do not contain Taxpayer Identification Numbers (TIN). According to Treasury, during March 1998, about one-third of the payment requests submitted by the agencies for payment by Treasury did not include TINs. Further, Treasury does not yet know the total number of federal payments that may be available for administrative offset. In addition to federal payments made by Treasury, more than 50 Non-Treasury Disbursing Offices (NTDO) make federal payments. However, Treasury has not yet identified the total volume of NTDO payments, which include those made by DOD, the U.S. Postal Service (USPS), and numerous other federal agencies. Moreover, Treasury has not yet fully determined the extent to which payments will be exempt from administrative offset. Currently, Treasury has a request pending from the Pension Benefit Guaranty Corporation for discretionary exemption for a number of payment types, including those related to premium refunds to pension plans. In the future, other agencies may identify payments exempt by statute or request means-tested or discretionary exemption of payments. To date, Treasury has primarily relied on the agencies to identify potentially exempt payments. For example, VA informed Treasury that certain payments were exempted based on Section 5301(a) of Title 38, and Treasury confirmed the exemption. In addition, the Social Security Administration (SSA) and USDA requested and received exemptions for Supplemental Security Income and certain Food and Consumer Services payments, respectively, based on DCIA's requirement that the Treasury Secretary exempt payments under means-tested programs. At this stage, Treasury does not know the total effect on the administrative offset program of payments that will be excluded from the program in accordance with DCIA, or other statutory provisions, and on the basis of requests for exclusions by heads of agencies. To facilitate implementation of payments into the administrative offset program, Treasury is developing several regulations applicable to payment issues. Some regulations have been published as Interim Rules (for example, those relating to federal salary offset), while others are currently being drafted or are with another agency for comment. For example, the rule for offset of federal benefit payments has been forwarded to SSA for consultation. Retirement and Survivors Benefits and Disability Insurance Benefits under the Social Security Program accounted for about 61 percent of the number of payments made by Treasury Disbursing Offices in fiscal year 1997. According to Treasury's most recent DCIA Implementation Plan, it does not intend to publish a final rule for offsetting federal benefit payments, including Social Security payments, until October 1998. In addition, according to Treasury and SSA officials, even if the final rule were published, SSA will not be ready to make required systems changes until 1999 because of demands on its staff related to the Year 2000 computing crisis. One of the DCIA's goals is to minimize debt collection costs by consolidating related functions and activities. To date, however, Treasury has not yet consolidated the administrative, tax refund, and federal salary offset programs. The Federal Tax Refund Offset Program (TROP) has been a cooperative effort of IRS and the federal program agencies. Legislation, beginning with the Deficit Reduction Act of 1984 (Public Law 98-369), authorized the use of tax refund offsets to recover delinquent federal nontax debts. The Emergency Unemployment Compensation Act of 1991 (Public Law 102-164) provided permanent authority to use tax refund offsets. Since TROP's inception in 1986, approximately $8.5 billion of delinquent debt has been recovered through the program. The Debt Collection Act of 1982 authorized, but did not require, federal salary offsets and administrative offsets to liquidate delinquent nontax debt owed to federal agencies. The DCIA requires agencies to participate in an annual matching of records to identify federal employees delinquent on federal debts. Since 1987, the federal employee salary offset program has been a cooperative effort between the federal agencies and DOD's Defense Manpower Data Center (DMDC). Under the program, DMDC performs the computer matching necessary to identify federal employees who are delinquent on their debts using delinquent nontax debtor files provided by the various creditor agencies. DMDC matches these files against active and retired civilian employment files provided by OPM, as well as against DOD's active, retired, and reserve military personnel files. Under a similar program, creditor agencies submit delinquent nontax debtor files to USPS for matching against USPS personnel files. According to Treasury data, during fiscal year 1997, agencies collected over $42 million through these programs. Treasury's lack of progress in consolidating the offset programs is primarily the result of its problems with the development of a new administrative offset system. I would now like to highlight these problems. Treasury does not have a system that can perform all the administrative offset functions envisioned as a result of DCIA. This can be directly attributed to problems Treasury has experienced in managing the development of such a system. Although Treasury has recently taken several actions to address systems development issues, it will be some time before enough information is available to accurately assess the effectiveness of those actions. In addition, we have identified several areas where additional actions must be taken immediately to reduce the risk of further system development problems. Prior to the passage of DCIA in April 1996, Treasury in conjunction with the Federal Reserve Bank of San Francisco (FRBSF), developed a pilot system to demonstrate the feasibility of conducting administrative offsets on a routine basis. The system, referred to as the Interim Treasury Offset Program (ITOP), is currently operational and is used to offset vendor payments disbursed by Treasury Disbursing Offices and OPM retirement payments. However, Treasury never intended the system, as it was originally developed, to perform all of the administrative offset functions envisioned as a result of DCIA. In September 1996, Treasury awarded a contract for the development and implementation of a new and expanded administrative offset system, known as the Grand Treasury Offset Program (GTOP). This system was to be used to consolidate the administrative, tax refund, and federal salary offset programs, and was to include all eligible delinquent federal nontax debt and federal payments. In addition, Treasury intended the system to be capable of incorporating state child support debts and other state debts, which DCIA authorizes to be recovered through federal payment offsets. GTOP was scheduled to be implemented in January 1998. However, because of systems development problems, it has not been placed into operation. Currently, Treasury is focusing its efforts on enhancing ITOP to handle all eligible debts and payments for the administrative offset program, as well as the consolidation of the administrative, tax refund, and federal salary offset programs. Treasury has concluded that it currently cannot use GTOP for the administrative offset program primarily because Treasury did not apply a disciplined system development process for that system. Treasury's policies, including its systems life cycle methodology, and our guidancecall for the completion of a concept of operations and functional requirements in the development of a major system. The GTOP development effort was undertaken without (1) completing an overall concept of operations, which includes the high-level information flows for the system and (2) documenting the functional requirements that the system must meet. Treasury's policies call for such generally accepted steps to be completed before a system is developed. We are unsure why the previous management team responsible for GTOP's oversight allowed GTOP to be developed before these critical steps were completed. However, according to Treasury, the effect was that the completeness and usefulness of the software delivered by the GTOP contractor in October 1997 cannot be reasonably measured and the system cannot be tested to determine if it would meet Treasury's needs. Thus, Treasury has not placed the system into operation. In December 1997, Treasury established a new management team for DCIA implementation, which includes managing a new systems development effort for the administrative offset program. The new management team has decided to halt all work on GTOP and enhance ITOP. Treasury recognizes that one of the disadvantages of this approach is that it may result in little or no return on the approximately $5 million it has paid to the contractor for development of the system software that has been delivered. However, it also believes that modifying ITOP is the most practical way to consolidate the administrative and tax refund offset programs for the 1998 tax year and to begin adding federal salary and benefit payment streams in the administrative offset program during calendar year 1998 or early 1999. According to Treasury officials, the enhancement of ITOP will comply with Treasury guidance for systems development efforts. Based on our review of documentation recently provided to us, there are indications that some of the critical system development requirements are being addressed. For example, Treasury has identified the information flows associated with several payment types and has begun to develop the corresponding functional requirements for those payment types. It has also developed a DCIA Implementation Plan that includes many of the steps necessary to enhance ITOP and projected completion dates for each step. This plan should enable Treasury management and others to promptly and objectively measure whether the ITOP enhancement is on schedule. In addition, Treasury's Financial Management Service's Debt Management Services is now routinely briefing the Under Secretary for Domestic Finance and other top Treasury officials on progress relating to the administrative offset program with the intention that such high-level oversight will facilitate keeping the implementation of DCIA on schedule and help to identify any significant problems early so that corrective actions can be taken promptly. While these efforts are positive steps, we have identified several areas where additional actions are needed. In reviewing Treasury's plans and actions to date, we have identified several areas where additional actions must be taken immediately to adequately reduce the risk of costly modifications and further delays in the effective implementation of the administrative offset provisions of DCIA. First, a documented overall concept of operations has not yet been developed. A concept of operations includes high-level descriptions of information systems, their interrelationships, and information flows. It also describes the operations that must be performed, who must perform them, and where and how the operations will be carried out. According to Treasury officials, they understand the importance of such a document, but until recently, have not placed a high priority of completing it because they believe the individuals involved with the project have an overall view of how the offset processes should work. After we discussed this issue with Treasury officials, they have agreed to increase the priority associated with this effort and have projected completion of an overall concept of operations in July 1998. It is important for Treasury to place a high priority on ensuring that this effort is completed on schedule because it is the primary building block on which the entire systems development effort is based. Moreover, if personnel changes occur prior to completion of the project, it would be difficult to effectively complete the project promptly without such documentation. Second, overall functional requirements for the administrative offset system are not yet available. Functional requirements, which describe a system's functional inputs, processes, and outputs, are derived from the concept of operations and serve as the rationale for a system's detailed requirements. They are generally expressed in user terminology and are the foundation that guides the development process. Although Treasury has begun to develop and document functional requirements for several key processes, such as federal salary and tax refund offsets, it has not developed overall functional requirements for the administrative offset system. While the development of functional requirements for each key process is a necessary step in the incremental systems development approach being used, it does not replace the need for overall functional requirements. Until the functional requirements for the overall system are defined, the requirements for a given process may not be adequate. We discussed this issue with Treasury officials, and they have agreed to increase the priority associated with this effort and have projected completion of overall functional requirements by the end of August 1998. Treasury is in the process of preparing functional requirements for certain key processes. Treasury personnel stated that for each key process, the functional requirements would be clearly defined and that a requirements traceability matrix would be developed so that a test plan could be prepared. Treasury must place a high priority on (1) completing the overall functional requirements, (2) clearly defining the specific functional requirements as they are prepared for each key process, and (3) ensuring that the key process functional requirements are consistent with the applicable overall functional requirements. This is important because many system developers and program managers have identified ill-defined or incomplete requirements as one of the root causes of system failures. In addition, as previously stated, the lack of documented functional requirements is a major reason GTOP was not able to be tested. Third, Treasury's DCIA Implementation Plan does not yet include all facets of the administrative offset program. The most recent version of the plan, dated May 1, 1998, includes the tasks and projected milestone dates involved with several of the key processes. However, the plan does not include information on handling certain payment types, such as payments made by NTDOs (other than USPS and DOD), miscellaneous payments, and salary payments made by payroll offices other than USDA's National Finance Center (NFC), for which Treasury makes the disbursement.According to Treasury officials, because of the priorities they have put on merging the administrative and tax refund offset programs, processing salary payments from NFC, and processing Social Security Benefit payments, they have not as yet devoted time to fully developing an overall DCIA Implementation Plan. We recognize that Treasury's current focus is largely directed toward consolidating existing payment offset programs to improve efficiency and attempt to minimize the costs of debt collection, which is an important objective of DCIA. In addition, the degree of specificity associated with a particular facet of the program may vary depending on the priority that Treasury assigns to it. However, a complete DCIA Implementation Plan is critical to the success of Treasury's systems development efforts. Such a plan is needed for Treasury management and others to effectively evaluate (1) how the development and implementation of the overall system is progressing and (2) when corrective action is needed to ensure that major slippages do not occur. Treasury officials have agreed to more fully develop the DCIA Implementation Plan in the near future. Fourth, Treasury has not yet completed a risk management plan. A risk management plan is critical for the successful implementation of a systems development project because it provides management and others the ability to focus their efforts on the areas that pose the greatest risks. It also outlines the actions that Treasury will take to mitigate the risks identified. Treasury officials stated that although they have not developed such a plan for the overall system, they have developed a plan for the software development efforts. A risk management plan takes on even more importance when tight time frames are involved in a given effort because it outlines the actions that will be taken should the project miss key delivery dates. Treasury officials agreed that an overall risk management plan is needed and has projected completion in July 1998. Finally, Treasury has not yet evaluated the adequacy of the hardware and software platforms. Treasury has decided to use the hardware and software platforms that were selected for GTOP until it can conduct tests to determine if these platforms are adequate. Treasury officials acknowledge that this decision increased project risk because development efforts were being based on these platforms prior to knowing whether they were adequate for the requirements of the enhanced ITOP system. However, they believe the risk is justified because (1) the hardware has already been acquired and an evaluation of the adequacy of the platforms should be completed by June 30, 1998, and (2) some work had been performed to evaluate the adequacy of the platforms before they were selected for GTOP. Management must ensure that the evaluation of the hardware and software platforms is completed by the estimated completion date of June 30, 1998. Otherwise, Treasury runs a risk that the system it is developing cannot become operational without costly modification. Treasury's commitment to address the systems development issues we have raised is encouraging. But it will be important for Treasury's top management to ensure that the planned corrective actions are effectively and expeditiously completed prior to making any significant investment in the development of an administrative offset system. Otherwise, Treasury is significantly exposed to the risk of costly systems modifications and additional delay in developing a system to implement the administrative offset provision of DCIA. Mr. Chairman, this concludes my statement. I would be happy to respond to any questions that you or other members of the Subcommittee may have at this time. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. 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Pursuant to a congressional request, GAO discussed the Department of the Treasury's implementation of the administrative offset provision of the Debt Collection Improvement Act (DCIA) of 1996, focusing on: (1) the status of referrals by agencies of delinquent nontax debts to Treasury for administrative offset; (2) actions Treasury has taken and plans to take to include all eligible federal payments in the administrative offset program; and (3) actions Treasury has taken, or plans to take, to consolidate the administrative, tax refund, and federal salary offset programs. GAO noted that: (1) Treasury has recently made progress in getting the 24 agencies covered by the Chief Financial Officers (CFO) Act of 1990 to refer nontax debt over 180 days delinquent for administrative offset; (2) as of April 1998, the CFO Act agencies had referred to Treasury about $16.7 billion in nontax debt over 180 days delinquent, and Treasury has entered these delinquencies into its debtor database; (3) this is a substantial increase over the $9.4 billion that had been referred to Treasury about 7 months earlier, at about the time the congressional subcommittee held DCIA oversight hearings in November 1997; (4) as of April 1998, about $26.4 billion of reported nontax debt over 180 days delinquent had not been referred to Treasury and is unlikely to be referred in the near future; (5) on the payment side, Treasury does not yet have a system capable of matching all federal payments against the delinquent debtor database; (6) as of April 1998, 2 years after DCIA's enactment, Treasury had collected about $1.2 million of delinquent nontax federal debt through its administrative offset program; (7) payments subject to offset through the administrative offset program are limited to those made by Treasury to vendors and to federal retirees by Treasury disbursing offices in fiscal year 1997; (8) also, Treasury has made little progress in fully determining the extent to which federal payments can be made available for offset; (9) Treasury has not yet consolidated the administrative, tax refund, and federal salary offset programs; (10) Treasury's systems development problems have also caused delay in consolidating these programs and thus, any debt collection efficiencies envisioned by such a consolidation have not yet been realized; (11) in developing an administrative offset system, Treasury did not apply a disciplined systems development process; (12) the resulting system, which was planned for implementation in January 1998, was not placed into operation, and a subsequent systems development effort is under way; (13) in efforts to develop an administrative offset system, Treasury has recently taken several actions to address systems development issues; (14) it will be important for Treasury's top management to ensure that the planned corrective actions are effectively and expeditiously completed prior to making any significant investment in the development of an administrative offset system; and (15) otherwise, Treasury is significantly exposed to risks that it may experience costly modifications and additional delays in developing a system for implementing the administrative offset provision of DCIA.
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The Uruguay Round and NAFTA included significant provisions to liberalize agricultural trade. Generally, these agreements comprised commitments for reducing government support, improving market access, and establishing for the first time rules on various aspects of global agricultural trade. As the largest exporter of agricultural commodities in the world, the United States was expected to benefit substantially from implementation of the reforms embodied in these agreements. The Uruguay Round represented the first time that GATT member countries established disciplines concerning international agricultural trade. The Uruguay Round agreements, including those on agriculture and SPS, included several key measures to liberalize agricultural trade. First, generally over a 6-year period beginning in 1995, member countries were required to make specific reductions in three types of support to agricultural producers: (1) import restrictions, (2) export subsidies, and (3) internal support. Second, member countries concluded an Agreement on the Application of Sanitary and Phytosanitary Measures that established guidelines on the use of import regulations to protect human, animal, and plant life and health. Third, countries established a Committee on Agriculture that would oversee implementation of WTO member countries' commitments to reduce agricultural support and provide a forum for discussions on agricultural trade policies. Fourth, the Round provided a definition of STEs and implemented procedural measures designed to improve compliance with GATT rules. Finally, member countries agreed to enter a second phase of negotiations to further liberalize agricultural trade beginning in 1999. Under NAFTA, the three member countries--Canada, Mexico, and the United States--agreed to eliminate all tariffs on agricultural trade. Some of these tariffs were to be eliminated immediately; others would be phased out over a 5-, 10- or 15-year period. NAFTA also required the immediate elimination of all nontariff trade barriers, such as import restrictions, generally through their conversion either to tariff-rate quotas or tariffs. For example, Mexico's import licensing requirements for bulk commodities, such as wheat, were terminated under NAFTA. In addition, the NAFTA charter's chapter on agriculture included provisions on SPS. NAFTA also established a joint committee on agricultural trade and a committee on SPS measures, providing a channel for discussion of member countries' ongoing concerns, in an effort to head off disputes. While forecasters have estimated that increases in agricultural trade would account for a sizable portion of the Uruguay Round and NAFTA accords' projected benefits to the United States, challenges exist for ensuring their full implementation. In particular, our work on foreign SPS measures and STEs illustrates the complexity of the implementation challenges, particularly in organizing U.S. government efforts to assure effective enforcement and monitoring of member nations' agricultural commitments under both agreements. For example, The U.S. Trade Representative (USTR) has found that as trade agreements begin to reduce tariffs on agricultural commodities, the United States must guard against the increasing use of SPS measures as the trade barrier of choice. The WTO Agreement on the Application of Sanitary and Phytosanitary Measures, and chapter 7 of NAFTA, established guidelines regarding the appropriate use of SPS measures in relation to trade. While these agreements are not identical, they are consistent in their guiding principles and rules. Both agreements recognize the right of countries to maintain SPS measures but stipulate that such measures (1) must not be applied arbitrarily or constitute a disguised restriction on trade and (2) must be based on scientific principles and an assessment of risk. In addition, the WTO and NAFTA agreements provided dispute settlement procedures to help resolve disagreements between member countries on SPS measures, including consultations and review by a dispute settlement panel. The WTO agreement also encourages progress toward achieving three objectives: (1) broad harmonization of SPS measures through greater use of international standards (harmonization), (2) recognition among members that their SPS measures may differ but still be considered "equivalent" provided they achieve the same level of protection (equivalency), and (3) adaptation of SPS measures to recognize pest- and disease-free regions (regionalization). Our work suggests open issues in the following areas: the lack of coordination of U.S. government efforts to address foreign SPS measures; the adequacy of the USDA's process for balancing its regulatory and trade facilitation roles and responsibilities; and the potential benefits from WTO member countries' progress toward achieving the longer-term objectives concerning harmonization, equivalency, and regionalization. Although USTR has identified some foreign SPS measures as key barriers to U.S agricultural exports, our recent report to Congress found several weaknesses in the federal government's approach to identifying and addressing such measures. Because of these weaknesses, the federal government cannot be assured that it is adequately monitoring other countries' compliance with the WTO or NAFTA SPS provisions and effectively protecting the interests of U.S. agricultural exporters. Specifically, we found that the federal structure for addressing SPS measures is complex and involves multiple entities. USTR and USDA have primary responsibility for addressing agricultural trade issues, and they receive technical support from the Food and Drug Administration (FDA), the Environmental Protection Agency (EPA), and the Department of State. Our review demonstrated that the specific roles and responsibilities of individual agencies within this complex structure are unclear and that effective leadership of their efforts has been lacking. During our review, USTR and USDA implemented certain mechanisms to improve their handling of SPS issues, but the scope of these mechanisms did not encompass the overall federal effort. In addition, we found that the various agencies' efforts to address foreign SPS measures have been poorly coordinated and they have had difficulty determining priorities for federal efforts or developing unified strategies to address individual measures. Finally, we found that goals and objectives to guide the federal approach and measure its success had not been developed. We believe that a more organized, integrated, strategic federal approach for addressing such measures would be beneficial. Therefore, we recommended that USTR, USDA, and the other concerned agencies, such as FDA and EPA, work together to develop coordinated goals, objectives, and performance measurements for federal efforts to address foreign SPS measures. Outstanding questions derived from our work include the following: What steps have USTR and USDA taken to address the weaknesses found by our study, such as the lack of a process to prioritize federal efforts to address foreign SPS measures? How do USTR and USDA plan to improve coordination of their activities to address SPS measures? How do USTR and USDA plan to work more closely with other relevant agencies, such as FDA and EPA, in determining which SPS measures to address and how to address them? Specifically, at the executive branch level how does the administration intend to balance its trade facilitation and regulatory roles and responsibilities? Absent a coordinated approach for addressing foreign SPS measures, the specific role of USDA regulatory and research agencies in resolving SPS has not been clearly defined. Some of these regulatory agencies, such as the Animal and Plant Health Inspection Service and the Food Safety Inspection Service, whose primary responsibilities are to safeguard human, animal, and plant life or health, have increasingly assumed a role in efforts to facilitate trade. Several trade authorities and industry officials have expressed frustration that these regulatory agencies (1) seem to lack a sense of urgency regarding trade matters and (2) are sometimes willing to engage in technical discussions regarding foreign SPS measures for many months and even years. These groups expressed concerns that regulatory authorities lack negotiating expertise, which sometimes undermined efforts to obtain the most advantageous result for U.S. industry regarding foreign SPS measures. U.S. regulatory officials, in turn, believe that at times trade authorities and industry groups fail to appreciate that deliberate, and sometimes lengthy, technical and scientific processes are necessary to adequately address foreign regulators' concerns about the safety of U.S. products. Government and industry officials have stated that regulatory and research agencies' responsibilities for dealing with foreign SPS measures have not been clearly defined. The tension in balancing the regulatory and trade facilitation activities of some USDA agencies underlines the need to more clearly define their role in addressing SPS measures. Questions resulting from our work include the following: What steps has USDA taken to use its strategic planning process for integrating disparate agency efforts to address SPS measures? What progress is USDA making in using the Working Group on Agricultural Trade Policy to strengthen USDA's SPS efforts? Has this initiative, or any other, begun to deal with the tensions that have arisen over the dual roles of some USDA agencies as both regulatory and trade facilitation entities? Has USDA provided guidance to regulatory agency officials to assist in promoting a more consistent effort to balance their competing goals and policies? Is there outreach to agricultural producers to clarify the new roles that increased foreign trade has required these regulatory agencies to adopt? WTO and USTR officials suggest that member countries appear to have focused on implementing provisions of the SPS agreement that enable them to resolve SPS disputes as they arise, such as the requirement that SPS measures be based on scientific evidence, but have paid less attention to other key provisions. Specifically, member countries have been less concerned with provisions regarding harmonization, equivalency, and regionalization of SPS measures. The practices these principles encourage are not currently widespread. Progress in implementing harmonization, equivalency, and regionalization could be time consuming. For example, the United States and the European Union negotiated for 3 years before reaching a partial agreement about the equivalence of their respective inspection systems for animal products. Nevertheless, these provisions could help minimize trade disputes in the long run by creating a more structured approach to SPS measures. Our work raises the following questions regarding the SPS agreement's long-term objectives: Is there a sufficient balance in efforts to implement the Uruguay Round SPS agreement so as to promote the goals of harmonization, equivalency, and regionalization as envisioned in the framework of the agreement? What factors limit cooperation among WTO member countries in pursuit of these three long-term objectives? How are USDA and USTR working to promote international harmonization of SPS measures based on U.S. standards that would facilitate U.S. industry access to foreign agricultural and agriculture-related markets? The agricultural and SPS agreements of the Uruguay Round were intended to move member nations toward establishing a market-oriented agricultural trading system by minimizing government involvement in regulating agricultural markets. Some member nations continue to use STEs to regulate imports and/or exports of selected products. For example, STEs have long been important players in the international wheat and dairy trade. As a result of the Uruguay Round, the WTO officially defined STEs and addressed procedural weaknesses of GATT's article XVII by improving the process for obtaining and reviewing information. In the past, GATT required that STEs (1) act in a manner consistent with the principles of nondiscriminatory treatment, (2) make purchases and/or sales in accordance with commercial considerations that allow foreign enterprises an opportunity to compete, and (3) notify the WTO secretariat about their STEs' activities (for example, WTO members who have STEs are required to report information on their operations). Subsequently, the Uruguay Round established an STE working party which is now incorporated into the WTO framework. In addition, STEs that engage in agricultural trade are also subject to the provisions in the Uruguay Round Agreement on Agriculture, that define market access restrictions, export subsidies, and internal support. Our work suggests open issues in two areas: (1) a lack of transparency in STE pricing practices and (2) the extent of U.S. efforts to address STEs. In the absence of complete and transparent information on the activities of STEs, member countries are hindered in determining whether STEs operate in accordance with GATT disciplines and whether STEs have a trade-distorting effect on the global market. In 1995, we reported that compliance with the Uruguay Round STE reporting requirements or notifications had been poor. Since then, STE notifications to the WTO have improved, including reporting by countries with major agricultural STEs. However, because they are not required to do so, none of the notifying STE countries have reported transactional pricing practices--information that could provide greater transparency about their operations. U.S. agricultural producers continue to express concern over the lack of transparency in STE pricing practices and their impact on global free trade. In 1996, we reported that our effort to fully evaluate the potential trade-distorting activities of STEs, including pricing advantages, could not be conducted because of a lack of transaction-level data. Without this data and the more transparent system it would create, the United States finds it difficult to assess the trade-distorting effects of, and compliance with, WTO rules governing reporting on STE operations. Our work on STEs raises the following questions with regard to the lack of transparency: What progress has the WTO working party on state trading enterprises made in studying STEs and improving the information available about their activities? What steps, if any, can be taken within the WTO framework, or otherwise, to increase the pricing transparency of import- and export-oriented STEs? U.S. agricultural interests have expressed concern regarding the potential of STEs to distort trade, and USDA officials have said that a focused U.S. effort to address STEs is vitally important. Although, under the WTO, STEs are recognized as legitimate trading entities subject to GATT rules, some U.S. agricultural producers and others are concerned that STEs, through their monopoly powers and government support, may have the ability to manipulate worldwide trade in their respective commodities. For example, some trade experts and some WTO member countries are concerned about STEs' potential to distort trade due to their role as both market regulator and market participant. Further, the U.S. agricultural sector competes with several prominent export STEs in countries such as Canada, Australia, and New Zealand and import STEs in other countries such as Japan. Questions from our work regarding the U.S. effort to address STEs include the following: How are USTR and USDA monitoring STEs worldwide to ensure that member countries are meeting their WTO commitments? Given the limited transparency resulting from STE notifications to the WTO, how can the United States be assured that STEs are not being operated in a way that circumvents other WTO agriculture commitments, such as the prohibition on export subsidies or import targets? Mr. Chairman and members of the Subcommittee, this concludes my statement for the record. Thank you for permitting me to provide you with this information. Agricultural Exports: U.S. Needs a More Integrated Approach to Address Sanitary/Phytosanitary Issues (GAO/NSIAD-98-32, Dec. 11, 1997). Assistance Available to U.S. Agricultural Producers Under U.S. Trade Law (GAO/NSIAD-98-49R, Oct. 20, 1997). North American Free Trade Agreement: Impacts and Implementation (GAO/T-NSIAD-97-256, Sept. 11, 1997). U.S. Agricultural Exports: Strong Growth Likely, but U.S. Export Assistance Programs' Contribution Uncertain (GAO/NSIAD-97-260, Sept. 30, 1997). World Trade Organization: Observations on the Ministerial Meeting in Singapore (GAO/T-NSIAD-97-92, Feb. 26, 1997). International Trade: The World Trade Organization's Ministerial Meeting in Singapore (GAO/T-NSIAD-96-243, Sept. 27, 1996). Canada, Australia, and New Zealand: Potential Ability of Agricultural State Trading Enterprises to Distort Trade (GAO/NSIAD-96-94, June 24, 1996). International Trade: Implementation Issues Concerning the World Trade Organization (GAO/T-NSIAD-96-122, Mar. 13, 1996). State Trading Enterprises: Compliance With the General Agreement on Tariffs and Trade (GAO/GGD-95-208, Aug. 30, 1995). Correspondence Regarding State Trading Enterprises (GAO/OGC-95-24, July 28, 1995). The General Agreement on Tariffs and Trade: Uruguay Round Final Act Should Produce Overall U.S. Economic Gains (GAO/GGD-94-83A&B, July 29, 1994). General Agreement on Tariffs and Trade: Agriculture Department's Projected Benefits Are Subject to Some Uncertainty (GAO/GGD/RCED-94-272, July 22, 1994). North American Free Trade Agreement: Assessment of Major Issues (GAO/GGD-93-137, Sept. 9, 1993) (two vols.). CFTA/NAFTA: Agricultural Safeguards (GAO/GGD-93-14R, Mar. 18, 1993). International Trade: Canada and Australia Rely Heavily on Wheat Boards to Market Grains (GAO/NSIAD-92-129, June 10, 1992). 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.
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GAO discussed the implementation of certain agricultural provisions of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) and North American Free Trade Agreement (NAFTA), focusing on: (1) the impact of measures to protect human, animal or plant life or health--referred to as sanitary and phytosantiary (SPS) measures; and (2) state trading enterprises (STEs). GAO noted that: (1) the Uruguay Round and NAFTA included significant provisions to liberalize agricultural trade; (2) while forecasters have estimated that increases in agricultural trade would account for a sizeable portion of the Uruguay Round and NAFTA agreements' projected benefits to the United States, challenges exist for ensuring their full implementation; (3) the World Trade Organization's (WTO) agreement on the application of sanitary and phytosanitiary measures, and chapter 7 of NAFTA, established guidelines regarding the appropriate use of SPS measures in relation to trade; (4) although the United States Trade Representative (USTR) has identified some foreign SPS measures as key barriers to U.S. agricultural exports, GAO's recent report to Congress found several weaknesses in the federal government's approach to identifying and addressing such measures; (5) because of these weaknesses, the federal government cannot be assured that it is adequately monitoring other countries' compliance with the WTO or NAFTA SPS provisions and effectively protecting the interests of U.S. agricultural exporters; (6) USTR and the Department of Agriculture (USDA) have primary responsibility for addressing agricultural trade issues, and they receive technical support from the Food and Drug Administration (FDA), the Environmental Protection Agency and the Department of State; (7) absent a coordinated approach for addressing foreign SPS measures, the specific role of USDA regulatory and research agencies in resolving SPS has not been clearly defined; (8) WTO and USTR officials suggest that member countries appear to have focused on implementing provisions of the SPS agreement that enable them to resolve SPS disputes as they arise; (9) the agricultural and SPS agreements of the Uruguay Round were intended to move member nations toward establishing a market-oriented agricultural trading system by minimizing government involvement in regulating agricultural markets; (10) as a result of the Uruguay Round, the WTO officially defined STEs and addressed procedural weaknesses of article XVII by improving the process for obtaining and reviewing information; (11) in the absence of complete and transparent information on the activities of STEs, member countries are hindered in determining whether STEs operate in accordance with GATT disciplines and whether they have a trade-distorting effect on the global market; and (12) U.S. agriculture interests have expressed concern regarding the potential of STEs to distort trade, and USDA officials have said that a focused U.S. effort to address STEs is vitally important.
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HUD's Section 8 Assisted Housing Program provides rental subsidies for low-income households. Assistance is either tenant-based--the household receives the assistance wherever it finds an acceptable housing unit owned by a landlord who agrees to participate in the program--or project-based--rent is paid for an eligible tenant or tenants when they occupy a specific housing development or unit. For tenant-based assistance, HUD contracts with and provides funding to local and state housing agencies to administer the program. In turn, these agencies make payments to private sector landlords to subsidize the rent for eligible households. For most project-based assistance other than the MOD REHAB Program, HUD contracts directly with and provides rental subsidies to the owners of private rental housing and to state finance agencies. Although the MOD REHAB Program is a type of project-based assistance, it is administered by local housing agencies under contract with HUD. For each type of Section 8 housing assistance, participating households generally pay 30 percent of their income for rent, although this percentage can vary depending on family income and program type. The Section 8 MOD REHAB Program was created in 1978 to add to the existing inventory of assisted housing. It did this by providing funding to upgrade a portion of the estimated 2.7 million then-unassisted rental housing units with deficiencies that required a moderate level of repair and rental subsidies for low-income families. Under annual contracts with housing agencies, HUD provides the funding for rental subsidies as well as an administrative fee to the agencies. The administering agencies, in turn, enter into Housing Assistance Payments (HAP) contracts with property owners. Under these HAP contracts, property owners rehabilitate their housing units by completing repairs costing at least $1,000 so their units meet HUD's standards for housing quality and make the rehabilitated units available to eligible families. In exchange, the housing agencies screen applicants for eligibility and pay the difference between the approved contract rent and the tenants' portion of the rent. Initially, the contract rent is based on an owner's costs, and housing agencies can approve rents up to 120 percent of an area's fair market rent to compensate the owner for rehabilitation costs. However, when the term of a property owner's rehabilitation loan is less than the term of a HAP contract, regulations require housing agencies to adjust the contract rent downward at the end of the rehabilitation loan's term to reflect the owner's reduced expenses. During the 11 years that the Congress funded new contracts under the MOD REHAB Program, the term for HAP contracts was 15 years. When the oldest of these contracts began to expire in 1995 and 1996, HUD instructed housing agencies to replace them with Section 8 tenant-based assistance. Since fiscal year 1997, however, the Congress has required HUD to renew an expiring contract with a 1-year MOD REHAB contract if the owner so requests and the property consists of more than four housing units covered in whole or in part by a HAP contract. In calendar year 1997, about 25 percent of these expiring HAP contracts were renewed as 1-year MOD REHAB contracts. As of January 15, 1998, the MOD REHAB Program was assisting over 81,000 households, but this represents a small proportion of the total number of households receiving Section 8 assistance (see fig. 1). The excess budget authority in the Section 8 MOD REHAB Program is funding that has been obligated to the housing agencies that administer the program but will not be needed to meet the agencies' obligations under current contracts. Three types of such funding exist in the Section 8 MOD REHAB Program: (1) funding that has been obligated to a housing agency but never been placed under a HAP contract, (2) budget authority that has been placed under a HAP contract but has not been used and thus has accumulated in a housing agency's reserve account, and (3) excess funding that HUD estimates will accrue in a housing agency's reserve account. The third type of excess budget authority cannot be recaptured until it actually accumulates in a housing agency's reserve account. HUDCAPS is designed to capture the data necessary to calculate the total amount of excess budget authority that has accumulated in the program on an annual cycle as each housing agency reports its actual program costs to HUD. In January 1998, HUD estimated that the excess budget authority in the Section 8 MOD REHAB Program was $814 million before adjustments. After subtracting amounts required to cover future requirements and contingencies, HUD estimated that $439 million could be recaptured from the housing agencies that administer the program. HUD did not recapture the excess budget authority in the MOD REHAB Program in September 1997, when it recaptured similar excesses in its tenant-based program because, according to HUD program officials, the Secretary of HUD did not have the authority to do so. In addition, problems with its data on the MOD REHAB Program would have made it difficult for the Department to identify and recapture excess budget authority. For example, some HAP contracts had not been entered into HUD's information system, and some of the data on the number of units under contract had been entered incorrectly. Therefore, HUD instructed its field offices to address these discrepancies by comparing the data in its central information system with the data in the Department's original contracts with housing agencies and the original HAP contracts and then making any necessary changes. Although this internal effort to correct the data ended in December 1997, HUD officials believe that the accuracy of the data could be further improved and that approximately 10 percent of the system's entries are inaccurate. As discussed later, HUD plans additional efforts to correct its data. After updating its information system to reflect the December 1997 corrections, the Department analyzed the system's data to estimate the amount of MOD REHAB excess budget authority that was available for recapture and reuse. To estimate this amount, HUD first calculated the excess budget authority by comparing the total unexpended budget authority with the program's requirements for that budget authority at each housing agency--the same method that it had used to determine the excess budget authority in its tenant-based program. As shown in table 1, HUD then determined that the total excess budget authority available as of January 15, 1998, was about $814 million before adjustments. Of that amount, HUD estimated that it would need about $191 million to cover known funding shortfalls for HAP contracts that have not had sufficient funding obligated to them to cover their expected needs through the end of their terms and $184 million to cover such contingencies as unexpected decreases in tenants' incomes or unexpected rent increases. According to HUD, the remaining $439 million is available for recapture and reuse to meet ongoing needs for housing assistance. The Congress may also decide to rescind this excess budget authority as it did when excess budget authority was identified in the Section 8 tenant-based program. The $184 million reserve for contingencies is equivalent to almost 4 months of housing assistance payments to property owners participating in the MOD REHAB Program. When HUD recaptured the excess budget authority in the Section 8 tenant-based program in September 1997, the Department held in reserve for contingencies an amount equal to only about 2 months of housing assistance payments to property owners. According to HUD officials, the Department established a larger reserve for contingencies in the MOD REHAB Program than the one it had established for the tenant-based program because, at the time the analysis was performed, it did not have as much confidence in its data for the MOD REHAB Program as it did in its data for the tenant-based program. We cannot evaluate the accuracy of HUD's estimate at this time because the Department has not completed its efforts to reconcile discrepancies between the data in its information system and contract documentation contained in field offices' files. Despite HUD's earlier efforts to improve its data on the MOD REHAB Program, the Department was not able to correct all the discrepancies identified before performing its analysis of excess budget authority. For example, at the time HUD performed its analysis, some HAP records still were incomplete and others contained irregular data. At the time of our review, officials in the Office of Public and Indian Housing qualitatively estimated that HUD's data on the MOD REHAB Program were not entirely accurate in terms of being correct and complete. To further improve the data's accuracy, HUD plans to continue correcting discrepancies in contracts that it has with housing agencies. HUD also plans to obtain an independent and statistically valid evaluation of the accuracy of the data in the MOD REHAB Program's information system. HUD recognizes that its data on the MOD REHAB Program are questionable; therefore, it plans to undertake additional efforts to verify the information. First, HUD plans to instruct the staff in its field offices to again compare the MOD REHAB data in its information system with the data contained in the original contract documentation maintained at those offices. HUD officials explained that potential data inconsistencies will be reported to its field offices, which will reconcile the data by using the information in their contract files. However, because it believes that the documentation at its field offices will not always be reliable, HUD also plans to hire a contractor to follow up on and correct discrepancies by obtaining missing or additional information from the housing agencies that administer the program. By taking these steps, HUD hopes to enhance the integrity of its data on the MOD REHAB Program. The Department expects its field offices to complete their portion of the data reconciliation by the end of August and the contractor to complete the rest of the data retrieval by the middle of October. For its Section 8 tenant-based program, HUD engaged a contractor to independently evaluate its estimate of excess budget authority. The contractor also conducted a representative sampling of transactions in its information system and developed a statistically valid estimate of the system's accuracy. HUD plans to require the contractor that will be correcting contract discrepancies to perform a similar evaluation of the accuracy of the MOD REHAB Program's information system. Until HUD completes such an evaluation, we cannot report on the accuracy of HUD's estimate of its excess budget authority. Although HUD plans to recapture the available excess budget authority from housing agencies' accounts, the Department has not finalized its plans for this activity, according to officials in HUD's offices of Public and Indian Housing and the Chief Financial Officer. For example, in addition to completing the data cleanup efforts discussed above, HUD also needs to develop and test the formula it will use to recapture the excess budget authority from housing agencies' accounts. While some factors in the formula, such as the inflation rate and certain economic assumptions prescribed by the Office of Management and Budget, are not within HUD's discretion to change, other aspects of the formula are still undetermined. For example, HUD may decide after its field offices complete their efforts to clean up the data that it no longer needs to keep the full $184 million in the housing agencies' accounts to cover contingencies, as it originally had estimated in January 1998. This means that the actual amount recaptured and available for rescission may change and perhaps be more than the $439 million estimated in HUD's January 1998 analysis. HUD officials could not provide us with a firm estimate of when the Department will finalize its recapture plan and could not predict a date for completing the recapture. Once HUD identifies the amount of excess budget authority in its Section 8 Program, the Congress has shown that it will act expeditiously to make the most productive use of that authority. Therefore, we believe that HUD is correct in taking steps to identify and plan for recapturing the excess budget authority in its MOD REHAB Program. Identifying, confirming, and recapturing this excess budget authority before HUD submits its fiscal year 2000 budget request would help to show that HUD is making progress toward improving its financial management of the Section 8 Program. To do this, HUD will need to complete its work to clean up its data, evaluate the accuracy of its data, and develop its recapture formula as soon as possible. Because HUD recognizes the steps it needs to take to properly report to the Congress the amount of excess budget authority in its MOD REHAB Program and has plans to take such steps, we are not making recommendations at this time. However, we will continue to monitor HUD's budget process and review its fiscal year 2000 budget submission to determine whether the Department's cost estimates accurately reflect the amount of its excess budget authority. We provided a draft of this report to HUD for review and comment. In commenting on the report, HUD said that it generally agreed with our assessment of the steps being taken to properly report to the Congress the amount of excess budget authority in the Section 8 MOD REHAB Program. The Department also provided several technical comments, which we incorporated, as appropriate. HUD's letter appears in appendix I. To determine how HUD estimated the excess budget authority in its Section 8 MOD REHAB Program and the accuracy of this estimate, we discussed with Department officials their general approach for calculating excess budget authority and reviewed preliminary documentation supporting their approach. Specifically, we discussed HUD's approach with officials in the offices of Public and Indian Housing and the Chief Financial Officer and analyzed reports from HUD's accounting system that showed the amount of excess budget authority available for recapture from the housing agencies that administer the program. However, at the time we completed our review, HUD had not finalized its recapture plan and the assumptions that will determine the specific amounts to be recaptured from each housing agency. To determine what HUD plans to do with the excess budget authority in the Section 8 MOD REHAB Program, we interviewed program and budget officials and officials in HUD's Office of the General Counsel about the Department's plans and legal authority to recapture the program's excess budget authority and reuse it to meet ongoing needs for housing assistance. We performed our work from February 1998 to July 1998 in accordance with generally accepted government auditing standards. We are sending copies of this report to the appropriate House and Senate committees; the Secretary of Housing and Urban Development; and to the Director, Office of Management and Budget. We also will provide copies to others on request. If you or your staff have any questions concerning this report, please contact me at (202) 512-7631. Major contributors to this report were Eric Marts, Assistant Director, and Paige Smith, Senior Evaluator, of our Resources, Community, and Economic Development Division. 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.
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Pursuant to a legislative requirement, GAO reviewed the Department of Housing and Urban Development's (HUD) financial management of the Section 8 rental assistance program, focusing on: (1) the amount of excess budget authority in the Section 8 Moderate Rehabilitation (MOD REHAB) Program and how HUD estimated this amount; (2) the accuracy of HUD's estimate; and (3) HUD's plans for recapturing this excess budget authority from housing agencies. GAO noted that: (1) in January 1998, HUD estimated that the amount of excess budget authority in the Section 8 MOD REHAB Program before necessary adjustments was $814 million; after subtracting amounts required to cover future requirements and contingencies, HUD estimated that $439 million could be recaptured from the housing agencies that the Department contracts with to administer the program; (2) HUD estimated these amounts after first addressing certain known problems with the data in its information system and then comparing the level of unspent program funds at each participating housing agency with that agency's future need for funding under its current contract with HUD; (3) GAO cannot determine the accuracy of HUD's estimate of excess budget authority in the Section 8 MOD REHAB Program at this time because HUD has neither completed identifying and correcting discrepancies in its data on the program nor tested the reliability of the data it used to estimate the excess budget authority; (4) because HUD still is not confident that its program data are sufficiently accurate, the Department plans to require its field staff to identify and address discrepancies in the accuracy of contract data and to work with a contractor to further address the data's problems on-site at housing agencies; (5) HUD officials do not expect these data cleanup efforts to be completed before the end of fiscal year 1998; (6) HUD plans to require its contractor to perform a statistically valid test of the accuracy of its information system; (7) although HUD plans to recapture the excess budget authority in the Section 8 MOD REHAB Program, the Department has not finalized its approach or timeframe to accomplish this task; (8) in addition to completing the planned data cleanup efforts in the field, HUD must also develop and test the formula it will use to recapture the excess budget authority from the housing agencies' accounts; (9) while some factors in the formula are not within HUD's discretion to change, policy decisions still need to be made to define other factors; (10) for example, HUD may decide that it does not need to leave as much excess budget authority in the housing agencies' accounts to cover contingencies as it originally had estimated in January 1998; (11) therefore, the actual amount recaptured from housing agencies and available for rescission by Congress may change and perhaps be more than the estimated amount in HUD's January 1998 analysis; and (12) HUD officials could not provide GAO with a firm estimate of when the Department will finalize its recapture plan and could not predict a date of completion.
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We believe that the United States generally achieved its negotiating objectives in the Uruguay Round, and most studies we reviewed projected net economic gains to the United States and the world economy. The General Agreement on Tariffs and Trade (GATT) Uruguay Round agreements are the most comprehensive multilateral trade agreements in history. For example, signatories (1) agreed to open markets by reducing tariff and nontariff barriers; (2) strengthened multilateral disciplines on unfair trade practices, specifically rules concerning government subsidies and "dumping;" (3) established disciplines to cover new areas such as intellectual property rights and trade in services; (4) expanded coverage of GATT rules and procedures over areas such as agriculture and textiles and clothing; and (5) created WTO, which replaced the preexisting GATT organizational structure and strengthened dispute settlement procedures. Despite expectations for overall economic gains, we noted in recent reports that specific industry organizations and domestic interest groups had concerns that the agreement would adversely affect some U.S. interests. For example, some believe that they did not gain adequate access to overseas markets or that they would lose protection provided by U.S. trade laws. In addition, because some sectors of the U.S. economy--notably textiles and apparel--and their workers will likely bear the costs of economic adjustment, the existing patchwork of reemployment assistance programs aimed at dislocated workers needs to be improved. Our work has indicated that it was difficult to predict outcomes and not all the effects of such a wide-ranging agreement will become apparent in the near term; important issues will evolve over a period of years during GATT implementation. We have identified provisions to be monitored to assure that commitments are fulfilled and the expected benefits of the agreements are realized. Moreover, our work on the GATT Tokyo Round agreements, negotiated in the 1970s, and numerous bilateral agreements has demonstrated that trade agreements are not always fully implemented. Implementation of the Uruguay Round agreements, which generally began to go into force on January 1, 1995, is complex, and it will take years before the results can be assessed. Nevertheless, our work highlights the following issues: (1) the WTO's organizational structure and the secretariat's budget have grown from 1994 to 1996 to coincid with new duties and responsibilities approved by the member countries; (2) faced with over 200 requirements, many member nations have not yet provided some of the notifications of laws or other information as called for in the agreements; (3) this year provides the first opportunity to review whether anticipated U.S. gains in agriculture will materialize, as countries begin to report on meeting their initial commitments; (4) the new agreements require that food safety measures be based on sound science, but U.S. agricultural exporters seem to be encountering more problems with other countries' measures and a number of formal disputes have already been filed with WTO; (5) while efforts are underway to improve transparency provisions regarding state trading, these provisions alone may not be effective when applied to state-dominated economies, like China and Russia, seeking to join WTO; (6) while textile and apparel quotas will be phased out over 10 years, the United States has continued to use its authority to impose quotas during the phase-out period and will not lift most apparel quotas until 2005; (7) despite the end of the Uruguay Round, some areas, like services, are still subject to ongoing negotiations; (8) there were 25 disputes brought before WTO in 1995 by various countries, including some involving the United States. The United States lost the first dispute settlement case regarding U.S. gasoline regulations brought by Brazil and Venezuela and is now appealing that decision. The WTO was established to provide a common institutional framework for multilateral trade agreements. Some observers have been concerned about the creation of this new international organization and its scope and size. The "new" WTO was based on a similar "provisional" GATT organizational structure that had evolved over decades. The Uruguay Round agreements created some new bodies; however, these new bodies address new areas of coverage, for example, the Councils for Trade in Services and for Trade-Related Aspects of Intellectual Property Rights. Other bodies, such as the WTO Committee on Anti-Dumping Practices, were "reconstituted" from those that already existed under the old GATT framework but that were given new responsibilities by the Uruguay Round agreements and had broader membership. The WTO secretariat, headed by its Director General, facilitates the work of the members. The work of the bodies organized under the WTO structure is still undertaken by representatives of the approximately 119 member governments, rather than the secretariat. Early meetings of some WTO committees were focused on establishing new working procedures and work agendas necessary to implement the Uruguay Round agreements. In 1995, the WTO secretariat staff was composed of 445 permanent staff with a budget of about $83 million. This represented a 18-percent staff increase and about a 7-percent increase in the budget (correcting for inflation) from 1994 when the Uruguay Round agreements were signed. The members establish annual budgets and staff levels. The approved secretariat's 1996 budget represents a 10-percent rise over the 1995 level to further support the organization's wider scope and new responsibilities; it also includes an additional 15-percent increase in permanent staff. WTO officials in Geneva have told us that any additional increases in secretariat staffing are unlikely to be approved by the members in the foreseeable future. The secretariat's duties include helping members organize meetings, gathering and disseminating information, and providing technical support to developing countries. Economists, statisticians, and legal staff provide analyses and advice to members. In the course of doing work over the last year, member government and secretariat officials told us it was important that the secretariat continue to not have a decision-making or enforcement role. These roles were reserved for the members (collectively). An important, but laborious, aspect of implementing the Uruguay Round agreements centers on the many notification requirements placed upon member governments. These notifications are aimed at increasing transparency about members' actions and laws and therefore encourage accountability. Notifications take many forms. For example, one provision requires countries to file copies of their national legislation and regulations pertaining to antidumping measures. The information provided allows members to monitor each others' activities and, therefore, to enforce the terms of the agreements. In 1995, some WTO committees began reviewing the notifications they received from member governments. The WTO Director General has noted some difficulties with members' fulfilling their notification requirements. Some foreign government and WTO secretariat officials told us in 1995 that the notification requirements were placing a burden on them and that they had not foreseen the magnitude of information they would be obligated to provide. The Director General's 1995 annual report estimated that the Uruguay Round agreements specified over 200 notification requirements. It also noted that many members were having problems understanding and fulfilling the requirements within the deadlines. While the report said that the developing countries faced particular problems, even the United States has missed some deadlines on filing information on subsidies and customs valuation laws. To address concerns about notifications, WTO members formed a working party in February 1995 to simplify, standardize, and consolidate the many notification obligations and procedures. One area of great economic importance to the United States during the Uruguay Round negotiations was agriculture; therefore, monitoring other countries' implementation of their commitments is essential to securing U.S. gains. Agricultural trade had traditionally received special treatment under GATT. For example, member countries were allowed to maintain certain measures in support of agricultural trade that were not permitted for trade in manufactured goods. As a result, government support and protection distorted international agricultural trade and became increasingly expensive for taxpayers and consumers. The United States sought a fair and more market-oriented agricultural trading system, to be achieved through better rules and disciplines on government policies regarding agriculture. The United States sought disciplines in four major areas--market access, export subsidies, internal support, and food safety measures--and was largely successful, as the Agreement on Agriculture and the Agreement on the Application of Sanitary and Phytosanitary (SPS) Measures together contain disciplines in all of these areas. Member countries are required to report to the new WTO Committee on Agriculture on their progress in implementing commitments on market access, export subsidies, and internal support. The agriculture agreement will be implemented over a 6-year period, and commitments are to be achieved gradually. After each year, countries are required to submit data to demonstrate how they are meeting their various commitments. The agreement allows countries to designate their own starting point for implementation during 1995, depending on domestic policies. In this regard, the U.S. period began on January 1, 1995, while the European Union (EU) period began on July 1, 1995. Therefore, in some cases, the first opportunity to closely review the extent to which other countries are meeting their agricultural commitments--and, thereby, whether anticipated U.S. gains are materializing--should occur later this year. At the outset of the Uruguay Round, the United States recognized that multilateral efforts to reduce traditional methods of protection and support for agriculture, such as quotas, tariffs, and subsidies, could be undermined if the use of food safety measures governing imports remained undisciplined. To prevent food safety measures from being used unjustifiably as nontariff trade barriers, the United States wanted countries to agree that these measures should be based on sound science. The SPS agreement recognizes that countries have a right to adopt measures to protect human, animal, and plant life or health. However, it requires, among other things, that such measures be based on scientific principles, incorporate assessment of risk, and not act as disguised trade restrictions. Carefully monitoring how countries implement the SPS agreement is essential to securing U.S. gains in agriculture. Since the end of the round, U.S. agricultural exporters seem to be encountering growing numbers of SPS-related problems. For example, South Korean practices for determining product shelf-life adversely affected U.S. meat exports and were the subject of recent consultations. As a result, Korea agreed to modify its practices. Meanwhile, the United States and Canada have both filed several other disputes that allege violations of the SPS agreement. Key implementation and monitoring issues regarding the SPS agreement include examining (1) other countries' SPS measures that affect U.S. agricultural exports; (2) how the SPS agreement is being implemented; (3) whether its provisions will help U.S. exporters overcome unjustified SPS measures; and (4) how the administration is responding to problems U.S. exporters face. We have ongoing work addressing all of these issues. Another issue that is currently important for agricultural trade but may have great future importance beyond agriculture is the role of state trading enterprises within WTO member countries. State trading enterprises (STE) are generally considered to be governmental or nongovernmental enterprises that are authorized to engage in trade and are owned, sanctioned, or otherwise supported by the government. They may engage in a variety of activities, including importing and exporting, and they exist in several agricultural commodity sectors, including wheat, dairy, meat, oilseeds, sugar, tobacco, and fruits. GATT accepts STEs as legitimate participants in trade but recognizes they can be operated so as to create serious obstacles to trade, especially those with a monopoly on imports or exports. Therefore, STEs are generally subject to GATT disciplines, including provisions that specifically address STE activities and WTO member country obligations. For example, member countries must indicate whether they have STEs, and if so, they must report regularly about their STEs' structure and activities. The goal of this reporting requirement is to provide transparency over STE activities in order to understand how they operate and what effect they may have on trade. However, as we reported in August 1995, compliance with this reporting requirement was poor from 1980 to 1994, and information about STE activities was limited. Although state trading was not a major issue during the Uruguay Round, the United States proposed clarifying the application of all GATT disciplines to STEs and increasing the transparency of state trading practices. Progress was made in meeting U.S. objectives, as the Uruguay Round (1) enhanced GATT rules governing STEs, (2) addressed procedural weaknesses for collecting information, and (3) established a working party to review the type of information members report. Within this working party, the United States is suggesting ways to make STE activities even more transparent. It is too early to assess whether the changes made will improve compliance with the STE reporting requirements. By mid-February, only 34 WTO members had met the requirement--or roughly 29 percent of all members. Still, this response rate is higher than during the earlier years we reviewed. We continue to examine this important issue and are presently reviewing the operations of select STEs. Looking toward the future, officials from the United States and other countries told us in 1995 they were concerned about the sufficiency of GATT rules regarding STEs because countries like China and Russia, where the state has a significant economic role, are interested in joining WTO. Some country officials observed that current rules focus on providing transparency, but such provisions alone may not provide effective disciplines. U.S. officials said that the subject of state trading has been prominent during China's WTO accession talks as WTO members attempt to understand the government's economic role and its ability to control trade. Textiles is one sector where the United States expected losses in jobs and in domestic market share after the Uruguay Round, even though consumers were expected to gain from lower prices and a greater selection of goods. We are currently reviewing how the United States is implementing the Uruguay Round Agreement on Textiles and Clothing, which took effect in January 1995. The Committee for the Implementation of Textile Agreements (CITA), an interagency committee, is charged with implementing the agreement, which calls for a 10-year phase-out of textile quotas. Because of the 10-year phase-out, the effects of the textiles agreement will not be fully realized until 2005, after which textile and apparel trade will be fully integrated into WTO and its disciplines. This integration is to be accomplished by (1) completely eliminating quotas on selected products in four stages and (2) increasing quota growth rates on the remaining products at each of the first three stages. By 2005, all bilateral quotas maintained under the agreement on all WTO member countries are to be removed. The agreement gives countries discretion in selecting which products to remove from quotas at each stage. During the first stage (1995 through 1997), almost no products under quota were integrated into normal WTO rules by the major importing countries. The United States is the only major importing country to have published an integration list for all three stages; other countries, such as the EU and Canada, have only published their integration plan for the first phase. Under the U.S. integration schedule, 89 percent of all U.S. apparel products under quota in 1990 will not be integrated into normal WTO rules until 2005. CITA officials pointed out that the Statement of Administrative Action accompanying the U.S. bill to implement the Uruguay Round agreements provided that "integration of the most sensitive products will be deferred until the end of the 10-year period." During the phase-out period, the textiles agreement permits a country to impose a quota only when it determines that imports of a particular textile or apparel product are harming, or threatening to harm, its domestic industry. The agreement further provides that the imposition of quotas will be reviewed by a newly created Textiles Monitoring Body consisting of representatives from 10 countries, including the United States. The United States is the only WTO member country thus far to impose a new quota under the agreement's safeguard procedures. In 1995, the United States requested consultations with other countries to impose quotas on 28 different imports that CITA found were harming domestic industry. The Textiles Monitoring Body has reviewed nine of the U.S. determinations to impose quotas (where no agreement was reached with the exporting country) and agreed with the U.S. determination in one case. In three cases, it did not agree with the U.S. decision, and the United States dropped the quotas. It could not reach consensus in the other five cases it reviewed. In 15 of the remaining 19 decisions, the United States either reached agreement with the exporting countries or dropped the quotas. Four cases are still outstanding. Another area that warrants tracking by policymakers is the General Agreement on Trade in Services (GATS), an important new framework agreement resulting from the Uruguay Round. Negotiations on financial, telecommunications, and maritime service sectors and movement of natural persons were unfinished at the end of the round and thus postponed. Each negotiation was scheduled to be independent from the other ongoing negotiations, but we found that they do in fact affect one another. In 1995, we completed a preliminary review of the WTO financial services agreement, which was an unfinished area in services that reached a conclusion. The agreement covers the banking, securities, and insurance sectors, which are often subject to significant domestic regulation and therefore create complex negotiations. In June 1995, the United States made WTO commitments to not discriminate against foreign firms already providing financial services domestically. However, the United States took a "most-favored-nation exemption," that is, held back guaranteeing complete market access and national treatment to foreign financial service providers. (Doing so is allowed under the GATS agreement.) Specifically, the U.S. commitment did not include guarantees about the future for new foreign firms or already established firms wishing to expand services in the U.S. market. Despite consistent U.S. warnings, the decision to take the exemption surprised many other countries and made them concerned about the overall U.S. commitment to WTO. The U.S. exemption in financial services was taken because U.S. negotiators, in consultation with the private sector, concluded that other countries' offers to open their markets to U.S. financial services firms, especially those of certain developing countries, were insufficient to justify broader U.S. commitments (with no most-favored-nation exemption). The effect of the U.S. exemption may go beyond the financial services negotiations. According to various officials in Geneva, foreign governments are wary of making their best offers in the telecommunications service negotiations, for fear that the United States would again take a significant exemption in these talks. Nevertheless, three-quarters of the participating countries have made offers, and the telecommunications talks are continuing toward the April 30 deadline. However, U.S. and foreign government officials have expressed concern regarding the quality of offers made and the fact that some key developing countries have not yet submitted offers. Despite the commitments that all parties made regarding market access and equal treatment in the financial services sector, several U.S. private sector officials told us that the agreement itself did little to create greater access to foreign markets. Still, the benefit from such an agreement results from governments making binding commitments (enforceable through the dispute settlement process) that reduce uncertainty for business. Monitoring foreign government implementation of commitments is important to ensure that the United States will receive the expected benefits. At the end of 1997, countries, including the United States, will have an opportunity to modify or withdraw their commitments. Thus, the final outcome and impact of the financial services agreement are still uncertain. According to the WTO Dispute Settlement Understanding, the dispute settlement regime is important because it is a central element in providing security and predictability to the multilateral trading system. Members can seek the redress of a violation of obligations or other nullification or impairment of benefits under the WTO agreements through the dispute settlement regime. The objective of this mechanism is to secure a "positive solution" to a dispute. This may be accomplished through bilateral consultations even before a panel is formed to examine the dispute. The vast majority of international trade transactions have not been the subject of a WTO dispute. According to recent WTO figures, in 1994 the total value of world merchandise exports was $4 trillion and commercial service exports was $1 trillion. WTO reports that its membership covers about 90 percent of world trade. However, 25 disputes have been brought before WTO between January 1, 1995, and January 16, 1996. As we previously reported, the former GATT dispute settlement regime was considered cumbersome and time-consuming. Under the old regime, GATT member countries delayed dispute settlement procedures for months and, sometimes, years. In 1985, we testified that the continued existence of unresolved disputes challenged not only the principles of GATT but the value of the system itself. We further stated that the member countries' lack of faith in the effectiveness of the old GATT dispute settlement mechanism resulted in unilateral actions and bilateral understandings that weakened the multilateral trading system. The United States negotiated for a strengthened dispute settlement regime during the Uruguay Round. In particular, the United States sought time limits for each step in the dispute settlement process and elimination of the ability to block the adoption of dispute settlement panel reports. The new Dispute Settlement Understanding establishes time limits for each of the four stages of a dispute: consultation, panel, appeal, and implementation. Also, unless there is unanimous opposition in the WTO Dispute Settlement Body, the panel or appellate report is adopted. Further, the recommendations and rulings of the Dispute Settlement Body cannot add to or diminish the rights and obligations provided in the WTO agreements. Nor can they directly force countries to change their laws or regulations. However, if countries choose not to implement the recommendations and rulings, the Dispute Settlement Body may authorize trade retaliation. As previously mentioned, there have been a total of 25 WTO disputes. Of these, the United States was the complainant in six and the respondent in four. In comparison, Japan was a respondent in four disputes and the EU in eight. All the disputes have involved merchandise trade. The Agreements on Technical Barriers to Trade and the Application of Sanitary and Phytosanitary Measures have been the subject of approximately half the disputes. In January 1996, the first panel report under the new WTO dispute settlement regime was issued on the "Regulation on Fuels and Fuels Additives - Standards for Reformulated and Conventional Gasoline." Venezuela and Brazil brought this dispute against the United States. The panel report concluded that the Environmental Protection Agency's regulation was inconsistent with GATT. The United States has appealed this decision. Based on our previous work on dispute settlement under the U.S.-Canadian Free Trade Agreement (CFTA), it may be difficult to evaluate objectively the results of a dispute settlement process. It may takes years before a sufficiently large body of cases exists to make any statistical observations about the process. After nearly 5 years of trade remedy dispute settlement cases under CFTA, there were not enough completed cases for us to make statistical observations with great confidence. Specifically, we were not able to come to conclusions about the effect of panelists' backgrounds, types of U.S. agency decisions appealed, and patterns of panel decisionmaking. WTO members must wrestle with three competing but interrelated endeavors in the coming years. Implementation, accession of new member countries, and bringing new issues to the table will all compete for attention and resources. The first effort, which we have already discussed, involves implementing the Uruguay Round agreements. It will take time and resources to (1) completely build the WTO organization so that members can address all its new roles and responsibilities; (2) make members' national laws, regulations, and policies consistent with new commitments; (3) fulfill notification requirements and then analyze the new information; and (4) resolve differences about the meaning of the agreements and judge whether countries have fulfilled their commitments. The importance of implementation was underscored by U.S. Trade Representative and Department of Commerce announcements earlier this year that they were both creating specific units to look at foreign government compliance with trade agreements, including WTO. The second effort is the accession of new countries to join WTO and to undertake GATT obligations for the first time. The accession of new members will present significant economic and political challenges over the next few years. Even though, as mentioned earlier, WTO members account for about 90 percent of world trade, there are many important countries still outside the GATT structure. The 28 countries that applied for WTO membership as of December 1995 included China, the Russian Federation, Viet Nam, and countries in Eastern Europe. These countries will be challenged in undertaking WTO obligations and fulfilling WTO commitments as current WTO members are themselves challenged by the additional responsibilities created by the Uruguay Round agreements. Many of these countries are undergoing a transition from centrally planned to market economies. The negotiations between current WTO members and those hoping to join are very complex and sensitive since they involve such fundamental issues as political philosophy. The third effort is negotiating new areas. In December 1996, a WTO ministerial meeting is to take place in Singapore. This is to be a forum for reviewing implementation of the Uruguay Round agreements and for negotiating new issues. Some foreign government and WTO officials told us that they hope these regularly scheduled, more focused WTO ministerial meetings will replace the series of multiyear, exhaustive negotiating "rounds" of the past. However, other officials expressed doubt that much progress could be made toward future trade liberalization without the pressure created by having a number of important issues being negotiated at one time. Nevertheless, any negotiations will require time and resources. Members are debating whether to (1) push further liberalization in areas already agreed to, but not yet fully implemented; and/or (2) negotiate new issues related to international trade. For example, future WTO work could include examination of national investment and competition policy, labor standards, immigration, and corruption and bribery. Some of these negotiations in new areas could be quite controversial, based on the experience of including areas like agriculture and services in the Uruguay Round negotiating agenda. Issues relating to the Singapore ministerial are currently under debate. This could be an opportunity for Congress to weigh the benefit of having U.S. negotiators give priority to full implementation of Uruguay Round commitments, as opposed to giving priority to advocating new talks on new topics. The first priority seeks to consolidate accomplishments and ensure that U.S. interests are secured; the latter priority seeks to use the momentum of the Uruguay Round for further liberalizations. Thank you, Mr. Chairman, this concludes my prepared remarks. I will be happy to answer any questions you or the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 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.
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GAO discussed the implementation of the General Agreement on Tariffs and Trade's Uruguay Round agreements and the operation of the World Trade Organization (WTO). GAO noted that: (1) the U.S. has generally achieved its negotiating objectives in the Uruguay Round; (2) the agreements are expected to open markets by reducing trade barriers and unfair trade practices; (3) some U.S. industries and domestic interests are concerned that the agreements will have adverse effects; (4) implementation of the agreements is complex and its effects will not be known for many years; (5) the United States needs to monitor the agreements' implementation to ensure that member countries honor their commitments and the expected benefits are realized; (6) the WTO organizational structure and the secretariat's budget have grown in relation to its expanded responsibilities; (7) several import and export issues involving the service, textile, and agriculture industries continue to be disputed and are awaiting settlement; (8) many member countries have not met their notification requirements so that other member countries can monitor and enforce agreement terms; and (9) WTO members need to address how to allocate its resources, how to assimilate new countries into WTO, and whether to pursue liberalization in areas already agreed upon or initiate negotiations on new topics.
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PT treatment consists of a planned program to relieve symptoms, improve function, and prevent further disability for individuals disabled by chronic or acute disease or injury. Health conditions that require physical rehabilitation, such as low back pain, bursitis, stroke, Parkinson's disease, or arthritis, may benefit from PT services. Beneficiaries are eligible to receive outpatient PT under Medicare Part B, which covers diagnosis and treatment of impairments, functional limitations, disabilities, or changes in physical function and health status. Medicare-covered outpatient PT services are provided in institutional settings such as hospital outpatient departments and skilled nursing facilities, as well as noninstitutional settings such as physicians' offices and PT clinics. To be covered by Medicare, outpatient PT services must be medically necessary, furnished while the beneficiary is or was under the care of a physician, and provided under a written plan of care established by an appropriate medical professional, such as a physician or physical therapist. The plan of care is required to contain, among other information, the amount, duration, and frequency of PT services. The plan of care must be certified by a physician or nonphysician practitioner within 30 days of the initial therapy treatment, and must be recertified at least every 90 days after the initial treatment. Medicare does not require that a beneficiary obtain a physician referral to initiate PT services. However, if a physician referral for PT services is documented in the medical record, it provides evidence that the patient was under the care of a physician. PT services are billed using Healthcare Common Procedure Coding System (HCPCS) codes; examples of HCPCS codes for PT services include therapeutic exercises and massage therapy. Each Medicare claim for PT can include one or more HCPCS codes, as well as one or more 15-minute "units" for each timed code. The total number of PT services provided to Medicare beneficiaries increased nearly 30 percent from 2004 through 2010. Over this period, the number of self-referred PT services was generally flat, while the number of non-self-referred PT services increased. In addition, expenditures increased over this time period for both self-referred and non-self-referred PT services, but this increase was larger for services that were not self-referred. The total number of PT services provided to Medicare beneficiaries increased nearly 30 percent from 2004 through 2010, despite a small decrease in the total number of FFS beneficiaries over this same period. From 2004 to 2010, the number of services per 1,000 FFS beneficiaries that we identified as self-referred was generally flat--about 320 services in both 2004 and 2010 (see fig. 1).referred PT services per 1,000 FFS beneficiaries grew by about 41 percent, from about 903 in 2004 to about 1,275 services in 2010. Because of the rapid growth in non-self-referred PT services, the In contrast, the number of non-self- proportion of PT services that were self-referred decreased from about 24 percent in 2004 to about 18 percent in 2010. The overall increase in PT services is likely due, in part, to an increase in the proportion of Medicare beneficiaries receiving these services. In 2004, approximately 4 percent of all Medicare FFS beneficiaries received PT services; this increased to approximately 6 percent in 2010. However, from 2004 through 2010, the number of beneficiaries that received self- referred PT services increased only 12 percent, while the number of beneficiaries that received non-self-referred PT services increased nearly 44 percent. In addition, the number of both self-referred and non-self- referred PT services temporarily declined in 2006, likely due to the reinstatement of the therapy payment cap on PT services. Expenditures for both self-referred and non-self-referred PT services grew from 2004 to 2010, but the increase was smaller for self-referred services (see fig. 2). Specifically, expenditures for self-referred services increased from $389 million to $428 million, an increase of about 10 percent. In contrast, expenditures for non-self-referred services increased from $1.2 billion in 2004 to $1.9 billion in 2010, an increase of about 57 percent. The larger increase in non-self-referred expenditures from 2004 to 2010 reflects the disproportionate increase in the number of beneficiaries receiving non-self-referred PT services over this period as well as more rapid growth in the number of 15-minute units billed for non- self-referred PT services. The overall relationship between provider referral status and the average number of PT services referred per provider was mixed and varied on the basis of referring provider specialty, Medicare beneficiary practice size, and geography. For example, self-referring family practice and internal medicine providers in urban areas, on average, generally referred more PT services in 2010 than their non-self-referring counterparts. Self- referring orthopedic surgeons, on average, generally referred fewer PT services than non-self-referring orthopedic surgeons. In addition, self- referring providers generally referred more beneficiaries for PT services, on average, than non-self-referring providers after accounting for differences in provider specialty, Medicare beneficiary practice size, and geography.fewer PT services per beneficiary than non-self-referring providers. Providers' referrals for PT services increased the year after they began to self-refer at a greater rate than non-self-referring providers. In 2010, the relationship between provider referral status and number of PT services referred across all beneficiaries differed on the basis of geography, provider specialty, and Medicare beneficiary practice size. In urban areas, self-referring providers generally referred more PT services, on average, than non-self-referring providers, with some exceptions (see table 1). For example, self-referring family practice providers in urban areas referred more services, on average, than non-self-referring family practice providers in every beneficiary practice size category. In contrast, self-referring orthopedic surgeons in urban areas referred fewer PT services, on average, in every beneficiary practice size category except the middle category (101 to 250 beneficiaries). In rural areas, self-referring providers in the three specialties generally referred fewer PT services, on average, than non-self-referring providers, with some exceptions, as shown in table 2. For example, self-referring family practice providers with a beneficiary practice size greater than 500, and orthopedic surgeons in rural areas with a beneficiary practice size of 251 through 500 beneficiaries referred more PT services, on average. Self-referring providers generally referred more beneficiaries for PT services during 2010, on average, but referred fewer PT services per beneficiary compared with non-self-referring providers. Specifically, in urban areas, self-referring providers in family practice, internal medicine, and orthopedic surgery referred more beneficiaries for PT services on average, than their non-self-referring counterparts in every Medicare beneficiary practice size category. However, the magnitude of the differences between the two groups varied by specialty and practice size. For example, the average number of beneficiaries referred by self- referring orthopedic surgeons was 13 to 29 percent higher than for their non-self-referring counterparts, depending on the beneficiary practice size category, while the average number of beneficiaries referred by self- referring family practice providers was approximately 43 to 87 percent higher than for their non-self-referring counterparts, depending on the beneficiary practice size category (see table 3). In general, self-referring providers in rural areas also tended to refer more beneficiaries for PT services across provider specialties and practice size categories. In rural areas, self-referring providers in family practice in our smallest beneficiary practice size category and orthopedic surgery with a practice size of 51 to 100 beneficiaries referred fewer beneficiaries for PT services, on average, than their non-self-referring counterparts. However, in all other instances, self-referring providers in rural areas referred more beneficiaries for PT services, on average, than their non-self-referring counterparts. For example, self-referring internal medicine providers in rural areas referred about 25 to 94 percent more beneficiaries than their non-self-referring counterparts, depending on the beneficiary practice size category (see table 4). While self-referring providers generally referred more beneficiaries during 2010, beneficiaries referred by self-referring providers in family practice, internal medicine, and orthopedic surgery received fewer PT services, on average, compared with beneficiaries referred by non-self-referring providers. For example, in urban areas, beneficiaries referred by self- referring family practice providers received 12 to 28 percent fewer PT services, on average, compared with beneficiaries referred by non-self- referring family practice providers, depending on the beneficiary practice size category (see table 5). In rural areas, beneficiaries referred by self-referring providers in family practice, internal medicine, and orthopedic surgery received fewer PT services, on average, than their non-self-referring counterparts in every practice size category (see table 6). Observed differences between self-referring and non-self-referring providers within each specialty in the number of PT services referred are not likely due to differences in the overall health status of the beneficiaries they referred. We found that self-referring and non-self-referring providers referred beneficiaries who were similar with respect to their average Medicare risk scores and disability status (see table 7). For example, self-referring and non-self-referring family practice providers referred beneficiaries whose average estimated cost to Medicare in 2010 was about 30 percent higher than for the average FFS beneficiary (31 and 33 percent higher, respectively). Some of the differences between self-referring and non-self-referring providers in the number of PT referrals may be due to differences in the severity or type of medical conditions of the beneficiaries that they referred for PT treatment. Although data on the severity of beneficiaries' medical conditions requiring PT treatment were not available for our study period, we found some differences in the extent to which self-referring and non-self-referring providers referred beneficiaries for selected diagnoses (see table 8). For example, self-referring family practice, internal medicine, and orthopedic surgery providers were more likely to refer beneficiaries who were treated for spine conditions. Non-self- referring providers in these specialties were more likely to refer beneficiaries who were treated for neurologic conditions or rehabilitation. In addition, we found some differences in the types of PT treatments used by self-referring and non-self-referring providers. For example, during 2010, self-referring providers in family practice and internal medicine were more likely to refer beneficiaries who were treated with ancillary services such as massage therapy and electrical stimulation. In contrast, non-self-referring providers in these specialties were more likely to refer beneficiaries who were treated with gait training and therapeutic activities (see app. II, which presents tables that show the distribution of PT services by provider specialty and self-referral status). PT service referrals for providers in family practice, internal medicine, and orthopedic surgery increased the year after they began to self-refer at a higher rate relative to non-self-referring providers of the same specialty. We compared the average number of PT service referrals made by providers that began self-referring beneficiaries for PT services in 2009 and continued doing so in 2010 ("switchers") with the average number of service referrals made by providers who were non-self-referring between 2008 and 2010. The percentage increase in average PT service referrals for switchers between 2008 and 2010 ranged from approximately 7 percent for orthopedic surgeons to 33 percent for family practice providers. In contrast, the percentage increase in the average number of PT service referrals for non-self-referring providers during this time was lower, ranging from approximately 4 percent for orthopedic surgeons to 14 percent for family practice providers (see table 9). The percentage point difference in the number of PT services referred between switchers and non-self-referring providers was higher for family practice and internal medicine providers (approximately 20 percent and 18 percent, respectively) and lower for orthopedic surgeons (approximately 4 percent). This is consistent with our earlier finding that self-referring family practice and internal medicine providers tended to have higher relative referral rates, on average, than their non-self-referring counterparts in 2010, while this effect was much more limited for orthopedic surgeons. By improving patients' physical functioning, strength, or mobility, PT treatment offers many Medicare beneficiaries the opportunity to restore function that they may have lost due to illness or injury. Proponents of PT self-referral contend that it has the potential to improve coordination of care and provide convenient access to PT services. Our review indicates that PT service use and expenditures grew considerably from 2004 to 2010, despite a slight decrease in the total number of FFS beneficiaries over this period. The primary driver of this growth was growth in non-self- referred services. These results differ from our prior work on self-referral of other Medicare services--namely, advanced imaging, anatomic pathology, and intensity-modulated radiation therapy--in which we reported that self-referred services and expenditures grew faster than non-self-referred services and expenditures. One potential reason for this difference is that non-self-referred PT services can be performed by providers who can directly influence the amount, duration, and frequency of PT services through the written plan of care required by Medicare. In contrast, non-self-referred services we examined for our prior work tend to be performed by providers who have more limited ability to generate additional services or referrals; for example, radiologists generally do not have the discretion to order more imaging services or more intense imaging procedures. Regardless, substantial growth in PT services raises concerns about higher costs for Medicare and beneficiaries. Although this growth is primarily due to non-self-referred services, we found notable differences between non-self-referring and self-referring providers. For example, we found that average PT service referrals, average PT beneficiary referrals, and average PT services per beneficiary differed based on whether the providers self-referred; further, PT service referrals increased the year after a provider began to self-refer at a higher relative rate to non-self- referring providers of the same specialty. Better understanding the differences in referral patterns between self-referring and non-self- referring providers may provide useful information to help manage growth in PT services. In 2013, CMS began collecting additional information on beneficiary functional status on all PT claims. These data may help CMS to better assess the appropriateness and effectiveness of PT treatment provided by both self-referring and non-self-referring providers. We provided a draft of this report to HHS, which oversees CMS, for comment. HHS thanked GAO for the opportunity to review the draft and stated that it had no comments. We obtained written comments from four professional associations selected because they represent an array of stakeholders with specific involvement in referring PT services: the American Academy of Family Physicians (AAFP), which represents physicians in family practice; the American Academy of Orthopaedic Surgeons (AAOS), which represents orthopedic surgeons; the American College of Physicians (ACP), which represents physicians in internal medicine; and the American Physical Therapy Association (APTA), which represents physical therapists. The following sections contain a summary of these organizations' comments on our methodology and findings and our response to these comments. We incorporated any technical comments provided where appropriate. AAFP appreciated the opportunity to review the draft report, but expressed a concern that our methodology to define self-referring providers as those with at least one self-referred PT service to a professional office may skew our results if the majority of the PT services referred by several self-referring providers were not self-referred. We applied this same threshold in our previous work on self-referral, as it is a conservative method for determining providers' self-referral status. Furthermore, we examined the distribution of self-referred PT services to professional offices during 2010 and found that providers who self-refer tended to self-refer a majority of the PT services utilized. AAFP also provided some context for our findings, noting that some factors may account for our finding that overall spending for PT services increased. For example, AAFP stated that health insurers have encouraged providers to use imaging procedures, surgery for back pain, and medications that manage pain (such as opioids) less frequently. According to AAFP, some providers may be choosing to use less imaging and treat fewer patients with surgery or opioids and instead manage these patients by referring them for PT services. AAFP considers PT a more cost-effective yet less invasive way to treat patients. In addition, AAFP believes that one possible explanation for GAO's finding that self- referring providers referred fewer PT services per beneficiary, on average, than non-self-referring providers, is that providers who self-refer are likely to fully understand the variety of services that are available in the PT facility for which they have an ownership interest. AAOS appreciated the opportunity to review the draft report and was pleased to see that the data showed that self-referring orthopedic practices generally self-referred the smallest number of PT services per beneficiary on average when compared to other specialty groups in our study. However, AAOS stated that it did not believe there was a rationale for examining "switchers"--providers who became self-referrers during our period of study--because we found that self-referring providers referred fewer services per beneficiary on average. We conducted an analysis of switchers to isolate the effects of self-referral, using a methodology similar to our previous reports on self-referral in Medicare. As noted in the draft report, the average number of PT service referrals made by providers that began self-referring beneficiaries for PT services in 2009 increased at a higher rate relative to non-self-referring providers of the same specialty during our period of study. Specifically, among these "switchers," the percentage increase in average PT service referrals between 2008 and 2010 was approximately 4 percentage points higher for orthopedic surgeons, 18 percentage points higher for internal medicine providers, and 20 percentage points higher for family practice providers. AAOS made two additional points for our consideration. First, AAOS noted that self-referring orthopedic surgeons may also refer some services outside of their practice. Our analyses provided a picture of self- referral at both the service and provider levels. Specifically, for our analysis of trends between 2004 and 2010 in the utilization of and expenditures for self-referred and non-self-referred services, we examined each PT service to determine if it was self-referred or not by matching the Taxpayer Identification Number (TIN) on the claim with a crosswalk of the TINs associated with each provider submitting claims. This method allowed us to examine utilization and spending for each PT service--self-referred and non-self-referred. For our analysis of self- referring providers, as we note in the draft report, we considered a provider to be non-self-referring if the provider referred at least one beneficiary for a PT service in a professional office and did not self-refer any PT services. Conversely, we considered a provider to be self- referring if the provider self-referred at least one beneficiary for a PT service that was provided in a professional office during our period of study. Second, AAOS noted that nine states have changed their laws governing self-referral to PT services during the study period and that this may impact our results. We agree that this may impact our results, but examining state laws governing self-referral were outside the scope of this report. ACP stated that a major conclusion of our report, that the primary driver of growth in Medicare expenditures and utilization of PT services was due to non-self-referred PT services, differs from our prior work on self-referral for advanced imaging, anatomic pathology, and intensity-modulated radiation therapy services. According to ACP, this finding demonstrates the complex effects of self-referral on Medicare utilization and expenditures, which may be influenced by type of service as well as the other variables outlined in this report, such as provider specialty, geographic location, and Medicare beneficiary practice size. ACP also stated that the primary payment model can also affect the relationship between self-referral, expenditures, and utilization. For example, and other value- practices that participate in Medicare Shared Savingsbased payment models likely refer in a different manner than those paid predominantly through the traditional Medicare FFS payment system. While we agree that different payment models could affect physicians' referral patterns, such payment models generally had not been implemented by Medicare at the time of our study. ACP also stated that it is important to consider the extent to which services are ordered on the basis of recognized appropriate use criteria. However, using appropriate use criteria can involve assessing the severity of symptoms in order to determine the appropriate course of treatment, and data on severity were not available at the time of our study. ACP believes that self-referral alone cannot explain expenditure growth differences and that, if utilized appropriately, self-referral allows for increased quality oversight by ordering physicians, better care coordination, and the potential for the provision of lower-cost care compared to alternative settings, such as hospitals. APTA acknowledged the thoroughness of the draft report and appreciated our comprehensive analysis. According to APTA, our findings that self- referring providers referred more beneficiaries for PT services, and that PT referrals for switchers in the three specialties we examined increased relative to non-self-referring providers, are consistent with other studies that found that providers have a financial interest to self-refer. However, APTA also expressed concerns about some of our results. Specifically, APTA noted that patient condition, physical impairments, and comorbidities have a major impact on the amount, duration, and frequency of PT services provided, and without this information it is difficult to draw conclusions about the impact of self-referral arrangements on the frequency of PT services. For example, APTA noted that the frequency of PT use could be attributed to differences in the complexity of the conditions of patients treated by self-referring compared with non-self-referring providers. It also expressed concern that the measures of health status in this report--such as disability status, average risk score, and Clinical Classification Software (CCS) diagnostic categories--are limited in their ability to explain differences in PT frequency. In this report, we state that some of the differences between self-referring and non-self-referring providers in the number of PT referrals may be due to differences in the severity or type of medical conditions of the beneficiaries that they referred for PT treatment. We also acknowledge that data on the severity of beneficiaries' medical conditions requiring PT treatment were not available for our study period. Given the lack of severity data, we examined risk scores, age, and disability status, and described these measures as "overall health status variables," and we present data on beneficiary diagnostic categories without labeling them as measures of severity. We also note that APTA agreed with our conclusion that data CMS began collecting in 2013 may help the agency to better assess the appropriateness and effectiveness of PT treatment for both self-referring and non self-referring providers. APTA also expressed concerns that including data on PT referrals to facilities, such as outpatient hospitals and skilled nursing facilities, may have affected the results shown in the tables in appendix II of this report, which compare the distribution of Medicare PT services for self-referring and non-self-referring providers. According to APTA, our assumption that all PT services referred to facilities were non-self-referred neglects a significant portion of self-referral arrangements. APTA also stated that because patients in facility settings tend to be more medically complex than patients seen in physician offices, these tables may make an unfair comparison. As we note in the limitations section of this report, we acknowledge that we may have understated the occurrence of certain self-referral arrangements, such as referring physician ownership of hospitals, by assuming that all PT services referred to facilities were non- self-referred. For example, some providers may have referred beneficiaries for PT services to hospital(s) in which they had a financial interest in the entire hospital, and, due to data limitations, we did not analyze the extent to which this type of referral may have occurred. 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 Secretary of Health and Human Services and relevant congressional committees, and others. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. This appendix describes the scope and methodology used to analyze our study objectives: (1) trends in the number of and expenditures for self- referred and non-self-referred Medicare physical therapy (PT) services from 2004 through 2010, and (2) how provision of these services differs among providers on the basis of whether they self-refer. For both objectives, we used 100 percent of fee-for-service (FFS) claims from the Medicare Part B Carrier file, which contains final action Medicare Part B claims for noninstitutional providers, such as physicians. For the second objective, we also used 100 percent of FFS claims from the Medicare Outpatient Claims file, which includes final action Medicare Part B claims for five types of facilities that also provide PT services: outpatient hospitals, skilled nursing facilities, comprehensive outpatient rehabilitation facilities, rehabilitation agencies, and home health agencies. Each Medicare claim contains data for one or more services for a particular beneficiary. Each service is identified on a claim by its Healthcare Common Procedure Coding System (HCPCS) code, which the Centers for Medicare & Medicaid Services (CMS) assigns to products, supplies, and services for billing purposes. To identify all PT services covered by Medicare, we used outpatient therapy HCPCS codes published in the Federal Register and in CMS's Annual Therapy Update to identify the universe of outpatient therapy HCPCS codes in use from 2004 through 2010. We then used the HCPCS code claim modifier (for Carrier file claims) and Revenue Center code (for Outpatient file claims) to distinguish PT services from occupational therapy or speech-language pathology services. Because there is no indicator or flag on the claim that identifies whether services were self-referred or non-self-referred, we developed a claims-based methodology to identify services as either self- referred or non-self-referred. Specifically, we classified services as self- referred if the provider that referred the beneficiary for a PT service and the provider that performed the PT service were identical or had a To determine providers' financial relationships, we financial relationship.used the Taxpayer Identification Number (TIN), which is either the Social Security Number or Employer Identification Number that an individual or organization uses to report tax information to the Internal Revenue Service. A TIN could be that of the provider, the provider's employer, or another entity to which the provider reassigns payment. There may be one or multiple TINs for a medical group practice depending on the organizational structure of the practice. To identify the associated TINs for the referring and performing providers, we created a crosswalk of the performing provider's unique physician identification number, or national provider identifier (NPI), to the TIN that appeared on the claim and used that to assign TINs to the referring and performing providers. To describe the trends in the number of and expenditures for self-referred PT services from 2004 through 2010, we used the 100 percent Medicare Part B Carrier file for each year to calculate utilization and expenditures for self-referred and non-self-referred PT services. We focused on PT referrals to professional offices, such as physician offices or PT clinics, because the financial incentive for providers to self-refer is most direct when the service is performed in a professional office. To calculate utilization, we counted the number of PT HCPCS codes. We also calculated the average number of 15-minute units provided per PT service.variable, which includes payments by Medicare and the beneficiary. We also conducted some analyses with an alternative definition of "non-self-referring provider." Our alternative definition of "non-self-referring provider" included providers who referred at least one beneficiary for a PT service in a professional office or a facility and did not self-refer any PT services. This alternative definition included an additional 49,062 providers in family practice, internal medicine, and orthopedic surgery who referred beneficiaries for PT services exclusively to facilities during 2010. With this alternative definition, we computed higher relative rates of self-referral for the average number of Medicare beneficiary referrals for PT services and for the average number of PT services provided per beneficiary (except for family practice providers). We decided to use our original definition of non-self-referring provider because it generally produced more conservative results. provider location). We identified providers' specialties on the basis of the specialties listed on the claims. We report results for three physician specialties that referred nearly 75 percent of PT services during 2010 that had a unique referring provider identification number--family practice (20 percent), internal medicine (26 percent), and orthopedic surgery (28 percent). We calculated beneficiary practice size by computing the number of unique Medicare FFS beneficiaries that providers treated in a professional office in 2010 for any medical condition covered by Medicare. We defined urban settings as metropolitan statistical areas, a geographic entity defined by the Office of Management and Budget as a core urban area of 50,000 or more population. We used rural-urban commuting area codes--a Census tract-based classification scheme that utilizes the standard Bureau of Census Urbanized Area and Urban Cluster definitions in combination with work commuting information to characterize all of the nation's Census tracts regarding their rural and urban status--to identify providers as practicing in metropolitan statistical areas. We considered all other settings to be rural. In addition, we examined the extent to which the characteristics of the beneficiaries referred by self-referring and non-self-referring providers differed. We used CMS's risk score file to identify each beneficiary's risk score, age (specifically, whether the beneficiary was age 85 or older), and disability status. The risk score is an estimate of each beneficiary's overall health status. It is the ratio of expected Medicare payments for that beneficiary under Medicare FFS relative to the average health care payments for all Medicare FFS beneficiaries.Classification Software (CCS) categories maintained by the U.S. Agency for Healthcare Research and Quality to identify the diagnostic category for which each beneficiary received PT treatment. The CCS categories are based on International Classification of Diseases, 9th Revision, Clinical Modification (ICD-9-CM), a uniform and standardized diagnostic and procedural coding system. The CCS categories group ICD-9-CM codes into a smaller number of clinically meaningful categories. The CCS diagnostic categories for PT that we used include Arthritis/Other Connective Tissue and Joint Disorders, Fractures/Traumatic Joint Disorders, Neurological, Spine, Sprains/Strains, V codes/Miscellaneous Rehab, and Other PT diagnoses. For the second analysis, we determined the extent to which the number of PT service referrals made by providers changed after they began to self-refer. Specifically, we identified a group of providers, whom we called "switchers," that were non-self-referring in 2008 and self-referring in 2009 and 2010. We then calculated the change in the number of PT referrals made from 2008 (i.e., the year before the switchers began self-referring) to 2010 (i.e., the year after they began self-referring). We compared the change in the number of referrals made by these providers to the change in the number of referrals made over the same time period by providers who were non-self-referring between 2008 and 2010. Differences in the average number of PT services referred by non-self-referring providers between 2008 and 2010 reflect changes during this period that were not related to self-referral, such as changes in the number of beneficiaries who needed PT services or changes in the severity or types of the medical conditions treated with PT. Differences in the average number of PT services referred by switchers may reflect these changes as well as changes associated with self-referral. The difference in the percentage change in the number of PT services referred by switchers and non-self- referring providers is an estimate of the change in providers' referrals for PT services that may be associated with self-referral. Our study has some limitations. First, we may not have identified all self- referred PT services, because CMS uses the referring provider identifier on PT claims to identify the provider who certified the beneficiary's plan of care, and in some cases the referring provider may be different from the certifying provider. In addition, Medicare claims data do not capture all financial relationships between performing and referring providers. Second, we may have understated the occurrence of certain self-referral arrangements, such as referring physician ownership of hospitals, by assuming that all PT services referred to facilities were non-self-referred. Third, our analysis that compares PT diagnostic categories for beneficiaries referred by self-referring and non-self-referring providers is based on data that CMS does not use to determine payment for PT services. Consequently, providers do not have a financial incentive to accurately report diagnostic data for PT services on Medicare claims. Finally, it is outside the scope of this report to examine the medical necessity, clinical appropriateness, or effectiveness of PT services beneficiaries received. We took several steps to ensure that the data used to produce this report were sufficiently reliable. Specifically, we assessed the reliability of the CMS data we used by interviewing officials responsible for overseeing these data sources, including CMS and Medicare contractor officials. We also reviewed relevant documentation, compared means and frequencies of selected variables with published data, and examined the data for obvious errors, such as missing values and values outside of expected ranges. We determined that the data were sufficiently reliable for the purposes of our study, as they are used by the Medicare program as a record of payments to health care providers. As such, they are subject to routine CMS scrutiny. We conducted this performance audit from February 2012 through April 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. Appendix II: Distribution of Medicare Physical Therapy Services for Self-Referring and Non- Self-Referring Providers, 2010 Physical therapy (PT) service Electrical stimulation (HCPCS 97032) Electrical stimulation, other than wound (HCPCS G0283) Gait training therapy (HCPCS 97116) Manual therapy (HCPCS 97140) Massage therapy (HCPCS 97124) Neuromuscular reeducation (HCPCS 97112) Physical therapy evaluation (HCPCS 97001) Therapeutic activities (HCPCS 97530) Therapeutic exercises (HCPCS 97110) Ultrasound therapy (HCPCS 97035) Electrical stimulation, other than wound (HCPCS G0283) Gait training therapy (HCPCS 97116) Manual therapy (HCPCS 97140) Massage therapy (HCPCS 97124) Neuromuscular reeducation (HCPCS 97112) Physical therapy evaluation (HCPCS 97001) Therapeutic activities (HCPCS 97530) Therapeutic exercises (HCPCS 97110) Ultrasound therapy (HCPCS 97035) Electrical stimulation, other than wound (HCPCS G0283) Gait training therapy (HCPCS 97116) Manual therapy (HCPCS 97140) Massage therapy (HCPCS 97124) Neuromuscular reeducation (HCPCS 97112) Physical therapy evaluation (HCPCS 97001) Therapeutic activities (HCPCS 97530) Therapeutic exercises (HCPCS 97110) Ultrasound therapy (HCPCS 97035) In addition to the contact named above, Jessica Farb, Assistant Director; Thomas Walke, Assistant Director; Daniel Lee; Elizabeth Morrison; Merrile Sing; Jennifer Whitworth; and Rachael Wojnowicz made key contributions to this report.
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Rising Medicare expenditures for PT services have long been of concern, and questions have been raised about the role of self-referral in this growth. Self-referral occurs when a provider refers patients to entities in which the provider or the provider's family members have a financial interest. GAO was asked to examine self-referral for PT services and Medicare spending for these services. This report examines (1) trends in the number of and expenditures for self-referred and non-self-referred Medicare PT services and (2) how provision of these services differs among providers on the basis of whether they self-refer. GAO analyzed Medicare Part B claims data from 2004 through 2010 and examined three measures of PT referral for each referring provider: number of PT services referred, number of beneficiaries referred, and number of PT services provided per beneficiary. GAO compared PT referrals for self-referring and non-self-referring providers after accounting for referring provider specialty, Medicare beneficiary practice size, and geographic (urban or rural) location. GAO also compared selected characteristics of the beneficiaries referred by self-referring and non-self-referring providers. The Department of Health and Human Services stated that it had no comments on a draft of this report. From 2004 to 2010, non-self-referred physical therapy (PT) services increased at a faster rate than self-referred PT services. During this period, the number of self-referred PT services per 1,000 Medicare fee-for-service beneficiaries was generally flat, while non-self-referred PT services grew by about 41 percent. Similarly, the growth rate in expenditures associated with non-self-referred PT services was also higher than for self-referred services. The relationship between provider self-referral status and PT referral patterns was mixed and varied on the basis of referring provider specialty, Medicare beneficiary practice size, and geography. GAO examined three measures of PT referral for each referring provider for the three provider specialties that referred nearly 75 percent of PT services in 2010--family practice, internal medicine, and orthopedic surgery. The overall relationship between provider referral status and the first measure of PT referrals--the average number of PT services referred per provider--was mixed. GAO found that self-referring family practice and internal medicine providers in urban areas, on average, generally referred more PT services than their non-self-referring counterparts. In contrast, self-referring orthopedic surgeons, on average, generally referred fewer PT services than non-self-referring orthopedic surgeons. Self-referring providers in all three specialties that GAO examined generally referred more beneficiaries for PT services, on average, but for fewer PT services per beneficiary compared with non-self-referring providers. For these two measures of PT referrals, differences between self-referring and non-self-referring providers generally persisted after accounting for referring providers' specialty, Medicare beneficiary practice size, and geographic location, although the magnitude of these differences varied on the basis of these factors. For example, the average number of beneficiaries referred by self-referring family practice providers in urban areas was approximately 43 to 87 percent higher than for their non-self-referring counterparts, depending on Medicare practice size. In contrast, beneficiaries referred by self-referring family practice providers in urban areas received 12 to 28 percent fewer PT services, on average, depending on practice size, compared with their non-self-referring counterparts. GAO also found that in the year a provider began to self-refer, PT service referrals increased at a higher rate relative to non-self-referring providers of the same specialty. For example, family practice providers that began self-referring in 2009 increased PT referrals 33 percent between 2008 and 2010. In contrast, non-self-referring family practice providers increased their PT service referrals 14 percent during this same period.
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Airports are a linchpin in the nation's air transportation system. This is true for both the 71 largest airports, as well as for the nation's 3,233 smaller commercial and general aviation airports. While small airports handle only about 10 percent of scheduled passenger traffic in total , they also serve a majority of the nation's general aviation activity. For many communities, a small airport is their primary access to air transportation. Smaller airports also provide important economic benefits to their communities in the form of jobs and transport. The National Civil Aviation Review Commission--established by the Congress to determine how to fund U.S. civil aviation--reported in December 1997 that more funding is needed, not only to develop system capacity at the larger airports but also to preserve smaller airports. In 1996, tax-exempt bonds, the Airport Improvement Program (AIP), and passenger facility charges (PFC) together provided about $6.6 billion of the total $7 billion in funding for large and small airports. State grants and airport revenue contributed the remaining funding for airports. Table 1 lists these sources of funding and their amounts in 1996. The amount and type of funding varies significantly with airports' size. The nation's 3,233 smaller national system airports obtained about $1.5 billion in funding in 1996, about 22 percent of the total for 1996. As shown in figure 1, smaller airports relied on AIP grants for half of their funding, followed by tax-exempt airport and special facility bonds,and state grants. PFCs accounted for only 7 percent of smaller airports' funding mix. Conversely, larger airports received more than $5.5 billion in funding, relying on airport bonds for 62 percent of their total funding, followed by PFC collections. AIP grants accounted for only 10 percent of larger airports' funding. Small airports' planned capital development during 1997 through 2001 may cost nearly $3 billion per year, or $1.4 billion per year more than these airports raised in 1996. Figure 2 compares small airports' total funding for capital development in 1996 with their annual planned spending for development. Funding for 1996, the bar on the left, is shown by source (AIP, PFCs, state grants, and bonds). Planned spending for small airports, the bar on the right, is shown by the relative priority FAA has assigned to the projects, as follows: Reconstruction and mandated projects, FAA's highest priorities, total $750 million per year and are for projects to maintain existing infrastructure (reconstruction) or to meet federal mandates, including safety, security, and environmental requirements (including noise mitigation requirements). Other high-priority projects, primarily adding capacity, account for another $373 million per year. Other AIP-eligible projects, a lower priority for FAA, such as bringing airports up to FAA's design standards, add another $1.37 billion per year, for a total of nearly $2.5 billion per year in projects eligible for AIP funding. Finally, small airports anticipate another $465 million per year on projects that are not eligible for AIP funding, such as expanding commercial space in terminals and constructing parking garages. Planned development 1997 through 2001 (annualized) Given this picture of funding and planned spending for development for small airports, it is difficult to develop a precise estimate of the extent to which AIP-eligible projects are deferred or canceled because some form of funding cannot be found for them. FAA does not maintain information on whether eligible projects that do not receive AIP funding are funded from other sources, deferred, or canceled. We were not successful in developing an estimate from other information sources, mainly because comprehensive data are not kept on the uses to which airport and special facility bonds are put. But even if the entire bond financing available to smaller airports were spent on AIP-eligible projects, these airports would have, at a minimum, about $945 million a year in AIP-eligible projects that are not funded. Conversely, if none of the financing from bonds were applied to AIP-eligible projects, then the full $1.41 billion funding shortfall for smaller airports would apply to these projects. As a proportion of total funding, the potential funding shortfall for smaller airports is more significant than it is for large airports. For large airports, the difference between 1996 funding and planned development is about $1.5 billion. However, because large airports obtained $5.5 billion in funding in 1996 versus $1.5 billion for small airports, large airports' potential shortfall represents 21 percent of their planned development costs as compared to small airports' potential shortfall of 48 percent. Therefore, while larger and smaller airports' respective shortfalls are similar in size, the greater scale of larger airports' planned development causes their shortfall to differ considerably in proportion. Proposals to increase airport funding or make better use of existing funding vary in the extent to which they would help smaller airports and close the gap between their funding and the costs of planned development. For example, increasing AIP funding would help smaller airports more than larger airports because current funding formulas would channel an increasing proportion of AIP funds to them. Conversely, any increase in PFC funding would help larger airports almost exclusively because they handle more passengers and are more likely to have a PFC in place. Changes to the current design of AIP or PFCs could, however, lessen the concentration of benefits on one group of airports. FAA has also used other mechanisms to better use and extend existing funding sources, such as state block grants and pilot projects to test innovative financing. So far, these mechanisms have had mixed success. Under the existing distribution formula, increasing total AIP funding would proportionately help smaller airports more than large and medium hub airports. Appropriated AIP funding for fiscal year 1998 was $1.7 billion; smaller airports received about 60 percent of this total. We calculated how much funding each group would receive under the existing formula, at funding levels of $2 billion and $2.347 billion. We chose these funding levels because the National Civil Aviation Review Commission and the Air Transport Association (ATA), the commercial airline trade association, have recommended that future AIP funding levels be stabilized at a minimum of $2 billion annually, while two airport trade groups--the American Association of Airport Executives and the Airports Council International-North America--have recommended a higher funding level, such as AIP's authorized funding level of $2.347 billion for fiscal year 1998. Table 2 shows the results. As indicated, smaller airports' share of AIP would increase under higher funding levels if the current distribution formula were used to apportion the additional funds. Increasing PFC-based funding, as proposed by the Department of Transportation and backed by airport groups, would mainly help larger airports, for several reasons. First, large and medium hub airports, which accounted for nearly 90 percent of all passengers in 1996, have the greatest opportunity to levy PFCs. Second, such airports are more likely than smaller airports to have an approved PFC in place. Finally, large and medium hub airports would forgo little AIP funding if the PFC ceiling were raised or eliminated. Most of these airports already return the maximum amount that must be turned back for redistribution to smaller airports in exchange for the opportunity to levy PFCs. If the airports currently charging PFCs were permitted to increase them beyond the current $3 ceiling, total collections would increase from the $1.35 billion that FAA estimates was collected during 1998. Most of the additional collections would go to larger airports. For every $1 increase in the PFC ceiling, we estimate that large and medium hub airports would collect an additional $432 million, while smaller airports would collect an additional $46 million (see fig. 2). In total, a $4 PFC ceiling would yield $1.9 billion, a $5 PFC would yield $2.4 billion, and a $6 PFC would yield $2.8 billion in total estimated collections. In recent years, the Congress has directed FAA to undertake steps to find ways to extend existing AIP funds, especially for small airports that rely more extensively on AIP funds than do large airports. The airport community's interest in these efforts has varied. For example, the state block grant program, which allows the participating states to direct grants to smaller airports, has been proven successful. Others efforts, such as pilot projects to test innovative financing and privatization, have received less interest from airports and are still being tested. Finally, one idea, using AIP grants to capitalize state revolving loan funds, has not been attempted but could help smaller airports. Implementing this idea would require legislative changes. In 1996, we testified before this Subcommittee that FAA's pilot program for state block grants was a success. The program allows FAA to award AIP funds in the form of block grants to designated states, which, in turn, select and fund AIP projects at small airports. In 1996, the program was expanded from seven to nine states and made permanent. Both FAA and the participating states believe that they are benefiting from the program. In recent years, FAA, with congressional urging and direction, has sought to expand airports' available capital funding through more innovative methods, including the more flexible application of AIP funding and efforts to attract more private capital. The 1996 Federal Aviation Reauthorization Act gave FAA the authority to test three new uses for AIP funding--(1) projects with greater percentages of local matching funds, (2) interest costs on debt, and (3) bond insurance. These three innovative uses could be tested on up to a total of 10 projects. Another innovative financing mechanism that we have recommended--using AIP funding to help capitalize state airport revolving funds--while not currently permitted, may hold some promise. FAA is testing 10 innovative uses of AIP funding totaling $24.16 million, all at smaller airports. Five projects tested the benefits of the first innovative use of AIP funding--allowing local contributions in excess of the standard matching amount, which for most airports and projects is otherwise fixed at 10 percent of the AIP grant. FAA and state aviation representatives generally support the concept of flexible matching because it allows projects to begin that otherwise might be postponed for lack of sufficient FAA funding; in addition, flexible funding may ultimately increase funding to airports. The remaining five projects test the other two mechanisms for innovative financing. Applicants have generally shown less interest in these other options, which, according to FAA officials, warrant further study. Some federal transportation, state aviation, and airport bond rating and underwriting officials believe using AIP funding to capitalize state revolving loan funds would help smaller airports obtain additional financing. Currently, FAA cannot use AIP funds for this purpose because AIP construction grants can go only to designated airports and projects. However, state revolving loan funds have been successfully employed to finance other types of infrastructure projects, such as wastewater projects and, more recently, drinking water and surface transportation projects.While loan funds can be structured in various ways, they use federal and state moneys to capitalize the funds from which loans are then made. Interest and principal payments are recycled to provide additional loans. Once established, a loan fund can be expanded through the issuance of bonds that use the fund's capital and loan portfolio as collateral. These revolving funds would not create any contingent liability for the U.S. government because they would be under state control. Declining airport grants and broader government privatization efforts spurred interest in airport privatization as another innovative means of bringing more capital to airport development, but thus far efforts have shown only limited results. As we previously reported, the sale or lease of airports in the United States faces many hurdles, including legal and economic constraints. As a way to test privatization's potential, the Congress directed FAA to establish a limited pilot program under which some of these constraints would be eased. Starting on December 1, 1997, FAA began accepting applications from airports to participate in the pilot program on a first-come, first-served basis for up to five airports, at least one of which must be a general aviation airport. Thus far, two airports--one general aviation and one nonhub commercial service airport--have applied to be part of the program. 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. 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.
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Pursuant to a congressional request, GAO discussed airport funding issues as they apply to smaller airports, focusing on: 1) how much funding has been made available to airports, particularly smaller airports, for their capital development and what are the sources of these funds; (2) comparing airports' plans for future development with current funding levels; and (3) what effect will various proposals to increase or make better use of existing funding have on smaller airports' ability to fulfill their capital development plans. GAO noted that: (1) in 1998, GAO reported that the 3,304 airports that make up the federally supported national airport system obtained about $7 billion from federal and private sources for capital development; (2) the nation's 3,233 smaller airports accounted for 22 percent of this total, or about $1.5 billion; (3) as a group, smaller airports depend heavily on federal grants, receiving half of their funding from the federally-funded Airport Improvement Program (AIP) and the rest from airport bonds, state grants, and passenger facility charges; (4) by contrast, the 71 largest airports in the national airport system obtained $5.5 billion in funding, mostly from tax-exempt bonds and relied on AIP for only 10 percent of their funding; (5) small airports planned to spend nearly $3 billion per year for capital development during 1997 through 2001, or $1.4 billion per year more than they were able to fund in 1996; (6) smaller airports' planned development consists of projects eligible for AIP grants, like runways, and projects not eligible for grants, like terminal retail space; (7) at least $945 million and as much as $1.4 billion of smaller airports' planned development that are eligible for grants may not be funded on an annual basis; (8) the difference between funding and planned development is much greater for smaller commercial and general aviation airports than it is for large airports; (9) several initiatives to increase or make better use of existing funding have emerged in recent years, including increasing the amount of AIP funding and raising the maximum amount airports can levy in passenger facility charges; (10) under current formulas, increasing the amount of AIP funding would help smaller airports more than larger airports, while raising passenger facility charges would mainly help larger airports; and (11) other initiatives for making better use of federal grant monies, such as AIP block grants to states, have primarily been directed toward smaller airports, but none appears to offer a major breakthrough in reducing the shortfall between funding and the levels airports plan to spend on development.
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OSC, which does not have in-house contracting staff, has an agreement with ARC, an office within Treasury's Bureau of the Public Debt, to provide contracting support for a fee. As a member of the Treasury franchise fund, ARC does not receive direct appropriated funds, but instead relies on revenue from its federal agency customers to pay organizational expenses. Franchise funds are government-run, self-supporting, business-like enterprises that provide a variety of common administrative services, such as payroll processing, information technology support, and contracting. The agreement between ARC and OSC is a mechanism for interagency contracting. This type of fee-for-service procurement process generally involves three parties: the agency requiring a good or service, the agency placing the order or awarding the contract, and the contractors that provide the goods and services. The requiring agency officials determine the goods or services needed and, if applicable, prepare a statement of work, sometimes with the assistance of the ordering agency. The contracting officer at the ordering agency ensures that the contract or order is properly awarded or issued (including any required competition) and administered under applicable regulations and agency requirements. If contract performance will be ongoing, a contracting officer's representative--generally an official at the requiring agency with relevant technical expertise--is normally designated by the contracting officer to monitor the contractor's performance and serve as the liaison between the contracting officer and the contractor. While interagency contracting can offer the benefits of improved efficiency and timeliness, this approach needs to be effectively managed. Due to the challenges associated with interagency contracts, we recently designated interagency contracting as a governmentwide high-risk area. As authorized by OSC's appropriation, OSC may use 5 U.S.C. SS 3109 to hire intermittent consultants. Section 3109 permits agencies, when authorized by an appropriation or other statute, to acquire the temporary or intermittent services of experts or consultants. Under the statute, appointments of experts and consultants may be made without regard to competitive service provisions and classification and pay requirements. Individuals appointed under this authority may not be paid in excess of the highest rate payable for a GS-15 unless a higher rate is expressly provided for by statute or an appropriation. Under section 3109, OPM is responsible for prescribing criteria governing circumstances in which it is appropriate to employ an expert or consultant and for prescribing criteria for setting pay. Section 3109 of title 5 and OPM's implementing regulations in 5 C.F.R. Part 304 provide for broad discretion in the appointment of experts and consultants. In promulgating its regulations, OPM recognized that agencies need to obtain outside opinion and expertise to improve federal programs, operations, and services and that by bringing in the talent and insights of experts and consultants, agencies can work more economically and effectively. OSC's primary mission is to protect federal employees from prohibited personnel practices. It carries out this mission by conducting investigations, attempting informal resolution through discussions with the agency during the investigation phase (or by offering mediation), and, when necessary, prosecuting corrective and disciplinary actions before the MSPB. An individual may also request that the Special Counsel go before the MSPB to seek to delay an adverse personnel action, such as a termination, pending an OSC investigation. If an agency fails to remedy a prohibited personnel practice upon request by OSC, corrective action may be obtained through litigation before the MSPB. OSC may also seek disciplinary action against an employee believed to be responsible for committing a prohibited personnel practice by filing a complaint with the MSPB. However, when the disciplinary action involves presidential appointees (subject to Senate confirmation), OSC forwards its complaint against the appointee, a statement of supporting facts, and any response of the appointee to the President for appropriate action. Obtaining the assistance of OSC may be an individual's only recourse with regard to an alleged prohibited personnel practice, unless the individual can pursue the matter with the MSPB or through the discrimination complaint process. Only employees who have been subject to an adverse action, such as a termination, demotion, or suspension beyond 14 days, may appeal to the MSPB and argue that such adverse action was the result of a prohibited personnel practice. An employee would not be able to go directly to the MSPB to complain that a geographic relocation was the result of a prohibited personnel practice. Even when an employee alleges that he or she was retaliated against for whistleblowing, he or she must first go to OSC and wait 120 days before filing directly with the MSPB, unless that employee was subject to an adverse action as noted above. An employee may also pursue resolution of a prohibited personnel practice through the federal equal employment opportunity (EEO) process if the prohibited practice relates to discrimination covered under the antidiscrimination laws enforced by the EEOC. In contracting with MPRI for the organizational assessment, several required steps were not taken: competition was not sought among Schedule vendors, and there was no convincing demonstration of why a sole-source order was necessary, the determination of the reasonableness of MPRI's price was not OSC officials performed duties normally done by contracting officer's representatives without authorization or training and, further, performed other duties that should have been reserved for the contracting officer. Contracting officers are generally required by the Competition in Contracting Act to promote and provide for full and open competition in soliciting offers and awarding government contracts. Use of GSA's Schedule program is considered a competitive procedure as long as the procedures established for the program are followed. In this instance, GSA's procedures required ordering offices to prepare a request for quotes and evaluate contractor catalogs and price lists, transmit the request to at least three contractors, and after evaluating the responses, place the order with the Schedule contractor that represented the best value. GSA's Schedule for Management, Organizational and Business Improvement Services (MOBIS), under which the MPRI task order was issued, includes these special ordering procedures. At the time the MPRI order was placed (April 2004), neither the FAR nor GSA's ordering procedures explicitly provided for sole-source orders under GSA Schedule contracts. However, ordering offices could meet competition requirements by properly justifying such an order. Rather than follow the required GSA special ordering procedures by placing the task order competitively on behalf of OSC, ARC approved a written sole-source justification prepared by OSC. The justification stipulated that the required services were available from only one responsible source--MPRI--and no other contractor could satisfy agency requirements. When supplies or services are available from only one responsible source and no other type of supplies or services will satisfy agency requirements, full and open competition need not be provided for. However, the justification merely asserted that "no other contractor except MPRI, Inc. has the experience and background in this type of sensitive assessment." It did not contain sufficient facts and rationale to justify a sole-source order and did not provide the minimum required information. For example, the justification did not demonstrate that the proposed contractor's unique qualifications or the nature of the acquisition required an exception to full and open competition, describe efforts made to ensure that offers were solicited from as many potential sources as practicable, determine that the anticipated cost would be fair and reasonable, or describe the market research conducted and the results. The only support in OSC's justification for the statement that MPRI was uniquely qualified for the task is a statement that "an informal market survey reveals that only MPRI has the demonstrated past performance in bringing together the required unbiased and highly ethical subject matter experts to complete this type of assessment in the time allocated." However, the cited market survey does not provide a credible foundation for the conclusion that only MPRI could perform the work. The Special Counsel and his Deputy asked three vendors, including MPRI, for presentations. OSC officials could not recall how these three vendors were selected, and no documentation was available--such as a request for quotes--that set forth the requirement to which the vendors were responding. Rather, the request was communicated orally to the vendors. OSC provided us with proposals submitted by two of the vendors and stated that MPRI submitted a statement of work as its proposal. This statement of work subsequently became part of ARC's official contract file. We found that the summary statement of OSC's requirement and the scope of work differ among the three proposals. OSC officials explained that the two vendors' proposals were not well-matched to what the Special Counsel had communicated to them as OSC's requirements and that MPRI offered a "no-frills" approach that met OSC's needs. Nevertheless, in the absence of a documented request for quotes or other solicitation tool, it is not possible to determine whether MPRI and the other vendors were responding to the same set of requirements. Further, our recent search of GSA's Web site revealed that 1,668 vendors (1,163 of them small businesses) had contracts under GSA's MOBIS schedule, many of which could have potentially performed the required services. The sole-source justification listed other factors as well. It stated that "there is insufficient time and no contractor's currently have the expertise to meet Government's requirements given the required budget limitations." There is no explanation in the justification as to why only this contractor could perform the task within the required time frame. In fact, despite the reference to urgency, 3 days before the period of performance was to end, OSC asked ARC to change the required completion date, almost doubling the time frame from 3 to 5- 1/2 months (with no increase in price). While acknowledging that the final, written report was a contract deliverable in the statement of work, OSC officials explained that MPRI met their needs within the 3-month period by providing a briefing on its findings that enabled OSC to begin addressing the problems that had been identified. Further, contracting without providing for full and open competition cannot be justified on the basis of concerns related to the amount of funds available. Thus, the justification's reference to budget constraints necessitating a sole-source order is not a valid rationale. ARC contracting officials did not question or validate OSC's justification, but told us they relied to a great extent on OSC's input in justifying the sole- source order. They said that they are now paying closer attention to requests from customer agencies, including OSC, for sole-source orders. OSC officials told us that, because ARC did not raise questions about the justification, they assumed it was adequate. A sole-source justification is required to document a determination by the contracting officer that the anticipated cost to the government will be fair and reasonable. Neither ARC, which was responsible for doing so, nor OSC adequately documented that MPRI's price was reasonable. Although vendors' GSA Schedule labor rates have already been determined by GSA to be fair and reasonable, ordering agencies are required to evaluate the contractor's price for orders requiring a statement of work. The contractor's price is based on the labor rates in the Schedule contract, the mix of labor categories, and the level of effort required to perform the services. Normally, when ordering services from GSA Schedules that require a statement of work, the ordering office is responsible for evaluating the contractor's level of effort and mix of labor proposed to perform the specific tasks being ordered and for making a determination as to whether the price is reasonable. ARC officials told us that they relied on OSC to conduct the price reasonableness assessment by reviewing a breakout of MPRI's price by skill mix, number of hours, and rates for each labor category. They maintain that the minimum requirements for price reasonableness documentation were met. However, we found no documentation demonstrating that the required price evaluation had been performed. OSC officials stated that the informal market survey was adequate to determine MPRI's price as reasonable because MPRI's price--which the Deputy Special Counsel negotiated with the vendor--was lower than the other vendors' prices. However, the absence of a solicitation instrument that would show all three vendors responded to the same requirement, and the disparities in the vendors' proposed scopes of work, do not support OSC's assertion. One of the contracting officer's key responsibilities is ensuring that the government monitors the contractor's performance. The contracting officer, in this case ARC, may designate a contracting officer's representative in the requiring agency, in this case OSC, to act as the contracting officer's technical expert and representative in the monitoring and administration of a contract or task order. ARC's standard designation letter to contracting officer's representatives outlines the scope of these responsibilities, including such things as monitoring the contractor's performance, representing the government in meetings with the contractor, keeping the contracting officer informed, and reviewing the contractor's invoices. ARC follows Treasury's training program for contracting officer's representatives, which consists of a basic acquisition course of at least 24 hours that includes pre-award, post-award, and procurement ethics training. ARC contracting staff named OSC's former human resource chief, who had taken the required training, as the contracting officer's representative for the MPRI task order. However, two other OSC officials not named by ARC, the Special Assistant and Director of Management and Budget and the Deputy Special Counsel, who had not received the training, effectively acted in the role of contracting officer's representatives on the MPRI order. In an April 20, 2004, e-mail to OSC staff, the Special Counsel named the Special Assistant as the liaison between the agency and the contractor. The statement of work names this official as the "governing authority" for the effort and as responsible for coordinating with the contractor on "any other direct costs" and certain travel requirements. Also, the Deputy Special Counsel was responsible for approving MPRI's contract execution plan and the contract deliverables. Further, ARC's delegation letter to contracting officer's representatives prohibits the delegation of or responsibility for certain duties, such as soliciting proposals, making commitments or promises to a contractor relating to the award of a contract, and negotiating the price with the contractor. The Special Counsel and Deputy Special Counsel, as discussed above, solicited proposals from three vendors, and the Deputy negotiated the final price with MPRI, functions that should have been performed by the ARC contracting officer. ARC contracting staff were not aware that the OSC officials had performed these duties until we informed them. They said that only the former human resource chief had received the training and authorization to act as a contracting officer's representative. OSC officials said that ARC, as their contracting office, never told them they were not following proper contracting practices. The tasks specified in the statement of work for the consultant that OSC hired on March 17, 2004, and that he completed before his departure were consistent with OPM criteria for appropriate uses of expert and consultant appointments. The employee, who was employed on an intermittent basis, was tasked with two major lines of work related to efficiency and curriculum development. OSC management expressed confidence in his qualifications and used its discretion to both hire him and set his compensation rate. OPM regulations permit agency heads to establish expert or consultant pay rates, but in doing so to consider specified factors, including level of difficulty of the work, qualifications of the expert or consultant, and pay rates of individuals performing comparable work. At the suggestion of the Special Counsel, OSC officials hired Alan J. Hicks as an intermittent employee on March 17, 2004, using the appointment authority under 5 U.S.C. SS 3109. According to the appointment paperwork, Mr. Hicks's appointment was to last from March 17, 2004, until March 16, 2005, and he was to work an intermittent schedule. His pay rate was set slightly below the highest rate for a GS-15. Mr. Hicks resigned his appointment effective October 24, 2004. During the 7 months Mr. Hicks was employed by OSC, he worked a total of 123 hours for a total of $6,621.09 in pay. Before hiring Mr. Hicks, the Special Counsel identified him as a possible consultant based on prior knowledge of Mr. Hicks's work as the headmaster of a private secondary school. The Deputy Special Counsel told us that he justified Mr. Hicks's pay on the basis of his qualifications-- specifically, his experience as headmaster and his educational level. He also noted that the Special Counsel had worked with Mr. Hicks and respected his opinion and judgment. According to Mr. Hicks's resume, during the 10 years of his headmaster position, he was responsible for a number of administrative functions, including designing and writing student curricula, recruiting and training faculty and staff, establishing financial and organizational structures of the school, hiring and management decisions, as well as teaching history, logic, and biology. According to his resume, Mr. Hicks had also taught at the college level. OPM regulations provide that agencies may appoint qualified experts or consultants to an expert or consultant position that requires only intermittent and/or temporary employment. While OPM regulations do not establish specific criteria for determining qualifications, they do generally describe the expectations for such positions and what constitutes appropriate tasks for experts and consultants to perform. For example, the regulations describe a consultant as a person who can provide valuable and pertinent advice generally drawn from a high degree of broad administrative, professional, or technical knowledge or experience. Furthermore, a consultant position is one that requires providing advice, views, opinions, alternatives, or recommendations on a temporary or intermittent basis on issues, problems, or questions presented by a federal official. The regulations also provide examples of inappropriate uses of expert/consultant appointments, including work performed by the agency's regular employees. Mr. Hicks's tasks were related to addressing OSC's backlog that we identified in our March 2004 report. Specifically, an OSC official noted that his experience in curricula development at the boarding school was viewed as key to cross-train employees in different units so those employees could be utilized in a number of ways to address workload. According to the OSC official, Mr. Hicks's efforts would complement those of MPRI. The official said he was confident that Mr. Hicks was fully qualified to do the work, and that OSC used management discretion to approve the appointment. Another official observed that Mr. Hicks provided both an outside perspective and experience that regular OSC staff did not have. Officials also said that although Mr. Hicks only worked at OSC for a short time, the agency was pleased with the value he added. Both the duties set out in Mr. Hicks's statement of work, as well as those duties he actually performed, were consistent with OPM regulations. According to the statement of work prepared by the human resource chief at the Deputy Special Counsel's direction, Mr. Hicks was to (1) review and analyze OSC program policies and procedures for efficiency and make recommendations and develop written revisions to these policies and procedures and (2) develop a long-term training curriculum and deliver training. Shortly before he terminated his consultant work for OSC, Mr. Hicks submitted a report outlining the work that he performed. In his report, Mr. Hicks made a number of observations on his concurrence with MPRI's conclusions. The report also said he was involved in a number of other tasks, including examining operational training manuals, meeting with staff concerning the procedures for handling assisting with and attending the Special Counsel's testimony before a preparing a paper for presentation at a staff retreat on philosophical matters related to work, meeting with MPRI to discuss its assessments and to share his observations based on his work, and having numerous conversations with the Special Counsel concerning the assessment team, his recommendations for curriculum and training, and the need for streamlined procedures. While most of the tasks that Mr. Hicks actually performed were consistent with those enumerated in his statement of work, Mr. Hicks also worked on whistleblower disclosure cases. According to an OSC official, Mr. Hicks spent approximately 25 percent of his time working through 50 disclosure case files. The OSC official stated that Mr. Hicks was not provided disclosure case files that contained sensitive information for which a security clearance would have been required. While Mr. Hicks noted in his report that this work on the disclosure cases "served the dual purpose of analysis of procedures and a reduction of backlog," an OSC official stated that Mr. Hicks's efforts were related to an analysis of the process of handling disclosures and not the type of efforts OSC's disclosure unit employees perform in handling such cases. According to the OSC official, while Mr. Hicks contacted some of the whistleblowers directly, it was for the purpose of determining those individuals' impressions about the process. This official stated that these activities were performed at the initiative of the Special Counsel and his senior staff, in order for Mr. Hicks to gain a better understanding of those processes and procedures specified in the statement of work. This official stated that prior to Mr. Hicks's arrival at OSC, the Special Counsel forwarded to Mr. Hicks statutory provisions on OSC's duties relating to disclosures from whistleblowers, including the obligation of OSC to maintain the confidentiality of a whistleblower's identity. Although OSC employees, like other federal employees, can seek redress for alleged prohibited personnel practices through OSC, this may be unworkable for OSC employees in certain circumstances. Two other agencies with redress roles, MSPB and EEOC, have acknowledged the need to avoid conflicts when their employees have complaints and have taken steps to avoid such conflicts when their employees use their agency's respective redress processes. Title 5 of the United States Code protects federal employees, including OSC employees, from prohibited personnel practices. OSC employees who believe that a prohibited personnel practice has occurred may seek redress from OSC. OSC employees may also seek redress through appealing adverse actions to the MSPB and filing EEO complaints. According to OSC officials, there are two ways in which an OSC employee could bring a prohibited personnel practice allegation within OSC. First, OSC employees may use the agency's administrative grievance system. If fact-finding is needed for a complaint filed against OSC staff, an OSC employee who has not been involved in the matter being grieved and, when possible, does not occupy a position subordinate to any official involved in the matter being grieved, is selected to conduct a review and prepare a report. Ideally, that employee is also located in a different geographic area; for example, an OSC employee in Dallas could be assigned to a complaint filed in Washington, D.C. OSC officials stated that this would ensure objectivity and independence in the processing of the complaint. Fact- finding is conducted informally and includes the collection of documents and statements of witnesses, as necessary. The grievant's second-level supervisor would render a decision based upon the fact-finder's report and any comments on the report provided by the grievant. The grievant may appeal this decision to the Deputy Special Counsel, or, if the matter was grieved to the Deputy Special Counsel in the first instance, to the Special Counsel. Both current and former OSC officials stated that this process could be successfully used when the prohibited personnel practice allegation relates to the actions of an official below the Deputy Special Counsel level. However, if the administrative grievance system were to be used to address grievances against the Special Counsel or the Deputy Special Counsel, there would be a conflict of interest since the final decision maker in this process is the Special Counsel. Second, OSC officials stated that OSC employees who believe a prohibited personnel practice has occurred can file a complaint with OSC in the same fashion as an individual from outside OSC. However, OSC employees do not have an outside agency to represent them in an independent manner-- the role that OSC plays for non-OSC employees in cases involving prohibited personnel practices. When an employee raises a prohibited personnel practice allegation against the Special Counsel, addressing such an allegation within OSC becomes unworkable because, OSC officials stated, all OSC employees ultimately report to the Special Counsel. OSC officials also stated that there cannot be an independent review when the employee performing the investigation reports to the individual being investigated. According to former and current OSC officials, the difficulty also extends to allegations against the Deputy Special Counsel because the Deputy Special Counsel, who is typically a noncareer senior executive, has a confidential relationship with the Special Counsel. According to the previous Special Counsel, an effort among senior staff to establish procedures for handling OSC employee allegations of prohibited personnel practices against senior OSC officers, including the Special Counsel, was initiated during her tenure. However, the effort was not completed, she said, noting that OSC staff did not reach a consensus over what the alternative process should be for handling complaints against the Special Counsel. The previous Special Counsel and current OSC officials who were involved in this effort told us that one of the options being considered was to have the matter investigated by an outside inspector general. At the time, however, concern was expressed about allowing inspectors general, who were subject to OSC's investigative and prosecutorial authority, to investigate the Special Counsel. The potential difficulties described above were recently illustrated when a complaint was filed anonymously against the Special Counsel on behalf of a number of OSC employees. The complainants requested that the complaint be referred to the chairman of the PCIE for an independent investigation, including a recommendation for corrective or disciplinary action. The PCIE is an interagency council, including presidentially appointed inspectors general, charged with promoting integrity and efficiency in federal programs. The complaint stated that OSC could not investigate these allegations because the Special Counsel could not oversee an investigation of which he is the subject and that all OSC staff are his subordinates. The complaint further observed that the complainants' ability to remain anonymous would be jeopardized if any OSC staff were assigned to work on the investigation. As discussed above, current OSC policy and procedures do not provide for special handling of complaints against the Special Counsel or the Deputy Special Counsel. The Deputy Special Counsel told us that he and the Special Counsel agreed that OSC should not handle the complaint, and subsequently forwarded it to the PCIE's Integrity Committee and notified the chair of the PCIE. In mid- October, 2005, the chair assigned OPM's inspector general to conduct the investigation. Two other agencies in the executive branch with major roles in ensuring the protection of employee rights, the MSPB and EEOC, have taken steps to address potential conflicts of interest when their own employees use their agencies' respective redress processes. The MSPB is an independent quasi-judicial agency established to protect federal merit systems against prohibited personnel practices and to ensure adequate protection for employees against abuses by agency management. MSPB carries out this mission, in part, by adjudicating federal employee appeals of adverse personnel actions. The MSPB has developed regulations which state that MSPB employee appeals are not to be heard by board-employed administrative judges who hear appeals from employees of other federal agencies, but instead are to be heard by administrative law judges (ALJ). According to the MSPB General Counsel, MSPB does not employ its own ALJs; rather, MSPB has a memorandum of understanding with the National Labor Relations Board to use its ALJs for MSPB employee appeals and other matters, including whistleblower retaliation cases brought by OSC. MSPB regulations further provide that the board's policy is to insulate the adjudication of its own employees' appeals from agency involvement as much as possible. The regulations provide that if an initial decision rendered by the ALJ is appealed to the board, the initial decision will not be altered unless there has been "harmful procedural irregularity" in the proceedings or there is a clear error of law. According to the MSPB General Counsel, this provides the board with very limited review authority. Finally, the regulations state what procedures are to be followed if a board member must recuse himself or herself from a specific case. The EEOC is responsible for enforcing the federal sector employment discrimination prohibitions contained in the federal antidiscrimination statutes, including Title VII of the Civil Rights Act of 1964, as amended. As part of this responsibility, EEOC provides for the adjudication of complaints and hearing of appeals. As is the case for all individuals who file a formal complaint of discrimination, EEOC employees may either request a hearing before an administrative judge or a final decision by the agency itself. However, according to EEOC officials, when EEOC employees request a hearing over their complaint of discrimination, such hearings are not to be conducted by the administrative judges employed by EEOC, but rather through contract administrative judges. EEOC officials state that using contract administrative judges is necessary to preserve the neutrality of the process, since EEOC's administrative judges are coworkers of any EEOC complainant. EEOC officials also told us that if an employee of its Office of Equal Opportunity (OEO), EEOC's own EEO office, raises an allegation of discrimination, the matter is sent outside the agency to another agency's EEO office for informal counseling, investigation, and/or mediation to guard against potential conflicts of interest within the OEO. Steps can be taken to ensure that OSC employees have alternative avenues of recourse when their prohibited personnel practice allegations involve the Special Counsel or the Deputy Special Counsel. Potential options are discussed below. However, unlike the MSPB and the EEOC, which have taken steps to address potential conflicts of interest when their own employees use their respective redress processes, OSC would need explicit authority for implementing such options. OSC employees could be afforded an external investigation of their prohibited personnel practice allegations against the Special Counsel or Deputy Special Counsel through an independent entity. Most of the current and former OSC officials we spoke with acknowledged that the option of such an external investigation is warranted. If such an external investigation were authorized, it may be desirable to also provide the results of the investigation to the President, who has the authority to take appropriate corrective action. However, OSC would need specific authority to implement this option since OSC does not have the mechanism to provide for such investigations. OSC employees could be afforded expanded rights to appeal directly to MSPB that would specifically encompass prohibited personnel actions involving the Special Counsel or the Deputy Special Counsel. As discussed above, OSC employees, as is the case with other federal employees, can take allegations of prohibited personnel practices to the MSPB only when certain adverse actions have been taken against those employees. One OSC official observed that care should be taken in expanding jurisdiction so as to prevent minor personnel actions from being appealable to the board. Since the MSPB appeals process is in statute, this option would require legislation for implementation. OSC employees who believe a prohibited personnel practice has occurred can file a complaint with OSC in the same fashion as an individual from outside the agency. However, OSC employees do not have an external, independent agency like OSC to represent them. This becomes particularly important when the complaint is filed against the Special Counsel or the Deputy Special Counsel. When an employee raises a prohibited personnel practice allegation against the Special Counsel, addressing such an allegation within OSC becomes unworkable because OSC employees ultimately report to the Special Counsel, including the complainant and any staff who would conduct an internal investigation. This difficulty extends to allegations against the Deputy Special Counsel because this individual has a confidential relationship with the Special Counsel. Steps could be taken to ensure that OSC employees, who cannot effectively obtain the services of OSC in addressing allegations of prohibited personnel practices, have alternative avenues of redress. Adequate management oversight is critical to ensuring that, in an interagency contracting environment, the requiring agency and the agency ordering the services on its behalf work together to follow proper contracting procedures. In agreeing to issue the sole-source order for the organizational assessment despite the flawed justification, and in being uninvolved in and unaware of the pre- and post-award activities conducted by OSC officials, ARC contracting officials neglected to fulfill their responsibilities. For their part, OSC officials demonstrated a lack of awareness of their responsibilities in the process of engaging MPRI and overseeing the contractor's work. Due to the unique nature of OSC and the difficulties involved when a prohibited personnel practice allegation is made against the Special Counsel or the Deputy Special Counsel, Congress should consider affording OSC employees (and former employees and applicants for employment) alternative means of addressing prohibited personnel practice allegations other than going through OSC. These means could include establishing (1) a right to an external investigation through an independent entity, where the entity would forward its findings to the President, who would decide the appropriate action, as is done when OSC handles allegations of prohibited personnel practices against Senate- confirmed presidential appointees; or (2) an expansion of the personnel actions that could be the basis for an appeal directly to the MSPB. We recommend that the Director of ARC's Division of Procurement take the following two actions to ensure that (1) documents prepared by program offices requesting contracting assistance--such as statements of work and sole-source justifications--are carefully reviewed for compliance with competition requirements and (2) ARC contracting staff, through regular communication with the program offices they support, ensure that only authorized program officials act as contracting officer's representatives. We also recommend that the Special Counsel put in place procedures to ensure that only those officials who have taken the required training and been designated as contracting officer's representatives act in that role and that program staff do not exceed their authority in interacting with contractors. On September 23, 2005, we provided a draft of this report to OSC and to ARC for review and comment. OSC's written response is included in appendix I, and ARC's written response is included in appendix II. OSC and ARC agreed with our recommendations. However, OSC suggested several wording changes to the report and expressed concern about the tone of the section on the sole-source order with MPRI. While we clarified our wording in several places, we did not make other changes suggested by OSC in its comment letter for the reasons discussed below. OSC recommended we add a paragraph that, in addition to making reference to our earlier report on case backlogs at OSC (which is discussed in the first paragraph of our current report), would make other points that are already addressed in our report. Thus, we did not include OSC's suggested language. OSC pointed out that ARC, as the contracting office, did not question the sole-source justification and that, if it had done so, another approach could have been taken for the procurement. Our report already clearly reflects the fact that this was ARC's responsibility and that ARC contracting personnel did not question the validity of the sole-source justification but, rather, relied on OSC's rationale. OSC suggested we revise the wording in our report to state that program staff participated in negotiations with MPRI, rather than state that the Deputy Special Counsel negotiated the price with the company. Our discussions with OSC officials--including one with the Deputy himself-- support our finding that the Deputy negotiated the final price with MPRI, and we have added the word "final" to make that clear. There is no evidence that ARC "set the final price," as OSC suggests; rather, ARC issued a task order using the final price provided to it by OSC. OSC also took exception to our statements that the Deputy Special Counsel was responsible for approving MPRI's contract execution plan and contract deliverables and suggested we change the wording to "Also, OSC program officials were included in the approval process for MPRI's contract execution plan and contract deliverables." Again, the evidence supports our finding as stated in the report. In fact, the contract's statement of work names the Deputy as the contracting officer's representative, as the official responsible for approving MPRI's contract execution plan, and as the recipient of the contractor's monthly reports. Further, the contract execution plan is addressed to the Deputy and it identifies him as the contracting officer's representative. 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 date of this letter. At that time, we will send copies of this report to OSC, the Bureau of the Public Debt, and interested parties. In addition, the report will be available at no charge on GAO's Web site at http://www.gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. If you or your staff have questions about this report, please call me at (202) 512-9490. Key contributors to this report included Kimberly Gianopoulos, Karin Fangman, Sharon Hogan, Michele Mackin, and Adam Vodraska.
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In January 2005, the U.S. Office of Special Counsel (OSC) implemented a plan, in part, to address a backlog of pending cases. This report discusses actions related to the development of this plan, including whether required practices and procedures were followed in contracting for the services of a management consulting company and in hiring an intermittent employee as a consultant. Also, the report identifies avenues of redress available to OSC employees for filing prohibited personnel practice allegations against OSC, and other redress options that could be made available. At OSC's request, the Administrative Resource Center (ARC), an office within the U.S. Department of the Treasury's Bureau of the Public Debt which provides OSC with contracting support for a fee, issued a $140,000 sole-source task order for an organizational assessment to a consulting firm, Military Professional Resources, Inc. (MPRI). In doing so, several required steps were not taken: competition was not sought among Schedule vendors and there was no convincing demonstration of why a sole-source order was necessary; the determination of the reasonableness of MPRI's price was not documented; and OSC officials performed duties normally done by contracting officer's representatives without authorization or training and, further, performed other duties that should have been reserved for the contracting officer. ARC officials told us they relied largely on OSC's input in justifying the sole-source order and determining MPRI's price to be reasonable and that they were unaware that the OSC officials had performed contracting-related duties. They told us that they are now paying particular attention to requests from their customers, including OSC, for sole-source orders. OSC officials said that they relied on ARC's expertise, as their contracting office, to ensure that proper contracting procedures were followed. The tasks specified in the statement of work for the consultant that OSC hired as an intermittent employee and that he completed before his departure were consistent with Office of Personnel Management criteria for appropriate uses of expert and consultant appointments. The intermittent employee was tasked with two major lines of work related to efficiency and curriculum development. OSC management expressed confidence in the individual's qualifications and was within its discretion to both hire him and set his level of compensation. While OSC employees, like other federal employees, are protected against prohibited personnel practices and may seek redress from OSC in making such allegations, this option becomes unworkable because of potential conflicts of interest when an OSC employee raises such an allegation of a prohibited personnel practice against either of the two top OSC officials. Two other federal agencies with redress roles, the Merit Systems Protection Board (MSPB) and the Equal Employment Opportunity Commission, have taken steps to address potential conflicts of interest when their own employees use their agency's respective redress processes. Steps could be taken to ensure that OSC employees have alternative avenues of recourse; for example, they could have an external investigation conducted through an independent body or broader appeal rights to the MSPB. OSC could not independently implement these options, and would need to be given authority to do so.
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VA's mission is to promote the health, welfare, and dignity of all veterans in recognition of their service to the nation by ensuring they receive medical care, benefits, social support, and lasting memorials. Its three major components, the Veterans Benefits Administration (VBA), the Veterans Health Administration (VHA), and the National Cemetery Administration are primarily responsible for carrying out this mission. Over time, the use of information technology has become crucial to the department's effort to provide benefits and services, with its budget for IT exceeding $1 billion annually. In reporting on VA's IT management over the past several years, we have highlighted challenges the department has faced in achieving its "One VA" vision, including that information systems and services were highly decentralized and that its administrations controlled a majority of the IT budget. For example, according to an October 2005 memorandum from the former CIO to the Secretary of Veterans Affairs, the CIO had direct control over only 3 percent of the department's IT budget and 6 percent of the department's IT personnel. In addition, in the department's fiscal year 2006 IT budget request, the Veterans Health Administration was identified to receive 88 percent of the requested funding, while the department was identified to receive only 4 percent. We have previously pointed out that, given the department's large IT funding and decentralized management structure, it was crucial for the department CIO to ensure that well- established and integrated processes for leading, managing, and controlling investments were followed throughout the department. Further, a contractor's assessment of VA's IT organizational alignment, issued in February 2005, noted the lack of control for how and when money is spent. The assessment found that project managers within the administrations had the ability to shift money to support individual projects. Also, according to the assessment, the focus of department-level management was only on reporting expenditures to the Office of Management and Budget and Congress, rather than on managing these expenditures within the department. We have reported in the past on key factors that are needed in order to successfully transform an organization to be more results oriented, customer focused, and collaborative in nature. We reported that conducting large-scale change management initiatives are not simple endeavors and require the concentrated efforts of both leadership and employees to realize intended synergies and to accomplish new organizational goals. We also noted that there are a number of key practices that can serve as the basis for federal agencies to transform their cultures in response to governance challenges, such as those that an organization like VA might face when transforming to a centralized IT management structure. Among the significant factors we identified as critical for ensuring the success of VA's move to centralized management are ensuring commitment from top leadership, establishing a governance structure to manage resources, linking the IT strategic plan to the organization strategic plan, using workforce strategic management to identify proper roles for all communicating change to all stakeholders, and dedicating an implementation team to manage change. VA's plans for realigning the management of its IT program include elements of several of the six factors that we identified as critical to the department's implementation of a centralized management structure (see table 1). Additional departmental actions could increase assurance that the realignment will be completed successfully. Without further action to fully address the factors we have identified, the risk to successfully centralizing the IT operations increases and the long-term benefits of the realignment may not be realized. It is important that an organization's top leadership supports and sustains major change initiatives through to completion. We have testified that top leadership involvement for making management improvements is critical to overcoming an organization's natural resistance to change, marshaling the resources needed to improve management, and building and maintaining organizationwide commitment to new ways of doing business. In addition, in reporting on the results of a forum to identify useful practices and lessons learned from major private- and public-sector organizational transformations, we noted that a key factor for successful organizational transformation was ensuring that top leadership drives the effort. The department has addressed this critical success factor through multiple actions. For example, in February 2007, the Secretary approved a new organization structure for centralized IT management. This structure was recommended by the realignment contractor following its review of the department's strategic business objectives, existing organization structure, and business processes and will serve as the framework for organizing the IT workforce under the centralized model. The structure assigns roles and responsibilities for IT management that VA expects will provide the Office of Information and Technology leadership the organizational stature and credibility to deal effectively with the administrations on IT matters. Another example of the Secretary's commitment to the realignment came through approval of the transfer of IT personnel to the Office of Information and Technology. Previously these personnel had been assigned to the administrations (e.g., VHA and VBA) and staff offices. The movement of these personnel should enable the CIO to improve control over IT development and operations in the department. A governance structure should ensure suitable stakeholder participation in the change initiative and reflect clearly defined stakeholder roles, responsibilities, and decision-making authority. When an organization is considering a major change initiative, it must ensure there is an established governance structure in place that provides for the effective use and oversight of resources during and after the change. According to VA's independent verification and validation contractor, two critical aspects of governance are (1) the inclusion of relevant stakeholders in the development of any new processes resulting from the initiative and (2) holding these parties accountable for execution of their responsibilities throughout the entire life cycle of the initiative. We have reported that organizations need to establish a governance structure that represents the entire stakeholder community and reflects clearly defined roles, responsibilities, and decision-making authority among the different levels of leadership. VA has partially addressed this critical success factor. In particular, while the governance plan for centralized management has been approved by the Secretary, the department has not yet established boards necessary to provide governance over the centralized structure and processes that are being developed. One of these boards--the Business Needs and Investment Board--is to provide investment control for the department's IT projects. According to VA officials, this board had not been established because some of the positions on the board had not yet been filled by permanent staff. In addition, the documentation that the department provided to us lacks detailed descriptions of how the new organization would support a completed, centralized IT governance process. Until the department establishes the elements needed to provide governance over its new IT structure and processes, the department cannot provide assurance that implementation of centralized management will be successful. Our November 2002 report noted that organizations attempting a transformation needed to establish a coherent mission with integrated strategic goals and align the transformed organization to support those goals. For example, if an organization's strategic goal is top-quality medical care, IT strategic goals and the related transformation should be aligned to support that goal. An IT strategic plan should define, in cooperation with the relevant stakeholders, how IT will contribute to the enterprise's strategic objectives and related costs and risks. Industry documentation further notes that planning helps ensure that leadership understands the link between an organization's direction and how IT is aligned to meet the organization's goals. According to this documentation, an organization and its strategies should be integrated, clearly linking enterprise goals and IT goals, and recognize opportunities as well as current limitations. Further, integration of enterprise and goals should be broadly communicated throughout the organization to ensure that all users and stakeholders have a clear sense of what the organization is attempting to accomplish. However, VA has not addressed this critical success factor because it has not yet updated an IT strategic plan to reflect the goals of the new centralized structure. According to department officials, a draft version of an updated IT strategic plan is expected to be completed by June 30, 2007. Additionally, this plan is expected to support the department's strategic plan, which includes the goals of each of the department's administrations. Until the IT strategic plan is updated, the department will have neither a clear link between the department's strategic plan and the IT strategic plan nor assurance that the realignment will meet the goals in these plans. Workforce strategic management is necessary to ensure that an organization has the personnel resources capable of developing and delivering the services required of the organization. We have previously reported that success in major change initiatives is more likely when the best individuals are selected for each position based on their competencies rather than on where they work. That is, the new organization needs to avoid a situation where key personnel are selected on the basis of an understanding that each of the originating components gets its "turn" in the selection process. Such an approach not only undermines the quality of the selections but also raises questions about top leadership's ability and commitment to creating a new, integrated organization. We have also reported that it is important to establish an organizationwide knowledge and skills inventory to exchange knowledge among transforming organizations. Valuable information resides in the organizational components of transformations, and when these components are combined, these intellectual assets are extremely powerful and beneficial to employees and stakeholders. Knowledge and skills inventories not only capture the intellectual assets of the new organization but also signal to employees that their particular expertise is valued by the organization. In addition, industry documentation notes that workforce strategic management should be supported by well-defined personnel competencies, staffing of appropriate roles, training, and related factors necessary for high performance. The department has taken steps to partially address this critical success factor. As stated previously, the department has aligned almost all of its IT workforce under the CIO, having transferred approximately 6,000 personnel from the administrations to the CIO's office. In addition, the department has identified the responsibilities for workforce strategic management within its new organizational structure--the Assistant Secretary for Information Technology has responsibility for workforce planning; the Deputy Assistant Secretary for Information Technology Resource Management has responsibility for ensuring the alignment of IT workforce skills with IT goals and objectives; and the Human Resources and Training Management Office has responsibility for developing and executing the human capital plan that supports the IT strategy. Nonetheless, key tasks remain to be completed in order for this critical factor to be fully addressed. For example, department officials indicate that VA is currently assessing the roles and responsibilities of the approximately 6,000 staff that have been permanently assigned to the Office of Information and Technology, but the department has not yet established a knowledge and skills inventory to determine what skills are available in order to decide the proper roles for all employees within the new organization. Also, the department has not yet developed policies and procedures to centrally manage the IT personnel, assessed personnel requirements, defined training requirements, or created career and training paths and requirements for the personnel. Until the department completes these important tasks, the success of the realignment is at risk because IT personnel may be situated in inappropriate positions within the department or they may lack adequate training to fulfill their job requirements. Any major change initiative should be supported by an effective communication strategy that shares expectations, reports on progress, and articulates the mission, service objectives, and policies and procedures. Our 2002 report on transformations noted that such communication should reach out to employees, customers, and stakeholders, engaging them in a two-way exchange. Furthermore, communication should provide for feedback about progress and concerns from stakeholders that will result in meaningful improvement in the transformation. The department has partially addressed this critical factor for successful implementation of its new structure. In particular, VA has taken actions to improve communication for the realignment by addressing staff concerns. During our site visits to two VA medical centers, communication of realignment goals and activities had been a concern for IT staff. The staff at these locations reported they had difficulty communicating directly with VA headquarters staff responsible for the realignment to obtain responses to issues. In addition, the department's realignment contractor reported in its survey of 167 VA facilities that 47 percent of VA facility staff wanted to see more information about the realignment and 23 percent of VA facility CIOs reported little opportunity for feedback from the VA field sites. In response to these concerns, the department distributed policy memoranda on changes resulting from the realignment and requested employee input on the realignment through a forum on the VA Web site. In addition, the department held conferences for Office of Information and Technology management and staff (which included sessions with the VA CIO) to communicate the goals and activities of the realignment. Nonetheless, further action could help ensure sustained communication throughout the realignment effort. Specifically, while the department has identified the Business Relationship Management Office as the single point of contact between the Office of Information and Technology and the administrations, it has not yet staffed this office. According to the department, it has concentrated its efforts to date on transferring staff to the CIO's office and on creating a new organizational structure. However, the performance of the Business Relationship Management Office in communicating the needs of the administrations to the Office of Information and Technology will be critical to the success of the realignment. Until this office is fully staffed, VA increases the risk that communication across the department will be inadequate, jeopardizing user and stakeholder support for the initiative. We reported in 2003 that a dedicated implementation team that is responsible for the day-to-day management of a major change initiative is critical to ensure that the project receives the focused, full-time attention needed to be sustained and successful. Specifically, the implementation team is important to ensuring that various change initiatives are implemented in a coherent and integrated way. The team must have the necessary authority and resources to set priorities, make timely decisions, and move quickly to implement the transformation. In addition, the implementation team can assist in tracking implementation goals for a change initiative and identifying performance shortfalls or schedule slippages. It is important for the team to use performance metrics to provide a succinct and concrete statement of expected performance versus actual performance. Because of its close involvement with the change initiative, the implementation team can also suggest corrections to remedy any problems. The department has not addressed this critical success factor because it has not dedicated an implementation team to manage the realignment effort and track its progress. At the conclusion of our review, staff from the IT realignment office, which was responsible for overseeing the realignment, had been reassigned to other areas of responsibility within the department's new structure. In addition, the Director of the Realignment Office told us that multiple offices will assume responsibility for managing the realignment through July 2008. For example, the Office of Quality and Performance Management will oversee process implementation across the Office of Information and Technology, and the Office of Oversight and Compliance Management will assess whether the department is complying with the new processes. However, there is no one entity currently responsible for managing the realignment. In addition, according to the Director of the Realignment Office, the department has developed performance metrics to measure progress on the implementation of the new management processes. However, metrics have not yet been developed to assess progress in implementing key milestones of the realignment. He noted that the department planned to develop performance metrics for tracking the progress of the realignment and that these metrics would be finalized by mid-June 2007. Also, the department expects to implement the new IT management processes incrementally by July 2008, but it has missed key implementation dates for these processes. Implementation of the first 9 of 36 processes was to begin in March 2007; however, as of early May 2007, the department had only begun pilot testing two of the new processes. With the dissolution of the IT Realignment Office in June, and the absence of any one entity currently dedicated for managing the realignment, it is less likely that VA will be able to ensure that the realignment is managed effectively throughout its implementation. Within VA's new centralized management structure, the CIO is expected to be responsible for ensuring that there are fiscal controls over the department's IT appropriation and for overseeing capital planning and execution. These responsibilities are consistent with the Clinger-Cohen Act of 1996, which requires federal agencies to develop processes for the selection, control, and evaluation of major systems initiatives. According to the department, it plans to establish the CIO's control over the IT budget by (1) designating organizations with specific roles and responsibilities for controlling the budget to report directly to the CIO, (2) implementing an IT governance structure that assigns budget oversight responsibilities to specific governance boards, and (3) developing and implementing IT portfolio management and financial management processes in the new organization. While these measures show the potential for establishing the CIO's control of the budget, the department has not yet fully implemented them; thus, their effectiveness in ensuring accountability for the budget has not yet been established. As one measure to establish CIO control within the new organization, two deputy assistant secretaries under the CIO are expected to have responsibility for managing and controlling different aspects of the IT budget. Specifically, the Deputy Assistant Secretary for IT Enterprise Strategy, Policy, and Programs is to have responsibility for the creation, implementation, and control of an integrated IT portfolio, and for the design, development, and implementation of a portfolio management process. In addition, the Deputy Assistant Secretary for Information Technology Resource Management is to have responsibility for managing budget execution and compliance, including tracking actual expenditures against the budget. However, as of May 2007, the deputy assistant secretary positions had been filled with acting officials, and department officials could not provide a date for when permanent appointees would be named to these positions. In addition, while these offices had been identified in the new organization structure, VA had not determined when personnel would be staffed to the offices and would assume their budget oversight responsibilities. Until these positions are filled with permanent appointees, the department cannot ensure their effectiveness in managing and controlling the IT budget. As a second measure, the IT governance plan, which was approved by the Secretary in April 2007, describes VA's approach to enhancing governance, including management of the IT budget. The plan states that the decision to undertake IT investments requires adherence to the governance process to assure that investments align with the department's strategic plan. In addition, it states that investment governance decisions should address how the department will program and budget resources against the IT business plan, meet customer demands, and allocate funding according to the needs and requirements of the administrations and staff offices. According to the plan, two governance boards are to have responsibility for overseeing the development and approval of the budget and monitoring budget execution: The Business Needs and Investment Board is to provide departmentwide investment control for the IT programs. Its responsibilities are to include reviewing investments, formulating and approving budgets, determining the source and amount of funding for IT projects, and monitoring budget execution. This board is to be chaired by the Principle Deputy Assistant Secretary of the Office of Information and Technology, and its membership is to include senior representatives of the administrations and staff offices, resource management offices, and selected IT service managers. The IT Leadership Board is to develop and approve the departmentwide IT budget based on information submitted to it by the Business Needs and Investment Board. This board is to be chaired by the CIO, and membership is to include key executive leaders in the Office of Information and Technology, administrations, and staff offices. In addition to these two governance boards, the Strategic Management Council is to be responsible for making decisions on the overall level of IT spending and priorities for the department and for approving budgets. The Strategic Management Council was in place prior to the realignment effort and the governance plan noted that it would be included as part of the governance structure. It is chaired by the Deputy Secretary, and its membership includes senior department leadership. As an example of the planned interaction between the boards, the Business Needs and Investment Board is to ensure that the administrations and staff offices' requirements have been identified, documented, justified, scoped, planned, and prioritized and that funds have been allocated. This information is to be forwarded with all other prioritized requirements to the IT Leadership Board for review and endorsement and then sent on to the Strategic Management Council for departmentwide approval. As of early May 2007, however, VA officials stated that neither the Business Needs and Investment Board nor the IT Leadership Board had been established. VA officials also could not provide a date for when they would be set up. Until the governance boards are in place with the Strategic Management Council, the department will lack a complete governance model for the new organization. As a third measure to establish the CIO's control over the IT budget, VA plans to implement processes that specifically address portfolio management and financial management. As noted earlier in this report, it is crucial for the CIO to ensure that well-established and integrated processes are in place for leading, managing, and controlling VA's IT resources. These two processes represent how the CIO organization intends to carry out its responsibilities for the development and control of the budget. Specifically, the IT portfolio management process is to address how the CIO will manage the department's investment portfolio to achieve strategic objectives and allocate funding. The process is to include steps VA will take to identify, select, initiate, manage, and control its projects. According to the realignment assistance contractor, implementation of this process should help VA make better investment decisions and gain better control over its projects. The financial management process, according to its charter, will address how the CIO organization plans to manage IT investment programs, address costs and benefits of investments, and provide a formal budgeting process for managing the IT portfolio against the budget. According to the realignment assistance contractor, implementation of this process should provide the CIO with accurate cost information to support IT investment decisions and justify expenditures, and enable this official to ensure that the Office of Information and Technology operates in a cost-effective manner by providing a sound basis for cost-benefit analyses. While the department had identified individuals who would be responsible for implementing these two processes, an official in the realignment office told us that the schedule for implementing the processes had not been established. The official stated that VA nonetheless expected to complete implementation of all management processes and meet the July 2008 target date for full implementation of the realignment. However, the absence of a schedule to implement these two processes increases the risk that they will not be implemented in a timely manner, thus reducing their effectiveness in contributing to improved IT budget accountability and oversight. The department has taken various actions that address several of the factors we identified as critical to its realignment, including establishing a new organizational structure, approving its governance plan, and transferring IT staff to the CIO's authority. While these are positive steps, the department has much work to complete in order to ensure the success of its efforts. For example, the department has not yet developed detailed IT governance process descriptions to address the management of IT resources, established a knowledge and skills inventory to determine the proper roles for employees transferred to the new organization, or identified the personnel requirements, career paths, and training requirements for these employees. Further, the department has not fully staffed offices necessary for supporting the new structure, identified an implementation team that will be responsible for managing the change to the new management structure, or developed performance metrics to assess progress in implementing key milestones of the realignment. The department's continued focus on ensuring that these important actions are taken is essential to successfully achieving and realizing the benefits of the realignment. While department officials and realignment documents identified three measures of the realignment that are to provide the CIO with control over the IT budget, VA has yet to identify how and when this control will be achieved. Specifically, the department has not yet staffed with permanent appointees the two deputy assistant secretary positions that will have responsibility for IT budget management and control, established the two governance boards that are to have IT budget oversight responsibility, or developed a schedule for implementation of the IT portfolio management and financial management processes. Without showing how and when such controls will be in place, it remains unclear if VA's actions will result in optimizing its IT investment management process to provide the CIO with full control over the budget. To ensure that VA's IT realignment is successfully accomplished, we recommend that the Secretary of Veterans Affairs direct the Chief Information Officer to take the following six actions: Develop detailed IT governance process descriptions that address how the department will manage IT resources within the centralized organization. Establish a knowledge and skills inventory to determine what skills are available in order to decide the proper roles for all employees transferred to the new organization. Assess personnel requirements under the centralized management model, including career paths and appropriate training requirements. Fully staff all offices necessary for supporting the new organizational structure. Dedicate an implementation team responsible for change management processes throughout the transformation to a centralized IT structure. Expedite the development of performance metrics to track the progress of the realignment. In addition, to ensure that centralized control of the IT budget is established, we recommend that the Secretary of Veterans Affairs direct the Chief Information Officer to take the following three actions: Establish milestones to permanently staff the deputy assistant secretary position for IT Enterprise Strategy, Policy, and Programs and the deputy assistant secretary position for IT Resource Management. Commit to a date for establishing the Business Needs and Investment Board and the IT Leadership Board. Establish a schedule for the implementation of the IT portfolio management and financial management processes. In providing written comments on a draft of this report, the Deputy Secretary of Veterans Affairs agreed with our findings and generally concurred with our recommendations. (The department's comments are reproduced in app. II.) The comments described actions planned that respond to our recommendations: for example, developing and implementing an IT career management program that includes a knowledge and skills inventory for Office of Information and Technology employees, and fully implementing the IT governance plan by October 2007. In addition, the comments provided further information on the department's actions taken since receiving our draft report, such as the establishment of the Business Needs and Investment Board that is a key component of the IT governance process; establishment of offices responsible for ensuring compliance with IT policies, directives and core IT processes; and filling a senior executive position in the Office of Information and Technology. If the actions that the department has planned to undertake are properly implemented, they should help ensure that the IT realignment is successfully accomplished. Although the department concurred with all our recommendations, it provided an alternative approach to dedicating an implementation team responsible for change management processes throughout the transformation to a centralized IT structure. Its written comments indicated that change management would be the responsibility of two organizations in the new structure. However, in our view, having a dedicated implementation team, responsible for day-to-day management of major change initiatives, is crucial to VA's ability to ensure that the IT realignment is fully and successfully implemented in a coherent, integrated, and coordinated manner. The approach articulated in the department's comments does not make clear how progress will be monitored, schedule slippages or shortfalls identified, and solutions to problems developed and implemented. Without having a dedicated implementation team, as we recommend, the department may increase the risk to the success of the realignment. We are sending copies of this report to the Chairman and Ranking Member of the Committee on Veterans' Affairs, House of Representatives. We are also sending copies to the Secretary of Veterans Affairs and appropriate congressional committees. We will also make copies available to others on request. In addition, the report is available at no charge on GAO's Web site at http://www.gao.gov. If you and your staff have any questions about this report, please contact me at (202) 512-6304 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors to this report are listed in appendix III. To determine whether the Department of Veterans Affairs (VA) realignment plan includes critical factors for successful implementation of a centralized management approach, we obtained and analyzed realignment documents from VA, its realignment contractor, and the independent verification and validation (IV&V) contractor. These documents included the realignment contract request for quotes and memorandums signed by the Secretary and Deputy Secretary relating to approval of the permanent assignment of operations and maintenance and development staff to the Office of Information and Technology. The documents also included the establishment of the VA single information technology (IT) leadership authority. We also obtained and analyzed the realignment contractor's performance work statement, which detailed the work the contractor was to perform. In addition, we reviewed other contractor deliverables, such as process charters for the new IT management processes, the "to be" organization structure transition plan, and the transition management plan. VA also provided IV&V contractor documents that assessed each of the realignment contract deliverables. We reviewed these documents to identify problems and concerns raised by the IV&V contractor. To identify factors critical to the success of the centralization effort, we reviewed GAO products relevant to organizational transformation. We also reviewed industry best practices documentation, such as the IT Governance Institute's Control Objectives for Information and related Technology 4.0, to identify industry standard success factors for IT organizations. To validate the success factors, we met with IV&V contractor officials to elicit their input on the relevance and soundness of factors we identified for consideration in our assessment of the realignment effort. IV&V contractor officials concurred that the factors we developed are critical to VA's successful IT realignment. In addition, we compared documents obtained from VA and realignment contractor officials against these factors to determine the level to which the critical success factors were included. We also conducted monthly meetings with the VA realignment team and the realignment contractor to determine whether these critical success factors were being considered in the implementation of the realignment. We visited the VA medical center and a benefits administration office in Baltimore and a VA medical center in Philadelphia to become familiar with the methodology that the realignment contractor was using to assess VA's readiness for the realignment. We observed teams from the realignment contractor as they gathered information that would be used to create a baseline of IT activities and a transition plan for the department. We selected these locations due to the schedule availability of the department and the contractor and because they are representative of VA facilities. To determine how the centralized management approach will ensure that the CIO is accountable for VA's entire IT budget, including those funds that previously had been administered by its administrations, we reviewed VA and realignment contractor documentation and plans that specifically address IT budget oversight and execution under the realignment. These documents included roles and responsibilities for those VA organizations listed in the single IT leadership organization structure that are to have responsibility for IT portfolio and financial management, the IT Governance Plan, and the IT Portfolio Management and Financial Management Process Design and Implementation Plans. To supplement our analysis, we met with officials in VA's Office of Information and Technology who are responsible for managing and executing the IT budget. We conducted our work in VA offices in Washington, D.C., and at VA facilities in Baltimore and Philadelphia from June 2006 through May 2007 in accordance with generally accepted government auditing standards. In addition to the contact named above, major contributors to this report were Barbara Oliver, Assistant Director; Nabajyoti Barkakati; Jacki Bauer; Neil Doherty; Nancy Glover; B. Scott Pettis; J. Michael Resser; and Eric Trout.
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The Department of Veterans Affairs (VA) spends nearly $1 billion yearly to support its information technology (IT) needs; yet it has encountered persistent challenges in managing IT projects. In October 2005, VA initiated a realignment to centralize its IT management program that it plans to complete by July 2008. GAO was requested to determine (1) whether the department's realignment plan includes critical factors for successful implementation and (2) how the centralized management approach is to ensure that the chief information officer (CIO) is accountable for the department's entire IT budget. To do so, GAO identified critical success factors, analyzed realignment and budget documents, and held discussions with VA officials. VA's plans for realigning the management of its IT program include elements of several factors that GAO identified as critical to the department's implementation of a centralized structure; additional departmental actions could increase assurance that the realignment will be completed successfully. Since undertaking the realignment, VA has concentrated its efforts on transferring approximately 6,000 staff to the CIO's authority and on creating a new organizational structure. It has also taken certain actions to establish an IT governance plan, identify workforce management responsibilities, and increase communication about the realignment with staff. However, it has not yet created a knowledge and skills inventory to help determine proper roles for all employees in the new organization, established governance boards to manage resources, or dedicated an implementation team to manage change and track the progress of the realignment with performance metrics. As a result, the department risks jeopardizing the success of its efforts and may not realize the long-term benefits of the realignment. Within the new structure, the CIO is to have responsibility for ensuring that there are fiscal controls over the IT appropriation and for overseeing capital planning processes, budget execution, and financial management programs. According to the department, it plans to establish the CIO's control by (1) designating organizations with specific roles and responsibilities for controlling the budget to report directly to the CIO; (2) implementing a governance structure that assigns budget oversight responsibilities to specific governance boards; and (3) developing and implementing IT portfolio management and financial management processes. While these measures show the potential for establishing control of the budget, VA has not yet fully implemented them or committed to a time frame for doing so. Thus, their effectiveness in ensuring the CIO's accountability for the budget has not yet been established.
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The U.S. Border Patrol, within the Department of Homeland Security's (DHS) U.S. Customs and Border Protection (CBP), is responsible for patrolling 8,000 miles of the land and coastal borders of the United States to detect and prevent the illegal entry of aliens and contraband, including terrorists, terrorist weapons, and weapons of mass destruction. As of October 2006, the Border Patrol had 12,349 agents stationed in 20 sectors along the southwest, northern, and coastal borders. In May 2006, the President called for comprehensive immigration reform that included strengthening control of the country's borders by, among other things, adding 6,000 new agents to the Border Patrol by the end of December 2008. This would increase the total number of agents from 12,349 to 18,319, an unprecedented 48 percent increase over the next 2 years. As shown in figure 1, this increase is nearly equivalent to the number of agents gained over the past 10 years. In addition, legislation has been proposed in Congress that would authorize an additional 10,000 agents, potentially increasing the size of the Border Patrol to about 28,000 agents by the end of 2012. FLETC is an interagency training provider responsible for basic, advanced, and specialized training for approximately 82 federal agencies, including CBP's Border Patrol. Under a memorandum of understanding, FLETC hosts the Border Patrol's training academy in Artesia, New Mexico, and shares the cost of providing training with the Border Patrol. For example, FLETC provides the facilities, some instructors (e.g., retired Border Patrol agents), and services (e.g., laundry and infirmary) that are paid for out of FLETC's annual appropriations. CBP's Office of Training and Development designs the training curriculum (in conjunction with the Border Patrol and with input from FLETC) for the academy, administers the Border Patrol Academy, and provides permanent instructors and staff. Basic training for new Border Patrol agents consists of three components: (1) basic training at the academy, (2) postacademy classroom training administered by the academy but conducted in the sectors, and (3) field training conducted on the job in the sectors. The academy portion of the training is currently an 81-day program consisting of 663 curriculum hours in six subject areas: Spanish, law/operations, physical training, driving, firearms, and general training. After graduating from the academy, new Border Patrol agents are required to attend classroom instruction at their respective sectors in Spanish and law/operations 1 day a week for a total of 20 weeks. Finally, new agents are generally assigned to senior agents in a sector's field training unit for additional on-the-job training intended to reinforce new agents' skills in safely, effectively, and ethically performing their duties under actual field conditions. The Border Patrol's basic training program exhibits attributes of an effective training program. GAO's training assessment guide suggests the kinds of documentation to look for that indicate that a training program has a particular attribute in place, such as incorporating measures of effectiveness into its course designs. As shown in table 1, the Border Patrol was able to document that its training program had key indicators in place for the applicable attributes of an effective training program. In addition, the Border Patrol is pursuing accreditation of its training program from the Federal Law Enforcement Training Accreditation organization. The core training curriculum used at the Border Patrol Academy has not changed since September 11, but the Border Patrol added new material on responding to terrorism and practical field exercises. For example, the Border Patrol added an antiterrorism course that covers, among other things, what actions agents should take if they encounter what they believe to be a weapon of mass destruction or an improvised explosive device. The Border Patrol also incorporated practical field exercises that simulate a variety of situations that agents may encounter, such as arresting an individual who is armed with a weapon, as shown in figure 2. With regard to capacity, Border Patrol officials told us they are confident that the academy can accommodate the large influx of new trainees anticipated over the next 2 years. In fiscal year 2006, the average cost to train a new Border Patrol agent at the academy was about $14,700. This cost represents the amounts expended by both the Border Patrol and FLETC. (See table 2.) The Border Patrol paid about $6,600 for the trainee's meals and lodging, and a portion of the cost of instructors, and FLETC paid about $8,100 for tuition, a portion of the cost of instructors, and miscellaneous expenses such as support services, supplies, and utilities. The $14,700 cost figure does not include the costs associated with instructors conducting postacademy and field training in the sectors. For fiscal year 2007, the average cost to train a new agent will increase to about $16,200. This is primarily due to an increase in the number of instructors hired, which increased CBP's instructor costs from about $2,800 to $6,100 per student. The Border Patrol's average cost per trainee at the academy is consistent with that of training programs that cover similar subjects and prepare officers for operations in similar geographic areas. For example, the estimated average cost per trainee for a BIA police officer was about $15,300; an Arizona state police officer, $15,600; and a Texas state trooper, $14,700. However, differences in the emphasis of some subject areas over others dictated by jurisdiction and mission make a direct comparison difficult. For example, while both the Border Patrol and the Texas Department of Public Safety require Spanish instruction, the Border Patrol requires 214 hours of instruction, compared with 50 hours for a Texas state trooper. Similarly, the Border Patrol does not provide instruction in investigative techniques, while BIA, Arizona, and Texas require 139, 50, and 165 hours of such instruction, respectively. Table 3 shows a comparison of Border Patrol's basic training program with other federal and nonfederal law enforcement basic training programs. The Border Patrol is considering several alternatives to improve the efficiency of basic training delivery and to return agents to the sectors more quickly. For example, in October 2007 the Border Patrol plans to implement a proficiency test for Spanish that should allow those who pass the test to shorten their time at the academy by about 30 days. According to Border Patrol officials, this could benefit about half of all trainees, because about half of all recruits already speak Spanish. The Border Patrol also plans to convert postacademy classroom training to computer-based training beginning in October 2007, allowing agents to complete the 1-day- a-week training at their duty stations rather than having to travel to the sector headquarters for this training. As a result, fewer senior agents will be required to serve as instructors for postacademy training. Finally, the Border Patrol is considering what other training it can shift from the academy to postacademy and field training conducted in the sectors, which could further reduce the amount of time trainees spend at the academy. While these strategies may improve the efficiency of training at the academy, officials expressed concern about the sectors' ability provide adequate supervision and continued training once the new agents arrive at the sectors. Some Border Patrol officials are concerned with having enough experienced agents available in the sectors to serve as first-line supervisors and field training officers for these new agents. According to the Chief of the Border Patrol, agencywide the average experience level of Border Patrol agents is about 4 or 5 years of service. However, in certain southwest border sectors the average experience level is only about 18 months. Moreover, the supervisor-to-agent ratio is higher than the agency would like in some southwest sectors. Border Patrol officials told us that a 5-to-1 agent-to-supervisor ratio is desirable to ensure proper supervision of new agents, although the desired ratio in certain work units with more experienced agents would be higher. Our analysis of Border Patrol data showed that as of October 2006, the overall agent-to-supervisor ratios for southwest sectors, where the Border Patrol assigns all new agents, ranged from about 7 to 1 up to 11 to 1. These ratios include some work units with a higher percentage of experienced agents that do not require the same level of supervision as new agents. To augment the supervision of new agents, the Border Patrol is considering using retired Border Patrol agents to act as mentors for new agents. Nevertheless, given the large numbers of new agents the Border Patrol plans to assign to the southwest border over the next 2 years, along with the planned reassignment of experienced agents from the southwest border to the northern border, it will be a challenge for the agency to achieve the desired 5-to-1 ratio for new agents in all work units in those sectors receiving the largest numbers of new agents. In addition to concerns about having a sufficient number of experienced agents to serve as supervisors and field training officers, the Border Patrol does not have a uniform field training program that establishes uniform standards and practices that each sector's field training should follow. As a result, Border Patrol officials are not confident that all new trainees currently receive consistent postacademy field training. Moreover, the addition of new training expectations may complicate this situation. The Border Patrol is in the process of developing a uniform field training program that it plans to implement beginning in fiscal year 2008. While Border Patrol officials are confident that the academy can accommodate the large influx of new trainees anticipated over the next 2 years, the larger challenge will be the sectors' capacity to provide adequate supervision and training. The rapid addition of new agents along the southwest border, coupled with the planned transfer of more experienced agents to the northern border, will likely reduce the overall experience level of agents assigned to the southwest border. In turn, the Border Patrol will be faced with relying on a higher proportion of less seasoned agents to supervise these new agents. In addition, the possible shifting of some training from the academy to the sectors could increase demand for experienced agents to serve as field training officers. Moreover, without a standardized field training program, training has not been consistent from sector to sector, a fact that has implications for the sectors' ability to add new training requirements and possibly consequences for how well agents will perform their duties. To ensure that these new agents become proficient in the safe, effective, and ethical performance of their duties, it will be extremely important that new agents have the appropriate level of supervision and that the Border Patrol have a sufficient number of field training officers and a standardized field training program. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other members of the subommittee may have at this time. For further information about this testimony, please contact me at (202) 512-8816 or by e-mail at [email protected]. Key contributors to this testimony were Michael Dino, Assistant Director; Mark Abraham; E. Jerry Seigler; and Julie Silvers. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. 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.
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In May 2006, the President called for comprehensive immigration reform that included strengthening control of the country's borders by, among other things, adding 6,000 new agents to the U.S. Border Patrol by the end of December 2008. This unprecedented 48 percent increase over 2 years raises concerns about the ability of the Border Patrol's basic training program to train these new agents. This testimony is based on a recent report for the ranking member of this subcommittee on the content, quality, and cost of the Border Patrol's basic training program for new agents and addresses (1) the extent to which the Border Patrol's basic training program exhibits the attributes of an effective training program and the changes to the program since September 11, 2001; (2) the cost to train a new agent and how this compares to the costs of other similar law enforcement basic training programs; and (3) any plans the Border Patrol has developed or considered to improve the efficiency of its basic training program. To address these issues, GAO reviewed relevant documents; observed classroom training and exercises at the Border Patrol Academy in Artesia, New Mexico; assessed the methodologies of training cost estimates; and interviewed Border Patrol officials. The Border Patrol's basic training program exhibits attributes of an effective training program. GAO's training assessment guide suggests the kinds of documentation to look for that indicate that a training program has a particular attribute in place. The Border Patrol's training program included all of the applicable key attributes of an effective training program. The core curriculum used at the Border Patrol Academy has not changed since September 11, but the Border Patrol added new material on responding to terrorism and practical field exercises. Border Patrol officials are confident that the academy can accommodate the large influx of new trainees anticipated over the next 2 years. In fiscal year 2006, the average cost to train a new Border Patrol agent at the academy was about $14,700. While differences in programs make a direct comparison difficult, it appears that the Border Patrol's average cost per trainee at the academy is consistent with that of training programs that cover similar subjects and prepare officers for operations in similar geographic areas. For example, the estimated average cost per trainee for a Bureau of Indian Affairs police officer was about $15,300; an Arizona state police officer, $15,600; and a Texas state trooper, $14,700. The Border Patrol is considering several alternatives to improve the efficiency of basic training delivery at the academy and to return agents to the field more quickly. For example, in October 2007 the Border Patrol plans to implement a proficiency test for Spanish that should allow those who pass the test to shorten their time at the academy by about 30 days. The Border Patrol is also considering what training it can shift from the academy to postacademy training conducted in the field, which could further reduce the amount of time trainees spend at the academy. However, Border Patrol officials have expressed concerns with having a sufficient number of experienced agents available to serve as first-line supervisors and field training officers. The Border Patrol also currently lacks uniform standards and practices for field training, and shifting additional training responsibilities to the field could complicate this situation.
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With this context in mind, I would like to turn now to recent trends in DOD's contracting activities. If you would turn to slide 4, DOD's spending on goods and services has increased by 88 percent since fiscal year 2000. In fiscal year 2005, DOD obligated nearly $270 billion on contracts for products, research and development efforts, and services, such as for information technology and management support. All indications are that this upward trend will continue. Aside from growth in dollar value, there have also been changes in what DOD is buying. DOD's new weapon system programs are expected to be the most expensive and complex ever, and will consume an increasingly large share of DOD's budget. To illustrate, in the last 5 years DOD has doubled its commitment to major weapon systems from $700 billion to $1.4 trillion. DOD is counting on these efforts to fundamentally transform military operations. The Army, for example, is undertaking the Future Combat Systems program--a family of weapons, including 18 manned and unmanned ground vehicles, air vehicles, sensors and munitions, that will be linked by an information network--to enable its combat force to become lighter, more agile, and more capable. Future Combat Systems' procurement will represent 60 to 70 percent of Army procurement from fiscal years 2014 to 2022. The Army, however, is not alone in pursuing complex and costly systems. For example, the Air Force is modernizing its tactical aircraft fleet as part of the $200 billion Joint Strike Fighter program and the F-22A Raptor aircraft, which is expected to cost more than $65 billion. Similarly, the Navy's Virginia class submarine is expected to cost about $80 billion, while the DDG-51 class of destroyer is expected to cost some $70 billion. DOD's development of such systems requires more funds than may reasonably be expected to be available. For example, we testified in April 2006 that the Navy's shipbuilding plan projects a supply of shipbuilding funds that will double by 2011 and will stay at high levels for years to follow. As overall obligations have increased, so has DOD's reliance on the private sector to provide services to fulfill DOD's missions and support its operations. In some cases, the growth in services reflects that DOD is using a different acquisition approach to support its missions. For example, DOD is now buying launch services, rather than rockets. Service contracts pose a number of challenges in terms of defining requirements, establishing expected outcomes, and assessing contractor performance. Additionally, in recent years, federal agencies including DOD have moved away from using in-house contracting capabilities and are making greater use of existing contracts awarded by other agencies. If you would turn now to slide 7, these interagency contracts are intended to leverage the government's buying power; provide a faster and easier method for procuring commonly used goods and services, and reduce initial contracting administrative costs. DOD is the largest user of these interagency contracting vehicles, and their availability has enabled DOD to save time by paying other agencies to award and administer contracts for goods and services on its behalf. DOD, however, lacks complete information about purchases made through other agencies' contracts. Moreover, our work and that of some agency inspectors general have uncovered instances of improper use of interagency contracts, including issuing orders that were outside the scope of the underlying contract, failing to follow procedures intended to ensure best pricing, and failing to establish clear lines of accountability and responsibility. Further, in some instances fee-for-service arrangements may have led to an inordinate focus on meeting customer demands at the expense of complying with sound contracting policy and required ordering procedures. These and other issues led us to designate management of interagency contracting a governmentwide high-risk issue in January 2005. Ensuring the proper use of interagency contracts must be viewed as a shared responsibility which requires that agencies clearly define responsibilities and adopt clear, consistent, and enforceable policies and processes that balance the need for customer service with the requirements of contract regulations. At the same time that the amount, nature, and complexity of contract activity has increased, DOD's acquisition workforce has remained relatively unchanged in size and faces certain skill gaps and serious succession planning challenges. DOD's acquisition workforce must have the right skills and capabilities if it is to effectively implement best practices and properly manage the goods and services it buys. We noted in a report issued in 2003, and again in July 2006, however, that procurement reforms, changes in staffing levels, workload, and the need for new skill sets have placed unprecedented demands on the acquisition workforce. Moreover, DOD's current civilian acquisition workforce level reflects the considerable downsizing that occurred in the 1990s. DOD's approach to acquisition workforce reduction during the 1990s was not oriented toward shaping the makeup of the workforce; rather, DOD relied primarily on voluntary turnover and retirements, freezes on hiring authority, and its authority to offer early retirements and buyouts to achieve reductions. Indeed, during our work on the early phases of DOD downsizing, some DOD officials voiced concerns about what was perceived to be a lack of attention to identifying and maintaining a balanced, basic level of skills needed to maintain in-house capabilities. I would like to turn now to briefly discuss some of DOD's practices in three areas--(1) competition and sound pricing; (2) incentivizing contractors; and (3) contract oversight--that increase risks and undermine DOD's ability to establish sound business arrangements. Our work has identified a number of issues related to competition and pricing in DOD's efforts to obtain needed goods and services. Under the Competition in Contracting Act of 1984, DOD contracting officers are, with certain exceptions, to solicit offers and award contracts using full and open competition, in which all responsible sources are permitted to compete. As shown on slide 10, DOD reports that only forty-one percent of its contract obligations in fiscal year 2005 were made on contracts that were awarded using full and open competition. The impact of not using full and open competition is reflected in one recent example involving the Army's award of sole-source contracts for security guards. In this case, we found that the Army devoted twice as many contract dollars--nearly $495 million--to sole-sourced contracts for security guards at 46 of 57 Army installations, despite the Army's recognition that it was paying about 25 percent more for its sole-source contracts than for those it previously awarded competitively. GAO, Defense Acquisitions: DOD Has Paid Billions in Award and Incentive Fees Regardless of Acquisition Outcomes, GAO-06-66 (Washington, D.C.: Dec. 19, 2005); and GAO, Defense Acquisitions: DOD Wastes Billions of Dollars through Poorly Structured Incentives, GAO-06-409T (Washington, D.C.: April 5, 2006). Another element of a sound business arrangement is the fee mechanism used to incentivize excellent contractor performance. In December 2005, we reported that DOD gives its contractors the opportunity to collectively earn billions of dollars through monetary incentives. Unfortunately, we found DOD programs routinely engaged in practices that failed to hold contractors accountable for achieving desired outcomes and undermined efforts to motivate results-based contractor performance, such as evaluating contractor performance on award-fee criteria that are not directly related to key acquisition outcomes (e.g., meeting cost and schedule goals and delivering desired capabilities to the warfighter); paying contractors a significant portion of the available fee for what award-fee plans describe as "acceptable, average, expected, good, or satisfactory" performance, which sometimes did not require meeting the basic requirements of the contract; and giving contractors at least a second opportunity to earn initially unearned or deferred fees. As a result, DOD has paid out an estimated $8 billion in award fees on contracts in our study population, regardless of whether acquisition outcomes fell short of, met, or exceeded DOD's expectations. On slide 15, we have included four cases in which contractors that were behind schedule and over cost were paid between 74 and 100 percent of the available award fee. Despite paying billions of dollars in award and incentive fees, DOD has not compiled data or developed performance measures to evaluate the validity of its belief that award and incentive fees improve contractor performance and acquisition outcomes. DOD's strategies for incentivizing its contractors, especially on weapon system development programs, are symptomatic of a lack of discipline, oversight, transparency, and accountability in DOD's acquisition process. I would like to briefly discuss the third element of sound business arrangements, DOD's oversight of its service contracts. Government monitoring and inspection of contractor activity, if not done well, can contribute to a lack of accountability and poor acquisition outcomes. In 2005, we reported that DOD's monitoring of nearly a third of the 90 service contracts we reviewed was insufficient. In these cases, we identified a number of contributing factors, including DOD's failure to assign government performance monitors and the fact that personnel are usually assigned such duties on a part-time basis and not evaluated on how well they performed their duties. DOD and senior military acquisition policy officials acknowledged that the priority of contracting offices is awarding contracts, not ensuring that trained performance monitors are assigned early so that contract oversight can begin upon contract award. Ultimately, however, if appropriate monitoring is not being done, DOD is at risk for paying contractors more than the value of the services they performed. In closing, these three illustrative business arrangement issues, along with those we have identified in DOD's acquisition and business management processes, present a compelling case for change. In short, it takes a myriad of things to go right for acquisitions to be successful, but only a few things to go wrong to cause major problems. Slide 17 provides examples of the impact that these problems can have on reducing the government's buying power. Such examples illustrate the outcomes of poor acquisition executions. The debate now centers on future investments and what return on investment will be realized. Finally, on slide 18 you will find a number of actions that can and should be taken to improve acquisition outcomes. By implementing the recommendations we have made on individual issues, DOD can improve specific processes and activities and save huge amounts of taxpayer dollars. At the same time, by working more broadly to improve its acquisition practices, DOD can set the right conditions for becoming a smarter buyer, getting better acquisition outcomes, and making more efficient use of its resources in what is sure to be a more fiscally constrained environment. DOD's written acquisition policies reflect many of our recommendations and often incorporate best practices. As such, the policies provide the basis for sound decisions and actions. The policies, however, are not consistently manifested on decisions made on individual acquisitions. In these cases, officials are rarely held accountable when acquisitions go astray. It is essential to create an environment conducive to changing behaviors and to recognize that achieving sound acquisition outcomes are a shared responsibility between the Congress, DOD, and the contractor community. Unless changes are made, DOD will continue on a path where wants, needs, affordability and sustainability are mismatched, with predictably and recurring unsatisfactory results. Mr. Chairman and members of the subcommittee, this concludes my testimony. I would be happy to answer any questions you may have. In preparing for this testimony, we relied principally on previously issued GAO reports. We also obtained data on DOD's contract activity from DOD's DD350 database and from the General Services Administration's Federal Procurement Data System. We have previously expressed concerns about the accuracy of the data contained in the Federal Procurement Data System. We determined, however, that the data were sufficiently reliable for the purposes of this testimony. We also obtained data from the Office of Personnel Management regarding DOD's acquisition workforce. For the purposes of this report, we selected 14 occupation series including contracting, business, purchasing, quality assurance and supply and inventory management personnel. We conducted our work in April and July 2006 in accordance with generally accepted government auditing standards. For further information regarding this testimony, please contact Katherine V. Schinasi at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Key contributors to this report were Lily Chin, David E. Cooper, Brendan Culley, Thomas Denomme, Timothy DiNapoli, Paul Francis, Alan Frazier, Christopher Kunitz, Michele Mackin, William Russell, Adam Vodraska, and Karen Zuckerstein. do the business of government. The work of the government is increasingly performed by the private sector under contract. DOD's spending on goods and services has grown significantly since fiscal year 2000, and all indications are the trend will continue. DOD's weapon systems acquisition and contract management processes have been on GAO's high-risk list for more than a decade. GAO designated the management of interagency contracting a governmentwide high-risk issue in January 2005; DOD is the largest user of interagency contracting vehicles. Workforce: GAO analysis of OPM data of 14 acquisition-related job series. Following the terrorist attacks of September 11, 2001, increased security requirements and deployment of active duty and reserve personnel resulted in DOD having fewer military personnel to protect domestic installations. The U.S. Army awarded contracts worth nearly $733 million to acquire contract guards at 57 installations. The Air Force historically bought space launch vehicles, such as the Delta and Titan rockets, as products; under the Evolved Expendable Launch Vehicle program, the Air Force purchases launch services using contractor-owned launch vehicles. Projected program cost is $28 billion. Defining requirements, establishing expected outcomes, and assessing contractor performance is often more complicated compared with contracting for supplies and equipment. changes to the scope and cost of the work. Use of task order contracts and time-and-materials contracts provides DOD flexibility to add work to contracts once needs are defined but may pose additional management and oversight risks. DOD may authorize contractors to begin work before reaching agreement on terms and conditions, including scope of work, specifications, and price, under agreements termed letter contracts or undefinitized contract actions. DOD obligated nearly $6.5 billion under letter contracts in fiscal year 2004. Allows DOD to initiate work quickly to meet urgent operational needs, but contract incentives to control costs are likely to be less effective. This enables the government to rely on competitive market forces to obtain needed goods and services at fair and reasonable prices. Use of other than full and open competition must be justified in writing and must cite specific statutory authority. 46 of 57 installations resulted in the Army paying 25 percent more for its sole-source contracts than for those it previously awarded competitively. February 2005 review of sole-source AWACS spare parts found that DOD did not obtain or evaluate appropriate pricing information, such as sales data for items asserted to be commercial, or adequately consider analyses conducted by the Defense Contract Audit Agency or Defense Contract Management Agency. In the absence of adequate price competition, the Truth-in-Negotiations Act enables DOD to obtain certified cost and pricing data for negotiated contracts exceeding $550,000 that are not for commercial items. GAO reviewed 20 contract actions valued at $4.4 billion in which DOD waived the requirement for cost and pricing data. DOD lacked guidance to help contracting officers determine whether a waiver should be granted, what constitutes acceptable data and analyses, or the need for assistance. range of responsibilities than traditional prime contractors. Examples include: The Army's $200 billion Future Combat Systems, in which the contractor is acting as a lead system integrator. Contractor is assuming greater responsibility for requirements development, design, and source selection of major system and subsystem contractors, and trade-off decisions. In an interagency contract for construction services, DOD paid 7 percent to Treasury to award a contract to a staffing company, which then subcontracted to a construction firm. In combination, Army paid 17 percent more than subcontractor's proposed price. Historically, DOD has limited visibility over the cost impact associated with using multiple layers of contractors to perform work. contractors the opportunity to collectively earn billions of dollars through monetary incentives known as award and incentive fees. On award-fee contracts, DOD personnel conduct periodic evaluations of the contractor's performance against specified criteria and recommend the amount of fee to be paid. Criteria and evaluations tend to be subjective. Incentive-fee contracts typically apply a formula, specified in the contract, that adjusts the fee based on an objective evaluation of the contractor's performance. DOD reports it obligated more than $75 billion on award- and incentive-fee contracts in fiscal year 2004. programs engaged in practices that undermined efforts to motivate contractor performance and that did not hold contractors accountable for achieving desired outcomes. DOD frequently paid most of available award fees regardless of whether acquisition outcomes fell far short of, met, or exceeded expectations; allowed contractors at least a second opportunity to earn initially unearned or paid significant amount of fee for "acceptable, average, expected, good, or satisfactory" performance. Contracts with incentive fees provided a clearer link to acquisition outcomes; however, about half of the contracts failed or are projected to fail to complete the acquisition at or below the target price. Despite paying billions in fees, DOD has little evidence to support its contention that these fees improved contractor performance. *When calculating the percentage of award fee paid (i.e. percentage of award paid = total fee paid to date/ (total fee pool - remaining fee pool)), we included rolled-over fees in the remaining fee pool when those fees were still available to be earned in future evaluation periods. If monitoring and inspection is not performed, not sufficient, or not well documented, DOD is at risk of being unable to identify and correct poor contractor performance in a timely paying contractors more than the value of the services performed. DOD personnel performed insufficient monitoring on nearly a third of the 90 service contracts reviewed in March 2005 report. DOD personnel failed to assign personnel to perform monitoring or did not document monitoring and some monitoring personnel were not formally trained; Monitoring is not perceived as important as awarding contracts; and Personnel are usually assigned monitoring duties as a part-time responsibility and are not evaluated on how well duties were performed. 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.
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The Department of Defense's (DOD) spending on goods and services has grown significantly since fiscal year 2000 to well over $250 billion annually. Prudence with taxpayer funds, widening deficits, and growing long-range fiscal challenges demand that DOD maximize its return on investment, while providing warfighters with the needed capabilities at the best value for the taxpayer. DOD needs to ensure that its funds are spent wisely, and that it is buying the right things, the right way. In this testimony, GAO discusses (1) recent trends in DOD contracting activity and the environment in which this activity takes place, and (2) practices which undermine its ability to establish sound business arrangements, particularly those involving the selection and oversight of DOD's contractors and incentivizing their performance. This statement is based on work GAO has completed over the past 6 years covering a range of DOD acquisition and contracting issues. Some of these issues are long-standing. GAO has identified DOD contract management as a high-risk area for more than decade. With awards to contractors large and growing, DOD will continue to be vulnerable to contracting fraud, waste or misuse of taxpayer dollars, and abuse. DOD obligated nearly $270 billion on contracts for goods and services in fiscal year 2005, an 88 percent increase over the amount obligated in fiscal year 2000. All indications are that this upward trend will continue. Aside from growth in dollar value there have also been changes in what DOD is buying. DOD's new weapons system programs are expected to be the most expensive and complex ever and will consume an increasingly large share of its budget. In the last 5 years DOD has doubled its commitment to major weapon systems from $700 billion to $1.4 trillion, and DOD is counting on these efforts to fundamentally transform military operations. As overall obligations have increased so has its reliance on the private sector to provide services to fulfill DOD's missions and support its operations. Additionally, in recent years DOD has increased its use of existing contracts awarded by other agencies (i.e. interagency contracts). While this approach provides a number of benefits, our work, and that of some agency inspector generals, revealed instances of improper use, including issuing orders that were outside the scope of the underlying contract as well as failing to establish clear lines of accountability and responsibility. While the amount, nature, and complexity of DOD contract activity have increased, its acquisition workforce has remained relatively unchanged in size. At the same time, the acquisition workforce faces certain skills gaps and serious succession planning challenges. There are a number of DOD practices which undermine its ability to establish sound business arrangements. For example, with regard to competition and pricing, we recently found that the Army acquired guard services under authorized sole-source contracts at 46 of 57 Army installations, despite the Army's recognition that it was paying about 25 percent more for its sole-source contracts than for those it previously awarded competitively. Another element of a sound business arrangement is the fee mechanism used to incentivize excellent contractor performance. In December 2005, we reported that DOD gives its contractors the opportunity to collectively earn billions of dollars through monetary incentives. Unfortunately, we found DOD programs routinely engaged in practices that failed to hold contractors accountable for achieving desired outcomes and undermined efforts to motivate results-based contractor performance. As a result, DOD paid out an estimated $8 billion in award fees on contracts in our study population, regardless of whether acquisition outcomes fell short of, met, or exceeded DOD's expectations. DOD also increased its risk of poor acquisition outcomes by not assuring that another element of a sound business arrangement, contractor oversight, was sufficient. For example, in 2005 we reported that DOD's oversight on nearly a third of 90 service contracts reviewed was insufficient, in part because DOD failed to assign performance monitors.
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In December 2009, we published a report assessing DHS's efforts to establish the National Biosurveillance Integration Center (NBIC). We reported that NBIC was not fully equipped to carry out its mission because it lacked key resources--data and personnel--from its partner agencies, a situation that could be at least partially attributed to collaboration challenges NBIC faced. We recommended that NBIC work with its federal partners to develop a strategy to enhance collaboration-- including sharing data, personnel, and other resources--and to establish effectiveness measures for that collaboration. DHS generally concurred with our findings and recommendations and stated that NBIC would work with its partners to develop a collaboration strategy to clarify both the mission space and roles and responsibilities for all partners. In August 2012, DHS issued the National Biosurveillance Integration Center Strategic Plan. According to DHS officials, the plan articulates a clear approach with a series of measurable steps and initiatives to enhance the nation's biosurveillance capability. In late August 2012, when providing us with a copy of the strategy, officials stated that they believe it satisfies the intent of our recommendations. Officials said the plan was written in coordination with NBIC's federal partners and is the result of a deliberative process examining NBIC's current capabilities and capability gaps. We are currently assessing the extent to which the plan fully responds to the recommendations. In June 2010, we reported on federal efforts that support a national biosurveillance capability and the extent to which mechanisms were in place to guide the development of a national biosurveillance capability. We reported that a national biosurveillance capability would largely rely on an interagency effort because the activities and accompanying resources that support the capability--personnel, training, equipment, and systems--are dispersed across a number of federal agencies. However, we found that the federal government did not have a unifying framework and structure for integrating dispersed capabilities and responsibilities and no federal agency had authority to guide and oversee the development and implementation of a national effort that encompassed all stakeholders with biosurveillance responsibilities. We concluded that without such a framework and an entity with the authority, resources, time, and responsibility for guiding its implementation, it would be very difficult to create an integrated approach to building and sustaining a national biosurveillance capability. We recommended that the Homeland Security Council within the White House direct the National Security Staff to identify, in consultation with relevant federal agencies, a focal point to lead the development of such a strategy. Our June 2010 report also noted that a national biosurveillance capability depends upon participation from state, local, and tribal governments, because few of the resources required to support the capability are wholly owned by the federal government. In October 2011, we reported on how the federal government worked with its nonfederal partners to support biosurveillance, activities those partners identified as essential to their biosurveillance efforts, and particular challenges those partners faced. We recommended that the strategy we called for in June 2010 incorporate a means to leverage existing efforts that support nonfederal biosurveillance capabilities, consider challenges that nonfederal jurisdictions face, and include a framework to develop a baseline and gap assessment of nonfederal jurisdictions' biosurveillance capabilities. The White House did not comment on these recommendations. In July 2012, the White House released the National Strategy for Biosurveillance to describe the U.S. government's approach to strengthening biosurveillance. The strategy describes guiding principles, core functions, and enablers for strengthening biosurveillance. The strategy states that its approach emphasized teamwork between and within federal departments, across all layers of government, and with private sector partners. A strategic implementation plan is to be completed within 120 days of the strategy issuance. The strategy does not fully meet the intent of our June 2010 and October 2011 recommendations, as discussed later in this statement, but it is possible that it will when the implementation plan is complete. DHS approved the Gen-3 acquisition in October 2009 without fully developing critical knowledge that would help ensure sound investment decision making, pursuit of optimal solutions, and reliable performance, cost, and schedule information. Specifically, DHS did not engage the initial phase of its Acquisition Life-cycle Framework, which is designed to help ensure that the mission need driving the acquisition warrants investment of limited resources. In the Acquisition Life Cycle Framework design, it is not the purpose of the Mission Needs Statement to specify a technical solution. Rather it is to serve as a touchstone for subsequent acquisition efforts by focusing on the capability gap to help articulate and build consensus around the goals and objectives for a program. However, DHS began to pursue a specific autonomous detection solution well before completing a Mission Needs Statement. Specifically, DHS's Integrated Planning Guidance (IPG) for fiscal years 2010-2014, which was finalized in March 2008, included specific goals for the next generation of BioWatch--to deploy in all major cities an autonomous BioWatch detection device reducing the operating cost per site by more than 50 percent and warning time to less than 6 hours. The purpose of DHS's IPG is to communicate the Secretary's policy and planning goals to component-level decision makers to inform their programming, budgeting, and execution activities. As such, this specific set of goals for BioWatch Gen-3 demonstrates that DHS leadership had established a course for the acquisition by March 2008, in advance of efforts to define the mission need through the Mission Needs Statement process, which was finalized more than a year and a half later. DHS officials in multiple departments described a climate, in the wake of the September 11, 2001, terrorist attacks and the subsequent Amerithrax attacks, in which the highest levels of the administration expressed interest in quickly deploying the early generation BioWatch detectors and improving their functionality--as quickly as possible--to allow for faster detection and an indoor capability. BioWatch officials stated that they were aware that the Mission Needs Statement prepared in October 2009 did not reflect a systematic effort to justify a capability need, but stated that the department directed them to proceed because there was already departmental consensus around the solution. Accordingly, the utility of the Mission Needs Statement as a foundation for subsequent acquisition efforts was limited. Additionally, DHS did not use the processes established by its Acquisition Life-cycle Framework to systematically ensure that it was pursuing the optimal solution--based on cost, benefit, and risk--to mitigate the capability gap identified in the Mission Needs Statement. The DHS Acquisition Life-cycle Framework calls for the program office to develop an Analysis of Alternatives that systematically identifies possible alternative solutions that could satisfy the identified need, considers cost- benefit and risk information for each alternative, and finally selects the best option from among the alternatives. However, the Analysis of Alternatives prepared for the Gen-3 acquisition did not reflect a systematic decision-making process. For example, in addition to--or perhaps reflecting--its origin in the predetermined solution from the Mission Needs Statement, the Analysis of Alternatives did not fully explore costs or consider benefits and risk information as part of the analysis. Instead, the Analysis of Alternatives focused on just one cost metric that justified the decision to pursue autonomous detection--cost per detection cycle--to the exclusion of other cost and benefit considerations that might have informed decision makers.the Analysis of Alternatives examined only two alternatives, though the Additionally, guidance calls for at least three. The first alternative was the currently deployed Gen-2 technology with a modified operational model (which by definition was unable to meet the established goals). The second alternative was the complete replacement of the deployed Gen-2 program with an autonomous detection technology and expanded deployment. BioWatch program officials acknowledged that other options--including but not limited to deploying some combination of both technologies, based on risk and logistical considerations--may be more cost-effective. As with the Mission Needs Statement, program officials told us that they were advised that a comprehensive Analysis of Alternatives would not be necessary because there was already departmental consensus that autonomous detection was the optimal solution. Because the Gen-3 Analysis of Alternatives did not evaluate a complete solution set, did not consider complete cost information, did not consider benefits, and did not include a cost-benefit analysis, it does not provide information on which to base trade-off decisions. For example, it does not provide information about the extent to which various aspects of the solution--such as the number of participating jurisdictions--results in a reduction of risk and at what cost. Given the uncertainty related to Gen- 3's costs, benefits, and risk mitigation potential, DHS does not have reasonable assurance that the strategy of expanding and completely replacing the existing Gen-2 program with autonomous detection technology is the most cost-effective solution. In October 2009, DHS approved the Gen-3 acquisition at Acquisition Decision Event (ADE) 2A--one of the key formal decision points in DHS's Acquisition Life-cycle Framework--based on information contained in acquisition documents provided by the BioWatch program. One critical purpose of the ADE-2A documentation set required by DHS's acquisition guidance is to describe the expected performance, cost, and schedule parameters for an acquisition. However, the ADE-2A Acquisition Decision Memorandum stated that significant data necessary for the proper adjudication of an ADE-2A decision were missing. Further, we reported that some performance, cost, and schedule expectations presented at ADE-2A were not developed in accordance with DHS guidance and good acquisition practices--like accounting for risk in schedule and cost estimates. On the basis of the Gen-3 documentation submitted at ADE-2A, DHS expected to acquire a system that would cost $2.1 billion, be fully deployed by fiscal year 2016, and meet certain performance requirements. However, the performance, cost, and schedule parameters for the Gen-3 acquisition have changed. Specifically, certain performance requirements have been revised, the estimated date for full deployment has been delayed from fiscal year 2016 to fiscal year 2022, and the expected life cycle cost has changed from the $2.1 billion point estimate prepared for ADE-2A to a risk-adjusted $5.8 billion estimate, calculated at the 80 percent confidence level. BioWatch program officials told us that they had to prepare ADE-2A documentation quickly because ADE-2A had been accelerated by more than a year. Additionally, DHS officials from multiple offices described a climate around the time of ADE-2A in which the department's business processes--including acquisition practices--were maturing and thus were less rigorous in their adherence to best practices for cost and schedule estimating. However, in the absence of complete and reliable information, DHS had limited assurance that the acquisition would successfully deliver the intended capability within cost and on schedule. Comprehensive and systematic information developed using good practices for cost and schedule estimating could help ensure that more reliable performance, cost, and schedule information is available for future acquisition decision making. We recommended that before continuing the acquisition, DHS reevaluate the mission need and alternatives and develop performance, cost, and schedule information in accordance with guidance and good acquisition practices. DHS concurred with the recommendations but plans to proceed with the next step in the acquisition--performance testing--while implementing them. We are pleased that DHS plans to implement the recommendation but are concerned by DHS's intention to continue the acquisition efforts before ensuring that it has fully developed the critical knowledge a comprehensive Acquisition Life-cycle Framework effort is designed to provide. The BioWatch program completed initial testing and evaluation on a Gen- 3 prototype technology in June 2011, but several steps remain before For example, the BioWatch Gen-3 can be deployed and operational.program must complete additional testing. The characterization testing conducted in 2010 and 2011 was intended to assess the state of available technology. This testing sought to demonstrate the performance of available candidate Gen-3 technologies against the requirements established by the BioWatch program, and consisted primarily of laboratory testing of individual system components. This testing did not demonstrate the performance of the full system in detecting live pathogens in the operational environment. It also did not test the information technology network that will transmit results for public health officials. Now the program plans to conduct the next phase of testing-- performance testing in three independent laboratories and operational test and evaluation in four BioWatch jurisdictions. On the basis of the June 2011 Life-cycle Cost Estimate, the BioWatch program estimates this testing will take approximately 3 years and cost approximately $89 million (risk adjusted at the 80 percent confidence level). The Deputy Secretary of Homeland Security and other senior officials met on August 16, 2012 for an Acquisition Review Board, during which the BioWatch program was seeking approval to initiate the next phase of the acquisition. DHS did not make a final decision, but authorized release of a solicitation for performance testing under the next testing phase. In response to the recommendations we made in the Gen-3 report, DHS officials stated that before awarding a performance testing contract-- which would allow the program to acquire a small number of test units-- the program office is directed to return to the Acquisition Review Board for approval. Before undertaking the remaining steps in the acquisition, the program office is directed to return for Acquisition Decision Event-2B (ADE-2B)-- the next formal decision point in DHS's Acquisition Life-cycle Framework--with updated information, including an Analysis of Alternatives and Concept of Operations, as we recommended. No timeframe for completing these actions has been specified, but according to DHS officials, it may take up to 1 year to update the Analysis of Alternatives. In preparation for the August 16, 2012, meeting, the BioWatch program had updated key acquisition documents--including the Life-cycle Cost Estimate and Acquisition Program Baseline--as required by the Acquisition Decision Authority in a February 2012 memo. However, in order to inform the ADE-2B decision, these documents must accurately reflect changes to Gen-3 performance requirements and updated cost and schedule estimates for the acquisition and therefore may require further revisions. If approved at ADE-2B, the BioWatch program plans to conduct operational testing of Gen-3 units in four BioWatch jurisdictions. Following operational testing, DHS intends to decide whether to authorize the production and deployment of Gen-3. If Gen-3 is approved, the BioWatch program plans to prepare for deployment by working with BioWatch jurisdictions to develop location-specific plans to guide Gen-3 operations. DHS estimates based on the June 2011 Life-cycle Cost estimate show that about $5.7 billion of the $5.8 billion life-cycle cost (risk adjusted at the 80 percent confidence level) remains to be spent to test, produce, deploy, and operate Gen-3 through fiscal year 2028. In the report on Gen-3 released today, we noted that beyond the uncertainty related to the costs and benefits of the planned Gen-3 approach, there is additional uncertainty about the incremental benefit of this kind of environmental monitoring as a risk mitigation activity because of its relatively limited scope. As the study committee for a 2011 National Academies evaluation of BioWatch noted, there is considerable uncertainty about the likelihood and magnitude of a biological attack, and how the risk of a release of an aerosolized pathogen compares with risks from other potential forms of terrorism or from natural diseases. The National Academies report also notes that while the BioWatch program is designed to detect certain biological agents (currently five agents) that could be intentionally released in aerosolized form, detecting a bioterrorism event involving other pathogens or routes of exposure requires other approaches. In the report we released today, we stated that given the total estimated operating cost for the Gen-3 program, it is important, especially in an increasingly resource-constrained environment, to consider the benefit-- in terms of its ability to mitigate the consequences of a potentially catastrophic biological attack--that the investment provides. We noted that the scope limitations of this kind of environmental monitoring provide context in both the consideration of mission need and in analyzing cost effectiveness. However, it was not within the scope of our BioWatch Gen-3 study nor was it our intention to reach a firm conclusion about the value of this kind of activity as part of a layered biosurveillance strategy. Rather, we believe the need to consider value within the larger biosurveillance enterprise as part of an effort to define mission need for a single federal program like Gen-3 provides a timely and concrete illustration of the kind of issues we sought to address with our June 2010 recommendation. The recommendation for the Homeland Security Council to direct the National Security Staff to identify a focal point to lead the development of a national biosurveillance strategy was grounded in previous work on desirable strategy characteristics for complex homeland security missions. We recognized the difficulty that decision makers and program managers in individual federal agencies face prioritizing resources to help ensure a coherent effort across a vast and dispersed interagency, intergovernmental, and intersectoral network. Therefore, we called for a strategy that would, among other things, (1) define the scope and purpose of a national capability; (2) provide goals, objectives and activities, priorities, milestones, and performance measures; and (3) assess the costs and benefits and identify resource and investment needs, including investment priorities. We stated that one of the aims of a national biosurveillance strategy should be to help prioritize where resources and investments should be targeted and guide agencies to allocate resources accordingly. Further, we reported that a national strategy could begin to address the difficult but critical issues of who pays and how funding for biosurveillance will be sustained in the future. Finally, we noted that in an environment with competing priorities, a strategy could help address situations where investments must be carefully weighed and sound judgments made about the most cost-effective approaches, but doing so would require information about the cost, benefits, and risks associated with the whole biosurveillance enterprise. The National Strategy for Biosurveillance includes four guiding principles that are designed to serve as a foundation for enterprisewide efforts, four core functions that are designed to promote a deliberate and shared approach, and four enabling capabilities that are designed to represent areas for ongoing focus. These planks of the strategy align with our call for a strategy that would help to clarify the scope and purpose of a national biosurveillance capability and the goals of that capability. Our June 2010 report described several categories of federal efforts to improve the personnel, training, and systems and equipment that support a national capability. These included responding to workforce needs, facilitating information sharing, and applying technologies to enhance surveillance. Among the planks of the National Strategy for Biosurveillance, it is possible to discern support for each these categories. For example, the enabling capability called build capacity, discusses both workforce and information sharing issues. The four guiding principles that serve as the strategy's foundation encourage broad-based and cross-cutting actions to leverage constrained resources, responding, in part, to our call for the strategy to help identify the resources currently being used, additional resources that may be needed, and opportunities for leveraging resources. However, the strategy does not yet offer a mechanism to identify resource and investment needs, including investment priorities among these various efforts. Accordingly, the enterprise is still without a framework to guide the systematic identification of risk, assessment of resources needed to address those risks, and the prioritization and allocation of investment across the entire biosurveillance enterprise, as we recommended in June 2010. For example, in the case of the broader contextual information needed to inform the BioWatch Gen-3 mission need, the strategy has language indicating that advances in science and technology are a priority. In fact, the capability enabler called fostering innovation specifically calls for science and technology capabilities, including new detection approaches. However, the strategy does not facilitate analysis or provide tools to assess the risks to be addressed--in the context of enterprisewide goals--by such science and technology approaches or the value they should offer the enterprise relative to their costs. Without such a framework and tool set, it remains difficult for decision makers--in both the executive and legislative branches--to help ensure that their resource allocation decisions contribute to a coherent enterprisewide approach. We are encouraged by the National Strategy for Biosurveillance and the work the White House has done to date to provide a platform for achieving a well-integrated national biosurveillance enterprise. We are hopeful that the forthcoming strategic implementation plan which promises to include specific actions and activity scope, designated roles and responsibilities, and a mechanism for evaluating progress will help to address the ongoing need for mechanisms to help prioritize resource allocation. Chairmen Bilirakis and Lungren, this concludes my prepared statement. I would be happy to respond to any questions you or the other committee members may have. For further information on this testimony, please contact Bill Jenkins, (202) 512-8757 or by e-mail at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Other contributors include; Hal Brumm, Nirmal Chaudhary, Michelle Cooper, Edward George, Kathryn Godfrey, Allyson Goldstein, Tracey King, Amanda Miller, Jan Montgomery, Katy Trenholme, and Katherine Trimble. 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.
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A catastrophic biological event could have devastating consequences. The U.S. government has efforts to provide early detection and warning of biological threats. DHS's BioWatch, which aims to detect certain pathogens in the air, is one such program. DHS has been pursuing a third generation of BioWatch technology (Gen-3) to further enhance detection. GAO has published a series of reports on national biosurveillance efforts, including a report released today on DHS's efforts to acquire Gen-3. This statement discusses (1) prior biosurveillance work and related federal efforts, (2) today's report on the Gen-3 acquisition, and (3) prior strategy recommendations and the White House's July 2012 National Strategy for Biosurveillance. This statement is based on GAO reports published from December 2009 to September 2012 and GAO's review of the National Strategy for Biosurveillance in relation to prior GAO recommendations for a national biosurveillance strategy. The Department of Homeland Security (DHS) and the White House have acted to strengthen biosurveillance consistent with prior GAO recommendations made from December 2009 through October 2011.In August 2012, DHS issued a strategic plan for its National Biosurveillance Integration Center (NBIC) that officials say was written in coordination with federal partners and designed to respond to GAO's December 2009 findings that NBIC did not have key resources to carry out its mission, in part due to collaboration issues it faced. In July 2012, the White House released the National Strategy for Biosurveillance, which describes guiding principles, core functions, and enablers for strengthening biosurveillance. In June 2010, GAO recommended a national biosurveillance strategy to provide a unifying framework for building and maintaining a national biosurveillance capability. In October 2011, GAO also recommended the strategy account for the need to leverage resources and respond to challenges while partnering with nonfederal entities. The July 2012 strategy partially responds to the issues GAO called for such a strategy to address, but does not fully address them, as discussed below. A strategic implementation plan is to be published within 120 days of strategy issuance (October 2012), and may align the strategy more fully with the array of issues GAO identified. DHS approved the Generation-3 (Gen-3) acquisition in October 2009, but it did not fully engage its acquisition framework to ensure that the acquisition was grounded in a justified mission need and that it pursued an optimal solution. The performance, schedule, and cost expectations presented in required documents when DHS approved the acquisition were not developed in accordance with DHS guidance and good acquisition practices--like accounting for risk in schedule and cost estimates. Since October 2009, the estimated date for full deployment has been delayed from fiscal year 2016 to fiscal year 2022. The 2009 life-cycle cost estimate--a point estimate unadjusted for risk--was $2.1 billion. In June 2011, DHS provided a risk-adjusted estimate at the 80 percent confidence level of $5.8 billion. Several steps remain before DHS can fully deploy Gen-3 including additional performance testing, operational testing, and developing location specific deployment plans. The White House's National Strategy for Biosurveillance serves as a foundation for enterprisewide efforts and begins to define mission, goals, and objectives, as we called for in making the June 2010 strategy recommendation; however, the strategy does not yet offer the mechanism GAO recommended to identify resource and investment needs, including investment priorities. Accordingly, the biosurveillance enterprise remains without a framework to guide the systematic identification of risk, assessment of resources needed to address those risks, and the prioritization and allocation of investment across the entire enterprise. In recommending a national strategy, GAO recognized the challenges individual federal programs and agencies face prioritizing resources to help ensure a coherent effort across the dispersed biosurveillance enterprise. Today's report on Gen-3 offers a timely and concrete example of this challenge--to assess the extent to which Gen-3 warrants the investment of scarce resources when the incremental value of the environmental monitoring Gen-3 offers is considered as part of a layered biosurveillance strategy. In prior reports, GAO made biosurveillance recommendations to DHS and the White House Homeland Security Council. DHS concurred with prior recommendations. The White House did not comment. In today's report, GAO recommended that before continuing the Gen-3 acquisition, DHS reevaluate the mission need and alternatives and update associated performance, schedule, and cost information. DHS concurred but stated it plans to reevaluate the acquisition and pursue performance testing concurrently. We believe DHS should first develop the critical information we recommended.
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In August 1983, DOD established a joint task force called Joint Task Force-Bravo (JTF-B) of about 1,100 Army and Air Force personnel at Soto Cano (formerly, Palmerola Air Base), the Honduran military installation that houses the Honduran Air Force Academy. The presence was established to support various U.S. political and military objectives that demonstrated U.S. commitment to its allies against the increasing communist threat in the region. JTF-B and the other U.S. military units at Soto Cano were assigned missions to coordinate and support U.S. counterinsurgency and intelligence operations, and military training exercises in the region. When directed, JTF-B provides support for disaster relief, search and rescue, and contingency-type missions in Central America. JTF-B was established as a subordinate unit of the U.S. Southern Command (USSOUTHCOM), headquartered in Panama. The United States funded construction projects and infrastructure upgrades at Soto Cano, such as a F-16 capable runway, semipermanent barracks, offices and recreational facilities, 22 miles of roads, and upgrades of the water, sewer, and electrical systems. The annual cost for the United States to maintain the U.S. military presence at Soto Cano has grown steadily from about $24 million annually in the mid-1980s to a projected $38 million for 1994. (See table 1 for a breakdown of the costs.) Since 1991, the average annual cost of new construction and upgrades has been about $2.5 million. U.S. operations at Soto Cano are funded from the Army's and the Air Force's Operations and Maintenance accounts. In addition to JTF-B, other U.S. military units are stationed at Soto Cano to support JTF-B's missions, such as an aviation battalion and a military police platoon. About two-thirds of the U.S. military personnel assigned to Soto Cano are on temporary duty, usually from 4 to 6 months. The remainder serve a 1-year tour. In April 1994, authorized U.S. military personnel at Soto Cano was reduced to 780 (see app. I). At the time of our fieldwork, DOD officials told us that the level of personnel was scheduled to increase to about 900 in October 1994 due to the relocation of helicopter personnel and three helicopters stationed in Panama. DOD officials informed us that this move was being made to keep aircraft assets in the theater due to the drawdown of U.S. forces in Panama. However, during discussions on a draft of this report, DOD officials told us that the level is now scheduled to decrease to about 500 personnel in October 1995 due to the deactivation of a helicopter battalion, which will reduce the number of helicopters from 31 to 11. In addition, all U.S. aviation operations and support at Soto Cano will be consolidated with JTF-B facilities, and the current main air facility, Camp Pickett, will be closed. According to DOD documents, the U.S. military presence at Soto Cano contributes about $14 million annually to the Honduran economy in the form of contracts and services to support the U.S. military presence. This includes the U.S. military personnel estimated spending on the Honduran local economy. With the resolution of military conflicts and greater political stability in Central America, the focus of U.S. interest in the region has shifted from political/military objectives to economic growth and democracy building. The U.S. government officials we met with said that the continuing U.S. military presence contributed to U.S. democracy objectives, but that the contribution was incidental to their presence to perform other missions. Since 1990, Central America has experienced new political stability as the conflicts in El Salvador and Nicaragua have been resolved, and the overall threat of communist expansion has diminished. As a result, U.S.-directed counterinsurgency and intelligence activities have ended. The changed political condition from the time that JTF-B was established is reflected in the April 1994 congressional testimony of the Assistant Secretary of State for Inter-American Affairs. The Assistant Secretary stated "the United States is no longer compelled to base foreign policy strategy on defending the United States and its neighbors from external aggression. Instead, foreign policy can now be focused on encouraging democracy and promoting economic growth." When questioned about the continuing need for a military presence in light of new U.S. goals and the relative stability in the region, military officials at Soto Cano and the Southern Command said that the military presence at Soto Cano contributes to U.S. efforts to promote democracy. According to these officials, the military personnel at Soto Cano serve as an example of a military force that is subordinate to civilian control, a main tenet of democracy. However, the officials stated that the influence exerted by the U.S. military at Soto Cano was incidental and difficult to quantify. According to State Department officials, the principal U.S. programs to promote democratic initiatives and military professionalism are administered by other U.S. agencies such as the State Department, the Agency for International Development, the Department of Justice, and the Defense Security Assistance Agency. Further, the continuing U.S. military presence at Soto Cano appears inconsistent with the current goal of the U.S. Embassy in Honduras--which is to reduce the overall size and scope of U.S. activities in Honduras in recognition of declining U.S. funding and increased political stability in the region. Moreover, the United States is also encouraging the government of Honduras to implement military reforms, which include reducing its armed forces. Since the end of the Cold War, the primary missions of JTF-B are to support joint, combined and interagency operations, and provide logistical support for military training exercises, and to maintain and operate an all-weather, C-5 capable airfield. While the U.S. military presence at Soto Cano is useful and convenient, it is not essential to support military training activities in the region. U.S. military personnel are routinely deployed throughout Latin America for training missions without a dedicated, semipermanent U.S. logistics and support base like Soto Cano. According to DOD records, in 1993 over 60,000 U.S. active and reserve military personnel were deployed from the United States and other locations to conduct a variety of training and civic assistance activities throughout Latin America. About 5,500 of the 60,000 participated in training activities conducted in Honduras. In discussions on a draft of this report, DOD officials provided us with figures for fiscal year 1994 training. These figures show that JTF-B provided support to 10,665 personnel, which is 89 percent of the total deployed in Central America. However, the types and levels of support provided by JTF-B to the various training exercises were not available. According to DOD officials, the number of personnel trained in Central America is approximately 17 percent of all personnel deployed from the United States and other locations to Latin America. Training activities conducted in Latin America included engineering exercises to drill wells, build roads, schools, and medical clinics; medical exercises to provide basic medical, dental, and veterinary care; and combined exercises with host nation forces, such as computer-simulated war exercises and counterterrorist training. JTF-B and the other U.S. military units stationed at Soto Cano provide support to these types of training exercises conducted in Honduras. For example, in support of an engineering exercise conducted in Honduras in 1993, U.S. military personnel at Soto Cano performed liaison functions with Honduran military and local government assisted U.S. reserve units in awarding contracts to procure services and supplies on the local economy, and transported and accompanied advance teams to identify suitable locations for base camps and inspected training sites during the exercise. The U.S. military at Soto Cano also often provides limited support (such as supplies and communication support) to training exercises in Belize, Guatemala, and El Salvador. For example, military personnel at Soto Cano provided and transported tents to a National Guard training site in Guatemala when the Guard's shipment of tents was delayed. Currently, assets from Soto Cano are being used to support demining training under the operational control of the U.S. Military Group (USMILGP) in Honduras for Brazilian, Costa Rican, and Honduran troops. JTF-B also recently provided assistance to the USMILGP in El Salvador in the coordination of air operations for the Fuertes Caminos exercise. Officials from the U.S. Army Reserve and National Guard said that the support they receive from U.S. military forces at Soto Cano makes training more convenient but that the training can be accomplished without a U.S. military presence. Since 1992, the Army National Guard and Army Reserve have increased their training deployments to other Central American countries, especially El Salvador and Guatemala. In these countries, intergovernmental coordination for logistical support is provided by U.S. military personnel attached to the Embassy; personnel deployed in advance of the training; post-exercise evaluation teams; and in some cases, the host nation military, according to U.S. Army Reserve and National Guard officials. In a March 1994 memorandum on the review of the requirement for JTF-B, to the Chief of Staff of the Army (CSA), the Army staff concluded that training activities in the region could continue without support from U.S. military personnel at Soto Cano. According to the memorandum training exercises in the region can be supported from bases located in the United States without the support of an "expensive, semi-permanent, logistics base." The memorandum states that the costs to support training exercises in Honduras exceed the benefits and the resources could be better used elsewhere to meet other Army operational requirements. Further, the Army Chief of Staff indicated to the Commander in Chief (CINC), USSOUTHCOM, and the Chairman of the Joint Chiefs of Staff, in a message, that reducing or eliminating the Army's support requirement for JTF-B would represent an important savings to the Army. Furthermore, we reported in November 1993 and testified in April 1994 that some DOD humanitarian and civic action projects were not designed to contribute to foreign policy objectives, did not appear to enhance U.S. military training, and either lacked the support of the country or were not used. According to DOD officials, the CINC, USSOUTHCOM, considered the CSA's concerns about the need for JTF-B. The CINC's position is that JTF-B could be reduced, but that access to Soto Cano, with its C-5 capable airfield and a U.S. presence, is needed to accomplish USSOUTHCOM's mission, which includes conducting various military and humanitarian operations, training, and providing support for exercises in the Central American region. U.S. military personnel at Soto Cano provide support to the U.S. Customs Service, the U.S. Navy, and the DEA counterdrug programs in the region. However, the level of support is minimal and involves only a small portion of the U.S. military personnel and equipment at Soto Cano. U.S. Customs, U.S. Navy, and DEA officials characterized the support they receive from the U.S. military at Soto Cano as useful and convenient, but not critical to their counterdrug programs. Honduras is an ideal location for U.S. Customs to intercept and track suspect drug-trafficking aircraft. The U.S. Customs Service has two airplanes and eight personnel stationed at Soto Cano to intercept and track planes suspected of carrying drugs in the Central American region and over the eastern Pacific Ocean. Customs provides housing for its personnel at the base and its mechanics maintain their counterdrug planes, but receives utilities and other support services through the U.S. military and can use U.S. military facilities, such as the dining hall. In addition, Customs purchases airplane fuel from U.S. military supplies and receives ground and air operations support, such as air traffic control and weather reports from U.S. military at Soto Cano. The U.S. military presence at the base provides Customs with a secure environment and operational capability 24 hours a day, 7 days a week. According to the U.S. Air Force commander at the base, about 130 personnel are involved in airfield operations. However, Customs counterdrug flights accounted for only a small percentage of the total flights handled by these personnel. For example, Customs' aircraft accounted for about 8 percent of total U.S. fixed-wing flights from Soto Cano between July 1993 and May 1994--an average of 16 times per month. During the 9-month period, April to December 1993, Interagency Counterdrug Assessment data shows that Customs' aircraft based at Soto Cano participated in intercepting/tracking 32 trafficking aircraft, which resulted in 13 cocaine seizures. Customs officials said their counterdrug operations could continue at Soto Cano without assistance from the U.S. military if support were obtained from the Honduran military and/or contractors. Additionally, Customs officials told us that if they did not have access to Soto Cano, they could use aircraft based in Panama, Mexico, or other locations to monitor areas now covered by the aircraft at Soto Cano. However, the officials also said that this option would decrease the effectiveness of operations because Customs' aircraft would always be in a "catch-up" mode rather than an intercept mode. We note that Customs carries out similar activities in Mexico and other locations without a U.S. military presence. Notwithstanding the current Customs' arrangement with USSOUTHCOM for use of the Soto Cano Base facilities, arrangements to provide for Customs use of civilian airport facilities for antidrug activities--without a U.S. military presence--may be possible as has been done in Mexico according to Customs officials. This would require the governments of the United States and Honduras to negotiate and establish appropriate arrangements. The Navy uses Soto Cano in its counterdrug operations, which involve detecting and monitoring suspected drug planes. U.S. military flight records at Soto Cano showed that Navy counterdrug planes landed at Soto Cano on average 11 times a month from July 1993 through May 1994. Two Navy P-3 counterdrug planes based in Panama sometimes use Soto Cano for refueling or as a temporary base for their operations. The aircraft refuel at Soto Cano and receive ground and air operations support similar to the support provided to Customs. Navy personnel are sometimes housed at Soto Cano during 2- to 3-day stopovers. Navy officials said that due to intercept geometry limitations, in order for the Navy P-3 aircraft to provide a constant air intercept capability, they must be staged at a Central American site. The optimum location for staging is north of Costa Rica but south of Mexico. Currently, Soto Cano is the only air base with U.S. aviation support that fits that description. These officials further added that due to excessive transit distance from other P-3 bases, a Central American base is required to conduct maritime patrols in the southwestern Caribbean and eastern Pacific. When Howard Air Force Base closes, Soto Cano will be the only base in Central America that has U.S. aviation support. According to DOD officials, if the U.S. presence at Soto Cano is discontinued, P-3s could potentially continue to stage out of there or other bases in the region if the appropriate operating agreement can be made with the host nation. However, in considering options associated with the possible elimination of the U.S. presence at Soto Cano, the effectiveness of the Navy's P-3 interdiction efforts should be considered. Our prior work has raised serious questions about the cost-effectiveness of DOD's surveillance efforts in the drug war. A part of DEA's mission is to assist local law enforcement agencies with counterdrug investigations, intelligence, and other activities. The 4th Battalion, 228th Aviation Regiment, at Soto Cano occasionally provides helicopter transport to DEA agents and Honduran law enforcement officers for counterdrug operations. These missions have involved transporting agents to investigate drug seizures (post-seizure investigation), reconnaissance, drug eradication, and training for Honduran law enforcement officers. At the time of our fieldwork, the helicopter battalion had 33 helicopters: 15 Blackhawk, 10 Huey, and 8 Chinook helicopters. From October 1992 through March 1994, the battalion provided transportation support to DEA about once a month, typically transporting two DEA and three Honduran agents. This accounts for only a small portion of the helicopter battalion's total flying hours. For example, during fiscal year 1993, DEA air transport totaled 91.3 flying hours, or only 1.2 percent of the helicopter battalion's total flying hours. The remaining 98.8 percent of the helicopter flying hours went for a variety of missions such as pilot proficiency training, humanitarian and civic action exercises, and general support for U.S. military groups and embassies in the region. DEA officials characterized the helicopter battalion's flight support as convenient. They said that DEA operations in Honduras could be conducted with one Chinook and two Blackhawk helicopters. However, DEA officials noted they have other options to meet their needs for air transportation. These include chartering planes, which they have done in the past, or using U.S. helicopters based in Guatemala. U.S. military and diplomatic officials told us that another reason to maintain a U.S. presence at Soto Cano is the pending U.S. withdrawal from Panama by the end of 1999, that will result in the loss of Howard Air Force Base. These officials stated that it is important to retain access to an airfield in the region that is operated by U.S. military personnel. Without a U.S. military presence at Soto Cano or Panama, officials said the United States would no longer control or have immediate access to an airfield in Latin America for contingency purposes. They stated, however, that this is not reason enough to justify continuing the U.S. presence. They also acknowledged that it was unlikely that the United States would become involved in a major military conflict in Latin America. Maintaining a U.S. military presence at Soto Cano does not guarantee continued access to the base because the United States has no base rights or status of forces agreements with the government of Honduras. According to some Honduran officials we met with, the Honduran constitution prohibits the permanent basing of foreign troops in Honduras, which would limit U.S. options with respect to future missions at Soto Cano. The 1954 Military Assistance Treaty between the United States and Honduras was the basis for military cooperation and assistance during the Cold War. Subsequent annexes and protocols to the 1954 agreement provided for the establishment of U.S. military presence at Soto Cano. U.S. and Honduran officials characterize the agreement allowing a U.S. military presence at Soto Cano as a "handshake" agreement, which either side could decide to break at any time. In fact, the current U.S. presence has become a source of political controversy. Some Honduran government officials question the need for the U.S. military at Soto Cano and the adequacy of the arrangement for this presence. The Honduran President, the Chief of the Armed Forces, and leaders of the Honduran Congress have called for an examination of the terms and conditions of the U.S. presence because the reasons for its establishment no longer exist. Finally, continuation of the U.S. military presence at Soto Cano will require recurring renovation and upgrade construction of some facilities and environmental issues will need to be addressed. For example, the waste water treatment system is not adequate for the current U.S. presence. We did not attempt to establish firm estimates of cost savings that would result from discontinuing the U.S. presence at Soto Cano because there were too many unknowns. For example, we did not know how current activities at Soto Cano would be dispersed to other DOD installations and whether they would continue at the same level. Similarly, we did not have a firm basis for estimating the costs that Customs would incur with a different support arrangement for its mission. However, since about 83 percent of training exercises in the region take place without assistance from U.S. forces at Soto Cano, there are other DOD units and bases that provide similar support and they could take on the support role currently performed by JTF-B. Thus, we infer that DOD resources (i.e., human, financial, supplies and equipment, and contracts and fees) associated with base operations and maintenance could be eliminated and costs would either decline and/or shift to other agencies. Table 1 shows the direct costs associated with maintaining the U.S. military presence for fiscal year 1994. The reason that the U.S. military presence at Soto Cano was established no longer exists and this presence is not critical to current missions. In light of budget constraints and current efforts to increase the cost-effectiveness of DOD's worldwide operations, we question whether the U.S. military presence at Soto Cano is justified. Therefore, we recommend that the Secretary of Defense reduce U.S. military personnel at Soto Cano to the level necessary to support counterdrug activities, pending the development of other arrangements to support those counterdrug activities; the Commissioner of the U.S. Customs Service, the Administrator of DEA, the Secretaries of State and Defense, in conjunction with the Director of the Office of National Drug Control Policy, develop a plan to conduct their operations without U.S. military units at Soto Cano; and the Secretary of Defense withdraw the remaining U.S. military personnel at Soto Cano once the interagency plan is developed and implemented. In its comments on a draft of this report, DOD stated that they have already begun reducing U.S. military personnel at Soto Cano to the levels necessary for USSOUTHCOM to carry out JTF-B's restructured mission, which was formally approved on November 18, 1994, after the completion of our audit work. DOD plans to reduce the number of helicopters from 33 to 11 and personnel from the April 1994 level of 780 to 499 by October 1995. DOD said that if JTF-B were eliminated, it would cost units deploying to the region about $8.2 million per year to provide the command and control and logistics support for most exercises in the Central American countries at the fiscal year 1993-94 level. No details were provided as to how the $8.2-million estimate was established or its relevance to the total cost of the U.S. presence at Soto Cano. DOD stated that continued U.S. military operations at Soto Cano are important to ensure effective forward presence and to execute peacetime operations in the Central American region. They responded that any further restructuring of DOD activities at Soto Cano should await decisions that are pending on the relocation of USSOUTHCOM headquarters. DOD's response and comments are in appendix II. The Department of State generally agreed with the information in the draft report but expressed concern about its timing and the political signal that might be perceived by the Latin American region if JTF-B were to be terminated. The U.S. Customs Service, DEA, and the Office of National Drug Control Policy generally agreed with the information contained in the draft report. Informal comments received from the agencies during discussions on a draft of this report have been included where appropriate. We interviewed officials from the Office of the Secretary of Defense, the Office of the Joint Chiefs of Staff, the State Department, the U.S. Customs Service, DEA, and the Army National Guard Readiness Bureau, all in the Washington, D.C., area. We also met with the Army Reserve Command Headquarters in Atlanta, Georgia, and the U.S. Atlantic Command in Norfolk, Virginia. We obtained additional information related to the costs of maintaining the presence at the base from Air Force Air Combat Command Headquarters in Langley, Virginia, and the Army Forces Command Headquarters in Atlanta, Georgia. In Panama, we met with officials from the USSOUTHCOM, including U.S. Army South, and the U.S. Customs Service and DEA. In Honduras, we visited the U.S. military installation at Soto Cano and interviewed the Commander, JTF-B; the Commander, 4th Battalion, 228th Aviation Regiment; and other military personnel assigned to the base. We also met with the U.S. Ambassador to Honduras and other embassy officials, including the Commander of the USMILGP, the Defense Attache, and the DEA Country Attache. Additionally, we interviewed former and present Honduran government and military officials regarding the U.S. military presence in Honduras. We did not assess the effectiveness of the programs that are supported by JTF-B and the other U.S. military units at the base. We conducted our review between October 1993 and June 1994 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretaries of Defense, State, and Treasury; the Attorney General; the Commissioner of U.S. Customs; the Administrator of DEA; the Directors of the Office of National Drug Control Policy and the Office of Management and Budget; and interested congressional committees. Copies will also be made available to others upon request. Please contact me at (202) 512-4128 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix III. Mario L. Artesiano, Regional Assignment Manager Nancy T. Toolan, Evaluator-in-Charge Daniel E. Ranta, Evaluator Sara L. Bingham, Reports Analyst The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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GAO reviewed whether the U.S. military presence at Soto Cano Air Base in Honduras is critical to current U.S. activities and objectives in the region, focusing on: (1) the cost of maintaining U.S. forces at the base; (2) U.S. objectives for regional economic growth and democratic reform; (3) drug interdiction activities; and (4) the withdrawal of U.S. forces from an air base in Panama. GAO found that: (1) the U.S. military presence at Soto Cano provides useful but minimal support to some U.S. government activities in the region, but there is not sufficient justification for maintaining the presence; (2) U.S. forces are to support military training exercises, humanitarian and civic assistance exercises, and U.S. counterdrug activities in Honduras; (3) the Army acknowledges that training can be conducted in the region without a semipermanent logistics support base; (4) federal agency officials believe that they can continue their regional operations without support from the U.S. military at Soto Cano; (5) Soto Cano provides minimal support to U.S. counterdrug activities; (6) Soto Cano's potential as a support facility for military operations in Latin America is limited by the lack of a base rights agreement with Honduras, its limited capacity, and political issues; and (7) eliminating the U.S. military presence at Soto Cano would have a minimal impact on current U.S. missions and would potentially result in budgetary savings.
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TEA-21 authorized a total of $36 billion in "guaranteed" funding through 2003 for a variety of transit programs, including financial assistance to states and localities to develop, operate, and maintain transit systems. One of these programs, the New Starts program, provides funds to transit providers for constructing or extending certain types of mass transit systems. A full-funding grant agreement (FFGA) establishes the terms and conditions for federal participation, including the maximum amount of federal funds available for the project, which cannot exceed 80 percent of its estimated net cost. The grant agreement also defines a project's scope, including the length of the system and the number of stations; its schedule, including the date when the system is expected to open for service; and its cost. To obtain a grant agreement, a project must first progress through a local or regional review of alternatives, develop preliminary engineering plans, and obtain FTA's approval for final design. TEA-21 requires that FTA evaluate projects against "project justification" and "local financial commitment" criteria contained in the act. FTA assesses the project justification or technical merits of a project proposal by reviewing the project's mobility improvements, environmental benefits, cost-effectiveness, and operating efficiencies. In assessing the stability of a project's local financial commitment, FTA assesses the project's finance plan for evidence of stable and dependable financing sources to construct, maintain, and operate the proposed system or extension. In evaluating this commitment, FTA is required to determine whether (1) the proposed project's finance plan incorporates reasonable contingency amounts to cover unanticipated cost increases; (2) each proposed local source of capital and operating funds is stable, reliable, and available within the timetable for the proposed project; and (3) local resources are available to operate the overall proposed mass transportation system without requiring a reduction in existing transportation services. Although these evaluation requirements existed prior to the enactment of the act, TEA-21 requires FTA to (1) develop a rating for each criterion as well as an overall rating of "highly recommended," "recommended," or "not recommended" and use these evaluations and ratings in approving projects' advancement to the preliminary engineering and final design phases and approving grant agreements; and (2) issue regulations on the evaluation and rating process. TEA-21 also directs FTA to use these evaluations and ratings to decide which projects to recommend to the Congress for funding in a report due each February. These funding recommendations are also reflected in the Department's annual budget proposal. In addition, TEA-21 requires FTA to issue a supplemental report to the Congress each August that updates information on projects that have advanced to the preliminary engineering or final design phases since the annual report. In April 1999 and 2000, we reported that FTA had made substantial progress in developing and implementing an evaluation process that included the individual criterion ratings and overall project ratings required by TEA-21. Before TEA-21 was enacted, FTA had already taken steps to revise its evaluation process for the New Starts program because most of the evaluation requirements contained in the act were introduced by the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA). FTA uses the results to approve projects for the preliminary engineering and final design phases, to execute grant agreements, and to make annual funding recommendations to the Congress. In May 2001, FTA issued its New Starts report for fiscal year 2002, which included project evaluations and ratings based upon the revised process. FTA's final rule, issued in December 2000, formalized the evaluation and rating process. Next year's process will use the procedures set forth in the final rule. FTA's current New Starts evaluation process assigns projects individual ratings for each TEA-21 criterion in order to assess each project's justification and local financial commitment. The process also assigns an overall rating that is intended to reflect the project's overall merit. FTA considers these overall ratings to decide which projects will proceed to the preliminary engineering and final design phases, be recommended for funding, and receive full-funding grant agreements (see fig. 1 for an illustration of the process). A project's overall rating is a combination of the project justification and local financial commitment ratings. With respect to project justification, FTA provides individual ratings for the four criteria identified by TEA-21-- mobility improvements, environmental benefits, operating efficiencies, and cost-effectiveness--as well as for transit-supportive land-use policies. According to FTA, the agency also considers a variety of other factors when evaluating the project's justification, including the degree to which policies and programs are in place as assumed in the forecasts, the project's management capability, and additional factors relevant to local and national priorities. To evaluate a project's local financial commitment, FTA rates the project on its capital and operating finance plans and the local share of its costs. After analyzing the documentation submitted by the project's sponsors, FTA assigns a descriptive rating (high, medium-high, medium, medium- low, or low) for each of the project justification and local financial commitment criteria. (App. I summarizes the performance measures that FTA uses in applying the criteria to develop these ratings.) As figure 1 shows, once the individual criterion ratings are completed, FTA assigns summary project justification and local financial commitment ratings by combining the individual criterion ratings. In developing the summary project justification rating, FTA gives the most weight to the criteria for transit-supportive land use, cost-effectiveness, and mobility improvements. For the summary local financial commitment ratings, the measures for the proposed local share of capital costs and the strength of the capital and operating finance plans are given equal consideration. FTA combines the summary project justification and local financial commitment ratings to create an overall rating for the project of "highly recommended," "recommended," or "not recommended." To receive a "highly recommended" rating, a project must have summary ratings of at least medium-high for the project justification and local financial commitment. To receive a rating of "recommended," the project must have summary ratings of at least medium. A project is rated as "not recommended" when either summary rating is lower than medium. In preparing its New Starts proposal each year, FTA gives first preference to projects with existing grant agreements. Following that, consideration is given to projects with an overall rating of "recommended" or higher. However, some projects rated as "highly recommended" or "recommended" may not meet FTA's "readiness" test for funding; FTA uses a number of milestones to determine whether a project is sufficiently developed for a grant agreement. For example, FTA determines whether the necessary real estate has been acquired, utility arrangements have been made, and local funding sources are in place. According to an FTA official, this ensures that there are no "red flags" signaling that the project has outstanding issues it must address. In addition, FTA has considered the following issues in evaluating grantees: the degree to which the transit agency has a satisfactory plan to manage an existing bus fleet to ensure no degradation of service for users of the current system; compliance with the Americans with Disabilities Act of 1990, including financial commitments necessary to maintain accessible service, make necessary improvements, and comply with key requirements for stations; and compliance with air quality standards in the region. For its New Starts report for fiscal year 2002, FTA evaluated a total of 40 projects and provided overall ratings for 26 of these projects. Of the 26 projects that were rated, 21 were rated as "recommended," 2 projects were rated as "highly recommended," and 3 projects received "not recommended" ratings. According to FTA, fewer projects received "highly recommended" ratings this year because FTA set the bar higher for such ratings. FTA believes that fewer projects received "not recommended" ratings because project officials have a better understanding of the evaluation and rating process and criteria used to assess a project's justification and local financial commitment. In assigning overall project ratings, FTA emphasized the continuous nature of project evaluation. Throughout the report, FTA underscored the fact that as candidate projects proceed through the final design stage, information concerning costs, benefits, and impacts will be refined. Consequently, FTA updates its ratings and recommendations at least annually to reflect this new information, changing conditions, and refined financing plans. Thus, a project that is rated as "not recommended" in the fiscal year 2002 report could receive a rating of "recommended" or "highly recommended" in the fiscal year 2003 report to reflect changes in the project. For example, in the report for fiscal year 2001, the New Orleans Canal Streetcar project received a "not recommended" rating. However, this year the project received a "recommended" rating and was proposed for a grant agreement. FTA attributed the project's improved rating to an improved finance plan--specifically, firmer financial commitments. Although the criteria and measures in the New Starts evaluation and rating process have not changed, FTA's final rule, issued in December 2000, made a number of refinements to the process. The final rule will be used as FTA considers its New Starts proposal for fiscal year 2003. The refinements in the final rule reflect public comments on FTA's proposed rule, which was issued in April 1999. Comments on the proposed rule were accepted through July 1999. A total of 41 individuals and organizations provided comments. Comments were submitted on virtually every aspect of the proposed rule, but most centered on four key issues: the measure of cost-effectiveness, the continued use of a no-build and Transportation System Management (TSM) alternative for evaluation purposes, the overall project rating, and the measure for mobility improvements. Twenty-three comments were received on FTA's use of the historical "cost per new rider" measure to indicate the cost-effectiveness of a proposed project. The consensus of the commenters was that the focus on new riders ignores benefits provided to other riders, which may bias the measure against cities with "mature" transit systems, where the focus of a proposed project may be to improve service, not attract new riders. In response, the final rule replaced the "cost per new rider" measure with a new measure of "transportation system user benefits." According to FTA, this measure is based on the basic goals of any major transportation investment--to reduce the amount of travel time and out-of-pocket costs that people incur for taking a trip (i.e., the cost of mobility). This approach de-emphasizes new riders by measuring not only the benefits to people who change modes but also benefits to existing riders and highway users. The need to evaluate a New Starts project against a no-build and TSM alternative was also the subject of substantial public comment. Commenters believed that evaluating proposed New Starts projects against both a no-build and a TSM alternative was unnecessarily burdensome, noting that certain incremental system improvements will occur whether the New Starts project is constructed or not--that is, it is no longer appropriate to view the no-build alternative as a "do nothing" scenario. In response to comments submitted on this issue and to simplify the New Starts process, the final rule eliminates the need to evaluate a proposed project against both a separate no-build and TSM alternatives. Instead, the final rule requires that the proposed New Starts projects be evaluated against a single "baseline alternative" agreed upon by project sponsors and FTA. The baseline alternative involves transit improvements that are lower in cost than the proposed New Starts project, resulting in a better ratio of measures of transit mobility compared to the no-build alternative. The purpose of the baseline comparison is to isolate the costs and benefits of the proposed major transit investment. Comments on the overall project rating focused on the possibility that a rating of "not recommended" would be misinterpreted to mean that a proposed project had no merit, resulting in the erosion of local support and funding. In response to these comments, the final rule added one- letter indicators to the "not recommended" rating that explain where improvement is needed: "j" for project justification, "o" for the operating funding plan, and "c" for the capital funding plan. Thus, in future New Starts reports, a proposed project that was found to need improvement in the capital plan would be rated as "not recommended (c)." Finally, public comment on the proposed rule recommended that the measure for mobility improvements be refined. The proposed measure was based on (1) projected savings in travel time and (2) the number of low-income households within a half-mile of the proposed stations. The majority of commenters specifically addressed the measure's focus on low-income households. Many recommended that the measure include the destinations to be served by the proposed project as well as the number of households near boarding points, arguing that a system that is located near low-income households is of little use to residents unless it can also provide access to employment and other activity centers. The final rule added a new factor to calculate destinations for jobs within a half-mile of boarding points on the new system, complementing the existing factor that measures low-income households within a half-mile of boarding points. Although FTA's intent to develop performance measures to evaluate the New Starts program for purposes of the Government Performance and Results Act of 1993 (GPRA) did not generate significant comment, FTA believes that the need for them still exists. Toward that end, the final rule requires that future project applications include a two-step data collection process for determining the degree to which projects remain on schedule and on budget once commitments to fund them have been made (i.e., grant agreements have been executed); and for measuring the success of New Starts projects once they are in operation. For those New Starts projects with grant agreements, FTA will combine before and after data with planning projections to evaluate the projects in several areas, including capital costs, operating costs, and system utilization. FTA's New Starts report and budget proposal for fiscal year 2002 requests that $1.14 billion be made available for the construction of new transit systems and expansions of existing systems through the New Starts program. After amounts for FTA oversight activities and for other purposes specified by TEA-21 are subtracted, a total of $1.11 billion would remain available for projects in fiscal year 2002. Of this amount, a total of $993.5 million would be allocated among 26 projects with existing grant agreements. An additional $121.2 million would be allocated to seven new projects. (See fig. 2.) Unlike prior years, FTA did not request funding for preliminary engineering activities. As described earlier, for fiscal year 2002 FTA evaluated 40 projects and prepared ratings for 26 of them. Of the 26 projects that received ratings, FTA rated 23 projects as "highly recommended" or "recommended" and proposed executing grant agreements for 4 projects that are expected to meet the readiness criteria by the end of fiscal year 2002. In addition, FTA is proposing three other projects for funding commitments for fiscal year 2002--for a total of seven projects. These three projects were not rated this year. Specifically, the Miami (South Miami-Dade Busway Extension) project plans to use less than $25 million in New Starts funds and therefore is exempt from the evaluation process. The Chicago (Metra Southwest Corridor Commuter Rail) and Baltimore (Central LRT Double Tracking) projects were proposed for grant agreements last year and are considered "pending federal commitments." According to FTA, the ratings of these two projects from last year are still valid. (Table 1 shows the ratings for the seven projects recommended for New Starts funding in fiscal year 2002.) As table 1 shows, two of the seven proposed projects received "highly recommended" ratings on the basis of their strong cost-effectiveness, good transit-supportive land-use policies, and a demonstrated local financial commitment to build and operate the projects. For instance, the proposed San Diego County/Oceanside-Escondido Rail project received a medium- high rating in mobility improvements because it is expected to serve 15,100 average weekday boardings in 2015, including 8,600 new daily riders. According to FTA, it will also help to eliminate the heavy congestion of northern San Diego County along the Route 78 corridor, saving 700,000 hours of travel time a year compared to the TSM alternative. In addition, the high ratings for the proposed project's capital and operating financing plans reflect the solid financial condition of the transit agency and the other funding partners, as well as the sufficient projected revenue growth and contingencies. Five of the seven projects proposed received overall ratings of "recommended" or were exempt from the rating process. Most were rated medium or medium-high on the project justification and/or local financial commitment criteria. For instance, the Baltimore/Central LRT double tracking project's "recommended" rating was based on the project's strong environmental benefits, cost-effectiveness, and demonstrated local financial commitment. According to FTA's New Starts report, the proposed system would significantly reduce nitrogen oxide and carbon monoxide emissions and would cost $8.70 per incremental passenger. In contrast, the sponsor of a project that was not recommended for funding in 2002 estimated that the proposed project would annually increase carbon dioxide emissions by 4,360 tons and would cost $15.50 per passenger. Finally, the Baltimore project's strong financial rating reflects FTA's favorable assessment of state support of transit operating subsidies and the financial soundness of the agency's operations. Nineteen other New Starts projects received "highly recommended" or "recommended" ratings but were not proposed for grant agreements. One of these projects--San Diego Midcoast Corridor--received a "highly recommended" rating based on the project's strong cost-effectiveness, good transit-supportive land use, and strong local financial commitment ratings. FTA officials told us that this project met FTA's evaluation and rating criteria as well as its "readiness test" but was not selected because completing the San Diego Mission Valley East LRT extension (an ongoing project) is the transit authority's top priority. FTA also notes that the authority may not have the financial capacity to fund both projects at this time. The other 18 projects were rated overall as "recommended." Many of these projects were not proposed for grant agreements in fiscal year 2002 because they are in the early stages of development and will not be ready for final design or construction for several years. Finally, FTA rated three proposed projects as "not recommended" primarily because of low local financial commitment summary ratings, reflecting the uncertainty of their local financial commitment or lack of committed local funding to build and operate the systems. For instance, one of the three projects received low ratings for the stability and reliability of its capital and operating finance plans, reflecting FTA's concerns about the lack of progress in the commitment of nonfederal funds and the absence of a local entity to build and operate the project. Other reasons for receiving a low financial rating included the absence of a dedicated funding source for operating the project and the uncertainty of revenue sources for the project. According to FTA, it will have limited authority to make funding commitments to New Starts projects throughout the remainder of the TEA-21 authorization period--the end of fiscal year 2003--if it makes funding commitments to seven projects as proposed in fiscal year 2002. TEA-21 and other legislation provided FTA with almost $10 billion in commitment authority for the New Starts program from fiscal years 1998 to 2003. However, FTA reports that it has already committed about 90 percent of this amount. The projects proposed in FTA's New Starts report and budget request for fiscal year 2002 would reduce its remaining commitment authority by over one-half, leaving it with about $462 million for new grant agreements in fiscal year 2003. This may not be enough to fund the 14 projects that FTA estimates may be ready for grant agreements during fiscal year 2003. In an effort to conserve commitment authority for future projects, FTA's fiscal year 2002 proposal did not allocate New Starts funds for preliminary engineering activities--something FTA did routinely in recent years. However, FTA could significantly increase the commitment authority available for projects competing for New Starts funds by "releasing" amounts reserved for projects that have been suspended. As of today, two segments of a New Starts project in Los Angeles have been suspended for over 3 years, and FTA has informed project sponsors that it no longer has funding commitments for the suspended segments. However, FTA continues to reserve $647 million in commitment authority for the project. Releasing this amount would give FTA additional funding flexibility through fiscal year 2003. Furthermore, the Administration's proposed 50- percent cap on New Starts funding could limit the amount of New Starts funding available to individual projects during the next surface transportation authorization period (after fiscal year 2003). FTA was authorized to make a record level of funding commitments-- about $10 billion--for the New Starts program from 1998 through 2003. TEA-21 provided the majority of FTA's commitment authority, authorizing $6.09 billion in "guaranteed" funding for the New Starts program. In addition, TEA-21 and the Department of Transportation appropriations act for fiscal year 2001 authorized FTA to make an additional $3.4 billion in contingent commitments, subject to future authorizations and appropriations. According to FTA, it has already committed approximately $8.9 billion for New Starts projects and program activities. Specifically, about $7.5 billion is committed to the 26 projects with grant agreements. After accounting for other requirements (such as the cost of project management oversight and preliminary engineering), which are expected to total about $1.4 billion, about $1 billion remains for new grant agreements in fiscal years 2002 and 2003. (Table 2 summarizes FTA's commitment authority and funding commitments.) Implementing FTA's New Starts report and budget proposal for fiscal year 2002 would reduce FTA's remaining commitment authority by over one- half--leaving about $462 million for new grant agreements in fiscal year 2003. The budget proposes $84.0 million for five new projects and $37.2 million for the two projects with pending grant agreements for fiscal year 2002. However, the $121.2 million requested for these projects for 2002 will be only a "down payment" on what would amount to a total federal commitment of $569.3 million for these seven projects over the next several years, if no changes were made to the current project proposals. This would leave FTA with $462 million for new grant agreements, which may not be enough to cover the projects that could be ready for grant agreements during fiscal year 2003. For example, FTA estimates that about 14 projects will be in or ready to enter the final design phase at the end of fiscal year 2002--signaling that they are ready to execute grant agreements and begin construction. To preserve commitment authority for future projects, FTA did not request any funding for preliminary engineering activities in the fiscal year 2002 budget. According to FTA, it has provided an average of $150 million a year from fiscal year 1998 through fiscal year 2001 for projects' preliminary engineering activities. However, FTA did not allocate any funds for preliminary engineering activities in fiscal year 2002, nor does it plan to do so for fiscal year 2003. According to a senior FTA official, this approach helps to conserve funds for existing and new grant agreements in fiscal year 2003 and to ensure that funds are provided only to projects that are ready to move forward. The official further noted that projects may use other federal funding for preliminary engineering activities, and no project should be negatively affected if New Starts funding was not provided for these activities in fiscal years 2002 and 2003. Officials from several transit projects in the preliminary engineering phase whom we contacted indicated that they would use other federal funds and/or state and local funds to pay for their preliminary engineering work. FTA could more than double the amount of commitment authority projected to be available for new projects in fiscal year 2003 by making some or all of the $647 million in commitment authority currently reserved for two suspended segments of the Los Angeles subway project available for all projects competing for New Starts funding. The Los Angeles project's grant agreement, which was executed in May 1993, committed a total of $1.4 billion to the project's three segments--North Hollywood, Eastside, and Mid-City. The North Hollywood segment began operations in June 2000. However, construction on the two other segments--Eastside and Mid-City--was suspended in 1998 due to the Los Angeles County Metropolitan Transportation Authority's (MTA) financial difficulties. Since 1998, MTA has been studying alternative transit investment options for the Eastside and Mid-City segments. In October 2000, FTA approved the Eastside segment's advancement to the preliminary engineering stage with a light rail line rather than a subway as originally planned. MTA is still conducting alternatives analyses for the Mid-City segment. The original grant agreement provided for a federal commitment of about $735 million to the Eastside and Mid-City subway segments. About $88 million of the $735 million has been appropriated for these segments through 2001. FTA advised MTA in July 1999 that FTA no longer had funding commitments for the Eastside or Mid-City segments and that it would evaluate projects once identified for these corridors under the New Starts criteria. However, FTA continues to reserve $647 million in commitment authority for these segments. Consequently, FTA is significantly understating its remaining commitment authority. An FTA official told us that FTA has not released the commitment authority reserved for this project because such authority was not needed to make funding commitments to other projects ready for grant agreements. FTA could also increase the remaining commitment authority available for projects competing for New Starts funds by "releasing" the $409 million committed to the Seattle (Central Link LRT MOS-1) project if the project is not ready to move forward before funding decisions for fiscal year 2003 are made. The grant agreement for the Seattle project, which was signed in January 2001, commits a total of $500 million in New Starts funds. A total of $91 million was appropriated to this project through fiscal year 2001, leaving a federal commitment of $409 million. However, this grant agreement is currently under review due to increases in the overall costs and delays in the project's implementation schedule. In April 2001, DOT's Inspector General recommended that the Secretary of DOT hold funds and funding decisions for this project until a specific set of actions related to cost estimation, project scope, cost control, and overall financing plans had been implemented. FTA and project officials have begun implementing these actions, and FTA did not propose New Starts funding for the project in 2002. "Releasing" the amounts committed to one or both of these projects would significantly increase FTA's flexibility to execute grant agreements for projects ready to move forward and begin construction in fiscal year 2003 and provide funds for preliminary engineering activities. Such action would not preclude the Los Angeles or Seattle projects from securing New Starts funding in the future. Rather, these projects would be treated like all other projects--that is, they would compete in future New Starts evaluation processes to determine if they should be recommended for grant agreements. The President's fiscal year 2002 budget recommends limiting New Starts funding to 50 percent of total project costs starting in fiscal year 2004.(Currently, New Starts funding--and all federal funding--is capped at 80 percent.) According to FTA, this proposal is consistent with its recent practice of seeking a local commitment of more than 20 percent in order to manage the increasing demand for New Starts funding. For example, as of February 2001, there were over 110 planning studies considering major transit capital investments, 28 New Starts projects in the preliminary engineering phase, and 13 projects in the final design stage. FTA estimates these projects would require about $80 billion in local, state, and federal funds to complete. According to FTA, limiting the New Starts funding to 50 percent will ensure that local governments play a major role in funding New Starts projects. Local governments will need to decide to apply either other federal funds or local funds to proposed New Starts projects based on their priorities. An FTA official also pointed out that a 50-percent cap would allow more projects to receive New Starts funding; however, the official also acknowledged that limiting New Starts funding may prevent some projects from being developed or moving forward because of limited local funding. The proposed cap could affect a number of projects currently being developed. For example, 15 of the 40 projects that were evaluated this year and currently in the final design or preliminary engineering stages plan to use New Starts funds to pay for over 50 percent of their total costs. The projected use of New Starts funds for these 15 projects ranges from 61 percent for Chicago (North Central Corridor Commuter Rail) to 80 percent for New Orleans (Canal Streetcar Spine). According to officials from several of these transit agencies, the impact of the proposed cap would vary. For example, an official from one project stated that the project would not be able to tap into any other funding sources to account for lower than planned New Starts funding. In contrast, an official from another project was confident that the project would be able to apply additional federal and local funds to make up for the reduced New Starts funding. As FTA approaches the end of the TEA-21 authorization period, it faces funding constraints for the New Starts program. The implementation of FTA's fiscal year 2002 New Starts proposal would reduce its remaining commitment authority by over one-half, leaving less than $500 million for new projects in fiscal year 2003. This may not be enough to fund the 14 projects that FTA believes will be ready to begin construction in fiscal year 2003. Because of this impending "budget crunch," it is important that FTA adopt the recommendation we made last year that it further prioritize among the projects it rates as "highly recommended" or "recommended" for funding purposes. This would ensure that the "best" projects receive New Starts funding and allow for a better understanding of why certain projects with similar ratings may receive funding while others do not. In addition, FTA could significantly increase its ability to make funding commitments to new projects through fiscal year 2003 and the next authorization if it adopted the practice of "releasing" commitment authority associated with projects for which it has withdrawn a funding commitment. For example, although two segments of the Los Angeles project have been suspended for over 3 years, have been or will be completely redesigned, and are not likely to be ready for construction by next year, FTA continues to reserve about $650 million in commitment authority associated with the original project--which significantly understates FTA's remaining commitment authority. Similarly, when other projects with federal funding commitments do not move forward as expected, FTA needs to reconsider and adjust its commitment authority accordingly. Taking these actions would give FTA additional funding flexibility for the New Starts program. We recommend that the Secretary of Transportation direct the Administrator of FTA to make commitment authority allocated to projects for which the federal funding commitments have been withdrawn available for all projects competing for New Starts funding. Specifically, we recommend that FTA "release" the $647 million reserved for the Los Angeles project. We provided DOT with a draft of this report for review and comment. FTA did not provide any comments or technical clarifications on the draft. In addition, FTA indicated that further consideration will be necessary before a decision is made on the report's recommendation. To address the issues discussed in this report, we reviewed the legislation governing New Starts transit projects, FTA's annual New Starts reports for fiscal years 2001 and 2002, the new regulations for New Starts transit projects, and documents related to New Starts funding. We also interviewed appropriate FTA headquarters officials and officials from the Baltimore, New Orleans, Hartford, San Juan, Nashville, and Chicago New Starts projects. We performed our work in accordance with generally accepted government auditing standards from May through July 2001. We are sending copies of this report to the Secretary of Transportation, the Administrator of the Federal Transit Administration, the Director of the Office of Management and Budget, and other interested parties. We will make copies available to others upon request. If you have questions regarding this report, please contact me on (202) 512-2834 or at [email protected]. Key contributors to this report were Nikki Clowers, Helen Desaulniers, Susan Fleming, and Ron Stouffer. Table 3 presents a summary of each of the New Starts criteria and the related performance measures that the Federal Transit Administration (FTA) uses to appraise candidate New Starts projects as part of its evaluation and rating process.
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The Federal Transit Administration's (FTA) New Starts program has provided state and local agencies with more than $6 billion in the last eight years to help design and construct transit projects. Although the funding for this program is higher than it has ever been, the demand for these resources is also extremely high. FTA was directed to prioritize projects for funding by evaluating, rating, and recommending potential projects on the basis of specific financial and project justification criteria. This report discusses (1) the refinements made to FTA's evaluation and rating process since last year, (2) how New Starts projects were selected for FTA's New Starts report and budget request for fiscal year 2002, and (3) FTA's remaining New Starts commitment authority. GAO found that FTA made several refinements to its rating process. For instance, potential grantees were more strictly assessed on their ability to build and operate proposed projects than in the past. FTA also made several technical changes and established new performance measures to evaluate the program. New Starts projects were selected by evaluating 40 new projects for 2002 and developing ratings for 26 of them. FTA then determined whether the projects rated "highly recommended" or "recommended" met its readiness criteria. Of these projects, FTA recommended four of them for funding commitments. FTA also recommended three additional projects--one that was exempt from the rating process and two that were rated last year. FTA reports that it will have limited authority to make funding commitments to new projects in fiscal year 2003 if it enters into the seven New Starts grant agreements in 2002 as proposed.
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Customs began ACE in 1994, and its early estimate of the cost and time to develop the system was $150 million over 10 years. At this time, Customs also decided to first develop a prototype of ACE, referred to as NCAP (National Customs Automation Program prototype), and then to complete the system. In May 1997, we testified that Customs' original schedule for completing the prototype was January 1997, and that Customs did not have a schedule for completing ACE. At that time, Customs agreed to develop a comprehensive project plan for ACE. In November 1997, Customs estimated that the system would cost $1.05 billion to develop, operate, and maintain throughout its life cycle. Customs plans to develop and deploy the system in 21 increments from 1998 through 2005, the first four of which would constitute NCAP. Currently, Customs is well over 2 years behind its original NCAP schedule. Because Customs experienced problems in developing NCAP software in- house, the first NCAP release was not deployed until May 1998--16 months late. In view of the problems it experienced with the first release, Customs contracted out for the second NCAP release, and deployed this release in October 1998--21 months later than originally planned. Customs' most recent dates for deploying the final two NCAP releases (0.3 and 0.4) are March 1999 and September 1999, which are 26 and 32 months later than the original deployment estimates, respectively. According to Customs, these dates will slip farther because of funding delays. Additionally, Customs officials told us that a new ACE life cycle cost estimate is being developed, but that it was not ready to be shared with us. At the time of our review, Customs' $1.05 billion estimate developed in 1997 was the official ACE life cycle cost estimate. However, a January 1999 ACE business plan specifies a $1.48 billion life cycle cost estimate. At the time of our review, Customs was not building ACE within the context of an enterprise systems architecture, or "blueprint" of its agencywide future systems environment. Such an architecture is a fundamental component of any rationale and logical strategic plan for modernizing an organization's systems environment. As such, the Clinger- Cohen Act requires agency Chief Information Officers (CIO) to develop, maintain, and implement an information technology architecture. Also, the Office of Management and Budget (OMB) issued guidance in 1996 that requires agency IT investments to be architecturally compliant. These requirements are consistent with, and in fact based on, information technology management practices of leading private and public sector organizations. Simply stated, an enterprise systems architecture specifies the system (e.g., software, hardware, communications, security, and data) characteristics that the organization's target systems environment is to possess. Its purpose is to define, through careful analysis of the organization's strategic business needs and operations, the future systems configuration that supports not only the strategic business vision and concept of operations, but also defines the optimal set of technical standards that should be met to produce homogeneous systems that can interoperate effectively and be maintained efficiently. Our work has shown that in the absence of an enterprise systems architecture, incompatible systems are produced that require additional time and resources to interconnect and to maintain and that suboptimize the organization's ability to perform its mission. We first reported on Customs' need for a systems architecture in May 1996 and testified on this subject in May 1997. In response, Customs developed and published an architecture in July and August 1997. We reviewed this architecture and reported in May 1998 that it was not effective because it was neither complete nor enforced. For example, the architecture did not 1. fully describe Customs' business functions and their relationships, 2. define the information needs and flows among these functions, and 3. establish the technical standards, products, and services that would be characteristic of its target systems environment on the basis of these business specifications. Accordingly, we recommended that Customs complete its enterprise information systems architecture and establish compliance with the architecture as a requirement of Customs' information technology investment management process. In response, Customs agreed to develop a complete architecture and establish a process to ensure compliance. Customs reports that its architecture will be completed in May 1999. Also, in January 1999, Customs changed its internal procedures to provide for effective enforcement of its architecture, once it is completed. Until the architecture is completed and enforced, Customs risks spending millions of dollars to develop, acquire, and maintain information systems, including ACE, that do not effectively and efficiently support the agency's mission needs. Effective IT investment management is predicated on answering one basic question: Is the organization doing the "right thing" by investing specified time and resources in a given project or system? The Clinger-Cohen Act and OMB and GAO guidance together provide an effective IT investment management framework for answering this question. Among other things, they describe the need for 1. identifying and analyzing alternative system solutions, 2. developing reliable estimates of the alternatives' respective costs and benefits and investing in the most cost-beneficial alternative, and 3. to the maximum extent practical, structuring major projects into a series of increments to ensure that each increment constitutes a wise investment. Customs did not satisfy any of these requirements for ACE. First, Customs did not identify and evaluate a full range of alternatives to its defined ACE solution before commencing development activities. For example, Customs did not consider how ACE would relate to another Treasury- proposed system for processing import trade data, known as the International Trade Data System (ITDS), including considering the extent to which ITDS should be used to satisfy needed import processing functionality. Initiated in 1995 as a project to develop a coordinated, governmentwide system for the collection, use, and dissemination of trade data, the ITDS project is headed by the Treasury Deputy Assistant Secretary for Regulatory, Tariff and Trade Enforcement. The system is expected to reduce the burden federal agencies place on organizations by requiring that they respond to duplicative data requests. Treasury intends for the system to serve as the single point for collecting, editing, and validating trade data as well as collecting and accounting for trade revenue. At the time of our review of ACE, these functions were also planned for ACE. Similarly, Customs did not evaluate different ACE architectural designs, such as the use of a mainframe-based versus client/server-based hardware architecture. Also, Customs did not evaluate alternative development approaches, such as acquisition versus in-house development. In short, Customs committed to and began building ACE without knowing whether it had chosen the most cost-effective alternative and approach. Second, Customs did not develop a reliable life cycle cost estimate for the approach it selected. SEI has developed a method for project managers to use to determine the reliability of project cost estimates. Using SEI's method, we found that Customs' $1.05 billion ACE life cycle cost estimate was not reliable, and that it did not provide a sound basis for Customs' decision to invest in ACE. For example, in developing the cost estimate, Customs did not (1) use a cost model, (2) account for changes in its approach to building different ACE increments, (3) account for changes to ACE software and hardware architecture, or (4) have historical project cost data upon which to compare its ACE estimate. Moreover, the $1.05 billion cost estimate used to economically justify ACE omitted relevant costs. For instance, the costs of technology refreshment and system requirements definition were not included (see table 1). Exacerbating this problem, Customs represented its ACE cost estimate as a precise point estimate rather than explicitly disclosing to investment decisionmakers in Treasury, OMB, and Congress the estimate's inherent uncertainty. Customs' projections of ACE benefits were also unreliable because they were either overstated or unsupported. For example, the analysis includes $203.5 million in savings attributable to 10 years of avoided maintenance and support costs on the Automated Commercial System (ACS)--the system ACE is to replace. However, Customs would not have avoided maintenance and support costs for 10 years. At the time of Customs' analysis, it planned to run both systems in parallel for 4 years, and thus planned to spend about $53 million on ACS maintenance and support during this period. As another example, $650 million in savings was not supported by verifiable data or analysis, and $644 million was based on assumptions that were analytically sensitive to slight changes, making this $644 million a "best case" scenario. Third, Customs is not making its investment decisions incrementally as required by the Clinger-Cohen Act and OMB. Although Customs has decided to implement ACE as a series of 21 increments, it is not justifying investing in each increment on the basis of defined costs and benefits and a positive return on investment for each increment. Further, once it has deployed an increment at a pilot site for evaluation, it is not validating the benefits that the increment actually provides, and it is not accounting for costs on each increment so that it can demonstrate that a positive return on investment was actually achieved. Instead, Customs estimated the costs and benefits for the entire system--all 21 increments, and used this as economic justification for ACE. Mr. Chairman, our work has shown that such estimates of many system increments to be delivered over many years are impossible to make accurately because later increments are not well understood or defined. Also, these estimates are subject to change in light of experiences on nearer term increments and changing business needs. By using an inaccurate, aggregated estimate that is not refined as increments are developed, Customs is committing enormous resources with no assurance that it will achieve a reasonable return on its investment. This "grand design" approach to managing large system modernization projects has repeatedly proven to be ineffective across the federal government, resulting in huge sums invested in systems that do not provide expected benefits. Failure of the grand design approach was a major impetus for the IT management reforms contained in the Clinger-Cohen Act. Software process maturity is one important and recognized measure of determining whether an organization is managing a system or project the "right way," and thus whether or not the system will be completed on time and within budget and will deliver promised capabilities. The Clinger- Cohen Act requires agencies to implement effective IT management processes, such as processes for managing software development and acquisition. SEI has developed criteria for determining an organization's software development and acquisition effectiveness or maturity. Customs lacks the capability to effectively develop or acquire ACE software. Using SEI criteria for process maturity at the "repeatable" level, which is the second level on SEI's five-level scale and means that an organization has the software development/acquisition rigor and discipline to repeat project successes, we evaluated ACE software processes. In February 1999, we reported that the software development processes that Customs was employing on NCAP 0.1, the first release of ACE, were not effective. For example, we reported that Customs lacked effective software configuration management, which is important for establishing and maintaining the integrity of the software products during development. Also, we reported that Customs lacked a software quality assurance program, which greatly increased the risk of ACE software not meeting process and product standards. Further, we reported that Customs lacked a software process improvement program to effectively address these and other software process weaknesses. Our findings concerning ACE software development maturity are summarized in table 2. As discussed in our brief history of ACE, after Customs developed NCAP 0.1 in-house, it decided to contract out for the development of NCAP 0.2, thus changing its role on ACE from being a software developer to being a software acquirer. According to SEI, the capabilities needed to effectively acquire software are different than the capabilities needed to effectively develop software. Regardless, we reported later in February 1999 that the software acquisition processes that Customs was employing on NCAP 0.2 were not effective. For example, Customs did not have an effective software acquisition planning process and, as such, could not effectively establish reasonable plans for performing software engineering and for managing the software project. Also, Customs did not have an effective evaluation process, meaning that it lacked the capability for ensuring that contractor-developed software satisfied defined requirements. Our findings concerning ACE software acquisition maturity are summarized in table 3. To address ACE management weaknesses, we recommended that Customs analyze alternative approaches to satisfying its import automation needs, including addressing the ITDS/ACE relationship; invest in its defined ACE solution incrementally, meaning for each system increment (1) rigorously estimate and analyze costs and benefits, (2) require a favorable return-on-investment and compliance with Customs' enterprise systems architecture, and (3) validate actual costs and benefits once an increment is piloted, compare actuals to estimates, use the results in deciding on future increments, and report the results to congressional authorizers and appropriators; establish an effective software process improvement program and correct the software process weaknesses identified in our report, thereby bringing ACE software process maturity to a least an SEI level 2; and require at least SEI level 2 processes of all ACE software contractors. In commenting on our February 1999 report, the Commissioner of Customs agreed with our findings and committed to implementing our recommendations. In April 13, 1999, testimony, the Commissioner outlined several actions Customs has underway to improve ACE project management and address our recommendations. In brief, Customs plans to acquire the services of a prime contractor that is at least SEI level 3 certified to help Customs implement mature software processes and plan, implement, and manage its modernization efforts, including ACE; plans to hire a Federally Funded Research and Development Center (FFRDC) to support solicitation, selection, contract award, contract management, and ongoing oversight of the prime contractor; has hired a contractor to update and improve the ACE life cycle cost has retained an audit firm to provide independent reviews of Customs' methodology for estimating ACE costs and revised cost/benefit analysis; has engaged a contractor to update and improve the ACE cost/benefit analysis by addressing our concerns, including use of ITDS as the interface for ACE; plans to perform additional cost/benefit analyses of ACE increments and analyze alternative approaches to building ACE; and plans to ensure that each ACE increment is compliant with Customs' enterprise systems architecture. Successful systems modernization is absolutely critical to Customs' ability to perform its trade import mission efficiently and effectively in the 21st century. Systems modernization success, however, depends on doing the "right thing, the right way." To be "right," organizations must (1) invest in and build systems within the context of a complete and enforced enterprise systems architecture, (2) make informed, data-driven decisions about investment options based on expected and actual return-on-investment for system increments, and (3) build system increments using mature software engineering practices. Our reviews of agency system modernization efforts over the last 5 years point to weaknesses in these three areas as the root causes of their not delivering promised system capabilities on time and within budget. Until Customs corrects its ACE management and technical weaknesses, the federal government's troubled experience on other modernization efforts is a good indicator for ACE. In fact, although Customs does not collect data to know whether the first two ACE releases are already falling short of cost and performance expectations, the data it does collect on meeting milestones show that the first two releases have taken about 2 years longer than originally planned. This is precisely the type of unaffordable outcome that can be avoided by making the management and technical improvements we recommended. To Customs' credit, it fully recognizes the seriousness of the situation, has quickly initiated actions to begin correcting its ACE management and technical weaknesses, and is committed to each of these actions. We are equally committed to working with Customs as it strives to do so and with Congress as it oversees this important initiative. This concludes my statement. I would be glad to respond to any questions that you or other Members of the Committee may have at this time. 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.
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Pursuant to a congressional request, GAO discussed the weaknesses of the Customs Service's Automated Commercial Environment (ACE) project. GAO noted that: (1) Customs is well over 2 years behind its original National Customs Automation Program prototype schedule; (2) Customs was not building ACE within the context of an enterprise systems architecture, or blueprint of its agencywide future systems environment; (3) Customs developed and published an architecture in July and August 1997; (4) GAO reviewed this architecture and reported in May 1998 that it was not effective because it was neither complete nor enforced; (5) in response, Customs agreed to develop a complete architecture and establish a process to ensure compliance; (6) Customs reports that its architecture will be completed in May 1999; (7) Customs did not identify and evaluate a full range of alternatives to its defined ACE solution before commencing development activities; (8) Customs did not develop a reliable life cycle cost estimate for the approach it selected; (9) Customs is not making investment decisions incrementally as required by the Clinger-Cohen Act and the Office of Management and Budget; (10) although Customs has decided to implement ACE as a series of 21 increments, it is not justifying investing in each increment on the basis of defined costs and benefits and a positive return on investment for each increment; (11) Customs lacks the capability to effectively develop or acquire ACE software; and (12) Customs lacked a software process improvement program to effectively address these and other software process weaknesses.
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Our April 1996 report found that since deregulation, as expected, fares had fallen and service had improved for most large-community airports. However, without the cross-subsidy that was present when the industry was regulated, experts also expected fares to increase somewhat at airports serving small and medium-sized communities and expected service to decline. We found, in fact, that since deregulation, substantial regional differences have existed in fare and service trends, particularly among small and medium-sized community airports. A primary reason for these differences has been the greater degree of economic growth that has occurred over the past two decades in the West and Southwest and in larger communities nationwide. In particular, we noted that most low-fare airlines that began interstate air service after deregulation, such as Southwest Airlines and Reno Air, had decided to enter airports serving communities of all sizes in the West and Southwest because of these communities' robust economic growth. By contrast, low-fare airlines had generally avoided serving small- and medium-sized-community airports in the East and upper Midwest, in part because of the slower growth, harsher weather, and greater airport congestion in these regions. Our review of the trends in fares between 1979 and 1994 for a sample of 112 small-, medium-sized, and large-community airports identified 15 airports where fares, adjusted for inflation, had declined by over 20 percent and 8 airports where fares had increased by over 20 percent.Each of the 15 airports where fares declined was located in the West or Southwest, and low-fare airlines accounted for at least 10 percent of the passenger boardings at all but one of those airports in 1994. On the other hand, each of the eight airports where fares had increased by over 20 percent since deregulation was located in the Southeast and the Appalachian region. Our April 1996 report also discussed similar trends in service quantity and quality since deregulation. Large communities, in general, and communities of all sizes in the West and Southwest had experienced a substantial increase in the number of departures and available seats as well as improvements in such service quality indicators as the number of available nonstop destinations and the amount of jet service. Over time, however, smaller- and medium-sized communities in the East and upper Midwest had generally experienced a decline in the quantity and quality of air service. In particular, these communities had experienced a sharp decrease in the number of available nonstop destinations and in the amount of jet service relative to turboprop service. This decrease occurred largely because established airlines had reduced jet service from these airports and deployed turboprops to link the communities to those airlines' major hubs. We reported in October 1996 that operating barriers at key hub airports in the upper Midwest and the East, combined with certain marketing strategies of the established carriers, had two effects on competition. The operating barriers and marketing strategies deterred new entrant airlines and fortified established carriers' dominance of those hub airports and routes linking those hubs with nearby small- and medium-sized-community airports. In the upper Midwest, there is limited competition in part because two airlines control nearly 90 percent of the takeoff and landing slots at O'Hare, and one airline controls the vast majority of gates at the airports in Minneapolis and Detroit under long-term, exclusive-use leases. Similarly, in the East, one airline controls the vast majority of gates under exclusive-use leases at Cincinnati, Charlotte, and Pittsburgh and a few established airlines control most of the slots at National, LaGuardia, and Kennedy. Perimeter rules at LaGuardia and National further limit the ability of airlines based in the West to compete in those markets. Particularly for these key markets in the upper Midwest and East, the relative significance of these barriers in limiting competition and contributing to higher airfares has grown over time. As a result, our October 1996 report recommended that DOT take action to lower the operating barriers and highlighted areas for potential congressional action. Our 1996 report also discussed the effects of some marketing strategies of incumbent airlines on competition. To reduce congestion, the Federal Aviation Administration (FAA) has limited since 1969 the number of takeoffs and landings that can occur at O'Hare, National, LaGuardia, and Kennedy. By allowing new airlines to form and established airlines to enter new markets, deregulation increased the demand for access to these airports. Such increased demand complicated FAA's efforts to allocate takeoff and landing slots equitably among the airlines. To minimize the government's role in the allocation of slots, in 1985 DOT began to allow airlines to buy and sell them to one another. Under this "Buy/Sell Rule," DOT "grandfathered" slots to the holders of record as of December 16, 1985. Emphasizing that it still owned the slots, however, DOT reserved the right to withdraw slots from the incumbents at any time. In addition, to mitigate the anticompetitive effects of grandfathering, DOT retained about 5 percent of the slots at O'Hare, National, and LaGuardia and in 1986 distributed them in a random lottery to airlines having few or no slots at those airports. Even with the lottery, we found that the level of control over slots by a few established airlines had increased over time. By contrast, the share held by the airlines that started after deregulation has remained low. (See app. I.) To address this problem, in October 1996, we recommended that DOT redistribute some of the grandfathered slots to increase competition, taking into account the investments made by those airlines at each of the slot-controlled airports. We were envisioning that a small percentage of slots would be redistributed. In response to our report, DOT has begun to use the authority that the Congress gave it in 1994 to allow additional slots for entry at O'Hare, LaGuardia, and Kennedy. In October 1997, DOT awarded Reno Air and Trans States Airlines exemptions from slot limitations at O'Hare, while Frontier Airlines, ValuJet Airlines, and AirTran Airways were granted exemptions at LaGuardia. These exemptions should help to enhance service in the East and upper Midwest. For example, Trans States Airlines received 8 exemptions to provide service between O'Hare and its choice of Asheville, North Carolina; Chattanooga, Tennessee; Roanoke, Virginia; and Tri-Cities, Tennessee/Virginia. Our reports have also identified restrictive gate leases as a barrier to establishing new or expanded service at some airports. These leases permit an airline to hold exclusive rights to use most of an airport's gates over a long period of time, commonly 20 years. Such leases prevent nonincumbents from securing necessary airport facilities on equal terms with incumbent airlines. To gain access to an airport where most gates are exclusively leased, a nonincumbent must sublet gates from the incumbent airlines--often at nonpreferred times and at a higher cost than the incumbent pays. While some airports, such as Los Angeles International, have attempted to regain more control of their facilities by signing less restrictive, shorter-term leases once the exclusive-use leases expired, our October 1996 report identified several airports where entry was still limited because of long-term, exclusive-use gate leases with one airline. We identified six airports in particular where this occurred: Charlotte; Cincinnati; Detroit; Minneapolis; Newark, New Jersey; and Pittsburgh. The vast majority of gates at each airport are exclusively leased, usually to one established airline. (See app. II.) As a result, it is extremely difficult to gain competitive access to these airports, according to executives at many airlines that started after deregulation. Although the development, maintenance, and expansion of airport facilities is essentially a local responsibility, most airports are operated under federal restrictions that are tied to the receipt of federal grant money from FAA. To address the gate lease problem, we recommended that when disbursing airport improvement grant moneys, FAA give priority to those airports that do not lease the vast majority of their gates to one airline under long-term, exclusive-use terms. DOT did not concur with this recommendation. According to DOT, because the number of airports that we identified as presenting gate access problems is sufficiently small, the agency would prefer to address those problems on a case-by-case basis. DOT emphasized that in cases where incumbent airlines are alleged to have used their contractual arrangements with local airport authorities to block new entry, the agency will investigate to determine whether the behavior constitutes an unfair or deceptive practice or an unfair method of competition. If so, the agency noted that it will take appropriate action. At LaGuardia and National airports, perimeter rules prohibit incoming and outgoing flights that exceed 1,500 and 1,250 miles, respectively. The perimeter rules were designed to promote Kennedy and Dulles airports as the long-haul airports for the New York and Washington metropolitan areas. However, the rules limit the ability of airlines based in the West to compete because those airlines are not allowed to serve LaGuardia and National airports from the markets where they are strongest. By contrast, because of their proximity to LaGuardia and National, each of the seven largest established carriers is able to serve those airports from its principal hub. While the limit at LaGuardia was established by the Port Authority of New York & New Jersey, National's perimeter rule is federal law. Thus, in our October 1996 report, we suggested that the Congress consider granting DOT the authority to allow exemptions to the perimeter rule at National when proposed service will substantially increase competition. We did not recommend that the rule be abolished because removing it could have unintended negative consequences, such as reducing the amount of service to smaller communities in the Northeast and Southeast. This could happen if major slot holders at National were to shift their service from smaller communities to take advantage of more profitable, longer-haul routes. As a result, we concluded that a more prudent course to increasing competition at National would be to examine proposed new services on a case-by-case basis. Our October 1996 report also emphasized that certain marketing strategies of incumbent airlines, taken together, had created strong loyalty among passengers and travel agents, making it difficult for nonincumbents to enter markets dominated by an established airline. Two strategies in particular--booking incentives to travel agents and frequent flier plans--have encouraged business flyers, who represent the most profitable segment of the industry, to use the dominant carrier in each market. Because about 90 percent of business travel is booked through travel agencies, airlines strive to influence the agencies' booking patterns by offering special bonus commissions as a reward for booking a targeted proportion of passengers on their airline. Similarly, frequent flier programs have become an increasingly effective tool to encourage customers' loyalty to a particular airline. As such, entry by new and established airlines alike into a market dominated by one carrier is very difficult. This is particularly true given that to attract new customers a potential entrant must announce its schedule and fares well in advance of beginning service, thus giving the incumbent an opportunity to adjust its marketing strategies. Such adjustments by the incumbent may include matching low fares offered by new entrant airlines and selling far more seats at these low fares than are being offered by the new entrants. In many cases, we found that airlines chose not to enter or to quickly exit markets where they did not believe they could overcome the combined effect of these marketing strategies. In October 1996, we reported that the effect of these and other marketing strategies tends to be the greatest--and fares the highest--in markets where the dominant carrier's position is protected by operating barriers. However, we also noted that the marketing strategies produced consumer benefits, such as free frequent flier trips, and concluded that short of an outright ban, few policy options existed that would mitigate the marketing strategies' negative impact on new entry. Because a variety of factors has contributed to higher fares and poorer service that some small and medium-sized communities in the East and upper Midwest have experienced since deregulation, a coordinated effort involving federal, regional, local, and private-sector initiatives may be needed. Recent efforts by DOT and proposed legislation are aimed at enhancing competition. Additional public and private activities are currently under way to address regional and local air service problems. If successful, these initiatives would complement, and potentially encourage, the increasing use of small jets by the commuter affiliates of established airlines--a trend that has the potential for increasing competition and improving the quality of service for some communities. In response to our October 1996 report, DOT stated in January 1997 that it shared our concerns that barriers to entry limit competition in the airline industry. As we mentioned earlier in this testimony, in October 1997, DOT granted slots to two new entrants at O'Hare and three new entrants at LaGuardia. At the same time, DOT set forth its new policy on slot exemptions, which has been expanded to take into account the need for increased competition at the slot-controlled airports. DOT is currently considering other slot exemptions but acknowledged that there are only a limited number of exemption opportunities. Because some in government and academia believe that slots at some airports may be underutilized, DOT is also evaluating how effectively slots are being used at these airports. In addition, DOT has expressed concern about potentially overaggressive attempts by some established carriers to thwart new entry. According to DOT, over the past 2 years, there has been an increasing number of alleged anticompetitive practices--such as predatory conduct--aimed at new competition, particularly at major network hubs. DOT is formulating a new policy to clearly delineate what is acceptable and unacceptable behavior in the area of competition between major carriers at their hubs and smaller, low-cost competitors. The policy will indicate those factors that DOT will consider if it pursues formal enforcement actions to correct unacceptable behavior. Over the past several months, a number of bills have been proposed to promote aviation competition and address some of the problems we identified. The proposals include creating a mechanism by which DOT would increase access to the slot-controlled airports by periodically withdrawing a small portion of the slots that were grandfathered to incumbent airlines and reallocating them among new entrant and limited incumbent air carriers. The proposals also include requiring DOT to grant exemptions to the perimeter rule at National under certain circumstances, limiting the time that DOT has to respond to complaints of predatory behavior, and providing loan guarantees for commuter air carriers to purchase regional jet aircraft for use in underserved markets. Recognizing that federal actions alone would not remedy their regions' air service problems, several airport directors and community chamber of commerce officials in the Southeast and Appalachian regions have begun a coordinated effort to improve air service in their region. As a result of this effort, several Members of Congress from these regions in turn organized a bipartisan caucus named "Special Places of Kindred Economic Situation" (SPOKES). Among other things, SPOKES is designed to ensure sustained consumer education and coordinate federal, state, local, and private efforts to address the air service problems of communities adversely affected since deregulation. Two SPOKES-led initiatives include establishing a Website on the Internet and convening periodic "national air service roundtables" to bring together federal, state, and local officials and airline, airport, and business representatives to explore potential solutions to air service problems. The first roundtable was held in Chattanooga in February 1997. The roundtable concluded that greater regional, state, and local efforts were needed to promote economic growth and attract established and new airlines alike to serve small and medium-sized markets in the East and upper Midwest. Suggested initiatives included (1) creating regional trade associations composed of state and local officials, airport directors, and business executives; (2) offering local financial incentives to nonincumbent airlines, such as guaranteeing a specified amount of revenue or providing promotional support; and (3) targeting aggressive marketing efforts by communities toward airlines to spur economic growth. A second roundtable was held in Jackson, Mississippi, in January 1998. A regional conference, held in West Virginia in December 1997, brought together federal and state officials, airport representatives, and local businesses to discuss ways to restore quality air service to small communities in the state. In West Virginia, for example, Wheeling, Elkins, and Martinsburg have lost all scheduled air service since deregulation. Throughout the state, communities have experienced declines in the number of nonstop flights, the number of seats available, and the number of jet flights. Regional concerns about air service have extended to other states and conferences were recently held in Iowa and Arizona. To grow and prosper, businesses need convenient, affordable air service. As a result, businesses located in the affected communities have increasingly attempted to address their communities' air service problems. Perhaps the most visible of these efforts was the formation of the Business Travel Contractors Corporation (BTCC) by 45 corporations, including Chrysler Motors, Procter & Gamble, and Black & Decker. These corporations formed BTCC because they were concerned about the high fares they were paying in markets dominated by one established airline. BTCC held national conferences in Washington, D.C., in April and October 1997 to examine this problem and explore potential market-based initiatives. At the October conference, attendees endorsed the concepts of (1) holding periodic slot lotteries to provide new entrant airlines with access to slot-controlled airports, (2) allowing new entrants and other small airlines to serve points beyond National's perimeter rule, and (3) requiring DOT to issue a policy addressing anticompetitive practices and specifying the time frames within which all complaints will be acted upon. While BTCC suspended operations in January 1998, its lobbying arm--the Business Travel Coalition--plans to continue efforts to increase competition. In addition to public and private-sector initiatives, the increasing use of 50- to 70-seat regional jets is improving the quality of air service for a growing number of communities. Responding to consumers' preference to fly jets rather than turboprops for greater comfort, convenience, and a perceived higher level of safety, commuter affiliates of established airlines are increasingly using regional jets to (1) replace turboprops on routes between established airlines' hubs and small and medium-sized communities and (2) initiate nonstop service on routes that are either uneconomical or too great a distance for commuter carriers to serve with slower, higher-cost, and shorter-range turboprops. Because regional jets can generally fly several hundred miles farther than turboprops, commuter carriers will be able to link more cities to established airlines' hubs. To the extent that this occurs, it could increase competition in many small and medium-sized communities by providing consumers with more service options. Mr. Chairman, this concludes our prepared statement. We would be glad to respond to any questions that you or any Members of the Subcommittee may have. Major lease holders and dates of lease expiration 48 43 (90%) 34 gates leased to USAir until 2007 67 67 (100%) 50 gates leased to Delta with 9 leases expiring in 2015 and 41 expiring in 2023 86 76 (88%) 64 gates leased to Northwest until the end of 2008, with all but 10 under exclusive-use terms 65 65 (100%) 49 gates leased to Northwest with 16 leases having expired as of 1996 and on month-to-month basis, and remainder expiring at various times ranging from the end of 1997 to 2015 94 79 (84%) 43 gates leased to Continental until 2013, 36 gates leased to the other established airlines until 2018, and 15 gates reserved primarily for international use 75 66 (88%) Domestic Aviation: Barriers Continue to Limit Competition (GAO/T-RCED-98-32, Oct. 28, 1997). Airline Deregulation: Addressing the Air Service Problems of Some Communities (GAO/T-RCED-97-187, June 25, 1997). Domestic Aviation: Barriers to Entry Continue to Limit Benefits of Airline Deregulation (GAO/T-RCED-97-120, May 13, 1997). Airline Deregulation: Barriers to Entry Continue to Limit Competition in Several Key Domestic Markets (GAO/RCED-97-4, Oct. 18, 1996). Changes in Airfares, Service, and Safety Since Airline Deregulation (GAO/T-RCED-96-126, Apr. 25, 1996). Airline Deregulation: Changes in Airfares, Service, and Safety at Small, Medium-Sized, and Large Communities (GAO/RCED-96-79, Apr. 19, 1996). Airline Competition: Essential Air Service Slots at O'Hare International Airport (GAO/RCED-94-118FS, Mar. 4, 1994). Airline Competition: Higher Fares and Less Competition Continue at Concentrated Airports (GAO/RCED-93-171, July 15, 1993). Airline Competition: Options for Addressing Financial and Competition Problems, testimony before the National Commission to Ensure a Strong Competitive Airline Industry (GAO/T-RCED-93-52, June 1, 1993). Computer Reservation Systems: Action Needed to Better Monitor the CRS Industry and Eliminate CRS Biases (GAO/RCED-92-130, Mar. 20, 1992). Airline Competition: Effects of Airline Market Concentration and Barriers to Entry on Airfares (GAO/RCED-91-101, Apr. 26, 1991). Airline Competition: Weak Financial Structure Threatens Competition (GAO/RCED-91-110, Apr. 15, 1991). Airline Competition: Fares and Concentration at Small-City Airports (GAO/RCED-91-51, Jan. 18, 1991). Airline Deregulation: Trends in Airfares at Airports in Small and Medium-Sized Communities (GAO/RCED-91-13, Nov. 8, 1990). Airline Competition: Industry Operating and Marketing Practices Limit Market Entry (GAO/RCED-90-147, Aug. 29, 1990). Airline Competition: Higher Fares and Reduced Competition at Concentrated Airports (GAO/RCED-90-102, July 11, 1990). Airline Deregulation: Barriers to Competition in the Airline Industry (GAO/T-RCED-89-65, Sept. 20, 1989). Airline Competition: DOT's Implementation of Airline Regulatory Authority (GAO/RCED-89-93, June 28, 1989). Airline Service: Changes at Major Montana Airports Since Deregulation (GAO/RCED-89-141FS, May 24, 1989). Airline Competition: Fare and Service Changes at St. Louis Since the TWA-Ozark Merger (GAO/RCED-88-217BR, Sept. 21, 1988). Competition in the Airline Computerized Reservation Systems (GAO/T-RCED-88-62, Sept. 14, 1988). Airline Competition: Impact of Computerized Reservation Systems (GAO/RCED-86-74, May 9, 1986). Airline Takeoff and Landing Slots: Department of Transportation's Slot Allocation Rule (GAO/RCED-86-92, Jan. 31, 1986). Deregulation: Increased Competition Is Making Airlines More Efficient and Responsive to Consumers (GAO/RCED-86-26, Nov. 6, 1985). 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.
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GAO discussed the air service problems that some communities have experienced since the deregulation of the airline industry in 1978. GAO noted that: (1) not all communities have benefited from airline deregulation; (2) certain airports--particularly those serving small and medium-sized communities in the East and upper Midwest--have experienced higher fares and poorer service since deregulation; (3) there are several reasons for the substantial regional differences in fare and service trends, including the dominance of routes to and from these airports by one or two traditional hub-and-spoke airlines and operating barriers, such as long-term exclusive-use gate leases at hub airports; (4) the more widespread entry of new airlines at airports in the West and Southwest since deregulation has stemmed largely from the greater economic growth in those regions as well as from the absence of dominant market positions of incumbent airlines and barriers to entry; (5) operating barriers continue to block entry at key airports and contribute to fare and service problems in the East and upper Midwest; (6) to minimize congestion and reduce flight delays, the Federal Aviation Administration has set limits since 1969 on the number of takeoffs or landings that can occur during certain periods of the day at four congested airports; (7) a few airlines control most of these slots at these airports, which limits new entrants; (8) in 1996 GAO reported that the vast majority of gates at six airports in the East and Upper Midwest were exclusively leased to usually one airline, making it very difficult to gain competitive access to these airports; (9) perimeter rules at two major airports limit the ability of airlines based in the West to compete at those airports; (10) these operating barriers, combined with certain marketing strategies by established carriers, have deterred new entrant airlines while fortifying established carriers dominance at key hubs in the East and upper Midwest; (11) increasing competition and improving air service at airports serving communities that have not benefited from deregulation will likely entail a range of federal, regional, local, and private-sector initiatives; (12) the Department of Transportation is undertaking several efforts to enhance competition; (13) recently proposed legislation would address several barriers to competition: slot controls, the perimeter rule, and predatory behavior by air carriers; (14) recent national and regional conferences exemplify efforts to pool available resources to focus on improving the airfares and quality of air service to such communities; and (15) other steps--such as improving the availability of gates--may also be needed to further ameliorate current competitive problems.
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In October 2004, Congress included a provision in the Ronald W. Reagan National Defense Authorization Act for Fiscal Year 2005 that required the Secretary of Defense to develop a comprehensive policy for DOD on the prevention of and response to sexual assaults involving members of the Armed Forces. The legislation required that the department's policy be based on the recommendations of the Department of Defense Task Force on Care for Victims of Sexual Assaults and on such other matters as the Secretary considered appropriate. Among other things, the legislation required DOD to establish a standardized departmentwide definition of sexual assault, establish procedures for confidentially reporting sexual assault incidents, and submit an annual report to Congress on reported sexual assault incidents involving members of the Armed Forces. In October 2005, DOD issued DOD Directive 6495.01, which contains its comprehensive policy for the prevention of and response to sexual assault, and in June 2006 it issued DOD Instruction 6495.02, which provides guidance for implementing its policy. DOD's directive defines sexual assault as "intentional sexual contact, characterized by the use of force, physical threat or abuse of authority or when the victim does not or cannot consent. It includes rape, nonconsensual sodomy (oral or anal sex), indecent assault (unwanted, inappropriate sexual contact or fondling), or attempts to commit these acts. Sexual assault can occur without regard to gender or spousal relationship or age of victim. 'Consent' shall not be deemed or construed to mean the failure by the victim to offer physical resistance. Consent is not given when a person uses force, threat of force, coercion, or when a victim is asleep, incapacitated, or unconscious." The Under Secretary of Defense for Personnel and Readiness has the responsibility for developing the overall policy and guidance for the department's sexual assault prevention and response program. Under the Office of the Under Secretary of Defense for Personnel and Readiness, DOD's Sexual Assault Prevention and Response Office (within the Office of the Deputy Under Secretary of Defense for Plans) serves as the department's single point of responsibility for sexual assault policy matters. These include providing the military services with guidance, training standards, and technical support; overseeing the department's collection and maintenance of data on reported sexual assaults involving servicemembers; establishing mechanisms to measure the effectiveness of the department's sexual assault prevention and response program; and preparing the department's annual report to Congress. In DOD, active duty servicemembers have two options for reporting a sexual assault: (1) restricted, and (2) unrestricted. The restricted reporting option permits a victim to confidentially disclose an alleged sexual assault to select individuals and receive care without initiating a criminal investigation. A restricted report may only be made to a Sexual Assault Response Coordinator, victim advocate, or medical personnel. Because conversations between servicemembers and chaplains are generally privileged, a victim may also confidentially disclose an alleged sexual assault to a chaplain. In contrast, the unrestricted reporting option informs the chain of command of the alleged sexual assault and may initiate an investigation by the military criminal investigative organization of jurisdiction. Since December 2007, the Coast Guard has employed a similar definition of sexual assault as well as similar options for reporting a sexual assault in its guidance, Commandant Instruction 1754.10C. At the installation level, the coordinators of the sexual assault prevention and response programs are known as Sexual Assault Response Coordinators in DOD and as Employee Assistance Program Coordinators in the Coast Guard. Other responders include victim advocates, judge advocates, medical and mental health providers, criminal investigative personnel, law enforcement personnel, and chaplains. DOD has taken positive steps to respond to congressional direction by establishing policies and a program to prevent, respond to, and resolve reported sexual assault incidents involving servicemembers, and the Coast Guard, on its own initiative, has taken similar steps. Further, we found that commanders are taking action against alleged sexual assault offenders. However, we also found that several factors hinder implementation of the programs, including (1) guidance that may not adequately address how to implement DOD's program in certain environments, (2) inconsistent support for the programs, (3) limited effectiveness of some program coordinators, (4) training that is not consistently effective, and (5) limited access to mental health services. In response to statutory requirements, DOD has established a program to prevent, respond to, and resolve sexual assaults involving servicemembers. DOD's policy and implementing guidance for its program are contained in DOD Directive 6495.01 and DOD Instruction 6495.02. Specific steps that DOD has taken include establishing a standardized departmentwide definition of sexual establishing a confidential option to report sexual assault incidents, known as restricted reporting; establishing a Sexual Assault Prevention and Response Office to serve as the single point of accountability for sexual assault prevention and response; requiring the military services to develop and implement their own policies and programs, based on DOD's policy, to prevent, respond to, and resolve sexual assault incidents; establishing training requirements for all servicemembers on preventing and responding to sexual assault; and reporting data on sexual assault incidents to Congress annually. Although not explicitly required by statute, the Coast Guard has had a sexual assault prevention and response program in place since 1997. In December 2007, the Coast Guard, on its own initiative, updated its instruction to mirror DOD's policy and to include a restricted option for reporting sexual assaults. In DOD, each of the military services has also established a Sexual Assault Prevention and Response office with responsibility for overseeing and managing sexual assault matters within that military service. The Coast Guard's Office of Work-Life, which falls under the Commandant of the Coast Guard, is responsible for overseeing and managing sexual assault matters within the Coast Guard. A key aspect of the DOD's and the Coast Guard's efforts to address sexual assault is the disposition of alleged sexual assault offenders. In both DOD and the Coast Guard, commanders are responsible for discipline of misconduct, including sexual assault, and they have a variety of judicial and administrative options at their disposal. During the course of our ongoing work, we found that commanders at the installations we visited were supportive of the need to take action against alleged sexual assault offenders and were generally familiar with the options available to them for disposing of alleged sexual assault cases. Commanders' options are specified in the Uniform Code of Military Justice (UCMJ) and the Manual for Courts-Martial and include trial by court-martial, the most severe disposition option, which can lead to many different punishments including death, prison time, and punitive separation from military service; nonjudicial punishment, pursuant to Article 15 of the UCMJ, which allows for a number of punishments including reducing a member's grade, seizing a portion of pay, and imposing restrictions on freedom; and administrative actions, which are corrective measures that may result in a variety of actions including issuing a reprimand, extra military instruction, or the administrative withholding of privileges. In some cases, commanders may also elect to take no action, such as if evidence of an offense is not sufficient. However, there are also instances in which commanders cannot take action, such as if the alleged offender is not subject to military law or could not be identified, if the alleged sexual assault is unsubstantiated or unfounded, or if there is insufficient evidence that an offense occurred. In determining how to dispose of alleged sexual assault offenders, commanders take into account a number of factors that are specified in the Manual for Courts-Martial. Some of the factors that commanders take into account include the character and military service of the accused, the nature of and circumstances surrounding the offense and the extent of harm caused, and the appropriateness of the authorized punishment to the particular accused or offense. Further, commanders' decisions are typically made after consulting with the supporting legal office (e.g., judge advocate). Despite taking positive steps to implement programs to prevent and respond to reported sexual assault incidents involving servicemembers, we identified several factors during the course of our ongoing work that, if not addressed, could continue to hinder implementation of the programs. DOD's guidance may not adequately address some important issues. DOD's directive and instruction may not adequately address how to implement the program when operating in deployed or joint environments. Program officials we met with overseas told us that DOD's policies do not sufficiently take into account the realities of operating in a deployed environment, in which unique living and social circumstances can heighten the risks for sexual assault and program resources can be widely dispersed, which can make responding to a sexual assault challenging. Similarly, program officials told us there is a need for better coordination of resources when a sexual assault occurs in a joint environment. At one overseas installation we visited, Coast Guard members told us that they were confused about which program they fell under--DOD's or the Coast Guard's--and thus who they should report an alleged sexual assault to. Installations can also have multiple responders responsible for responding to an assault, potentially leading to further confusion. While most commanders support the programs, some do not. DOD's instruction requires commanders and other leaders to advocate a strong program and effectively implement DOD's sexual assault prevention and response policies. The Coast Guard's instruction similarly requires that commanders and other leaders ensure compliance with the Coast Guard's policies and procedures. Though we found that commanders--that is, company and field grade officers, at the installations we visited have taken actions to address incidents of sexual assault, some commanders do not support the programs. For example, at three of the installations program officials told us of meeting with resistance from commanders when attempting to place, in barracks and work areas, posters or other materials advertising the programs or the options for reporting a sexual assault. In some cases, commanders we spoke with told us that they supported the programs but did not like the restricted reporting option because they felt it hindered their ability to protect members of the unit or discipline alleged offenders. Commanders who do not support the programs effectively limit servicemembers' knowledge about the program and ability to exercise their reporting options. Program coordinators' effectiveness can be hampered when program management is a collateral duty. To implement sexual assault prevention and response programs at military installations, DOD and the services rely largely on Sexual Assault Response Coordinators, while the Coast Guard relies on Employee Assistance Program Coordinators. However, we found that there are a variety of models for staffing these positions. DOD's instruction leaves to the military services' discretion whether these positions are filled by military members, DOD civilian employees, or DOD contractors, and thus whether Sexual Assault Response Coordinators perform their roles as full-time or collateral duties. In the Coast Guard, Employee Assistance Program Coordinators are full-time federal civilian employees, but they are also responsible for simultaneously managing multiple programs, including sexual assault prevention and response, for a designated geographic region. We found that the time and resources dedicated to implementing sexual assault prevention and response programs varies, particularly when the program coordinators have collateral duties. Training is not consistently effective. Although DOD and the Coast Guard require that all servicemembers receive periodic training on their respective sexual assault prevention and response programs, our nongeneralizeable survey, interviews, and discussions with servicemembers and program officials revealed that a majority, but not all, servicemembers are receiving the required training, and that some servicemembers who have received it may not understand how to report a sexual assault using the restricted reporting option. For example, a survey we administered at 14 military installations revealed that while the majority of servicemembers we surveyed had received the required training, the percentage of servicemembers who responded that they would not know how to report a sexual assault using the restricted reporting option ranged from 13 to 43 percent for the seven installations where we administered our survey in the United States and from 13 to 28 percent for the seven installations where we administered our survey overseas. To date, neither DOD nor the Coast Guard has systematically evaluated the effectiveness of the training provided. Servicemembers who have not received the required training or are otherwise not familiar with their respective programs incur the risks of not knowing how to mitigate the possibility of being sexually assaulted or how to seek assistance if needed, or risk reporting the assault in a way that limits their option to maintain confidentiality while seeking treatment. Access to mental health services may be limited. DOD and the Coast Guard both require that sexual assault victims be made aware of available mental health services, and in 2007, DOD's Mental Health Task Force recommended that DOD take action to address factors that may prevent some servicemembers from seeking mental health care. However, we found that several factors, including a DOD-reported shortage of mental health care providers, the inherent logistical challenges of operating overseas or in geographically remote locations in the United States or overseas, and servicemembers' perceptions of stigma associated with mental health care can affect whether servicemembers who are victims of sexual assault can or do access mental health services. We also did not find any indication that either DOD or the Coast Guard are taking steps to systematically assess factors that may impede servicemembers who are victims of sexual assault from accessing mental health services. We found, based on responses to our nongeneralizeable survey and a 2006 DOD survey, the most recent available, that occurrences of sexual assault may be exceeding the rates being reported, suggesting that DOD and the Coast Guard have only limited visibility over the incidence of these occurrences. We recognize that the precise number of sexual assaults involving servicemembers is not possible to determine and that studies suggest sexual assault are generally underreported in the United States. Nevertheless, our findings indicate that some servicemembers may choose not to report sexual assault incidents for a variety of reasons, including the belief that nothing would be done or that reporting an incident would negatively impact their careers. In fiscal year 2007, DOD received 2,688 reports of alleged sexual assault made with either the restricted or unrestricted reporting option involving servicemembers as either the alleged offenders or victims. The Coast Guard, which did not offer the restricted reporting option during fiscal year 2007, received 72 reports of alleged sexual assault made using the unrestricted reporting option during this same time period. At the 14 installations where we administered our survey, 103 servicemembers indicated that they had been sexually assaulted within the preceding 12 months. Of these, 52 servicemembers indicated that they did not report the sexual assault incident. The number who indicated they did not report the sexual assault ranged from one to six servicemembers per installation. Respondents to our survey also told us that they were aware of alleged sexual assault incidents involving other servicemembers that were not reported to program officials. DOD's fiscal year 2007 annual report and a Coast Guard program official further support the view that servicemembers are not reporting all sexual assault incidents, as does the Defense Manpower Data Center's 2006 Gender Relations Survey of Active Duty Members, administered between June and September 2006. Issued in March 2008, the Defense Manpower Data Center survey found that of the estimated 6.8 percent of women and 1.8 percent of men in DOD who experienced unwanted sexual contact during the prior 12 months, the majority (an estimated 79 percent of women and 78 percent of men) chose not to report it. The Defense Manpower and Data Center report did not include data for the Coast Guard, but, at our request, the center provided information showing that an estimated 3 percent of female and 1 percent of male Coast Guard respondents reported experiencing unwanted sexual contact during the prior 12 months. While the survey results suggest a disparity between the actual number of sexual assault incidents and the number of those reported, this is largely an expected result of anonymous surveys. Whereas formal reports, whether restricted or unrestricted, involve some level of personal identification and therefore a certain amount of risk on the part of the victim, the risks and incentives for service members making anonymous reports are very different. Hence, anonymous survey results tend to produce higher numbers of reported incidents. Another factor obscuring the visibility that DOD and Coast Guard officials can have over the incidence of sexual assault is the fact that many of the individuals to whom the assaults may be reported--including clergy and civilian victim care organizations, civilian friends, or family--are not required to disclose these incidents. As a result, while DOD and the Coast Guard strive to capture an accurate picture of the incidence of sexual assault, their ability is necessarily limited. Our survey data revealed a number of reasons why respondents who experienced a sexual assault during the preceding 12 months did not report the incident. Commonly cited reasons by survey respondents at the installations we visited included: (1) the belief that nothing would be done; (2) fear of ostracism, harassment, or ridicule by peers; and (3) the belief that their peers would gossip about the incident. Survey respondents also commented that they would not report a sexual assault because of concern about being disciplined for collateral misconduct, such as drinking when not permitted to do so; not knowing to whom to make a report; concern that a restricted report would not remain confidential; the belief that an incident was not serious enough to report; or concern that reporting an incident would negatively impact their career or unit morale. The Defense Manpower Data Center's 2006 Gender Relations Survey of Active Duty Members identified similar reasons why servicemembers did not report unwanted sexual contact, including concern that reporting an incident could result in denial of promotions, assignment to jobs that are not career enhancing, and professional and social retaliation. However, servicemembers also reported favorable results after reporting unwanted sexual contact to military authorities, including being offered counseling and advocacy services, medical and forensic services, legal services, and having action taken against alleged offenders. Respondents to our survey indicated they were supportive of the restricted reporting option as well. For example, a junior enlisted female observed that the military is going to great lengths to improve the ways that sexual assault can be reported and commented that "in my opinion, people will be more likely to report an incident anonymously." Similarly, a female senior officer commented that "giving the victim a choice of making a restricted or unrestricted report is a positive change and allows that person the level of privacy they require." DOD and the Coast Guard have established some mechanisms for overseeing reports of sexual assault involving servicemembers. However, they lack the oversight framework necessary to evaluate the effectiveness of their sexual assault prevention and response programs, and DOD lacks key information from the military services needed to evaluate the effectiveness of department's program. DOD's annual reports to Congress may not effectively characterize incidents of sexual assault in the military services because the department has not clearly articulated a consistent methodology for reporting incidents and the means of presentation for some of the data does not facilitate comparison. In addition, the congressionally directed Defense Task Force on Sexual Assault in the Military Services has yet to begin its review, although DOD considers its work to be an important oversight element. DOD's directive establishes the department's oversight mechanisms for its sexual assault prevention and response program and assigns oversight responsibility to DOD's Sexual Assault Prevention and Response Office (within the Office of the Deputy Under Secretary of Defense for Plans). DOD's Sexual Assault Prevention and Response Office is responsible for developing programs, policies, and training standards for the prevention, reporting, response, and program accountability of sexual assaults involving servicemembers; developing strategic program guidance and joint planning objectives; storing and maintaining sexual assault data; establishing institutional evaluation, quality improvement, and oversight mechanisms to periodically evaluate the effectiveness of the department's program; assisting with identifying and managing trends; and preparing the department's annual report to Congress. To help provide oversight of the department's program, in 2006 DOD established a Sexual Assault Advisory Council, which consists of representatives from DOD's Sexual Assault Prevention and Response Office, the military services, and the Coast Guard. The Sexual Assault Advisory Council's responsibilities include advising the Secretary of Defense on the department's sexual assault prevention and response policies, coordinating and reviewing the department's policies and programs, and monitoring progress. The military services have also established some oversight mechanisms, though these efforts are generally focused on collecting data. Though Coast Guard representatives attend meetings of DOD's Sexual Assault Advisory Council, the Coast Guard has few other formal oversight mechanisms in place to oversee its sexual assault prevention and response program. According to program officials with whom we spoke in both DOD and the Coast Guard, to date their focus has been on program implementation, as opposed to program evaluation. Though DOD and the Coast Guard have established some oversight mechanisms, neither has established an oversight framework for their respective sexual assault prevention and response programs, which is necessary to ensure the effective implementation of their programs. Our prior work has demonstrated the importance of outcome-oriented performance measures to successful program oversight and shown that having an effective plan for implementing initiatives and measuring progress can help decision makers determine whether their initiatives are achieving desired results. In reviewing DOD's and the Coast Guard's programs, we found that neither has established an oversight framework because they have not established a comprehensive plan that includes such things as clear objectives, milestones, performance measures, and criteria for measuring progress, nor established evaluative performance measures with clearly defined data elements with which to analyze sexual assault incident data. Because DOD's and the Coast Guard's sexual assault prevention and response programs lack an oversight framework, their respective programs, as currently implemented, do not provide decision makers with the information they need to evaluate the effectiveness of the programs or to determine the extent to which the programs are helping to prevent sexual assault from occurring and to ensure that servicemembers who are victims of sexual assault receive the care they need. During the course of our ongoing work, we found a number of areas demonstrating the need for an oversight framework. For example, although DOD's Sexual Assault Prevention and Response Office is responsible for establishing institutional program evaluation, quality improvement, and oversight mechanisms to periodically evaluate the effectiveness of the department's programs, it has yet to establish qualitative or quantitative metrics to facilitate program evaluation and assess effectiveness. As a specific example, DOD has not yet established metrics to determine the frequency with which victims were precluded from making a confidential report using the restricted reporting option or reasons that precluded them from doing so. Additionally, we found that neither DOD nor the Coast Guard has established performance goals, such as a goal to ensure that a specific percentage of servicemembers within a unit have received required training. In the absence of such measures, Sexual Assault Prevention and Response Office officials in DOD told us that they currently determine the effectiveness of DOD's program based on how well the military services are complying with program implementation requirements identified by DOD. Importantly, both DOD and the Coast Guard recognize the need to establish an oversight framework in addition to their existing oversight mechanisms. For example, the Sexual Assault Advisory Council is in the initial stages of developing performance measures and evaluation criteria to assess program performance and identify conditions needing attention. However, DOD has not yet established time frames for developing and implementing these measures. DOD also is working with the military services to develop guidelines to permit, among other uses, consistent assessment of program implementation during site visits. In addition, Coast Guard program officials told us that they plan to conduct reviews of their program for compliance and quality in the future and plan to leverage any metrics developed by DOD to assess their program. Further, the Coast Guard Investigative Service has begun to conduct limited trend analysis on reported incidents, including the extent to which alcohol or drugs were involved in alleged sexual assaults. Without an oversight framework to guide program implementation, DOD and the Coast Guard also risk not collecting all of the information needed to provide insight into the effectiveness of their programs. In reviewing DOD's program, we found that the military services encountered challenges providing requested data because the request to do so was made after the start of the data collection period. For example, with the exception of the Army, none of the military services was able to provide data as part of the fiscal year 2007 annual report to Congress on sexual assaults involving civilian victims, such as contractors and government employees. Similarly, while there is no statutory reporting requirement, the Coast Guard voluntarily participates in DOD's annual reporting requirement by submitting data to DOD's Sexual Assault Prevention and Response Office. However, DOD does not include these data in its annual report, and the Coast Guard does not provide these incident data to Congress because neither is required to do so. As a result, at the present time Congress does not have visibility over the extent to which sexual assaults involving Coast Guard members occur. Though DOD's Sexual Assault Prevention and Response Office is responsible for assisting with identifying and managing trends, it is not able to conduct comprehensive cross-service trend analysis of sexual assault incidents because it lacks access to installation- or case-level data that would facilitate such analyses. DOD officials told us that the military services will not provide installation- or case-level incident data beyond those that are aggregated at the military service level. These data are generally limited to information needed to meet statutory requirements for inclusion in the annual report to Congress. In discussing this matter with the military services, service officials told us they do not want to provide installation- or case-level data to DOD because they are concerned (1) the data may be misinterpreted, (2) even nonidentifying data about the victim may erode victim confidentiality, and (3) servicemembers may not report sexual assaults if case-level data are shared beyond the service-level. However, without access to such information, DOD does not have the means to identify those factors, and thus to fully execute its oversight role, including assessing trends over time. For example, without case-level data, DOD cannot determine the frequency with which sexual assaults are reported in each of the geographic combatant commands to better target resources over time. DOD reports data to Congress annually on the total number of restricted and unrestricted reported incidents of sexual assault. However, in reviewing DOD's annual reports to Congress, we found that the reports may not effectively characterize incidents of sexual assault in the military services because the department has not clearly articulated a consistent methodology for reporting incidents and the means of presentation for some of the data does not facilitate comparison. For example, meaningful comparisons of the data cannot be made because the respective offices that provide the data to DOD measure incidents of sexual assault differently. In the military services, Sexual Assault Response Coordinators, who focus on victim care, report data on the number of sexual assault incidents brought using the restricted reporting option based on the number of victims involved. In contrast, the criminal investigative organizations, which report data on the number of sexual assault incidents brought using the unrestricted reporting option, report data on a per "incident" basis, which may include multiple victims or alleged offenders. We believe that this lack of a common means of presentation for reporting purposes has prevented users of the reports from making meaningful comparisons or drawing conclusions from the reported numbers. Further, DOD's annual report lacks certain data that we believe would facilitate congressional oversight or understanding of victims' use of the reporting options. For example, while DOD's annual report provides Congress with the aggregated numbers of investigations during the prior year for which commanders could not take action against alleged offenders, those aggregated numbers do not distinguish cases in which evidence was found to be insufficient to substantiate an alleged assault versus the number of times a victim recanted an accusation or an alleged offender died. Also, though DOD's annual report documents the number of reports that were initially brought using the restricted reporting option and later changed to unrestricted, it includes these same figures in both categories--that is, the total number of restricted reports and the total number of unrestricted reports. An official in DOD's Sexual Assault Prevention and Response Office told us that because the military services do not provide detailed case data to DOD that the department is not able to remove these reports from the total number of restricted reports when providing information in its annual report. However, we believe that the double listing of these figures is confusing. To provide further oversight of DOD's sexual assault prevention and response programs, the Ronald W. Reagan National Defense Authorization Act for Fiscal Year 2005 required that the Defense Task Force on Sexual Assault in the Military Services conduct an examination of matters relating to sexual assault in cases in which members of the Armed Forces are either victims or offenders. As part of its examination, the law directs the task force to assess, among other things, DOD's reporting procedures, collection, tracking, and use of data on sexual assault by senior military and civilian leaders, as well as DOD's oversight of sexual assault prevention and response programs. The law does not require an assessment of the Coast Guard's program. Senior officials within the Office of the Under Secretary of Defense for Personnel and Readiness have stated that they plan to use the task force's findings to evaluate the effectiveness of DOD's sexual assault prevention and response programs. However, as of July 2008, this task force has yet to begin its review. Senior task force staff members we spoke with attributed the delays to challenges in appointing the task force members and member turnover. As of July 2008, however, they told us that all 12 task force members were appointed and that their goal is to hold their first open meeting, and thus begin their evaluation, in August 2008. They also told us that they project that by the end of fiscal year 2008 DOD will have expended about $15 million since 2005 to fund the task force's operations--with much of this funding going towards the task forces' operational expenses, such as salaries for the civilian staff members, contracts, travel, and rent. The law directs that the task force submit its report to the Secretary of Defense and the Secretaries of the Army, Navy, and Air Force no later than 1 year after beginning its examination. If such a goal were met, the task force's evaluation could be complete by August 2009. However, at this time it is uncertain whether the task force will be able to meet this goal. In closing, we believe that DOD and the Coast Guard have taken positive steps to prevent, respond to, and resolve reported incidents of sexual assault. However, a number of challenges--such as limited guidance for implementing DOD's policies in certain environments, some commanders' limited support and limited resources for the programs, training that is not consistently effective, limited access to mental health services, and a lack of an oversight framework--could undermine the effectiveness of some of their efforts. Left unchecked, these challenges could undermine DOD's and the Coast Guard's efforts by eroding servicemembers' confidence in the programs, decreasing the likelihood that sexual assault victims will turn to the programs for help when needed, or by limiting the ability of DOD and the Coast Guard to judge the overall successes, challenges, and lessons learned from their programs. We expect to make a number or recommendations in our final report to improve implementation and oversight of sexual assault prevention and response programs in both DOD and the Coast Guard. Our final report will also include DOD's and the Coast Guard's response to our findings and recommendations once they have had an opportunity to further review our draft report. Mr. Chairman and Members of the Subcommittee, this concludes my prepared statement. I would be happy to answer any questions you may have at this time. If you have any questions on matters discussed in this testimony, please contact Brenda S. Farrell at (202) 512-3604 or [email protected]. Key contributors to this statement include Marilyn K. Wasleski (Assistant Director), Joanna Chan, Pawnee A. Davis, K. Nicole Harms, Wesley A. Johnson, Ronald La Due Lake, Stephen V. Marchesani, Amanda K. Miller, and Cheryl A. Weissman. 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.
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In 2004, Congress directed the Department of Defense (DOD) to establish a comprehensive policy to prevent and respond to sexual assaults involving servicemembers. Though not required to do so, the Coast Guard has established a similar program. This statement addresses the extent to which DOD and the Coast Guard (1) have developed and implemented policies and programs to prevent, respond to, and resolve sexual assault incidents involving servicemembers; (2) have visibility over reports of sexual assault; and (3) exercise oversight over reports of sexual assault. This statement draws on GAO's preliminary observations from an ongoing engagement examining DOD's and the Coast Guard's programs to prevent and respond to sexual assault. In conducting its ongoing work GAO reviewed legislative requirements and DOD and Coast Guard guidance, analyzed sexual assault incident data, and obtained through surveys and interviews the perspective on sexual assault matters of more than 3,900 servicemembers stationed in the United States and overseas. The results of GAO's survey and interviews provide insight into the implementation of the programs but are nongeneralizable. GAO expects to issue its final report in August 2008 and to make a number of recommendations to improve implementation of sexual assault prevention and response programs and improve oversight of the programs in both DOD and the Coast Guard. DOD and the Coast Guard have established policies and programs to prevent, respond to, and resolve reported sexual assault incidents involving servicemembers; however, implementation of the programs is hindered by several factors. GAO found that (1) DOD's guidance may not adequately address some important issues, such as how to implement its program in deployed and joint environments; (2) most, but not all, commanders support the programs; (3) program coordinators' effectiveness can be hampered when program management is a collateral duty; (4) required sexual assault prevention and response training is not consistently effective; and (5) factors such as a DOD-reported shortage of mental health care providers affect whether servicemembers who are victims of sexual assault can or do access mental health services. Left unchecked, these challenges can discourage or prevent some servicemembers from using the programs when needed. GAO found, based on responses to its nongeneralizeable survey administered to 3,750 servicemembers and a 2006 DOD survey, the most recent available, that occurrences of sexual assault may be exceeding the rates being reported, suggesting that DOD and the Coast Guard have only limited visibility over the incidence of these occurrences. At the 14 installations where GAO administered its survey, 103 servicemembers indicated that they had been sexually assaulted within the preceding 12 months. Of these, 52 servicemembers indicated that they did not report the sexual assault. GAO also found that factors that discourage servicemembers from reporting a sexual assault include the belief that nothing would be done; fear of ostracism, harassment, or ridicule; and concern that peers would gossip. Although DOD and the Coast Guard have established some mechanisms for overseeing reports of sexual assault, neither has developed an oversight framework--including clear objectives, milestones, performance measures, and criteria for measuring progress--to guide their efforts. In compliance with statutory requirements, DOD reports data on sexual assault incidents involving servicemembers to Congress annually. However, DOD's report does not include some data that would aid congressional oversight, such as why some sexual assaults could not be substantiated following an investigation. Further, the military services have not provided sufficient data to facilitate oversight and enable DOD to conduct trend analyses. While the Coast Guard voluntarily provides data to DOD for inclusion in its report, this information is not provided to Congress because there is no requirement to do so. To provide further oversight of DOD's programs, Congress, in 2004, directed DOD to form a task force to undertake an examination of matters relating to sexual assault in which members of the Armed Forces are either victims or offenders. However, as of July 2008, the task force has not yet begun its review. Without an oversight framework, as well as more complete data, decision makers in DOD, the Coast Guard, and Congress lack information they need to evaluate the effectiveness of the programs.
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Wildland fires ignited by lightning are both natural and inevitable and play an important ecological role on the nation's landscape. In addition to maintaining habitat diversity, releasing soil nutrients, and causing the seeds of fire-dependent species to germinate, fire periodically removes undergrowth, small trees, and vegetation that can otherwise build up and intensify subsequent fires. However, various human land use and management practices, including decades of suppressing wildland fires, have altered the normal frequency of fires in many forest and rangeland ecosystems, leading to uncharacteristically dense vegetation and atypical fire patterns in some places. At the same time, more homes and communities are being built in areas where fires can occur, increasing risks to human life, property, and infrastructure. Experts estimate that between 1990 and 2000, 60 percent of all new housing units in the United States were built in the wildland-urban interface, and by 2000, about 38 percent of housing units overall were located in the wildland-urban interface. Recent media reports indicate that this trend of growth in the wildland-urban interface continues. Finally, agency analyses indicate that climate change and related drought may also be responsible for significant increases in the occurrence of, and costs of responding to, wildland fire. Increases in the size and severity of wildland fires, and in the cost of fighting them, have led federal agencies to fundamentally reexamine their approach to wildland fire management. For decades, federal agencies aggressively suppressed wildland fires and were generally successful in decreasing the number of acres burned. In some areas of the country, however, rather than eliminating severe wildland fires, decades of suppression disrupted ecological cycles and began to change the structure and makeup of forests and rangelands, increasing the land's susceptibility to fire. Increasingly, the agencies have recognized the key role that fire plays in many ecosystems and the utility of fire itself as a tool in managing forests and watersheds. The agencies worked together to develop the Federal Wildland Fire Management Policy in 1995, which for the first time formally recognized the essential role that fire plays in maintaining natural systems. This policy was subsequently reaffirmed and updated in 2001. In addition to noting the negative effects of past wildland fire suppression, the policy also recognized that continued development in the wildland- urban interface has placed more values at risk from wildland fire while increasing the complexity and cost of wildland fire suppression operations. To help address these trends, the policy directed agencies to consider management objectives and the values at risk when determining how or whether to suppress a wildland fire. Under this approach, termed "appropriate management response," the agencies may fight fires that threaten communities or other highly valued areas more aggressively than they fight fires in remote areas or in areas where natural fuel reduction would be beneficial. In some cases, the agencies may simply monitor the fire, or take only limited suppression actions, to ensure that it continues to pose little threat to valued resources. Under current interagency policy, local federal units must develop land management and fire management plans that document approved fire management strategies for each acre of burnable land and other important information about how the land will be managed, including local values at risk, needed local fuel reduction, and rehabilitation actions. Once a fire starts, land management and fire management specialists are to identify and implement the appropriate management response, in accordance with the unit's approved land and fire management plans. Responding to wildland fires--which can burn across federal and nonfederal jurisdictions--often requires coordination and collaboration among federal, tribal, state, and local firefighting entities to effectively protect lives, homes, and resources. Five federal agencies--the Forest Service within the Department of Agriculture and the Bureau of Indian Affairs, Bureau of Land Management, Fish and Wildlife Service, and National Park Service within the Department of the Interior--fight wildland fires. These federal agencies work together with nonfederal firefighting entities to share personnel, equipment, and supplies and to fight fires, regardless of which entities have jurisdiction over the burning lands. Agreements developed and agreed to by cooperating entities, commonly referred to as master agreements, govern cooperative fire protection efforts and include general provisions for sharing firefighting costs among responsible entities. Agencies need a cohesive strategy that identifies the available long-term options and associated funding for reducing excess vegetation and responding to wildland fires if the agencies and the Congress are to make informed decisions about an effective and affordable long-term approach for addressing problems that have been decades in the making. We first recommended that the agencies develop such a strategy for addressing fuels in 1999. After we evaluated a number of related wildland fire management issues, we reiterated our recommendation in 2005 and 2006 but also recognized that a comprehensive solution needs to address not only reducing fuels but also an overall response to wildland fire. To develop an effective overall strategy, agencies need to complete several key tasks, which address weaknesses we previously identified. Our 2005 report summarized several weaknesses in the federal government's management of fuel reduction and related wildland fire programs and identified a number of actions to address these weaknesses. Specifically, these weaknesses included the following: the agencies lacked basic data, such as the extent and location of lands needing fuel reduction; the agencies needed to identify and prioritize fuel reduction projects; many federal land management units did not have fire management plans that met agency requirements designed to restore fire's natural role in ecosystems consistent with human health and safety; and the agencies were unable to assess the extent to which they were reducing wildland fire risks, to establish meaningful fuel reduction performance measures, or to determine the cost-effectiveness of these efforts because they lacked needed data. We also identified a number of tasks the agencies needed to complete to develop a cohesive strategy. These tasks included finishing data systems that are needed to identify the extent, severity, and location of wildland fire threats in our national forests and rangelands; updating local fire management plans to better specify the actions needed to effectively address these threats; and assessing the cost-effectiveness and affordability of options for reducing fuels and responding to wildland fire problems. The agencies have made some progress on the three primary tasks we identified as important to developing a wildland fire management strategy, although concerns have been raised about when or whether the agencies will successfully complete them. More specifically, LANDFIRE, a geospatial data and modeling system, is being designed to assist the agencies in identifying the extent, severity, and location of wildland fire threats to the nation's communities and ecosystems. LANDFIRE data are nearly complete for most of the western United States, with data for the remainder of the country scheduled to be completed in 2009. The agencies will need to ensure, however, that LANDFIRE data are kept current in order to reflect landscape-altering events, such as large fires and hurricanes, and they do not yet have a plan to do so. In 2006, we reported that 95 percent of the agencies' individual land management units had completed fire management plans in accordance with agency requirements promulgated in 2001. However, the agencies do not require regular plan updates to ensure that new data (from LANDFIRE, for example) are incorporated into the plans. Moreover, in the wake of two court decisions--each holding that the Forest Service was required to prepare an environmental assessment or environmental impact statement under the National Environmental Policy Act (NEPA) to accompany the relevant fire management plan--the Forest Service decided to withdraw the two plans instead of completing them. It is unclear whether the agency would withdraw other fire management plans successfully challenged under NEPA; nor is it clear whether or to what extent such agency decisions could undermine the interagency policy directing that every burnable acre have a fire management plan. Without such plans, however, current agency policy does not allow use of the entire range of wildland fire response strategies, including less aggressive, and potentially less costly, strategies. The Fire Program Analysis (FPA) system is a computer-based model designed to assist the agencies in cost-effectively allocating the resources necessary to address wildland fires. FPA is being designed in two phases. Phase I was intended to provide information for use in allocating resources for the initial responses to fires and in developing estimates for agencies' fiscal year 2008 budgets. Phase II was to be focused on additional activities, including fuel reduction and large-fire suppression. A "midcourse review" of FPA, completed in 2006, however, has resulted in recent endorsement by the Wildland Fire Leadership Council of what may be significant design modifications to FPA--ones that may not fulfill key project goals of (1) optimizing how resources are allocated, (2) linking fuel reduction to future preparedness and suppression costs, (3) ensuring comparability among different agencies' analyses and resulting decisions, and (4) enabling aggregation of local costs to identify national options and related budgets. Agencies plan to have a prototype of phase II, reflecting this design modification, completed by June 2007. According to a program official, the prototype will enable project managers to assess and report to the leadership council on the planned scope, schedule, and cost of FPA, including whether or not they will meet the scheduled completion date of June 2008. Further, gaps in the data collected for FPA may also reduce its usefulness in allocating resources. Although the agencies had made progress on these three primary tasks at the time of our 2006 update, they had not developed either a cohesive strategy identifying options for reducing fuels or a joint tactical plan outlining the critical steps, together with related time frames, the agencies would take to complete a cohesive strategy, as we recommended in our 2005 report. In February 2006, the agencies issued an interagency document titled Protecting People and Natural Resources: A Cohesive Fuels Treatment Strategy, but we found that the document did not identify long-term options or associated funding for reducing fuels and responding to wildland fires. During our update, officials from the Office of Management and Budget stated that it would not allow the agencies to publish long-term funding estimates until the agencies had sufficiently reliable data on which to base the estimates. The agencies commented that having such data would not be possible until LANDFIRE and FPA were more fully operational. We continue to believe that until a cohesive strategy can be developed, it is essential that the agencies create a tactical plan for developing this strategy, so the Congress understands the steps and time frames involved in completing the strategy. Federal agencies need to take steps to improve the framework for sharing wildland fire suppression costs between federal and nonfederal entities. Effective sharing of suppression costs among responsible entities can play a role in helping to contain federal expenditures, especially with the growing number of homes in areas at risk from wildland fire that may require protection. We recommended in our 2006 report that federal agencies work with relevant state entities to clarify the financial responsibilities for suppressing fires that burn, or threaten to burn, across multiple jurisdictions and provide more specific guidance as to when particular cost-sharing methods should be used. As of January 2007, the agencies were updating guidance on options for sharing costs and under what circumstances each would typically be used, but it is unclear how the agencies will ensure that such guidance is followed. We found that federal and nonfederal entities used a variety of methods to share the costs of fighting wildland fires affecting both federal and nonfederal lands and resources. Agreements between federal and nonfederal entities--known as master agreements--provide the framework for those entities to share suppression costs for wildland fires that burn or threaten both federal and nonfederal lands and resources. These agreements typically list several available cost-sharing methods. The agreements we reviewed, however, often lacked clear guidance for officials to use in deciding which method to apply for a specific fire. Clear guidance is important because local representatives of federal and nonfederal firefighting entities responsible for protecting lands and resources affected by the fire use this guidance in deciding which costs will be shared and for what period. We found, however, that cost-sharing methods were applied inconsistently within and among states, even for fires with similar characteristics. For example, in one state we reviewed, the costs for suppressing a large fire that threatened homes were shared solely according to the proportion of acres burned within each entity's area of fire protection responsibility, a method that has traditionally been used. Yet costs for a similar fire within the same state were shared differently. For this fire, the state agreed to pay for certain aircraft and fire engines used to protect the wildland-urban interface, while the remaining costs were shared on the basis of acres burned. In contrast to the two methods applied in this state, officials in another state used yet a different cost-sharing method for two similar large fires that threatened homes, apportioning costs each day for personnel, aircraft, and equipment deployed on particular lands, such as the wildland-urban interface. The type of cost-sharing method ultimately used can have significant financial consequences for the entities involved, potentially amounting to millions of dollars. Moreover, as we reported, federal officials expressed concern that the existing cost-sharing framework insulated state and local governments from the cost of providing wildland fire protection in the wildland-urban interface, thus reducing the incentive for state and local governments to adopt laws--such as building codes that require fire- resistant materials in areas at high risk of wildland fires--that in the long run could help reduce the cost of suppressing wildland fires. We recommended in our 2006 report that the federal agencies work with relevant state entities to clarify the financial responsibility for fires that burn, or threaten to burn, across multiple jurisdictions and develop more specific guidance as to when particular cost-sharing methods should be used. The federal agencies generally agreed with our findings and recommendations and agreed to improve the guidance on sharing suppression costs. As of January 2007, the agencies were updating guidance that can be used when developing master agreements between cooperating federal and nonfederal entities, as well as agreements on how to share costs for a specific fire. Agency officials said that this guidance provides additional information about potential methods for sharing costs and about the circumstances under which each cost-sharing method would typically be used. It is unclear, however, how the agencies will ensure that the guidance is followed. Further, because master agreements are updated only every 5 years, it may take a number of years before the new guidance is fully incorporated into master agreements between cooperating entities. Preliminary findings from our ongoing work for the committee show that, despite dozens of federal and nonfederal studies issued since 2000 that consistently identified similar areas needing improvement to help contain wildland fire costs, the agencies have made little progress in addressing these areas. Areas identified as needing improvement to help contain costs--in addition to reducing fuels and cost sharing discussed previously--include acquiring and using firefighting personnel and equipment, selecting appropriate strategies for responding to wildland fires, and effectively managing cost-containment efforts. Although the agencies have begun taking steps to address some of the areas previous studies have identified as needing improvement, much work remains to be done. For example: Acquiring and using personnel and equipment. The agencies have taken steps to improve their ability to track and deploy personnel and equipment, but they have made little progress in completing the more fundamental step of determining the quantity and type of firefighting assets needed based on an analysis of values at risk and appropriate suppression strategies. Further, although the Forest Service has identified a series of improvements it plans to make in the acquisition process, it has so far made little progress. Selecting appropriate suppression strategies. The agencies have also begun to improve analytic tools that assist land and fire managers identify the appropriate suppression strategy for a given fire, but shortcomings remain. Federal policies encourage the use of less intensive suppression strategies when possible, strategies that may also be less costly. Land and fire managers, however, may be reluctant to employ anything less than full suppression because of concerns that a fire will escape control. Currently, much of the information managers use to estimate potential fire size, risks, and costs are based on their individual experiences, which can vary widely. Researchers are developing a new suite of tools that will analyze fuel conditions and predicted weather conditions to model expected fire growth and behavior and provide better information for managers making fire response decisions, but as of January 2007, these new tools were still being developed and tested. Managing cost-containment efforts. The steps the agencies have taken to date to contain wildland fire costs lack several key elements fundamental to sound program management, such as clearly defining cost- containment goals, developing a strategy for achieving those goals, and measuring progress toward achieving them. First, the agencies have not clearly articulated the goals of their cost-containment efforts. For cost- containment efforts to be effective, the agencies need to integrate cost- containment goals with the other goals of the wildland fire program--such as protecting life, property, and resources. For example, the agencies have established the goal of suppressing wildland fires at minimum cost, considering firefighter and public safety and values being protected, but they have not defined criteria by which these often-competing objectives are to be weighed. Second, although the agencies are undertaking a variety of steps designed to help contain wildland fire costs, the agencies have not developed, and agency officials to this point have been unable to articulate, a clear plan for how these efforts fit together or the extent to which they will assist in containing costs. Finally, the agencies are developing a statistical model of fire suppression costs that they plan to use to identify when the cost for an individual fire may have been excessive. The model compares a fire's cost to the costs of suppressing previous fires with similar characteristics. However, such comparisons with previous fires' costs may not fully consider the potential for managers to select less aggressive--and potentially less costly--suppression strategies. In addition, the model is still under development and may take a number of years to fully refine. Without clear program goals and objectives, and corresponding performance measures to evaluate progress, the agencies lack the tools to be able to determine the effectiveness of their cost-containment efforts. The federal government is expending substantial effort and billions of dollars in attempting to address our nation's wildland fire problems. Yet despite promises to do so, the agencies still cannot articulate how the steps they are taking fit together to form a comprehensive and cohesive strategy to contain costs or to address the many wildland fire management problems we and others have reported over the last 7 years. Given the interrelated nature of wildland fire issues, they cannot be addressed in isolation but must be viewed from and addressed within a broader perspective. Agencies need to understand how each issue affects the others and determine the trade-offs required to effectively meet program goals while containing program costs. Therefore, if the agencies and the Congress are to make informed decisions about an effective and affordable long-term approach to responding to these issues, agencies need to first develop clearly defined program goals and objectives and a strategy to achieve them, including identifying associated funding. Because it will likely be at least 2009 before the agencies develop a strategy for fuel reduction efforts that would meet standards required by the Office of Management and Budget, we continue to believe that in the interim, it is essential that the agencies create a tactical plan for developing this strategy, so that the Congress understands the steps and time frames involved with its completion. In doing so, the agencies need to make very clear how the final design of FPA will meet the key program goals enumerated here, how and when the agencies will complete all fire management plans, and what schedule they envision for periodically updating LANDFIRE data. At the same time, to help address the rising cost of protecting the growing number of homes built in the wildland urban interface--a cost that may be disproportionately borne by the federal government--federal agencies also need to work with relevant state entities to ensure that appropriate methods are used for sharing the costs of suppressing fires that burn, or threaten to burn, across multiple jurisdictions. Mr. Chairman, this concludes my prepared 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 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. David P. Bixler, Assistant Director; Ellen W. Chu; Jonathan Dent; Janet Frisch; Chester Joy; and Richard Johnson made key contributions to this statement. 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Over the past two decades, the number of acres burned by wildland fires has increased, often threatening human lives, property, and ecosystems. The cost of responding to wildland fires has also grown, especially as more homes are built in or near wildlands, an area called the wildland-urban interface. Past management practices, including a concerted federal policy in the 20th century of suppressing fires to protect communities and ecosystems, unintentionally resulted in steady accumulation of dense vegetation that can fuel large, intense, and often costly wildland fires. GAO was asked to identify actions that federal wildland fire agencies need to take to help contain federal wildland fire expenditures. GAO has identified these actions in three of its reports addressing fuel reduction and cost-sharing efforts and as part of an ongoing review of federal agencies' efforts to contain wildland fire preparedness and suppression costs for this committee. Specifically, GAO focused on examining agencies' efforts to (1) reduce accumulated fuels and address wildland fire problems, (2) share with nonfederal entities the costs of responding to multijurisdictional fires, and (3) contain the costs of preparing for and responding to wildland fires. Over the past 7 years, GAO has recommended a number of actions federal wildland fire agencies should take to improve their management of wildland fire activities, actions that could also help contain the rising federal expenditures for responding to wildland fires. These agencies--the Forest Service within the Department of Agriculture and land management agencies within the Department of the Interior--concurred with GAO's recommendations but have not completed, or in some cases have not yet begun, needed actions. GAO's ongoing review of federal agencies' efforts to contain wildland fire preparedness and suppression costs has also identified other actions that may be needed. Specifically, the agencies need to: (1) Develop a cohesive strategy that identifies the options and associated funding to reduce fuels and address wildland fire problems. In 1999, to address the problem of excess fuels and their potential to increase the severity of wildland fires and the cost of suppression efforts, GAO recommended that a cohesive strategy be developed that identified the available long-term options and associated funding for reducing these fuels. In 2005 and 2006, because the agencies had not yet developed one, GAO reiterated the need for such a strategy but broadened its focus to better address the interrelated nature of fuel reduction efforts and wildland fire response. GAO also recommended that, as an interim step, the agencies develop a tactical plan outlining the steps and time frames needed for completing a cohesive strategy. As of January 2007, the agencies had not developed either a cohesive strategy or a tactical plan. (2) Clarify their guidance for sharing wildland fire suppression costs with nonfederal entities. In 2006, to address the rising costs of responding to fires that threaten both federal and nonfederal lands and resources, GAO recommended that the federal agencies provide more specific guidance as to when particular cost-sharing methods should be used. The cost-sharing method used can have significant financial consequences for the entities involved--potentially amounting to millions of dollars. As of January 2007, the agencies were updating their guidance on possible cost-sharing methods and when each typically would be used, but it is unclear how the agencies will ensure that the guidance is followed. (3) Establish clear goals, strategies, and performance measures to help contain wildland fire costs. Preliminary findings from GAO's ongoing work indicate that the effectiveness of agencies' efforts to contain costs may be limited because the agencies have not clearly defined their cost-containment goals, developed a strategy for achieving those goals, or developed related performance measures. For these efforts to be effective, the agencies need to integrate cost-containment goals with the other goals of the wildland fire program--such as protecting life and property--and to recognize that trade-offs will be needed to meet desired goals within the context of fiscal constraints.
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The growth in information technology, networking, and electronic storage has made it ever easier to collect and maintain information about individuals. An accompanying growth in incidents of loss and unauthorized use of such information has led to increased concerns about protecting this information on federal systems. As a result, the basic law governing privacy protections, the Privacy Act of 1974, has been supplemented by more recent laws and guidance that are particularly concerned with the protection of personally identifiable information maintained in automated information systems. Protecting personally identifiable information in federal systems is critical because its loss or unauthorized disclosure can lead to serious consequences for individuals. These consequences include identity theft or other fraudulent activity, which can result in substantial harm, embarrassment, and inconvenience. In 2006, the estimated losses associated with identity theft to U.S. organizations were $49.3 billion. Like other sectors, the federal government has seen significant exposures of personally identifiable information. According to a 2006 congressional staff report, since January 2003, 19 departments and agencies reported at least one loss of personally identifiable information that could expose individuals to identity theft. (App. II provides selected examples of these and other incidents.) A series of data breaches at federal agencies have involved system intrusion, phishing scams, and the physical loss or theft of portable computers, hard drives, and disks. During fiscal year 2006, federal agencies reported a record number of incidents to the U.S. Computer Emergency Readiness Team (US-CERT). For example, in 2006 there were 5,146 incident reports--a substantial increase over the 3,569 incidents reported in 2005. During this period, US-CERT recorded a dramatic rise in incidents where either physical loss or theft or system compromise resulted in the loss of personally identifiable information. As illustrated by recent security incidents and as we have previously reported, significant weaknesses continued to threaten the confidentiality, integrity, and availability of critical information and information systems used to support the operations, assets, and personnel of federal agencies. In their fiscal year 2006 financial statement audit reports, 21 of 24 major agencies indicated that deficient information security controls were either a reportable condition or a material weakness. Our audits continue to identify similar weaknesses in nonfinancial systems. Similarly, in their annual reporting under 31 U.S.C. SS 3512 (commonly referred to as the Federal Managers' Financial Integrity Act of 1982), 17 of 24 agencies reported shortcomings in information security, including 7 that considered it a material weakness. Agency inspectors general have also noted the seriousness of information security, with 21 of 24 including it as a "major management challenge" for their agencies. According to our reports and those of inspectors general, persistent weaknesses appear in the five major categories of information system controls: (1) access controls, which ensure that only authorized individuals can read, alter, or delete data; (2) configuration management controls, which provide assurance that only authorized software programs are implemented; (3) segregation of duties, which reduces the risk that one individual can independently perform inappropriate actions without detection; (4) continuity of operations planning, which provides for the prevention of significant disruptions of computer-dependent operations; and (5) an agencywide information security program, which provides the framework for ensuring that risks are understood and that effective controls are selected and properly implemented. Most agencies had weaknesses in each of these categories. Accordingly, we have designated information security as a governmentwide high-risk issue in reports to Congress since 1997--a designation that remains in force today. The primary laws that provide privacy protections to personal information are the Privacy Act of 1974 and the E-Government Act of 2002; these laws describe, among other things, agency responsibilities with regard to personally identifiable information, which include providing security. The security of information held by the federal government is specifically addressed by FISMA, which requires agencies to develop, document, and implement agencywide programs to provide security for their information and information systems, including personally identifiable information. Along with technical guidance from NIST, FISMA establishes a risk-based approach to security management, which requires an agency, among other things, to categorize its information and systems according to the potential impact to the agency should the information be jeopardized. In the wake of recent incidents of security breaches involving personal data, OMB has issued guidance reiterating the requirements of these laws and guidance, drawing particular attention to those associated with personally identifiable information. In addition, OMB updated and added to requirements for reporting security breaches and the loss or unauthorized access of personally identifiable information. The major requirements for the protection of personal privacy by federal agencies come from two laws, the Privacy Act of 1974 and the privacy provisions of the E-Government Act of 2002. In addition, FISMA, which is included in the E-Government Act of 2002, addresses the protection of personal information in the context of securing federal agency information and information systems. To protect personal privacy, the Privacy Act places limitations on agencies' collection, disclosure, and use of personal information maintained in systems of records. The act describes a "record" as any item, collection, or grouping of information about an individual that is maintained by an agency and contains his or her name or another personal identifier. It also defines "system of records" as a group of records under the control of any agency from which information is retrieved by the name of the individual or by an individual identifier. The Privacy Act requires that when agencies establish or make changes to a system of records, they must notify the public by a notice in the Federal Register identifying, among other things, the type of data collected, the types of individuals about whom information is collected, the intended "routine" uses of the data, and procedures that individuals can use to review and correct personal information. The act's requirements also apply to government contractors when agencies contract for the development and maintenance of a system of records to accomplish an agency function. The provisions of the Privacy Act are consistent with and based primarily on a set of principles for protecting the privacy and security of personal information--the Fair Information Practices. These principles have been widely adopted as the standard benchmark for evaluating the adequacy of privacy protections; one of the principles is security safeguards. In this regard, the Privacy Act requires agencies to "establish appropriate administrative, technical, and physical safeguards to insure the security and confidentiality of records and to protect against any anticipated threats or hazards to their security or integrity which could result in substantial harm, embarrassment, inconvenience, or unfairness to any individual on whom information is maintained." The E-Government Act of 2002 strives to enhance protection for personal information in government information systems by requiring that agencies conduct privacy impact assessments (PIA). A PIA is an analysis of how personal information is collected, stored, shared, and managed in a federal system. More specifically, according to OMB guidance, a PIA is an analysis of how information is handled (1) to ensure handling conforms to applicable legal, regulatory, and policy requirements regarding privacy; (2) to determine the risks and effects of collecting, maintaining, and disseminating information in identifiable form in an electronic information system; and (3) to examine and evaluate protections and alternative processes for handling information to mitigate potential privacy risks. Agencies must conduct PIAs (1) before developing or procuring information technology that collects, maintains, or disseminates information that is in a personally identifiable form or (2) before initiating any new data collections involving personal information that will be collected, maintained, or disseminated using information technology if the same questions are asked of 10 or more people. OMB guidance also requires agencies to conduct PIAs when a system change creates new privacy risks, for example, changing the way in which personal information is being used. The PIA requirement does not apply to all systems. For example, no assessment is required when the information collected relates to internal government operations, the information has been previously assessed under an evaluation similar to a PIA, or when privacy issues are unchanged. Besides these primary laws, Congress has passed laws requiring protection of personally identifiable information that are agency-specific or that target a specific type of information. For example, the Veterans Benefits, Health Care, and Information Technology Act, enacted in December 2006, establishes information technology security requirements for personally identifiable information that apply specifically to the Department of Veterans Affairs (VA). The act mandates, among other things, that VA develop procedures for detecting, immediately reporting, and responding to security incidents; notify Congress of any significant data breaches involving personally identifiable information; and, if necessary, provide credit protection services to those individuals whose personally identifiable information has been compromised. Another example is the Health Insurance Portability and Accountability Act of 1996 (HIPAA), which requires the Secretary of Health and Human Services to adopt standards for the electronic exchange, privacy, and security of health information. These standards apply to agencies, such as the Department of Defense and VA, to the extent they are covered by HIPAA. FISMA is the primary law governing information security in the federal government; it also addresses the protection of personal information in the context of securing federal agency information and information systems. FISMA, which establishes a risk-based approach to security management, defines federal requirements for securing information and information systems that support federal agency operations and assets. Under the act, agencies are required to provide sufficient safeguards to cost-effectively protect their information and information systems from unauthorized access, use, disclosure, disruption, modification, or destruction, including controls necessary to preserve authorized restrictions on access and disclosure (and thus to protect personal privacy, among other things). The act also requires each agency to develop, document, and implement an agencywide information security program to provide security for the information and information systems that support the operations and assets of the agency (including those provided or managed by another agency, contractor, or other source). Specifically, the act requires that these information security programs include, among other things, periodic assessments of the risk and magnitude of harm that could result from the unauthorized access, use, disclosure, disruption, modification, or destruction of information or information systems; risk-based policies and procedures that cost-effectively reduce information security risks to an acceptable level and ensure that information security is addressed throughout the life cycle of each information system; subordinate plans for providing adequate information security for networks, facilities, and systems or groups of information systems, as appropriate; security awareness training for agency personnel, including contractors and other users of information systems that support the operations and assets of the agency; periodic testing and evaluation of the effectiveness of information security policies, procedures, and practices, performed with a frequency depending on risk, but no less than annually, and that includes testing of management, operational, and technical controls for every system identified in the agency's required inventory of major information systems; a process for planning, implementing, evaluating, and documenting remedial action to address any deficiencies in the information security policies, procedures, and practices of the agency; procedures for detecting, reporting, and responding to security incidents; plans and procedures to ensure continuity of operations for information systems that support the operations and assets of the agency. In addition, FISMA requires agencies to produce an annually updated inventory of major information systems (including major national security systems) operated by the agency or that are under its control, which includes an identification of the interfaces between each system and all other systems or networks, including those not operated by or under the control of the agency. Like protecting other information and systems, protecting personally identifiable information is dependent on agencies' having established security programs that include the elements described above. Among other things, agencies must identify the personally identifiable information in their information systems, determine the appropriate risk level associated with it, develop appropriate controls to secure it, and ensure that these controls are applied and maintained. FISMA also establishes evaluation and reporting requirements. Under the act, each agency must have an annual independent evaluation of its information security program and practices, including control testing and compliance assessment. Evaluations of non-national security systems are to be performed by the agency inspectors general or by an independent external auditor, while evaluations related to national security systems are to be performed only by an entity designated by the agency head. FISMA also requires each agency to report annually to OMB, selected congressional committees, and the Comptroller General on the adequacy of information security policies, procedures, and practices, and compliance with the act's requirements. In addition, agency heads are required to annually report the results of their independent evaluations to OMB. OMB is required to submit a report to Congress each year on agency compliance with the act's requirements, including a summary of findings of agencies' independent evaluations. Other major FISMA provisions require NIST to develop, for systems other than national security systems, standards for categorizing information and information systems according to risk levels, guidelines on the types of information and information systems that should be included in each category, and standards for minimum information security requirements for information and information systems in each category. Accordingly, NIST developed the following guidance: Federal Information Processing Standards (FIPS) 199, Standards for Security Categorization of Federal Information and Information Systems. This standard is to be used by all agencies to categorize all their information and information systems based on the objectives of providing appropriate levels of information security according to a range of risk levels. In addition, NIST has published Special Publication 800-60, to provide guidance on how to implement FIPS 199 and how to determine whether a system or information should be categorized as having a high-, moderate-, or low-risk impact level. FIPS 200, Minimum Security Requirements for Federal Information and Information Systems. This standard provides minimum information security requirements for information and information systems in each risk category. NIST Special Publication 800-53, Recommended Security Controls for Federal Information Systems. The publication provides guidelines for selecting and specifying security controls for information systems supporting the federal government. OMB is responsible for establishing governmentwide policies and for providing guidance to agencies on how to implement the provisions of FISMA, the Privacy Act, and other federal information security and privacy laws. It has issued both recommended steps and required actions to protect federally owned information and information systems. For example, OMB memorandum M-05-08 directs agencies to designate a senior official with overall responsibility for information privacy issues, including taking appropriate steps to protect personally identifiable information from unauthorized use, access, disclosure, or sharing, and to protect related information systems from unauthorized access, modification, disruption, or destruction. Following the May 2006 VA data breach, OMB issued guidance reiterating agency responsibilities under the laws and technical guidance, drawing particular attention to the requirements associated with personally identifiable information. OMB memorandum M-06-15, Safeguarding Personally Identifiable Information, re-emphasizes agency responsibilities to safeguard personally identifiable information and to appropriately train employees in this regard. It also requires agencies to perform a review of their policies and procedures for the protection of personally identifiable information, including an examination of physical security, and to take corrective action. OMB memorandum M-06-16, Protection of Sensitive Agency Information, asks agencies to verify that existing organizational policy adequately addresses the information protection needs associated with personally identifiable information that is accessed remotely or physically removed. It recommends, among other things, that all information on mobile computers and devices be encrypted unless a written waiver is issued certifying that the computer does not contain any sensitive information. In addition, M-06-16 recommends that agencies use a NIST checklist included in the memorandum. The NIST checklist states that agencies should verify that information requiring protection as personally identifiable information is appropriately categorized as such and that it is assigned an appropriate risk impact category. OMB also updated and added to requirements for reporting security breaches and the loss or unauthorized access of personally identifiable information. OMB memorandum M-06-19 directs agencies to report all incidents involving personally identifiable information to US-CERT within 1 hour of discovery of the incident. Further, OMB recommends that agencies establish a core management group responsible for responding to the loss of personal information in a memorandum issued September 20, 2006. In OMB memorandum M-06-20, FY 2006 Reporting Instructions for the Federal Information Security Management Act and Agency Privacy Management, OMB asks agencies to identify in their yearly FISMA reports any physical or electronic incidents involving the loss of or unauthorized access to personally identifiable information. In these annual reports, agencies also are required to report numbers of incidents for the reporting period, the number of incidents the agency reported to US-CERT, and the number reported to law enforcement. Most recently, OMB memorandum M-07-16, Safeguarding Against and Responding to the Breach of Personally Identifiable Information, requires agencies to develop and implement breach notification policies-- that is, policies governing how and under what circumstances affected parties are notified in case of a security breach. Agencies were to develop and implement such policies and associated plans within 120 days from the issuance of the memorandum (May 22, 2007). The memorandum also reiterates four particularly important existing security requirements that agencies should already have been implementing: (1) assigning an impact level to all information and information systems, (2) implementing the minimum security requirements and controls in FIPS 200 and NIST Special Publication 800- 53 respectively, (3) certifying and accrediting information systems, and (4) training employees. With regard to the first of these, OMB stressed that agencies should generally consider categorizing sensitive personally identifiable information (and information systems within which such information resides) as moderate or high impact. In addition, this memorandum reiterates the guidance provided in memorandum M-06-16 on protection of personally identifiable information and changes earlier recommendations to requirements. These and other OMB memorandums significant to the protection of personally identifiable information are briefly described in table 1. Ensuring that agency policies and procedures appropriately emphasize the protection of personally identifiable information in accordance with applicable laws and guidance is an important aspect of protecting personal privacy. In recent guidance, OMB directed agencies to encrypt and otherwise protect personally identifiable information that is either accessed remotely or physically transported outside an agency's secured physical perimeter. Specifically, agencies were required to encrypt all data on mobile computers or devices that carry agency data, unless the data are determined to be nonsensitive; allow remote access only with two-factor authentication, where one of the factors is provided by a device separate from the computer gaining access; use a "time-out" function for remote access and mobile devices that requires that users re-authenticate after 30 minutes of inactivity; and log all instances in which computer-readable data are extracted from databases holding sensitive information, and verify that each extract including sensitive data has been erased within 90 days or that its use is still required. OMB also recommended the use of a NIST-provided checklist for the protection of remote information, which was included in memorandum M- 06-16. The checklist provides specific actions to be taken by federal agencies for the protection of personally identifiable information that is categorized as moderate or high impact and that is either accessed remotely or physically transported outside an agency's secured, physical perimeter, including information transported on removable media and on portable or mobile devices such as laptop computers and personal digital assistants. The controls and assessment methods and procedures in the checklist are a subset of what is currently required under NIST Special Publications 800-53 and 800-53A for moderate- and high-impact information systems. In addition, NIST standard (FIPS 140-2, Security Requirements for Cryptographic Modules) is to be used by federal organizations when it is specified that cryptographic-based security systems are to be used to provide protection for sensitive or valuable data. All encryption modules that protect sensitive data must follow this standard. However, not all agencies had developed policies and procedures reflecting OMB guidance for protecting personally identifiable information that is accessed remotely or physically transported outside an agency's secured perimeter. Of the 24 major agencies, 22 had developed policies requiring personally identifiable information to be encrypted on mobile computers and devices. A smaller number of agencies had policies to provide other protections recommended by OMB, 14 of the agencies had two-factor authentication policies for remote access. Fifteen of the agencies had policies to use a "time-out" function for remote access and mobile devices requiring user reauthentication after 30 minutes of inactivity. One agency used a reauthentication time shorter than 30 minutes (15 minutes). Fewer agencies (11) had established policies to log computer-readable data extracts from databases holding sensitive information and erase the data within 90 days after extraction. However, several of the agencies that had not established such policies indicated that they were researching technical solutions to address these issues. Four agencies had policies requiring the use of the NIST checklist recommended by OMB. In addition, 20 agencies had written policies that require encryption software to be NIST FIPS 140-2 compliant. Gaps in their policies and procedures reduce agencies' ability to protect personally identifiable information from improper disclosure. The loss of personally identifiable information can result in substantial harm, embarrassment, and inconvenience to individuals and may lead to identity theft or other fraudulent use of the information. Because agencies maintain significant amounts of information concerning individuals, agencies should be more vigilant to protect that information from loss and misuse. At the conclusion of our review and with the recent release of OMB's President's Management Agenda Scorecard for the fourth quarter of fiscal year 2007, OMB announced that agencies that did not complete all the privacy and security requirements identified in OMB memorandum M-07- 16, which included the requirements just described, received a downgrade in their scores for E-Government progress. According to OMB, it will continue working with agencies to help them strengthen their information security and privacy programs, especially as they relate to the protection of personally identifiable information. In view of OMB's recent actions in this area, we are making no recommendations at this time. We reiterate, however, as we have in the past, that although having specific policies and procedures in place is an important factor in helping agencies to secure their information systems and to protect personally identifiable information, proper implementation of these policies and procedures remains crucial. Agencies' implementation of OMB's guidance on personally identifiable information, as well as our previous recommendations on improving agency information security and implementation of FISMA requirements, will be essential in improving the protection of personally identifiable information. In providing oral comments on a draft of this report, OMB representatives stated that they generally agreed with the report's contents. In addition, they provided technical comments that we incorporated into the report. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to interested congressional committees and other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at www.gao.gov. If you have questions about this report, please contact me at (202) 512- 6244. I can also be reached by e-mail at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. Our objectives were to (1) identify the federal laws and guidance issued to protect personally identifiable information from unauthorized use or disclosure and (2) describe agencies' policies and documented procedures that respond to recent Office of Management and Budget (OMB) guidance to protect personally identifiable information that is either accessed remotely or physically transported outside an agency's secured physical perimeter. To address our first objective, we identified and reviewed legislative requirements for the protection of personally identifiable information by federal agencies. Specifically, we reviewed the Privacy Act of 1974; the E-Government Act of 2002; the Federal Information Security Management Act of 2002; the Veterans Benefits, Health Care, and Information Technology Act of 2006; and the Health Insurance Portability and Accountability Act of 1996. We also reviewed policy and guidance issued by OMB and National Institute of Standards and Technology (NIST) relevant to agencies' policies and procedures to safeguard personally identifiable information. To address our second objective, we selected 24 major agencies and assessed the status of their policies and procedures addressing recent OMB guidance addressing personally identifiable information. At our request, each agency completed a survey of personally identifiable information practices and provided related policies and procedures. The survey and document request were based on requirements and recommendations in the OMB guidance. We examined survey responses and compared agency-documented policies and procedures to OMB's requirements and guidance for consistency and sufficiency. We did not evaluate the effectiveness of agencies' implementation of the practices. However, we reviewed applicable prior GAO and agency inspector general reports and discussed whether agency policies had been fully implemented with applicable agency information technology officials. We conducted this performance audit from September 2006 to January 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The incidents noted here were reported by government agencies between November 2004 and January 2007. Many of these incidents included the loss of personally identifiable information. These incidents were selected to provide illustrative examples of the types of incidents that occurred during this period. November 3, 2004, Department of Education: information of 8,290 individuals lost in the mail A contractor to the Federal Student Aid program sent the personal information of 8,290 individuals via a commercial shipping company. After determining that the package had been lost in transit, the department decided not to notify the affected individuals. It discontinued using that carrier for that facility as a result. November 24, 2004, Department of Veterans Affairs (VA): personal information accidentally disclosed on public drive of VA e-mail system A public drive on a VA e-mail system permitted entry by all users to folders and files containing personally identifiable information (name, Social Security number, date of birth, and in some cases personal health information such as surgery schedules, diagnosis, status, etc.) of veterans after computer system changes were made. All folders were then restricted and the individual services were contacted to limit user access. December 6, 2004, Department of Veterans Affairs: two personal computers stolen, exposing data of 2,000 research subjects Two desktop personal computers were stolen from a locked office in the research office of a medical center. One of the computers had files containing names, Social Security numbers, next of kin, addresses, and phone numbers of approximately 2,000 research subjects. The computers were password protected by the standard VA password system. The medical center immediately contacted the agency privacy officer for guidance. Letters were mailed to all research subjects informing them of the computer theft and potential for identity theft. VA enclosed letters addressed to three major credit agencies and postage paid envelopes. This incident was reported to VA and federal incident offices. December 17, 2004, Department of Agriculture: e-mail sent out to 1,537 individuals whose personally identifiable information was potentially exposed An e-mail was sent to 1,537 people that included an attachment with the Social Security numbers and other personal information of all 1,537 individuals. In response to the event, a letter of apology was sent and training on appropriate security measures was developed. February 24, 2005, Department of Agriculture: hacker obtains access A system containing research data was breached when someone cracking a password or a user account installed hacking software. The agency reports that no data were compromised but that the hacker had read and write access to the server and opened access points. March 4, 2005, Department of Veterans Affairs: list of Social Security numbers of 897 providers inadvertently sent via e-mail An employee reported e-mailing a list of the names and Social Security numbers of 897 providers to a new transcription company. This was immediately reported and a supervisor called the transcription company and spoke with the owner and requested that the company destroy the file immediately. Notification letters were sent out to all 897 providers. Disciplinary action was taken against the employee. June 17, 2005, Department of Defense: potential unauthorized access A systems administrator discovered potential unauthorized access to the Air Force Personnel Center Assignment Management System with personally identifiable information on 33,000 military members. Notifications were sent out to system users and an investigation was begun. Mid 2005, Department of Energy: a hacker accessed more than 1,500 In June 2006, it was announced a hacker had gained access to a file containing the names and Social Security numbers of 1,502 individuals. This event, which was detected in mid 2005, was not reported to senior Department officials until June 2006. October 14, 2005, Department of Veterans Affairs: personal computer stolen, exposing data on 421 patients A personal computer was stolen from a medical center that contained information on 421 patients and included patient names, last four digits of their Social Security number, height, weight, allergies, medications, recent lab results, and diagnoses. The agency's privacy officer and medical center information security officer were notified. The use of credit monitoring was investigated and it was determined that, because the entire Social Security number was not listed, it would not be necessary to use these services at the time. November 5, 2005, Department of Education: personally identifiable information of 11,329 student borrowers lost The unencrypted magnetic tape was lost from the Federal Student Aid's Virtual Data Center. After an investigation, no criminal activity was found and the case was closed. November 18, 2005, Department of Health and Human Services: contractor employees steal records of approximately 1,574 Two employees of the Centers for Medicare & Medicaid Services contractor stole records for the purpose of identity theft. The approximately 1,574 individuals were notified. February 15, 2006, Department of Health and Human Services: 22 laptops stolen from contractor site, exposing information on 1,382 The Centers for Disease Control and Prevention reported 22 laptops stolen from a contractor's facility; 3 of them contained Department of Defense service member information affecting 1,382 personnel. All of the potentially impacted individuals were notified. March 17, 2006, Department of Defense: thumb drive with personally identifiable information of approximately 207,570 Marines lost The information on approximately 207,570 enlisted Marines from 2001 to 2005 was lost. A notification letter was sent to the affected individuals and the Marine Corps. March 28, 2006, Department of Health and Human Services: eight laptops stolen from contractor, exposing information on 10,855 Eight laptops containing beneficiary and supplier information were stolen from the contractor's office. The beneficiary list on the laptops included 10,855 names, addresses, and dates of birth. April 5, 2006, Department of Defense: hackers access Tricare Management Activity, exposing personal data Hackers accessed a system containing personally identifiable information on military employees. Approximately 14,000 active duty and retired service members and dependents were affected and notified. New security measures were implemented. April 11, 2006, Department of Veterans Affairs: hacker and employee compromise systems, exposing information on 79,000 veterans A former VA employee was suspected of hacking into a medical center computer system with the assistance of a current employee who provided rotating administrator passwords. All systems in the medical center serving 79,000 veterans were compromised. May 3, 2006, Department of Veterans Affairs: computer equipment containing personally identifiable information of approximately 26.5 million veterans and active duty members of the military was stolen Computer equipment containing personally identifiable information on approximately 26.5 million veterans and active duty members of the military was stolen from the home of a VA employee. June 3, 2006, Department of Agriculture: systems compromised and potentially exposed information on 26,000 Three Department of Agriculture computers system were compromised, potentially exposing the personally identifiable information of 26,000 individuals, including photographs. The department notified the individuals. June 19, 2006, Department of Education: package with personally identifiable information of 13,700 study respondents lost The shipping contractor to the department's National Center for Education Statistics lost a package containing the personally identifiable information of 13,700 study respondents. June 22, 2006, Department of Health and Human Services: laptop stolen from contractor employee, exposing information on 49,572 The theft of a contractor employee's laptop containing a variety of personally identifiable information including medical information was reported. A total of 49,572 Medicare beneficiaries may have been affected. All were notified. July 1, 2006, Department of Commerce: documents and database copied by a former employee, exposing 934 employees A former employee copied sensitive letters and a database of employee information. The database included information on 883 cases and the letters had medical information on 51 employees. July 27, 2006, Department of Transportation: laptop stolen from car of DOT Inspector General, exposing information on approximately 133,000 A laptop containing personally identifiable information of approximately 133,000 Florida pilots, commercial drivers, and other Florida residents was stolen from a government-owned vehicle. August 1, 2006, Department of Defense: laptop falls off motorcycle, losing personally identifiable information of 30,000 A laptop containing personally identifiable information on 30,000 applicants, recruiters, and prospects fell off a motorcycle belonging to a Navy recruiter. August 3, 2006, Department of Veterans Affairs: desktop computer stolen, exposing financial records of approximately 18,000 patients A desktop computer was stolen from a secured area at a contractor's facility in Virginia that processes financial accounts for VA. The desktop computer was not encrypted. Notification letters were mailed and credit monitoring services offered. September 6, 2006, Department of Veterans Affairs: laptop stolen, exposing patient information on an unknown number of individuals A laptop attached to a medical device was stolen. The information on an unknown number of individuals was exposed. Notification letters and credit protection services were offered to 1,575 patients. January 22, 2007, Department of Veterans Affairs: external hard drive missing or stolen, exposing records on 535,000 veterans and 1.3 million non-VA physician provider records An external hard drive was discovered missing or stolen, exposing records on 535,000 veterans and 1.3 million non-VA physician provider records from a research facility in Birmingham, Alabama. Notification letters were sent to veterans and providers, and credit monitoring services were offered to those individuals whose records contained personally identifiable information. In addition to the individual named above, Shaun Byrnes, Barbara Collier, Susan Czachor, Kristi Dorsey, Nancy Glover, Joshua Hammerstein, Anthony Molet, David Plocher, Charles Vrabel (Assistant Director), and Jeffrey Woodward were key contributors to this report.
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The loss of personally identifiable information can result in substantial harm, embarrassment, and inconvenience to individuals and may lead to identity theft or other fraudulent use of the information. As shown in prior GAO reports, compromises to such information and long-standing weaknesses in federal information security raise important questions about what steps federal agencies should take to prevent them. As the federal government obtains and processes information about individuals in increasingly diverse ways, properly protecting this information and respecting the privacy rights of individuals will remain critically important. GAO was requested to (1) identify the federal laws and guidance issued to protect personally identifiable information from unauthorized use or disclosure and (2) describe agencies' progress in developing policies and documented procedures that respond to recent guidance from the Office of Management and Budget (OMB) to protect personally identifiable information that is either accessed remotely or physically transported outside an agency's secured physical perimeter. To do so, GAO reviewed relevant laws and guidance, surveyed officials at 24 major federal agencies, and examined and analyzed agency documents, including policies, procedures, and plans. In commenting on a draft of this report, OMB stated that it generally agreed with the report's contents. Two primary laws (the Privacy Act of 1974 and the E-Government Act of 2002) give federal agencies responsibilities for protecting personal information, including ensuring its security. Additionally, the Federal Information Security Management Act of 2002 (FISMA) requires agencies to develop, document, and implement agencywide programs to provide security for their information and information systems (which include personally identifiable information and the systems on which it resides). The act also requires the National Institute of Standards and Technology (NIST) to develop technical guidance in specific areas, including minimum information security requirements for information and information systems. In the wake of recent incidents of security breaches involving personal data, OMB issued guidance in 2006 and 2007 reiterating agency responsibilities under these laws and technical guidance, drawing particular attention to the requirements associated with personally identifiable information. In this guidance, OMB directed, among other things, that agencies encrypt data on mobile computers or devices and follow NIST security guidelines regarding personally identifiable information that is accessed outside an agency's physical perimeter. Not all agencies had developed the range of policies and procedures reflecting OMB guidance on protection of personally identifiable information that is either accessed remotely or physically transported outside an agency's secured physical perimeter. Of 24 major agencies, 22 had developed policies requiring personally identifiable information to be encrypted on mobile computers and devices. Fifteen of the 24 agencies had policies to use a "time-out" function for remote access and mobile devices requiring user reauthentication after 30 minutes of inactivity. Fewer agencies (11) had established policies to log computer-readable data extracts from databases holding sensitive information and erase the data within 90 days after extraction. Several agencies indicated that they were researching technical solutions to address these issues. Gaps in their policies and procedures reduced agencies' ability to protect personally identifiable information from improper disclosure. At the conclusion of GAO's review, OMB announced in November 2007 that agencies that did not complete certain privacy and security requirements, including those just described, received a downgrade in their scores for progress in electronic government initiatives. According to OMB, it will continue working with agencies to help them strengthen their information security and privacy programs, especially as they relate to the protection of personally identifiable information. In view of OMB's recent actions in this area and GAO's previous recommendations on improving agency information security and implementation of FISMA requirements, GAO is making no further recommendations at this time.
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VA's mission is to promote the health, welfare, and dignity of all veterans in recognition of their service to the nation by ensuring that they receive medical care, benefits, social support, and lasting memorials. It is the second largest federal department and, in addition to its central office located in Washington, D.C., has field offices throughout the United States, as well as the U.S. territories and the Philippines. The department's three major components--the Veterans Benefits Administration (VBA), the Veterans Health Administration (VHA), and the National Cemetery Administration (NCA)--are primarily responsible for carrying out its mission. More specifically, VBA provides a variety of benefits to veterans and their families including disability compensation, educational opportunities, assistance with home ownership, and life insurance. VHA provides health care services, including primary care and specialized care, and it performs research and development to improve veterans' needs. Lastly, NCA provides burial and memorial benefits to veterans and their families. Collectively, the three components rely on approximately 340,000 employees to provide services and benefits. These employees work in 167 VA medical centers, approximately 800 community-based outpatient clinics, 300 veterans centers, 56 regional offices, and 131 national and 90 state or tribal cemeteries situated throughout the nation. The use of IT is critically important to VA's efforts to provide benefits and services to veterans. As such, the department operates and maintains an IT infrastructure that is intended to provide the backbone necessary to meet the day-to-day operational needs of its medical centers, veteran- facing systems, benefits delivery systems, memorial services, and all other IT systems supporting the department's mission. The infrastructure is to provide for data storage, transmission, and communications requirements necessary to ensure the delivery of reliable, available, and responsive support to all VA staff offices and administration customers, as well as veterans. Toward this end, the department operates approximately 240 information systems, manages 314,000 desktop computers and 30,000 laptops, and administers nearly 460,000 network user accounts for employees and contractors to facilitate providing benefits and health care to veterans. These systems are used for the determination of benefits, benefits claims processing, patient admission to hospitals and clinics, and access to health records, among other services. For example, VBA relies on VBMS to collect and store information such as military service records, medical examinations, and treatment records from VA, DOD, and private medical service providers. IT also is widely used and critically important to supporting the department in delivering health care to veterans. VHA's systems provide capabilities to establish and maintain electronic health records that health care providers and other clinical staff use to view patient information in inpatient, outpatient, and long-term care settings. Specifically, the Veterans Health Information Systems and Technology Architecture, known as VistA, consists of many computer applications and modules that collect, among other things, information about a veteran's demographics, allergies, procedures, immunizations, and medical diagnoses. However, a number of VA's systems are old. For example, our recent report on legacy systems used by federal agencies identified 2 of the department's systems as being over 50 years old and among the 10 oldest investments and/or systems that were reported by 12 selected agencies. Personnel and Accounting Integrated Data (PAID)--This 53-year old system automates time and attendance for employees, timekeepers, payroll, and supervisors. It is written in Common Business Oriented Language (COBOL), a programming language developed in the late 1950s and early 1960s, and runs on IBM mainframes. VA plans to replace PAID with a project called Human Resources Information System Shared Service Center in 2017. Benefits Delivery Network (BDN)--This 51-year old system tracks claims filed by veterans for benefits, eligibility, and dates of death. It is a suite of COBOL mainframe applications. VA has general plans to roll the capabilities of BDN into another system, but there is no firm date associated with this transition. To address these obsolete systems that are in need of modernization or replacement, we recommended that the Secretary of Veterans Affairs direct the department's Chief Information Officer (CIO) to identify and plan to modernize or replace legacy systems, as needed, and consistent with draft OMB guidance, including time frames, activities to be performed, and functions to be replaced or enhanced. VA concurred with our recommendation and stated that it is planning to retire PAID and BDN in 2017 and 2018, respectively. In 2014, VA issued its 6-year strategic plan, which emphasizes the department's goal of increasing veterans' access to benefits and services, eliminating the disability claims backlog, and ending veteran homelessness. According to the plan, the department intends to improve access to benefits and services through the use of improved technology to provide veterans with access to more effective care management. The plan also calls for VA to eliminate the disability claims backlog by fully implementing an electronic claims process that is intended to reduce processing time and increase accuracy. Further, the department has an initiative under way that provides services, such as health care, housing assistance, and job training, to end veteran homelessness. Toward this end, VA is working with other agencies, such as the Department of Health and Human Services, to implement more coordinated data entry systems to streamline and facilitate access to appropriate housing and services. VA reported spending about $3.9 billion to improve and maintain its IT resources in fiscal year 2015. Specifically, the department reported spending approximately $548 million on new systems development efforts, approximately $2.3 billion on maintaining existing systems, and approximately $1 billion on payroll and administration. For fiscal year 2016, the department received appropriations of about $4.1 billion for IT. Further, for fiscal year 2017, the department's budget request included nearly $4.3 billion for IT. The department requested approximately $471 million for new systems development efforts, approximately $2.5 billion for maintaining existing systems, and approximately $1.3 billion for payroll and administration. In addition, in its 2017 budget submission, the department requested appropriations to make improvements in a number of areas, including: veterans' access to health care, to include enhancing health care- related systems, standardizing immunization data, and expanding telehealth services ($186.7 million); veterans' access to benefits by modernizing systems supporting benefits delivery, such as VBMS and the Veterans Services Network ($236.3 million); veterans' experiences with VA by focusing on integrated service delivery and streamlined identification processes ($171.3 million); VA employees' experiences by enhancing internal IT systems ($13 information security, including implementing strong authentication, ensuring repeatable processes and procedures, adopting modern technology, and enhancing the detection of cyber vulnerabilities and protection from cyber threats ($370.1 million). VA's CIO has recently initiated an effort to transform the focus and functions of the Office of Information and Technology (OI&T), in response to the Secretary's goal of achieving a more veteran-focused organization. The CIO's transformation strategy, initiated in January 2016, calls for OI&T to focus on stabilizing and streamlining processes, mitigating weaknesses highlighted in GAO assessments, and improving outcomes by institutionalizing a new set of IT management capabilities. As part of this transformation, the CIO began transitioning the oversight and accountability of IT projects to a new project management process called the Veteran-focused Integration Process in January 2016, in an effort to streamline systems development and the delivery of new IT capabilities. The CIO also intends to establish five new functions within OI&T: The enterprise program management office is to serve as OI&T's portfolio management and project tracking organization. The account management function is to be responsible for managing the IT needs of VA's major components. The quality and compliance function is to be responsible for establishing policy governance and standards and ensuring adherence to them. The data management organization is expected to improve both service delivery and the veteran experience by engaging with data stewards to ensure the accuracy and security of the information collected by VA. The strategic sourcing function is to be responsible for establishing an approach to fulfilling the agency's requirements with vendors that provide solutions to those requirements, managing vendor selection, tracking vendor performance and contract deliverables, and sharing insights on new technologies and capabilities to improve the workforce knowledge base. According to the CIO, the transformation strategy is expected to be completed by the first quarter of fiscal year 2017, although the vast majority of the plan, including establishing the five new functions, is to be executed by the end of fiscal year 2016. In February 2015, we designated VA health care as a high-risk area. Among the five broad areas contributing to our determination was the department's IT challenges. Of particular concern was the failed modernization of a system, suspended development of another system, and the extent of system interoperability--the ability to exchange information--with DOD, which present risks to the timeliness, quality, and safety of VA health care. We have reported on the department's failed attempts to modernize its outpatient appointment scheduling system, which is about 30 years old. Among the problems cited by VA staff responsible for scheduling appointments are that the system requires them to use commands requiring many keystrokes and that it does not allow them to view multiple screens at once. Schedulers must open and close multiple screens to check a provider's or a clinic's full availability when scheduling a medical appointment, which is time-consuming and can lead to errors. In addition, we reported in May 2010 that after spending an estimated $127 million over 9 years on its outpatient scheduling system project, VA had not implemented any of the planned system's capabilities and was essentially starting over by beginning a new initiative to build or purchase another scheduling system. We also noted that VA had not developed a project plan or schedule for the new initiative, stating that it intended to do so after determining whether to build or purchase the new application. We recommended that the department take six actions to improve key systems development and acquisition processes essential to the second outpatient scheduling system effort. The department generally concurred with our recommendations, but as of May 2016, had not addressed four of the six recommendations. Further, in January 2014, we reported that the inability to electronically share data across facilities had led VA to suspend the development of a system that would have allowed it to electronically store and retrieve information about surgical implants (including tissue products) and the veterans who receive them nationwide. Having this capability would be particularly important in the event that a manufacturer or the Food and Drug Administration ordered a recall on a medical device or tissue product because of safety concerns. In the absence of a centralized system, at the time of our report, VA clinicians tracked information about implanted items using stand-alone systems or spreadsheets that were not shared across VA facilities, which made it difficult for the department to quickly determine which patients may have received an implant that was subject to a safety recall. Additionally, we reported in February 2014 that VA and DOD lacked electronic health record systems that permit the efficient electronic exchange of patient health information as military service members transition from DOD to VA health care systems. Since 1998, VA and DOD have undertaken a patchwork of initiatives intended to allow their health information systems to exchange information and increase interoperability. Among others, these have included initiatives to share viewable data in existing (legacy) systems, link and share computable data between the departments' updated heath data repositories, and jointly develop a single integrated system. In March 2011, the secretaries of the two departments announced that they would develop a new, joint integrated electronic health record system (referred to as iEHR). This was intended to replace the departments' separate systems with a single common system, thus sidestepping many of the challenges they had previously encountered in trying to achieve interoperability. However, in February 2013, about 2 years after initiating iEHR, the secretaries announced that the departments were abandoning plans to develop a joint system, due to concerns about the program's cost, schedule, and ability to meet deadlines. The Interagency Program Office (IPO) reported spending about $564 million on iEHR between October 2011 and June 2013. In place of the iEHR initiative, VA stated that it would modernize VistA, while DOD planned to buy a commercially available system. The departments stated that they would ensure interoperability between these updated systems, as well as with other public and private health care providers. Our February 2014 report noted that the departments did not substantiate their claims that it would be less expensive and faster than developing a single, joint system. We have also noted that the departments' plans to modernize their two separate systems were duplicative and stressed that their decisions should be justified by comparing the costs and schedules of alternate approaches. We therefore recommended that the departments should develop cost and schedule estimates that would include all elements of their approach (i.e., modernizing both departments' health information systems and establishing interoperability between them) and compare them with estimates of the cost and schedule for the single-system approach. If the planned approach were projected to cost more or take longer, we recommended that they provide a rationale for pursuing such an approach. VA and DOD agreed with our prior recommendations and stated that initial comparison indicated that the current approach would be more cost effective. However, as of June 2016, the departments have not provided us with a comparison of the estimated costs of their current and previous approaches. Moreover, with respect to their assertions that separate systems could be achieved faster, both departments have developed schedules that indicate their separate modernizations are not expected to be completed until after the 2017 planned completion date for the previous single-system approach. To further highlight the department's IT challenges, our most recent report in August 2015 on VA's efforts to achieve electronic health record interoperability with DOD noted that the departments have engaged in several near-term efforts focused on expanding interoperability between their existing electronic health record systems. For example, the departments analyzed data related to 25 "domains" identified by the Interagency Clinical Informatics Board and mapped health data in their existing systems to standards identified by the IPO. The departments also expanded the functionality of their Joint Legacy Viewer--a tool that allows clinicians to view certain health care data from both departments in a single interface. In addition, VA and DOD have moved forward with plans to modernize their respective electronic health record systems. For its part, VA has developed a number of plans for its VistA modernization effort (known as VistA Evolution), including an interoperability plan and a road map describing functional capabilities to be deployed through fiscal year 2018. According to the road map, the first set of capabilities was to be delivered in September 2014, and was to include access to the Joint Legacy Viewer, among other things. VA's CIO has asserted that the department has continued to improve VistA. However, the CIO also recently indicated that the department is taking a step back in reconsidering how best to meet VA's future electronic health record system needs and has not determined whether to modernize VistA or to replace it with an off-the- shelf system. Nevertheless, a significant concern that we identified is that VA (and DOD) had not identified outcome-oriented goals and metrics that would more clearly define what they aim to achieve from their interoperability efforts and the value and benefits these efforts are intended to yield. As we have stressed in our prior work, assessing the performance of a program should include measuring its outcomes in terms of the results of products or services. In this case, such outcomes could include improvements in the quality of health care or clinician satisfaction. Establishing outcome-oriented goals and metrics is essential to determining whether a program is delivering value. In our August 2015 report, we stressed that using an effective outcome- based approach could provide VA with a more accurate picture of its progress toward achieving interoperability with DOD and the value and benefits generated. Accordingly, we recommended that the departments, working with the IPO, establish a time frame for identifying outcome- oriented metrics, define related goals as a basis for determining the extent to which the departments' modernized electronic health record systems are achieving interoperability, and update IPO guidance accordingly. VA concurred with our recommendations and has told us that it has initiated actions in response to them. In September 2015, we reported that VBA had made progress in developing and implementing VBMS, its system that is to be used for processing disability benefit claims. Specifically, it had deployed the initial version of the system to all of its regional offices as of June 2013. Further, after initial deployment, VBA continued developing and implementing additional system functionality and enhancements to support the electronic processing of disability compensation claims. As a result, 95 percent of records related to veterans' disability claims are electronic and reside in the system. Nevertheless, we found that VBMS was not able to fully support disability and pension claims, as well as appeals processing. Specifically, while the Under Secretary for Benefits stated in March 2013 that the development of the system was expected to be completed in 2015, implementation of functionality to fully support electronic claims processing was delayed beyond 2015. In addition, VBA had not produced a plan that identified when the system will be completed. Accordingly, holding VA management accountable for meeting a time frame and for demonstrating progress was difficult. As VA continues its efforts to complete the development and implementation of VBMS, we reported in September 2015 that three areas could benefit from increased management attention. Cost estimating: The program office did not have a reliable estimate of the cost for completing the system. Without such an estimate, VA management and the department's stakeholders had a limited view of the system's future resource needs, and the program risked not having sufficient funding to complete development and implementation of the system. System availability: Although VBA had improved its performance regarding system availability to users, it had not established system response time goals. Without such goals, users did not have an expectation of the system response times they could anticipate and management did not have an indication of how well the system performs relative to performance goals. System defects: While the program had actively managed system defects, a recent system release included unresolved defects that impacted system performance and users' experiences. Continuing to deploy releases with large numbers of defects that reduce system functionality could adversely affect users' ability to process disability claims in an efficient manner. We also found in our September 2015 report that VA had not conducted a customer satisfaction survey that would allow the department to compile data on how users view the system's performance, and ultimately, to develop goals for improving the system. GAO's 2014 survey of VBMS users found that a majority of them were satisfied with the system, but decision review officers were considerably less satisfied. Although the results of our survey provided VBA with data about users' satisfaction with VBMS, the absence of user satisfaction goals limited the utility of survey results. Specifically, without having established goals to define user satisfaction, VBA did not have a basis for gauging the success of its efforts to promote satisfaction with the system, or for identifying areas where its efforts to complete development and implementation of the system might need attention. In our September 2015 report, we recommended that VA develop a plan with a time frame and a reliable cost estimate for completing VBMS, establish goals for system response time, minimize the incidence of high and medium severity system defects for future VBMS releases, assess user satisfaction, and establish satisfaction goals to promote improvement. As we stressed in our report, attention to these issues can improve VA's efforts to effectively complete the development and implementation of VBMS. Fully addressing our recommendations, as VA agreed to do, should help the department give appropriate attention to these issues. As we reported in May 2016, VA's expenditures for its care in the community programs, the number of veterans for whom VA has purchased care, and the number of claims processed by VHA have all grown considerably in recent years. The substantial increase in utilization of VA care in the community programs poses staffing and workload challenges for VHA, which has had ongoing difficulty processing claims from community providers in a timely manner. VHA officials and staff at three of the four claims processing locations we visited told us that limitations of the existing IT systems, including the Fee Basis Claims System (FBCS) that VHA uses for claims processing, have delayed processing and payment of claims for VA care in the community services. Officials at the sites we visited described the following limitations. VHA cannot accept medical documentation electronically. Authorizations for VA care in the community services are not always readily available in FBCS. FBCS cannot automatically adjudicate claims. System weaknesses have delayed claims payments. The officials we interviewed said that if the agency is to dramatically improve its claims processing timeliness, comprehensive and technologically advanced solutions must be developed and implemented, such as modernizing and upgrading VHA's existing claims processing system or contracting out the claims processing function. In October 2015, VHA submitted a plan to address these issues as part of a broader effort to consolidate VA care in the community programs. The agency estimated that it would take at least 2 years to implement solutions that would fully address all of the challenges now faced by its claims processing staff and by providers of VA care in the community services. However, VHA has not yet provided to Congress or other external stakeholders a plan for modernizing its claims processing system. In particular, VHA has not provided (1) a detailed schedule for developing and implementing each aspect of its new claims processing system; (2) the estimated costs for developing and implementing each aspect of the system; and (3) performance goals, measures, and interim milestones that VHA will use to evaluate progress, hold staff accountable for achieving desired results, and report to stakeholders the agency's progress in modernizing its claims processing system. That VHA has not yet provided a detailed plan but has stated that it expects to deploy a modernized claims processing system as early as fiscal year 2018 is cause for concern. Thus, to help provide reasonable assurance that VHA achieves its long-term goal of modernizing its claims processing system, we recommended in May 2016 that the Secretary of Veterans Affairs direct the Under Secretary for Health to ensure that the agency develops a sound written plan that includes: a detailed schedule for when VHA intends to complete development and implementation of each major aspect of its new claims processing system; the estimated costs for implementing each major aspect of the system; and the performance goals, measures, and interim milestones that VHA will use to evaluate progress, hold staff accountable for achieving desired results, and report to stakeholders the agency's progress in modernizing its claims processing system. The department concurred with our recommendation and said that VHA plans to address the recommendation when the agency develops an implementation strategy for the future consolidation of its VA care in the community programs. In conclusion, effective IT management is critical to the performance of VA's mission. The department faces challenges in key areas, including the development of new systems, modernization of existing systems, and increasing interoperability with DOD. While we recognize that the transformation of VA's IT organization is intended, among other things, to mitigate the IT weaknesses we have identified, sustained management attention and organizational commitment will be essential to ensuring that the transformation is successful and that the weaknesses are fully addressed. 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. If you or your staff have any questions about this testimony, please contact Valerie C. Melvin at (202) 512-6304 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony statement. GAO staff who made key contributions to this statement are Mark T. Bird (Assistant Director), Jennifer Stavros-Turner (Analyst in Charge), Kara Epperson, Rebecca Eyler, and Jacqueline Mai. 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.
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VA relies on IT to meet its mission and effectively serve the nation's veterans. Over the past several years, the department has expended billions of dollars to manage and modernize its information systems. However, VA has experienced challenges in managing its IT, raising questions about the effectiveness of its IT operations. GAO has previously reported on a number of the department's IT initiatives. This statement summarizes results from key GAO reports issued between 2010 and 2014 highlighting IT challenges that have contributed to GAO's designation of VA health care as a high risk area. It also describes additional challenges that GAO more recently identified in 2015 and 2016 that are related to increasing the electronic exchange of VA's health records with those of DOD, development and use of VBMS, and the department's modernization of its health care claims processing system. In February 2015, GAO designated Veterans Affairs (VA) health care as a high-risk area based on its concerns about the department's ability to ensure the quality and safety of veterans' health care in five broad areas, one of which was information technology (IT) challenges. Of particular concern at that time was the failed modernization of an outpatient appointment scheduling system, suspended development of a system that was to electronically store and retrieve information about surgical implants, and the extent of system interoperability--the ability to exchange information--with the Department of Defense (DOD), which present risks to the timeliness, quality, and safety of VA health care. Subsequent to the designation of VA health care as high risk, GAO completed evaluations that identified additional IT management challenges at VA. In August 2015, GAO reported on VA's efforts to achieve electronic health record interoperability with DOD and noted that (1) the two departments had engaged in several near-term efforts to expand interoperability and (2) VA and DOD had moved forward with plans to separately modernize their electronic health record systems. However, of significant concern was that VA (and DOD) had not identified outcome-oriented goals and metrics that would clearly define what it aims to achieve from its efforts. GAO recommended that VA develop goals and metrics, among other things. VA concurred with the recommendations and stated that it has initiated actions in response. VA had made progress in developing and implementing its Veterans Benefits Management System (VBMS), with deployment of the initial version of the system. However, in September 2015, GAO reported that the development and implementation of the system was ongoing and noted three areas that could benefit from increased management attention: cost estimating, system availability, and system defects. The report also noted that VA had neither conducted a customer satisfaction survey nor developed goals for improving the system. GAO recommended that VA develop a plan with a time frame and a reliable cost estimate for completing VBMS, establish goals for system response time, minimize the incidences of high and medium severity system defects for future VBMS releases, assess user satisfaction, and establish satisfaction goals to promote improvement. VA agreed with the recommendations and noted steps it was taking to address them. Due to recent increases in utilization of VA care in the community, the department has had difficulty processing claims in a timely manner. In May 2016, GAO reported that VA officials and claims processing staff indicated that IT limitations, manual processes, and staffing challenges had delayed claims processing. The department had implemented interim measures to address some of the system's challenges, but did not expect to deploy solutions to address all challenges, including those related to IT, until fiscal year 2018 or later. Further, VA did not have a sound plan for modernizing its claims processing system, which GAO recommended it develop. The department concurred with this recommendation and stated that it intended to address the recommendation through the planned consolidation of its care in the community programs. GAO has made numerous recommendations to VA to improve the modernization of its IT systems. Among other things, GAO has recommended that VA address challenges associated with its efforts to modernize its electronic health record system to increase interoperability with DOD, develop goals and metrics as a basis for determining the extent to which VA's and DOD's modernized electronic health records systems are achieving interoperability, address shortcomings with VBMS planning and implementation, and develop a sound written plan for deploying its modernized claims processing system. VA has concurred with these recommendations and has some actions ongoing.
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The first BRAC Commission was chartered by the Secretary of Defense in 1988, and operated in accordance with processes later established by the Defense Authorization Amendments and Base Closure and Realignment Act of 1988. Since that time, the BRAC process has changed in many ways, with a variety of requirements and procedures mandated by subsequent BRAC statutes or adopted by DOD. Among these is the requirement that the Secretary of Defense develop a current force structure plan. DOD's force structure plan is designed to identify the number and type of forces that DOD needs to combat the anticipated threats to the security of the United States. As specified in DOD's force structure plan in support of BRAC 2005, the President's National Security Strategy and the Secretary of Defense's National Defense Strategy provide the focus for the military forces. DOD then analyzes current and future threats, challenges, and opportunities to develop the force structure plan. DOD's planning framework helps determine the capabilities required to respond to a range of scenarios. The Department then analyzes the force requirements for the most likely, the most dangerous, and the most demanding circumstances. One of the objectives of the first BRAC Commission was to review the current and planned military base structure in light of force structure assumptions and, using the process and the criteria the Commission developed, to identify which bases should be realigned or closed. To accomplish this, the Commission used a two-phase approach. Phase I grouped bases into 22 overall categories, such as training bases and administrative headquarters, and then focused on determining the military value of bases within each category, each base's capacity to absorb additional missions and forces, and the overall excess capacity within the category. The Commission then ranked the bases to identify those warranting review in phase II, which focused on assessing the cost and savings of base realignment and closure options. The Defense Base Realignment and Closure Act of 1990 substantially revised the process for DOD base closure and realignment actions within the United States, establishing an independent Defense Base Closure and Realignment Commission and providing for BRAC rounds in 1991, 1993, and 1995. One of the key elements of the 1990 BRAC statute was the requirement that DOD submit a force structure plan and that closure and realignment decisions be based on that force structure plan and on the final selection criteria established for the BRAC round. As part of the BRAC process for 1991, 1993, and 1995, an important step in the military services' approach for identifying bases to close or realign was determining whether excess capacity existed at their bases. The starting point for this step was comparing changes in the force structure plan to the base structure of the military services. After applying military value criteria and other specific BRAC criteria, each of the services developed their recommendations for closures and realignments for submission to the BRAC Commission. In May 1997, the Secretary of Defense announced his intention to ask Congress to authorize two additional BRAC rounds. Later that year, Congress enacted section 2824 of the National Defense Authorization Act for Fiscal Year 1998, which required that the Secretary of Defense provide the congressional defense committees with a comprehensive report on a range of BRAC issues, including the need for any additional BRAC rounds and an estimate of the amount of DOD's excess capacity. DOD submitted the required report in April 1998 and estimated that DOD had 23 percent excess capacity. In the report, DOD also stated that its method for estimating excess capacity determined the extent to which reductions in base structure had kept pace with reductions in force structure since 1989. The National Defense Authorization Act for Fiscal Year 2002 amended the 1990 BRAC statute by authorizing a BRAC round for 2005, and required DOD to report to Congress on several BRAC-related issues in 2004 in order for the 2005 round to proceed. The statute directed, among other things, that the Secretary of Defense provide Congress with a 20- year force structure plan and a worldwide inventory of military installations and facilities as part of DOD's fiscal year 2005 budget justification documents. In addition, as part of the force structure plan and inventory submission, the Secretary was to prepare (1) a description of the infrastructure necessary to support the force structure described in the force-structure plan, (2) a discussion of categories of excess infrastructure and infrastructure capacity, and (3) an economic analysis of the effect of the closure or realignment of military installations to reduce excess infrastructure. DOD provided the required report, which estimated that the department had 24 percent excess capacity, on March 23, 2004. In that report, the Secretary of Defense also certified that an additional round of BRAC was needed and that the round would result in savings by fiscal year 2011. Subsequently, an initial part of DOD's BRAC recommendations development process for the 2005 round involved an overall capacity analysis of specific locations or functions and subfunctions at specific locations. The analysis relied on data calls to obtain certified data to assess such factors as maximum potential capacity, current capacity, current usage, excess capacity, and capacity needed to meet surge requirements. This capacity analysis--in conjunction with the department's 20-year force structure plan, military value analysis, and transformational options; applicable guiding principles, objectives, or policy imperatives identified by individual military services or joint cross- service groups; and military judgment--was used to identify realignment and closure scenarios for further analysis, ultimately leading to finalized recommendations for base realignments and closures. Our review of DOD's pre-BRAC estimates of excess capacity found that the methods DOD has used and the resulting estimates have limitations. DOD used similar methods in 1998 and 2004 to calculate its pre-BRAC estimates of excess capacity. However, our current review identified a number of additional limitations with DOD's methods. For example, DOD's approach assigns each installation to only one mission category, even though most installations support more than one mission. In addition, to arrive at the excess capacity estimate it provided to Congress in 2012 and repeated in 2013, DOD subtracted an estimate of excess capacity that it expected would be disposed of during the 2005 BRAC round from the amount of excess capacity estimated to exist immediately before that BRAC round to arrive at the current excess capacity estimate of about 20 percent. However, because DOD's pre-BRAC excess capacity estimate, expressed as a percentage of bases, and plant replacement value, expressed in dollars, are not measured in the same units, they are not comparable measures. DOD based its 1998 and 2004 estimates of 23 percent and 24 percent excess capacity, respectively, on a method that compared measures of force structure projected to be in place at the end of the 5-year Future Years Defense Programs that were current at the time of each estimate, to associated indicators of capacity. DOD's 1998 and 2004 technique consisted of three major steps: (1) categorizing bases according to their primary missions and defining indicators of capacity, (2) developing ratios of capacity-to-force structure for DOD's baseline year of 1989, and (3) aggregating these various excess capacity indicators that were calculated at the installation level to the military service level and then department- wide. To begin DOD's analysis, each of the military services identified categories for their bases, identified bases that the services considered major installations, and categorized their bases according to their primary missions--such as depots, training, or administration--so that each installation was included in only one category. Figure 1 shows the installation categories used by each military service and the Defense Logistics Agency. Figure 1. Installation Categories for the Military Services and the Defense Logistics Agency. The services then defined various indicators of capacity--such as maneuver base acres or facility square feet--for each installation category. Next, DOD divided each services' indicators of capacity by a measure of force structure--such as the number of military and civilian personnel authorized, authorized end strength, or the size of the acquisition workforce--to develop ratios of capacity-to-projected force structure and compared them to ratios from 1989, which was used as a baseline. For its 1998 analysis DOD projected force structure through 2003, and for its 2004 analysis DOD projected force structure through 2009 because these dates marked the end of DOD's Future Year's Defense Program projections that were current at the time the analyses were performed. For example, as illustrated in Figure 2, in its 1998 capacity analysis, DOD projected, that in 2003, there would be 6.575 million square feet of administrative space on Army administrative bases, and DOD projected that there would be 65,516 military and civilian personnel assigned to those bases, resulting in a capacity-to-force structure ratio of 100.4. Similarly, according to its 2004 capacity analysis, DOD projected that, in 2009, there would be 6.121 million square feet of administrative space on Army administrative bases, and DOD projected that there would be 64,598 military and civilian personnel assigned to those bases, resulting in a capacity-to-force structure ratio of 94.8. DOD then calculated the extent to which the ratio of capacity-to-force structure for each base category differed from the ratio in 1989, which was used as a baseline. To do this, DOD first calculated an estimate of capacity it would need for the year in question for each of its various indicators of capacity. For instance, to continue with the second example above, DOD calculated an estimate of administrative capacity the Army would need for 2009. As illustrated in Figure 3, DOD calculated its needed capacity indicators by multiplying the projected 2009 force structure measure (64,598 military and civilian personnel in this case) by the 1989 capacity-to-force ratio (81.3 for Army administrative bases), which in this case resulted in an estimated needed capacity of 5.25 million square feet of Army administrative space. To calculate the projected excess capacity for 2009, DOD subtracted a base category's estimated needed capacity from its projected 2009 capacity. In our Army administrative base example, DOD subtracted its estimated needed capacity for 2009 of 5.25 million square feet from its estimated existing capacity in 2009 of 6.12 million square feet, which resulted in DOD's estimate of 0.87 million square feet of excess Army administrative space or 14 percent of the Army's existing administrative space in 2009. After computing these indicators of excess capacity for each category of installation for each military service and the Defense Logistics Agency, DOD then aggregated these indicators departmentwide. Specifically, DOD first multiplied the number of bases in a category by the percentage of excess for that category, which resulted in DOD's estimate of the number of excess bases in each category. Continuing our Army administrative capacity example above, as illustrated in Figure 4, the percentage of excess capacity (in this case, the Army's estimated 14- percent excess of projected administrative space in 2009) would be multiplied by the number bases in the category (12 in the case of Army administrative bases), resulting in an estimated number of excess administrative bases (1.7 in this case). As illustrated in Figure 5, to calculate an overall indication of excess capacity for each DOD component, DOD summed the estimated number of excess bases for each installation category within a component (22.3 in the case of the Army) and divided this by the sum of the number of all bases in all categories for that component (78 in the case of the Army), which resulted in a percentage of excess bases for the component. In our example, DOD estimated that 29 percent of the Army's bases were in excess to its estimated needed capacity. Finally, the departmentwide excess was calculated by summing the estimated number of excess bases for each military service and the Defense Logistics Agency (65.2), summing the number of bases included in the analysis (276), then dividing the sum of the excess bases by the total number of bases in the analysis, resulting in estimated department- wide excess of 24 percent. DOD recognized some limitations within its method for estimating excess capacity, stating in both its 1998 and 2004 reports to Congress that the analysis it performed provided an indication of the type and amount of excess capacity within the department, but recognizing that the analyses lacked the precision to identify specific installations or functional configurations for realignment or closure. In addition, our current review of DOD's method for estimating excess capacity outside of a congressionally-authorized BRAC process identified a number of limitations. First, DOD assigned each base to only one installation category, even though most bases support more than one mission. This approach effectively excluded significant portions of a base's infrastructure from the analysis. For example, in the case of Army maneuver bases, using base acres as the indicator of capacity does not include about 204 million square feet of buildings located on the 12 Army maneuver bases in DOD's analysis. Another limitation associated with DOD's method is that the services measured capacity for some similar functions differently. For example, the Army and Air Force measured capacity for test and evaluation facilities in terms of physical total square feet of space, while the Navy measured its capacity for these facilities in terms of work years. These differences make it difficult for DOD to assess excess capacity across the department. A third limitation is that, in using 1989 as a baseline, DOD assumed that the bases and facilities as they existed in 1989 were appropriately sized to support missions, and DOD did not identify any excess capacity or capacity shortfall that may have existed at that time. This approach, in essence, transfers any excesses and shortfalls that existed in 1989 into DOD's estimates of future capacity needs because, as illustrated in Figure 3 above, the capacity-to-force structure ratio from 1989 was used to calculate the needed capacity for 2009. It is therefore uncertain to what extent DOD's estimates of excess capacity are overstated or understated. Finally, in both the 1998 and 2004 analyses, in instances where DOD's analysis indicated that projected capacity was less than needed capacity--indicating a capacity shortage--within a specific installation category, DOD treated these cases as having zero or no excess capacity. Despite the data showing capacity shortages, DOD used this data to aggregate the results of its analysis across the department. If DOD had treated those installation categories as having capacity shortages, DOD's estimates would have resulted in a lower number of excess bases and consequently a lower percentage of excess capacity across the department than DOD reported to Congress. DOD's testimony in March 2012 and March 2013, that by its estimates DOD had about 20 percent excess capacity remaining after the end of BRAC 2005, relied on earlier calculations that the department made in 2004 and 2005. First, in 2004, using the method described above, the department estimated that it had 24 percent excess capacity. Then, in 2005, DOD's report transmitting its recommendations to the BRAC Commission stated that, while it is difficult to measure the full extent of the improvements in effectiveness and efficiency of the BRAC 2005 recommendations, four statistics would illustrate the breadth and depth of the effect of its proposed actions. One of those statistics was the department's projection that DOD's plant-replacement value would be reduced by 5 percent. After the BRAC Commission reviewed DOD's recommendations and made some changes, including reducing the number of closures at major installations, DOD revised its estimate of the expected percentage reduction in plant-replacement value and projected that it would likely be around 3 percent. In 2012, the Deputy Under Secretary of Defense (Installations and Environment) said that these estimates from 2004 and 2005 suggested that roughly 20 percent excess capacity remained. However, because DOD's pre-BRAC excess capacity estimate, which is expressed as a percentage of bases, and plant replacement value, which is expressed in dollars, are not measured in the same units, they are not comparable measures. In March 2013, the Acting Deputy Under Secretary of Defense (Installations and Environment) testified that the method upon which DOD's current estimate of 20 percent excess capacity is based is helpful in making a broad assessment in determining whether an additional BRAC round is justified, but it cannot identify specific installations or functional configurations for realignment or closure. The Acting Deputy Under Secretary further stated that the specific capacity analysis that is an integral part of the BRAC process is preferable to aggregate metrics used in DOD's pre-BRAC estimates. He further stated that only through the BRAC process is the Department able to determine excess capacity by installation and by mission or function in a process that is thorough and fair. We provided a draft of this report to DOD for comment. In its written comments, which are reproduced in appendix I, DOD stated that we properly highlighted the limitations of its approach used to estimate excess capacity. In addition, DOD stated that our report provides proper context for its methodology by contrasting it with the extensive and detailed data collection and analysis that DOD has used to develop BRAC recommendations. DOD concluded that only through the BRAC process is it able to determine excess capacity by installation and mission or function in a fair and thorough way. DOD also provided a technical comment which we incorporated into our report. We are sending copies of this report to appropriate congressional committees and the Secretary of Defense; the Secretaries of the Army, Navy, and Air Force; the Commandant of the Marine Corps; and the Director, Office of Management and Budget. This report is also available at no charge 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) 512-4523 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 major contributions to this report are listed in appendix II. Brian J. Lepore, (202) 512-4523 or [email protected]. In addition to the contact named above, Harold Reich (Assistant Director), Ronald Bergman, Timothy Burke, Susan Ditto, Gregory Marchand, Carol Petersen, Amie Steele, Laura Talbott, John Van Schaik, and John Wren made significant contributions to the report. Military Bases: Opportunities Exist to Improve Future Base Realignment and Closure Rounds. GAO-13-149. Washington, D.C.: March 7, 2013. GAO's 2013 High Risk Series: An Update. GAO-13-283. Washington, D.C.: February 2013. DOD Joint Bases: Management Improvements Needed to Achieve Greater Efficiencies. GAO-13-134. Washington, D.C.: November 15, 2012. Military Base Realignments and Closures: The National Geospatial- Intelligence Agency's Technology Center Construction Project. GAO-12-770R. Washington, D.C.: June 29, 2012. Military Base Realignments and Closures: Updated Costs and Savings Estimates from BRAC 2005. GAO-12-709R. Washington, D.C.: June 29, 2012. Military Base Realignments and Closures: Key Factors Contributing to BRAC 2005 Results. GAO-12-513T. Washington, D.C.: March 8, 2012. Excess Facilities: DOD Needs More Complete Information and a Strategy to Guide Its Future Disposal Efforts. GAO-11-814. Washington, D.C.: September 19, 2011. Military Base Realignments and Closures: Review of the Iowa and Milan Army Ammunition Plants. GAO-11-488R. Washington, D.C.: April 1, 2011. GAO's 2011 High-Risk Series: An Update. GAO-11-394T. Washington, D.C.: February 17, 2011. Defense Infrastructure: High-Level Federal Interagency Coordination Is Warranted to Address Transportation Needs beyond the Scope of the Defense Access Roads Program. GAO-11-165. Washington, D.C.: January 26, 2011. Military Base Realignments and Closures: DOD Is Taking Steps to Mitigate Challenges but Is Not Fully Reporting Some Additional Costs. GAO-10-725R. Washington, D.C.: July 21, 2010. Defense Infrastructure: Army Needs to Improve Its Facility Planning Systems to Better Support Installations Experiencing Significant Growth. GAO-10-602. Washington, D.C.: June 24, 2010. Military Base Realignments and Closures: Estimated Costs Have Increased While Savings Estimates Have Decreased Since Fiscal Year 2009. GAO-10-98R. Washington, D.C.: November 13, 2009. Military Base Realignments and Closures: Transportation Impact of Personnel Increases Will Be Significant, but Long-Term Costs Are Uncertain and Direct Federal Support Is Limited. GAO-09-750. Washington, D.C.: September 9, 2009. Military Base Realignments and Closures: DOD Needs to Update Savings Estimates and Continue to Address Challenges in Consolidating Supply- Related Functions at Depot Maintenance Locations. GAO-09-703. Washington, D.C.: July 9, 2009. Defense Infrastructure: DOD Needs to Periodically Review Support Standards and Costs at Joint Bases and Better Inform Congress of Facility Sustainment Funding Uses. GAO-09-336. Washington, D.C.: March 30, 2009. Military Base Realignments and Closures: DOD Faces Challenges in Implementing Recommendations on Time and Is Not Consistently Updating Savings Estimates. GAO-09-217. Washington, D.C.: January 30, 2009. Military Base Realignments and Closures: Army Is Developing Plans to Transfer Functions from Fort Monmouth, New Jersey, to Aberdeen Proving Ground, Maryland, but Challenges Remain. GAO-08-1010R. Washington, D.C.: August 13, 2008. Defense Infrastructure: High-Level Leadership Needed to Help Communities Address Challenges Caused by DOD-Related Growth. GAO-08-665. Washington, D.C.: June 17, 2008. Defense Infrastructure: DOD Funding for Infrastructure and Road Improvements Surrounding Growth Installations. GAO-08-602R. Washington, D.C.: April 1, 2008. Military Base Realignments and Closures: Higher Costs and Lower Savings Projected for Implementing Two Key Supply-Related BRAC Recommendations. GAO-08-315. Washington, D.C.: March 5, 2008. Defense Infrastructure: Realignment of Air Force Special Operations Command Units to Cannon Air Force Base, New Mexico. GAO-08-244R. Washington, D.C.: January 18, 2008. Military Base Realignments and Closures: Estimated Costs Have Increased and Estimated Savings Have Decreased. GAO-08-341T. Washington, D.C.: December 12, 2007. Military Base Realignments and Closures: Cost Estimates Have Increased and Are Likely to Continue to Evolve. GAO-08-159. Washington, D.C.: December 11, 2007. Military Base Realignments and Closures: Impact of Terminating, Relocating, or Outsourcing the Services of the Armed Forces Institute of Pathology. GAO-08-20. Washington, D.C.: November 9, 2007. Military Base Realignments and Closures: Transfer of Supply, Storage, and Distribution Functions from Military Services to Defense Logistics Agency. GAO-08-121R. Washington, D.C.: October 26, 2007. Defense Infrastructure: Challenges Increase Risks for Providing Timely Infrastructure Support for Army Installations Expecting Substantial Personnel Growth. GAO-07-1007. Washington, D.C.: September 13, 2007. Military Base Realignments and Closures: Plan Needed to Monitor Challenges for Completing More Than 100 Armed Forces Reserve Centers. GAO-07-1040. Washington, D.C.: September 13, 2007. Military Base Realignments and Closures: Observations Related to the 2005 Round. GAO-07-1203R. Washington, D.C.: September 6, 2007. Military Base Closures: Projected Savings from Fleet Readiness Centers Likely Overstated and Actions Needed to Track Actual Savings and Overcome Certain Challenges. GAO-07-304. Washington, D.C.: June 29, 2007. Military Base Closures: Management Strategy Needed to Mitigate Challenges and Improve Communication to Help Ensure Timely Implementation of Air National Guard Recommendations. GAO-07-641. Washington, D.C.: May 16, 2007. Military Base Closures: Opportunities Exist to Improve Environmental Cleanup Cost Reporting and to Expedite Transfer of Unneeded Property. GAO-07-166. Washington, D.C.: January 30, 2007. Military Bases: Observations on DOD's 2005 Base Realignment and Closure Selection Process and Recommendations. GAO-05-905. Washington, D.C.: July 18, 2005. Military Bases: Analysis of DOD's 2005 Selection Process and Recommendations for Base Closures and Realignments. GAO-05-785. Washington, D.C.: July 1, 2005. Military Base Closures: Observations on Prior and Current BRAC Rounds. GAO-05-614. Washington, D.C.: May 3, 2005. Military Base Closures: Assessment of DOD's 2004 Report on the Need for a Base Realignment and Closure Round. GAO-04-760. Washington, D.C.: May 17, 2004. Military Bases: Review of DOD's 1998 Report on Base Realignment and Closure. GAO/NSIAD-99-17. Washington, D.C.: November 13, 1998.
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Due in part to challenges DOD faces in reducing excess infrastructure, DOD's Support Infrastructure Management is on GAO's High Risk List of program areas vulnerable to fraud, waste, abuse, and mismanagement, or are most in need of transformation. Since 1988, DOD has relied on the BRAC process as a primary means of reducing excess infrastructure or capacity and realigning bases to meet changes in the size and structure of its forces. In 1998 and 2004, Congress required DOD to submit reports that, among other things, estimated the amount of DOD's excess capacity at that time. Also, in March 2012, DOD testified that it had about 20 percent excess capacity. The methods used to develop such preliminary excess capacity estimates differ from the data-intensive process--supplemented by military judgment--that DOD has used to formulate specific base closure and realignment recommendations. A Senate Armed Services Committee report directed GAO to review how DOD identifies bases or facilities excess to needs. The objective of this report is to discuss how DOD has estimated its excess capacity, outside of the BRAC process. To do so, GAO reviewed excess capacity estimates from 1998, 2004, and 2012; analyzed DOD's data; reviewed supporting documentation; assessed assumptions and limitations of DOD's analysis; and interviewed DOD officials. In commenting on a draft of this report, DOD stated that GAO had properly highlighted the limitations of its approach to estimating excess capacity and contrasted it with the method used to develop BRAC recommendations. The Department of Defense's (DOD) methods for estimating excess capacity outside of a congressionally-authorized Base Realignment and Closure (BRAC) process have limitations. DOD used similar processes in its excess capacity analyses conducted in 1998 and 2004. This process included three major steps: (1) categorizing bases according to their primary missions and defining indicators of capacity; (2) developing ratios of capacity-to-force structure for DOD's baseline year of 1989; and (3) aggregating the analysis from the installation level across the military services and department-wide. In both its 1998 and 2004 reports, DOD recognized some limitations with its methods for estimating excess capacity and stated that its analyses lacked the precision necessary to identify specific installations or functional configurations for realignment or closure. In addition, GAO's review of DOD's methods for estimating excess capacity outside of a congressionally-authorized BRAC process identified a number of limitations. First, DOD's approach assigns each installation to only one mission category, even though most installations support more than one mission. This approach effectively excluded significant portions of some bases' infrastructure from the analysis. Second, the services measured capacity for some similar functions differently such as test and evaluation facilities, which makes it difficult for DOD to evaluate excess capacity across the department. Third, DOD did not attempt to identify any excess capacity or capacity shortfall that existed in 1989; hence it is uncertain to what extent DOD's estimates of excess capacity may be overstated or understated. Finally, in instances where DOD's analysis indicated that projected capacity was less than needed capacity--indicating a capacity shortage--within an installation category, DOD treated these cases as having zero or no excess capacity when aggregating the results of its analysis. If DOD had treated those installation categories as having a capacity shortages, DOD's method would have calculated a lower number of bases and consequently a lower percentage of excess capacity across the department than DOD reported to Congress. DOD's testimony in March 2012 and again in March 2013, that it had about 20 percent excess capacity remaining after the end of BRAC 2005, relied on earlier calculations that the department made in 2004 and 2005. Specifically, these estimates were reached by subtracting DOD's estimate of the amount of capacity that would be eliminated by the approved recommendations from BRAC 2005--3 to 5 percent of plant replacement value--from DOD's 2004 estimate that it had 24 percent excess capacity. However, pre-BRAC estimates of the percentage of bases that may be excess to needed capacity, which is expressed as a percentage of bases, and plant replacement value, which is measured in dollars, are not comparable measures. In March 2013, the Acting Deputy Under Secretary of Defense (Installations and Environment) testified that the method upon which DOD's current estimate is based is helpful in determining whether an additional BRAC round is justified, but only through the BRAC process is the Department able to determine specifically which installations or facilities are excess.
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During this Committee's hearings on S. 981, one of the witnesses indicated that Congress should determine the effectiveness of previously enacted regulatory reforms before enacting additional reforms. Perhaps the most directly relevant of those reforms to S. 746 is title II of the Unfunded Mandates Reform Act of 1995 (UMRA), which requires that agencies take a number of analytical and procedural steps during the rulemaking process. We examined the implementation of UMRA during its first 2 years of operation and, for several reasons, concluded that it had little effect on agencies' rulemaking actions. First, the act's cost-benefit requirement did not apply to many of the rulemaking actions that were considered "economically significant"actions under Executive Order 12866 (78 out of 110 issued in the 2-year period). Second, UMRA gave agencies discretion not to take certain actions if they determined that those actions were duplicative or unfeasible. For example, subsection 202(a)(3) of the act requires agencies to estimate future compliance costs and any disproportionate budgetary effects of the actions "if and to the extent that the agency determines that accurate estimates are reasonably feasible." Third, UMRA requires agencies to take actions that they were already required to take. For example, the act required agencies to conduct cost- benefit analyses for all covered rules, but Executive Order 12866 required such analyses for more than a year before UMRA was enacted and for a broader set of rules than UMRA covered. Like UMRA, S. 746 contains some of the same requirements contained in Executive Order 12866 and in previous legislation. However, the requirements in the bill are also different from existing requirements in many respects. For example, S. 746 would address a number of topics that are not addressed by either UMRA or the executive order, including risk assessments and peer review. These requirements could have the effect of improving the quality of the cost-benefit analyses that agencies are currently required to perform. Also, S. 746 applies to rules issued by independent regulatory agencies that are not covered by Executive Order 12866. "an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities." "(A) the agency proposing the rule or the Director (of the Office of Management and Budget) reasonably determines is likely to have an annual effect on the economy of $100,000,000 or more in reasonably quantifiable costs; or (B) is otherwise designated a major rule by the Director on the ground that the rule is likely to adversely affect, in a material way, the economy, a sector of the economy, including small business, productivity, competition, jobs, the environment, public health or safety, or State, local or tribal governments, or communities." Therefore, a rule that is economically significant under Executive Order 12866 because it is likely to have more than $100 million in benefits (but perhaps only $90 million in costs) would not be covered by the analytical requirements in S. 746 (unless designated by the Director). Also, the bill does not cover a rule if the agency determines that it imposes $90 million in costs plus other costs that are not "reasonably quantifiable." If the intent of the bill is not to exclude these kinds of rules covered by the executive order, the definition of a major rule in subsection 621(7)(A) could be amended to eliminate the words "in reasonably quantifiable costs." The centerpiece of S. 746 is its emphasis on cost-benefit analysis for major rules. The bill establishes detailed procedures for preparing those analyses and using them in the rulemaking process. Therefore, it is important to understand how agencies are currently preparing cost-benefit analyses. Mr. Chairman, in a 1998 report prepared at your and Senator Glenn's request, we examined 20 cost-benefit analyses at 5 agencies to determine the extent to which those analyses contain the "best practices" elements recommended in the Office of Management and Budget's (OMB) January 1996 guidance for conducting cost-benefit analyses. We concluded that some of these 20 analyses did not incorporate OMB's best practices. For example, the guidance states that the cost-benefit analysis should show that the agency has considered the most important alternative approaches to the problem addressed by the proposed regulatory action. However, 5 of the 20 analyses that we examined did not discuss any alternatives to the proposed action, and some of the studies that discussed alternatives did so in a limited fashion. For example, the Food and Drug Administration's (FDA) regulation on adolescents' use of tobacco examined six regulatory alternatives but contained only a few paragraphs on the five that were ultimately rejected. A more thorough discussion of the alternatives that FDA considered would have better enabled the public to understand why the agency chose the proposed action. Six of the cost-benefit studies did not assign dollar values to benefits, and only six analyses specifically identified net benefits (benefits remaining after costs have been accounted for)--a key element in OMB's guidance. Executive Order 12866, on which OMB's guidance is based, emphasizes that agencies should select approaches that maximize net benefits unless a statute requires another regulatory approach. assumptions were not identified or were not explained in 8 of the analyses. For example, one analysis assumed a value of life that ranged from $1.6 million to $8.5 million while another analysis that was prepared in the same year assumed a value of life that ranged from $3 million to $12 million. In neither case did the analysis clearly explain why the values were chosen. Eight of the 20 cost-benefit analyses that we examined in our 1998 report did not include an executive summary that could help Congress, decisionmakers, the public, and other users quickly identify key information addressed in the analyses. In our 1997 report, 10 of the 23 analyses supporting air quality regulations did not have executive summaries. We have previously recommended that agencies' cost-benefit analyses contain such summaries whenever possible, identifying (1) all benefits and costs, (2) the range of uncertainties associated with the benefits and costs, and (3) a comparison of all feasible alternatives. S. 746 addresses many of these areas of concern. For example, when an agency publishes a notice of proposed rulemaking (NPRM) for a major rule, section 623 of the bill would require agencies to prepare and place in the rulemaking file an initial regulatory analysis containing an analysis of the benefits and costs of the proposed rule and an evaluation of the benefits and costs of a reasonable number of alternatives. Section 623 also requires an evaluation of the relationship of the benefits of the proposed rule to its costs, including whether the rule is likely to substantially achieve the rulemaking objective in a more cost-effective manner or with greater net benefits than other reasonable alternatives. Finally, it requires agencies to include an executive summary in the regulatory analysis that describes, among other things, the key assumptions and scientific or economic information upon which the agency relied. vary from one analysis to another, the agencies should explain those variations. If enacted, Congress may want to review the implementation of this part of S. 746 to ensure that the initial regulatory analysis requirements apply to all of the rules that it anticipated. As I previously noted, the bill's analytical requirements apply to all major rules at the time they are published as an NPRM. The Administrative Procedure Act of 1946 (APA) permits agencies to issue final rules without NPRMs when they find, for "good cause," that the procedures are impracticable, unnecessary, or contrary to the public interest. When agencies use this exception, the APA requires the agencies to explicitly say so and provide an explanation for the exception's use when the rule is published in the Federal Register. In a report we issued last April, we pointed out that 23 of the 122 final rules that were considered "major" under the Small Business Regulatory Enforcement Fairness Act and published between March 29, 1996, and March 29, 1998, were issued without a previous NPRM. If the same proportion holds true for the major rules covered by S. 746, the initial analytical requirements in the bill would not apply to nearly one-fifth of all final major rules. We also examined the issuance of final rules without NPRMs in another report that we issued last year. In some of the actions that we reviewed, agencies' stated rationales for using the good cause exception were not clear or understandable. For example, in one such action, the agencies said in the preamble to the final rule that a 1993 executive order that imposed a 1994 deadline for implementation and incorporation of its policies into regulations prevented the agencies from obtaining public comments before issuing a final rule in 1995. In other actions, the agencies made only broad assertions in the preambles to the rules that an NPRM would delay the issuance of rules that were, in some general sense, in the public interest. appropriate situations. Similarly, we believe that using the issuance of NPRMs as the trigger for analytical requirements may be entirely appropriate. However, as a result, some major rules will probably not be subject to these requirements. S. 746 also requires agencies to provide for an independent peer review of any required risk assessments and cost-benefit analyses of major rules that the agencies or the OMB Director reasonably anticipate are likely to have a $500 million effect on the economy. Peer review is the critical evaluation of scientific and technical work products by independent experts. The bill states that the peer reviews should be conducted through panels that are "broadly representative" and involve participants with relevant expertise who are "independent of the agency." We believe that important economic analyses should be peer reviewed. Given the uncertainties associated with predicting the future economic impacts of various regulatory alternatives, the rigorous, independent review of economic analyses should help enhance the quality, credibility, and acceptability of agencies' decisionmaking. In our 1998 study of agencies' cost-benefit analysis methods that I mentioned previously, only 1 of the 20 analyses that we examined received an independent peer review. Of the five agencies whose analyses we examined, only EPA had a formal peer review policy in place. Although OMB does not require peer reviews, the Administrator of OMB's Office of Information and Regulatory Affairs (OIRA) testified in September 1997 that the administration supports peer review. However, she also said that the administration realizes that peer review is not cost-free in terms of agencies' resources or time. The peer review requirements in S. 746 provide agencies with substantial flexibility. If an agency head certifies that adequate peer review has already been conducted, and the OMB Director concurs, the bill requires no further peer review. However, agencies will need to carefully plan for such reviews given the bill's requirement that they be done for all risk assessments and each cost-benefit analysis for which the associated rule is expected to have a $500 million effect on the economy. Agencies will also need to ensure that a broad range of affected parties are represented on the panels and (as S. 746 requires) that panel reports reflect the diversity of opinions that exist. Mr. Chairman, last year we issued a report which you and Senator Glenn requested, assessing the implementation of the regulatory review transparency requirements in Executive Order 12866. Those requirements are similar to the public disclosure requirements in S. 746 in that they require agencies to identify for the public the substantive changes made during the period that the rules are being reviewed by OIRA, as well as changes made at the suggestion or recommendation of OIRA. We reviewed four major rulemaking agencies' public dockets and concluded that it was usually very difficult to locate the documentation that the executive order required. In many cases, the dockets contained some evidence of changes made during or because of OIRA's review, but we could not be sure that all such changes had been documented. In other cases, the files contained no evidence of OIRA changes, and we could not tell if that meant that there had been no such changes to the rules or whether the changes were just not documented. Also, the information in the dockets for some of the rules was quite voluminous, and many did not have indexes to help the public find the required documents. Therefore, we recommended that the OIRA Administrator issue guidance on how to implement the executive order's transparency requirements. The OIRA Administrator's comments in reaction to our recommendation appeared at odds with the requirements and intent of the executive order. Her comments may also signal a need for ongoing congressional oversight and, in some cases, greater specificity as Congress codifies agencies' public disclosure responsibilities and OIRA's role in the regulatory review process. For example, in response to our recommendation that OIRA issue guidance to agencies on how to improve the accessibility of rulemaking dockets, the Administrator said "it is not the role of OMB to advise other agencies on general matters of administrative practice." The OIRA Administrator also indicated that she believed the executive order did not require agencies to document changes made at OIRA's suggestion before a rule is formally submitted to OIRA for formal review. However, the Administrator also said that OIRA can become deeply involved in important agency rules well before they are submitted to OIRA. Therefore, adherence to her interpretation of the order would result in agencies' failing to document OIRA's early role in the rulemaking process. Those transparency requirements were put in place because of earlier congressional concerns regarding how rules were changed during the regulatory review process. Finally, the OIRA Administrator said that an "interested individual" could identify changes made to a draft rule by comparing drafts of the rule. This position seems to change the focus of responsibility in Executive Order 12866. The order requires agencies to identify for the public changes made to draft rules. It does not place the responsibility on the public to identify changes made to agency rules. Also, comparison of a draft rule submitted for review with the draft on which OIRA concluded review would not indicate which of the changes were made at OIRA's suggestion--a specific requirement of the order. We believe that enactment of the public disclosure requirements in S. 746 would provide a statutory foundation to help ensure the public's access to regulatory review information. In particular, the bill's requirement that these rule changes be described in a single document would make it easier for the public to understand how rules change during the review process. We are also pleased to see that S. 746 requires agencies to document when no changes were made to the rules. Additional refinements to the bill may help clarify agencies' responsibilities in light of the OIRA Administrator's comments responding to our report. For example, S. 746 could state more specifically that agencies must document the changes made to rules at the suggestion or recommendation of OIRA whenever they occur, not just the changes made during the period of OIRA's formal review. Similarly, if Congress wants OIRA to issue guidance on how agencies can structure rulemaking dockets to facilitate public access, S. 746 may need to specifically instruct the agencies to do so. S. 746 contains a number of provisions designed to improve regulatory management. These provisions strive to make the regulatory process more intelligible and accessible to the public, more effective, and better managed. Passage of S. 746 would provide a statutory foundation for such principles as openness, accountability, and sound science in rulemaking. This Committee has been diligent in its oversight of the federal regulatory process. However, our reviews of current regulatory requirements suggest that, even if S. 746 is enacted into law, congressional oversight will continue to be important to ensure that the principles embodied in the bill are faithfully implemented. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. 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Pursuant to a congressional request, GAO discussed S.746, the Regulatory Improvement Act of 1999, focusing on: (1) the effectiveness of previous regulatory reform initiatives; (2) agencies' cost-benefit analysis practices and the trigger for the analytical requirements; (3) peer review of agencies' regulatory analyses; and (4) the transparency of the regulatory development and review process. GAO noted that: (1) GAO examined the implementation of the Unfunded Mandates Reform Act (UMRA) during its first 2 years of operation and, for several reasons, concluded that it had little effect on agencies' rulemaking actions; (2) the act's cost-benefit requirement did not apply to many of the rulemaking actions considered economically significant under Executive Order 12866; (3) UMRA gave agencies discretion not to take certain actions if they determined that those actions were duplicative or unfeasible; (4) UMRA requires agencies to take actions that they were already required to take; (5) the centerpiece of S. 746 is its emphasis on cost-benefit analysis for major rules; (6) in 1998, GAO examined 20 cost-benefit analyses at 5 agencies to determine the extent to which those analyses contain the best practices elements recommended in the Office of Management and Budget's (OMB) guidance for conducting cost-benefit analysis; (7) GAO concluded that some of these 20 analyses did not incorporate OMB's best practices; (8) 6 of the cost-benefit studies did not assign dollar values to benefits, and only 6 analyses specifically identified net benefits; (9) 8 of the 20 cost-benefit analyses that GAO examined did not include an executive summary that could help Congress, decisionmakers, the public, and other users quickly identify key information addressed in the analyses; (10) S. 746 addresses many of these areas of concern; (11) enactment of the analytical, transparency, and executive summary requirements in S. 746 would extend and underscore Congress' previous statutory requirements that agencies identify how regulatory decisions are made; (12) S. 746 also requires agencies to provide for an independent peer review of any required risk assessments and cost-benefit analyses of major rules that the agencies or the OMB Director reasonably anticipate are likely to have a $500 million effect on the economy; (13) GAO believes that important economic analyses should be peer reviewed; (14) given the uncertainties associated with predicting the future economic impacts of various regulatory alternatives, the rigorous, independent review of economic analyses should help enhance the quality, credibility, and acceptability of agencies' decisionmaking; (15) GAO believes that enactment of the public disclosure requirements in S. 746 would provide a statutory foundation to help ensure the public's access to regulatory review information; and (16) in particular, the bill's requirement that rule changes be described in a single document would make it easier for the public to understand how rules change during the review process.
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The threat of terrorism against the United States has increased, according to the intelligence community. The experts believe that aviation is likely to remain an attractive target for terrorists well into the foreseeable future. Until the early 1990s, the Federal Bureau of Investigation (FBI), the State Department, FAA, the Department of Transportation (DOT), and airline officials had maintained that the threat of terrorism was far greater overseas than in the United States. However, the World Trade Center bombing and the recent convictions of individuals charged with plotting to bomb several landmarks in the New York area revealed that the international terrorist threat in the United States is more serious and more extensive then previously believed. By 1994, reports by several agencies indicated a change in the pattern of terrorism. In 1994, the State Department reported a decline in attacks worldwide by state-sponsored, secular terrorist groups but an increase in attacks by radical fundamentalist groups, who operate more autonomously. The FBI reported in the same year that the most important development in international terrorism inside the United States was the emergence of international radical terrorist groups with an infrastructure that can support terrorists' activities. These groups are more difficult to infiltrate, and consequently, it is also more difficult to predict and prevent their attacks. As we reported in January 1994, terrorists' activities are continually evolving and present unique challenges to FAA and law enforcement agencies. We further reported in March 1996 that the bombing of Philippines Airlines Flight 434 in December 1994, which resulted in the death of one passenger and injuries to several others, illustrated the potential extent of terrorists' motivation and capabilities as well as the attractiveness of aviation as a target for terrorists. According to information that was accidentally uncovered in early January 1995, this bombing was a rehearsal for multiple attacks on specific U.S. flights in Asia. Officials told us that they rarely have the advantage of a detailed, verifiable plot to target U.S. airlines. They also said that the terrorists were aware both of airports' vulnerabilities and how existing security measures could be defeated. Even though FAA has changed security procedures as the threat has changed, the domestic and international aviation system continues to have numerous vulnerabilities. Aviation security is a shared responsibility. The intelligence community--the Central Intelligence Agency (CIA), the National Security Agency, the FBI, among others--gathers information to prevent actions by terrorists and provides intelligence information to FAA. On the basis of this information, FAA makes judgments about the threat and establishes procedures to address it. The airlines and airports are responsible for implementing the procedures. For example, the airlines are responsible for screening passengers and property, and the airports are responsible for the security of the airport environment, including security personnel. FAA and the aviation community rely on a multifaceted approach that includes information from various intelligence and law enforcement agencies; contingency plans to meet a variety of threat levels; and the use of screening equipment, such as conventional X-ray devices and metal detectors. However, many of these measures, such as walk-through metal detectors, were primarily designed to avert hijackings during the 1970s and 1980s, as opposed to the more current threat of sophisticated attacks by terrorists that involve explosive devices. For flights within the United States, basic security measures include the use of walk-through metal detectors for passengers and X-ray screening of carry-on baggage; these measures are augmented by additional procedures that are based on an assessment of risk. These additional procedures are contained in the contingency plans developed by FAA in coordination with the aviation industry. FAA's plans describe a wide range of procedures that can be invoked, depending on the nature and degree of the threat. Among these procedures are (1) passenger profiling, a method of identifying potentially threatening passengers who are then subjected to additional security measures, and (2) passenger-bag matching, a procedure to ensure that a passenger who checks a bag also boards the flight; if the passenger does not board, the bag is removed. FAA mandated higher levels of temporary security measures several times in 1995 because of the increased threat of terrorism, and the current measures in place are at the highest level invoked since the Gulf War. Because the threat of terrorism had been considered greater overseas, FAA has mandated more stringent security measures for international flights. Currently, for all international flights, FAA requires U.S. carriers to implement the International Civil Aviation Organization standards at a minimum, including the inspection of carry-on bags and passenger-bag matching. FAA also requires additional, more stringent measures--including interviewing passengers that meet certain criteria, screening every checked bag, and screening supplementary carry-on baggage--at all airports in Europe and the Middle East and many airports elsewhere. In the aftermath of the 1988 bombing of Pan Am 103, a Presidential Commission on Aviation Security and Terrorism was established to examine the nation's aviation security system. This Commission reported that the system was seriously flawed and failed to provide adequate protection for the traveling public. In spite of the Commission's finding and the Congress's enactment of the Aviation Security Improvement Act of 1990, our work illustrates that many vulnerabilities are persistent. Providing effective security is a complex problem because of the size of the U.S. aviation system, differences among airlines and airports, and the unpredictable nature of terrorism. In our January and May 1994 reports on aviation security, we highlighted a number of vulnerabilities in the overall security framework, such as the screening of checked baggage, mail, and cargo. We also raised concerns about unauthorized individuals gaining access to critical parts of an airport and the potential use of sophisticated weapons, such as surface-to-air missiles, that could be deployed against commercial aircraft. More recent security concerns include smuggling bombs aboard aircraft in carry-on bags or on passengers themselves. Specific information on the vulnerabilities of the nation's aviation security system is classified and cannot be detailed here, but we can provide some information. We have a classified report in process that discusses the system's vulnerabilities in greater detail. FAA believes the greatest threat to aviation is explosives in checked baggage. For those bags that are screened, we reported in March 1996 that conventional X-ray screening systems (comprising the machine and operator who reads the X-ray screen) have performance limitations and offer little protection against a moderately sophisticated explosive device. There are also vulnerabilities in screening passengers because the walk-through devices that currently screen for metal objects are unable to detect explosives carried by passengers. Aviation security rests on a careful mix of intelligence information, procedures, technology, and security personnel. New explosives detection technology will play an important part in improving security, but it is not the panacea. In response to the Aviation Security Improvement Act of 1990, FAA accelerated its efforts to develop explosives detection technology, and devices are now commercially available to address some vulnerabilities. Since October 1, 1990, FAA has invested about $150 million in developing technologies specifically designed to detect concealed explosives. FAA relies primarily on contracts and grants with private companies and research institutions to develop these technologies. The act specifically directed FAA to develop and deploy explosives detection systems by November 1993. However, this goal has not been met. In September 1993, FAA published a general certification standard that explosives detection systems must meet before they are deployed. The standard sets certain minimum performance criteria, such as what kinds of explosives must be detected and how many bags per hour the device processes. However, the specifics of the standard are classified. To minimize human error, the standard also requires that the devices automatically sound an alarm when explosives are suspected; this feature is in contrast to currently used conventional X-ray devices, where the operator has to look at the X-ray screen for each bag. In 1994, we reported that FAA had made little progress in meeting the law's requirement because of technical problems, such as slow baggage processing. Since then, one system has passed FAA's certification standard and is being operationally tested at two U.S. airports in Atlanta and San Francisco. Explosives detection devices can substantially improve airlines' ability to detect concealed explosives before they are brought aboard aircraft. While most of these technologies are still in development, a number of devices are now commercially available. For example, some devices are in use in foreign countries, such as the United Kingdom, Belgium, and Israel. None of the commercially available devices, however, is without shortcomings. On the basis of our analysis, we have three overall observations about detection technologies: First, these devices vary in their ability to detect the types, quantities, and shapes of explosives. For example, one device excels in its ability to detect certain explosive substances but not others. Other devices can detect explosives but not in certain shapes. Second, explosives detection devices typically produce a number of false alarms that must be resolved either by human intervention or other technical means. These false alarms occur because devices use various technologies to identify characteristics, such as shapes, densities, and properties, that could potentially indicate an explosive. Given the huge numbers of passengers, bags, and cargo processed by the average major U.S. airport, even relatively modest false alarm rates translate into several hundreds, even thousands, of items per day needing additional scrutiny. Third, and most important, these devices ultimately depend upon human beings to resolve alarms. This activity can range from closer inspection of a computer image and a judgment call to a hand search of the item in question. The ultimate detection of explosives depends on security personnel taking extra steps--or arriving at the correct judgment--to determine whether or not an explosive is present. Because many of the devices' alarms signify only the potential for explosives being present, the true detection of explosives requires human intervention. The higher the false alarm rate, the more a system needs to rely on human judgment. As we noted in our January and May 1994 reports, this reliance could be a weak link in the explosives detection process. This fact has implications for the selection and training of operators for new equipment. A number of explosives detection devices are currently available or under development to determine whether explosives are present in checked and carry-on baggage or on passengers, but they are costly. FAA is still developing systems to screen cargo and mail at airports. Four explosives detection devices with automatic alarms are commercially available for checked bags, but only one has met FAA's certification standard (the CTX 5000). FAA's preliminary estimates are that the one-time acquisition and installation costs of the certified system for the 75 busiest airports in the United States could range from $400 million to $2.2 billion, depending on the number of machines installed. A computerized tomography (CT) device, which is based on advances made in the medical field, offers the best overall detection ability but is relatively slow in processing bags and has the highest price, costing approximately $1 million each. This device was certified by FAA in December 1994. Two advanced X-ray devices have lower detection capability but are faster and cheaper, costing approximately $350,000 to $400,000 each. The last device, which uses electromagnetic radiation, offers chemical-specific detection ability but only for some of the explosives specified in FAA's standard. The current price is about $340,000 each. All of these devices require additional steps by security personnel when there are indications that an explosive is present. FAA is funding the development of next-generation CT devices from two different manufacturers. These devices are being designed to meet FAA's standard for detecting explosives and processing speeds; they could sell for about $500,000 each. Advanced X-ray devices with improved capabilities are also in development. Explosives detection devices are commercially available for carry-on bags, electronics, and other items but not yet for screening bottles or containers that could hold liquid explosives. Devices for liquids, however, may be commercially available within 2 years. Carry-on bags and electronics. At least five manufacturers sell devices that can detect the residue or vapor from explosives on the exterior of carry-on bags and on electronic items, such as computers or radios. These devices, also known as "sniffers," are commonly referred to as "trace" detectors and range in price from about $45,000 to $170,000 each. They have very specific detection capability as well as low false alarm rates. The main drawbacks are (1) the possibility of insufficient residue on the exterior of the item concealing the bomb and (2) nuisance alarms, where the device accurately detects explosive material--for example, a heart patient's nitroglycerin medication--but the source is not a bomb. An electromagnetic device is also available that offers a high probability of chemical-specific detection, but only for some explosives. The price is about $65,000. Detecting liquid explosives. FAA is developing two different electromagnetic systems for screening bottles and other containers, likely to sell for $25,000 and $125,000 per device. A development issue is processing speed. These devices may be available within 2 years. Although a number of commercially available trace devices could be used on passengers if deemed necessary, passengers might find their physical intrusiveness unacceptable. In June 1996, the National Research Council, for example, reported that there may be a number of health, legal, operational, privacy, and convenience concerns about passenger screening devices. Accordingly, FAA and the Department of Defense (DOD) are developing devices that passengers may find more acceptable. FAA estimates that it would cost $1.9 billion to provide about 3,000 of these devices to screen passengers. A number of trace devices in development will detect residue or vapor from explosives on passengers' hands. Two devices screen either documents or tokens that have been handled by passengers. These devices should be available in 1997 or 1998 and sell for approximately $65,000 to $85,000 each. Five devices under development use a walk-through screening checkpoint similar to the current metal detectors. Three will use trace technology to detect particles and vapor from explosives on passengers' clothing or in the air surrounding their bodies. Ranging in expected selling prices from approximately $170,000 to $300,000, one of these devices will be tested at an airport as early as this month, and another device may undergo airport testing next year. Two other devices, based on electromagnetic technology, are in development. Rather than detecting particles or vapor, these devices will provide images of items concealed under passengers' clothing. Prices are expected to be approximately $100,000 to $200,000. Cargo and mail continue to represent vulnerabilities in the system. Screening cargo and mail at airports is difficult because individual packages or pieces of mail are usually batched into larger shipments that are more difficult to screen. Although not yet commercially available, two different systems for detecting explosives in large containers are being developed by FAA and DOD. Each system draws vapor and particle samples and uses trace technology to analyze them. One system is scheduled for testing in 1997. In addition, FAA is considering for further development three nuclear-based technologies, originally planned for checked-bag screening, for use on cargo and mail. These technologies use large, heavy apparatus to generate gamma rays or neutrons to penetrate larger items. However, they require shielding for safety reasons. These technologies are not as far along in the development process as many other devices. They are still in the laboratory development stage rather than the prototype development stage. If fully developed, these devices could cost as much as $2 million to $5 million each. To reduce the effects of an in-flight explosion, FAA is conducting research on, among other things, blast-resistant containers. FAA's tests have demonstrated that it is feasible to contain the effects--blast and fragments--of an internal explosion. However, because of their size, blast-resistant containers can be used only on wide-body aircraft that typically fly international routes. FAA is working with a joint industry-government consortium to address concerns about the cost, weight, and durability of the new containers and is planning to blast test several prototype containers later this year. Also this year, FAA will place about 20 of these containers into airline operations to see how well they function in actual use. In addition to technology-based security, FAA has several procedures that it uses, and can expand upon, to augment domestic aviation security or use in combination with technology to reduce the workload required by detection devices, such as random hand searches. On July 25, the President announced additional measures for international and domestic flights that include, among other things, stricter controls over checked baggage and cargo as well as additional inspections of aircraft. Two procedures that are routinely used on many international flights and could be implemented in the short term for domestic flights are passenger profiling and passenger-bag matching. FAA officials have said that profiling can reduce the number of passengers and bags that require additional security measures by as much as 80 percent. Profiling and bag matching are unable to address certain types of threats. However, in the absence of sufficient or effective technology, these procedures are a valuable part of the overall security framework. These methods may also be expensive. FAA has estimated that incorporating bag matching in everyday security measures could cost up to $2 billion in startup costs and lost revenue. The direct costs to airlines include, among other things, equipment, staffing, and training. The airlines' revenues and operations could be affected differently because the airlines currently have different capabilities to implement bag matching, different route structures, and different periods of time allowed for connecting flights. Aviation security has become an issue of national importance, but no agreement currently exists among the Congress, the administration--including FAA and the intelligence community, among others--and the aviation industry on the steps necessary to meet the threat and improve security in the short and long terms or who will pay for new security initiatives. While FAA has increased security at domestic airports on a temporary basis, FAA and DOT officials believe that more permanent changes are needed. The cost of these new security initiatives will be significant and may require changes in how airlines and airports operate and will likely have an impact on the traveling public. The law makes airlines responsible for screening passengers and property. In November 1995, senior FAA officials stated that they planned to recommend a high-level national policy review of civil aviation to develop a consensus in government and industry on the nature and extent of the threat, appropriate types of responses, and who would pay for those responses. FAA officials told us that standard cost-benefit analyses would likely reject many initiatives and that a consensus was needed among the Congress, industry, and the executive branch before any regulatory action is taken. There has been considerable debate about how to fund the deployment and operational costs for new security initiatives. Several options have been discussed: (1) government funding, if viewed as a national security issue, (2) industry financing as a cost of doing business, and (3) a fee assessed on air travelers. In January 1996, FAA briefed the National Security Council (NSC) on the threat to civil aviation and the need for a high-level national policy review on ways of increasing aviation security. FAA recommended the establishment of a presidential commission as a means of obtaining the essential elements of consensus and a legislative mandate. At that briefing, FAA provided preliminary estimates on the cost of various options, including the deployment of new explosives detection technology for passengers and baggage and other new security procedures. Depending on the option selected, FAA estimated that costs would range from $1 billion to more than $6 billion over a 10-year period. While no agreement was reached on how to finance these improvements, FAA estimated that it would cost the traveling public between $0.20 and $1.30 per one-way ticket. As a result of this meeting and two others, FAA and NSC agreed to submit a proposal to FAA's Aviation Security Advisory Committee to establish a working group to review the threat against aviation and recommend options for improving security. In addition to FAA's effort, on July 15, 1996, the President established a Commission on Critical Infrastructure Protection, whose mission includes assessing the threat and vulnerabilities and making recommendations on how to protect telecommunications, electrical power, banking and finance, water supply, gas and oil storage, emergency services, and transportation. Senior DOT officials told us that they intend to provide several staff to this effort but that it is uncertain how much attention will be placed on transportation and, specifically, aviation security. However, recent events will likely influence the focus of this effort and place greater emphasis on aviation security. On July 17, 1996, the same day that TWA Flight 800 exploded, FAA proposed a joint government-industry working group to its security advisory committee. The committee agreed to establish a working group that will include representatives from FAA, the aviation community, the NSC, the CIA, the FBI, the Departments of Defense and State, and the Office of Management and Budget. This group will (1) review the threat to aviation, (2) examine vulnerabilities, (3) develop options for improving security, (4) identify and analyze funding options, and (5) identify the legislative, executive, and regulatory actions needed. The working group established a goal of submitting a final report to the FAA Administrator by October 16, 1996. Any national policy issues would then be referred to the President by the FAA Administrator through the Secretary of Transportation. Recognizing the importance of aviation security as a national policy issue, the President established a commission on July 25, 1996, headed by the Vice-President, to review aviation safety and airport security. This commission is to report back to the President within 45 days. The international aviation community may need to be involved in developing new procedures to improve security. The administration is working with the Group of Seven industrial nations on additional ways to cooperate on countering terrorism. In summary, Mr. Chairman, we face an urgent national problem that needs to be addressed at the highest levels of government now. The threat of terrorism has been an international issue for some time, with events such as the bombing in Saudi Arabia of U.S. barracks. But other incidents such as the bombings of the World Trade Center in New York, the federal building in Oklahoma City, possibly at the Olympics in Atlanta, and perhaps of TWA 800--if in fact this is determined to be an act of terrorism--have made terrorism a domestic as well as an international issue. Public concern about aviation safety, in particular, has already been heightened as a result of the ValuJet crash, and the recent TWA 800 crash has increased that concern. If further incidents occur, public fear and anxiety will escalate and the economic well-being of the nation will suffer because of reductions in travel and the shipment of goods. Three separate initiatives are under way that may address the concerns about aviation security. In our view, a unified and concentrated effort is needed to address this national issue. The commission that the Vice-President heads could be the focal point to build a consensus on the actions that need to be taken to address a number of long-standing vulnerabilities. As we noted, procedures and technology can be used to improve aviation security but will require substantial resources. We believe several steps need to be taken immediately: (1) conduct a comprehensive review of the safety and security of all major domestic and international airports and airlines to identify the strengths and weaknesses of their procedures to protect the traveling public, (2) identify vulnerabilities in the system, (3) establish priorities to address the system's identified vulnerabilities, (4) develop a short-term approach with immediate actions to correct significant security weaknesses, and (5) develop a long-term and comprehensive national strategy that combines new technology, procedures, and better training for security personnel. Because terrorism is an international problem, close cooperation with foreign governments is also required. In addition, the time has come to inform and involve the American public in this effort. If there was ever a time that public will accept new security measures, it is now. This concludes my prepared statement. I would be glad to respond to any questions. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO discussed aviation security, focusing on the measures needed to reduce potential security threats. GAO noted that: (1) the threat of terrorism is increasing in the United States; (2) aviation security responsibilities are shared by the Federal Aviation Administration (FAA), airlines, and airports; (3) FAA and the aviation community rely on information from various intelligence and law enforcement agencies, depend on contingency plans to meet a variety of threats, and use screening equipment to detect bombs and explosives; (4) basic security measures for domestic flights include the use of walk-through metal detectors and x-ray screening equipment; (5) FAA is considering passenger profiling and bag matching to ensure that passengers checking carry-on baggage actually board a flight; (6) FAA has mandated additional security measures for international flights; (7) conventional x-ray screening is limited and offers little protection against sophisticated explosive devices; (8) new explosive detectors are being developed and could be available within the next 2 years; (9) the cost of adopting these new technologies will cost at least $6 billion over the next 10 years; (10) recent events underscore the need for improved airline security; and (11) Congress and the aviation and intelligence communities need to agree on a strategy for combating terrorism and funding new security measures.
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CSRS and FERS are the two largest retirement programs for federal civilian employees. At the beginning of fiscal year 1995, these programs covered about 2.8 million federal employees, or 90 percent of the current civilian workforce. OPM administers CSRS and FERS. CSRS and FERS pension benefits are financed partly by federal agency and employee contributions and partly by other government payments to the Civil Service Retirement and Disability Fund. Although CSRS and FERS both provide pensions, the programs are designed differently. CSRS was established in 1920 and predates the Social Security system by 15 years. When the Social Security system was established, Congress decided that employees in CSRS would not be covered by Social Security through their federal employment. CSRS is a stand-alone pension program that provides an annuity determined by a formula as well as disability and survivor benefits. The program was closed to new entrants after December 31, 1983, and, according to OPM actuaries, is estimated to end in about 2070, when all covered employees and survivor annuitants are expected to have died. FERS was implemented in 1987 and generally covers those employees who first entered federal service after 1983 as well as those who transferred from CSRS to FERS. The primary impetus for the new program was the Social Security Amendments of 1983, which required that all federal employees hired after December 1983 be covered by Social Security. FERS is a three-tiered retirement program that includes Social Security and a Thrift Savings Plan --in addition to a basic pension. Like CSRS, FERS provides disability and survivor benefits. A distinctive feature of CSRS and FERS pensions is the annual COLAs they are to provide. COLAs are post-retirement increases in pension amounts that generally are given on either an ad hoc or automatic basis to offset increases in living costs due to inflation. Congress enacted the first automatic COLA for CSRS annuitants in 1962 (effective January 1963). At that time, the automatic adjustment was viewed as a way of controlling pension costs, because prior ad hoc adjustments had been criticized as being unrelated to price increases and subject to political manipulation. Although COLAs generally have been provided on an automatic basis since 1962, COLA policies have been modified numerous times over the years. As shown in table 1, the changes made during the 1960s and 1970s were intended to enhance pension purchasing power with respect to inflation as measured by the consumer price index (CPI), but some of the changes made during the 1980s had the effect of reducing purchasing power. Table 1 is based on information in the Congressional Research Service (CRS) Report for Congress, 94-834 EPW, updated March 13, 1996. One of these changes provides especially relevant background for considering the relationship between current pensions and final salaries and requires a more complete discussion. As noted in table 1, P.L. 97-253 (the Omnibus Budget Reconciliation Act of 1982) restricted COLAs in relation to final salaries in certain cases. Under this restriction, a pension may not be increased by a COLA to an amount that exceeds the greater of the current maximum pay for a GS-15 federal employee or the final pay of the employee (or high-3 average pay, if greater), increased by the overall annual average percentage adjustments (compounded) in rates of pay of the general schedule for the period beginning on the retiree's annuity starting date and ending on the effective date of the adjustment. In effect, the statute requires that a retiree's pension is to be capped at an amount not to exceed the maximum pay of a general schedule employee (i.e., GS-15) or an amount that represents the value of the retiree's final or average pay, adjusted for the general schedule pay adjustments that had been provided since the annuitant retired. According to OPM's policy handbook, because the cap applies to COLA increases to pensions, in no instance would a pension already exceeding the cap be reduced. As noted earlier, under current policy--enacted in 1984--COLAs for CSRS and FERS retirees are based on increases in living costs as measured by the CPI-W between the third quarter (July through September) of the current calendar year and the third quarter of the previous year. Although the COLA formula and schedule are the same for FERS and CSRS, FERS COLAs are limited if inflation is over 2 percent. If inflation is between 2.0 and 3.0 percent, the FERS COLA is 2.0 percent; if inflation is 3.0 percent or more, the COLA is the CPI minus 1 percent. If, however, inflation is less than 2 percent, FERS COLAs are to be fully adjusted for inflation. Also, CSRS benefits are to be fully indexed from the time of retirement, and FERS pensions are to be indexed beginning at age 62 for regular retirees. To respond to your request, we used a computerized personnel database of CSRS and FERS retirees and case file information maintained by OPM. At the time of our analysis, the latest available data were for living CSRS and FERS annuitants who were retired as of October 1, 1995. The database and case files provided much of the information that we needed for our analysis, including the retirees' initial and 1995 pensions, retirement dates, high-3 average salaries, service histories, survivor benefits, and other retirement-related information. However, the database did not have information on retirees' final salaries, which we needed in order to compare their final salaries to their 1995 annuities. The database did have information on "high-3" average salaries, which are used in calculating initial pensions. Thus, we compared the retirees' high-3 average salaries to their 1995 pensions to identify a set of retirees whose pensions were most likely to have exceeded their final salaries. From this group, we selected a random sample of 400 from among the 524,435 CSRS retired general employees whose annuities exceeded their high-3 average salaries and all 105 FERS retired general employees for whom the database reported annuities exceeding their high-3 average salaries. We reviewed the selected retirees' case files to verify that those we had selected had 1995 pensions that, in fact, exceeded their unadjusted final salaries. From our review of the sample of 400 CSRS annuitants, we identified 348 whose 1995 pensions exceeded their final salaries. We identified and removed from our sample 50 with pensions below their final salaries, 1 whose case file did not have the data we needed for our analysis, and another whose case file was not available for our review. From our case file review of the 105 FERS annuitants, we identified and removed 104 that did not match our criterion (i.e., did not have a 1995 annuity that exceeded the retiree's final salary). The remaining case had a pension that exceeded the final salary. However, the pension combined both FERS and CSRS benefits. This retiree had transferred from CSRS to FERS and thus was receiving benefits that were neither wholly FERS nor wholly CSRS. Consequently, we included this individual in our estimates of the number of retirees who had annuities that exceed their final salaries, but excluded this individual from our regression analysis. We weighted the CSRS sample results to estimate the number of retired general employees in the population whose pensions had come to exceed both their final salaries and high-3 average salaries. In making these estimates, we assumed that the small number of FERS and CSRS cases for which data were not available were similar to the cases that we had reviewed. The sample results thus estimate the total number of general employees whose pensions exceed both their final salaries and their high-3 average salaries. As the final salary is generally included in the three highest salaries that are averaged, these employees are described as having pensions that exceed their "final salaries" in the remainder of the report. We also adjusted the retirees' final salaries for inflation, using the 1995 CPI-W, and made a second estimate of the number of retirees whose 1995 pensions exceeded their final salaries, expressed in constant dollar terms. To understand why retiree pensions could come to exceed unadjusted final salaries as much as they did, we used regression analysis to model the relationship between key retirement policy variables and the extent to which the pensions of the sample retirees exceeded their unadjusted final salaries. Regression is a statistical technique that can be used to measure the relationship between a dependent variable and a set of independent (i.e., explanatory) variables and isolate their independent effects. This analysis was based on the subsample of 348 CSRS employees whose 1995 pensions exceeded their final salaries. This subsample did not include the single FERS annuitant whose pension exceeded the final salary, the two sampled cases with missing information, nor the 50 sampled cases whose 1995 pensions did not exceed their final salaries. We used the percentage by which the retirees' pensions exceeded final salaries as the dependent variable in the model, because our sample did not include retirees whose pensions were below their high-3 average salaries. We selected retirement variables to use as independent variables because they were (1) required to be used for computing pension benefits (e.g., years of service); or (2) known to affect pension amounts for some or all retirees (e.g., COLAs and the selection of spousal survivor benefits). Although variables representing changes in a retiree's personal circumstances (e.g., marriage, death of a spouse, or divorce) that would have changed his or her pension over the period of retirement were not included in the final regression model, we reviewed the retirees' case files to determine what effects these changes may have had on individual sample retirees. We found that these changes in personal circumstances could cause an individual retiree's pension to fluctuate (e.g., increase and/or decrease) during his or her retirement depending on whether survivor's benefits were being deducted. To compare the effects of current and historical COLA policy on retirees' pensions, we reviewed federal retirement-related documents and identified the historical changes in COLA policy since the inception of automatic COLAs in 1962. Using this information, we calculated the pensions that the sample of 398 retirees would have received each year from 1962 through 1995 had current COLA policy been in effect without interruption. We compared these results to the pensions that they would have received under actual COLA policy, absent other changes that might have affected their pensions (e.g., adjustments due to death of a spouse when survivor benefits had been chosen). We then compared the resulting numbers to assess the probability that the change, if any, in the number of retirees whose 1995 pensions had exceeded their unadjusted final salaries was statistically significant, that is, unlikely to be due to sampling error. To illustrate the effects that the different COLA policies could have had on pensions during the sample annuitants' retirements, we simulated the effects of current and actual policy on pension amounts for three different retirement periods. To simplify the analysis, our simulation of the impacts of current COLA policy implemented without interruption since 1984 was not adjusted to reflect the actual effective dates of COLAs, the actual pay dates, "lookback" payments or adjustments, or prorated to reflect the month an employee retired. We selected 1961 to 1995, 1968 to 1995, and 1981 to 1995 to show the cumulative effects that the COLAs of the 1960s and 1970s, which overcompensated for inflation, and the suspensions of COLAs in the 1980s could have had for different periods of retirement. We used the average initial pension for the sample annuitants who had retired in the first year of each of the three periods for our starting pension amounts (e.g., the average initial pension of those annuitants who retired in 1961). Our analysis had several limitations. As agreed with your office, we did not independently verify the accuracy of OPM's database. However, we did verify the accuracy of the data for the cases used in our analysis. Also, the number of retirees whose pensions had come to exceed their final unadjusted salaries could be somewhat higher than we estimated for two reasons. As noted, we used high-3 average salary to identify a population that we believed would be most likely to have pensions that had come to exceed final salaries, because OPM's computerized database did not include final salary information. Thus, our estimates do not include those retirees whose pensions were lower than their high-3 salaries but whose pensions were higher than their final salaries. Also, the annuity amounts contained in the case files already had survivor benefit reductions, if any, taken. Thus, retirees who selected survivor benefits would have had higher initial pensions than the pensions reported in OPM's files. However, we could not take this reduction into account, because the automated data file did not identify those retirees who had selected this benefit. On the basis of our examination of the data and our knowledge of the key retirement policy variables used in our analysis, we believe that any such underestimate would have been small. We requested comments on a draft of this report from the Director of OPM, and those comments are discussed at the end of this letter. We did our review from December 1995 to July 1997 in Washington, D.C., according to generally accepted government auditing standards. As of 1995, 1.7 million retirees who were covered by the CSRS and/or FERS pension plans were on the federal retirement rolls. Our estimate of the number of these retirees whose 1995 pensions exceeded their final salaries differed, depending on whether we adjusted the retirees' final salaries for inflation. When we did not adjust the salaries for inflation, about 459,000, or 27 percent, of the total general employee retirees received pensions that in nominal dollars exceeded their final salaries. However, when we adjusted the final salaries for inflation, no retiree received a pension that exceeded his or her final salary. As a general rule, using constant--rather than nominal--dollars is more meaningful for examining dollar values across time, because constant dollars correct for the effects of inflation or deflation. Constant dollars are especially appropriate for comparing current pensions and final salaries, because the number of years that the annuitants in our sample had been retired averaged 22 years and ranged from 8 to 42 years. Table 2 compares the 1995 pensions and the nominal and inflation-adjusted final salaries for three illustrative retirees in our sample. The illustrative pensions shown in the table are the average amounts received by those sample annuitants who had retired in the years 1961, 1968, or 1981. Three factors help to explain why some retirees' pensions came to exceed their final salaries when their salaries were not adjusted for the effects of inflation--the number and size of COLAs that retirees received, the number of years that they had been retired, and their number of years of federal service. Two factors--the number and size of the COLAs that the retirees had received and the number of years that they had been retired--contributed because they helped to cause the retirees' pension amounts to increase over time. The third factor--years of federal service--contributed because years of service was used in computing the retirees' initial pensions. Our regression model showed that the value of the COLAs that the sample retirees received, as determined by the number and size of COLAs and the length of employees' retirement, together with their years of federal service, explained about 82 percent of the variation in the percentage by which the retirees' pensions exceeded their unadjusted final salaries. The important role that COLAs and length of service played is a predictable consequence of pension policies that are designed to reward employee service and maintain the purchasing power of pensions. During retirement, the retirees' pensions increased because the COLAs that the retirees were to receive increased in number. The amount of the increase each year fluctuated according to changes in the CPI-W. In contrast, unadjusted final salaries remained unchanged. Thus, the longer the annuitants had been retired, the more COLAs they received and the more likely it was that their pensions exceeded their unadjusted final salaries. In fact, the average annuitant in our sample had been retired about 22 years and had received 26 COLAs. The 4 percent who had retired before 1963 had received 36 COLAs. Generally, the likelihood that a retiree's pension exceeded his or her unadjusted final salary increased when the annuitant had been retired during periods of high inflation, because larger COLAs were given during these periods. Our model showed that, on average, a 1 percentage point increase in the total value of the COLAs that a retiree had received would result in a 0.5 percentage point increase in the amount by which the retiree's pension exceeded his or her final salary, other factors being equal. In particular, more than 90 percent of the retirees in our sample had been retired during all or part of the 1969 through 1980 period when the most frequent and largest COLAs were given. Over this 12-year period, pensions increased by 166 percent in nominal terms. Appendix I provides a summary of COLA history since automatic COLAs were enacted in 1962. The number of years of federal service also contributed to the explanation of why some retirees' pensions exceeded their unadjusted final salaries, because years of service is included in determining the percentage of high-3 average salary that a retiree ultimately will receive as his or her initial pension. For example, under CSRS, an employee who had 41 years, 11 months of service at retirement would have been entitled to receive 80 percent of his or her high-3 average salary--the maximum percentage allowed--while an employee who had worked 30 years would have been entitled to receive 56.25 percent. As a result, the longer a retiree had worked for the federal government, the closer the retiree's initial pension would have been to his or her unadjusted final salary. Nineteen (5 percent) of the retirees in our sample had worked 40 years or more for the federal government, and another 288 (83 percent) had worked 20 to 39 years. The remaining 41 (12 percent) worked 5 to 19 years. Our model showed that on average, a 1-year increase in a retiree's federal service time would result in about a 3.7 percentage point increase in the percentage by which the retiree's pension had exceeded his or her final salary, other factors being equal. A final factor--whether a retiree had chosen a survivor's annuity benefit--helped to explain why some retirees' pensions had come to exceed their unadjusted final salaries as much as they did. As noted in the background section of this report, an employee who chooses a survivor annuity benefit can have his or her basic annuity reduced by as much as 10 percent. As a consequence, if two retirees retired in the same year and had the same final salaries and years of service, but only one had chosen a survivor annuity benefit, the retiree who elected not to take the benefit would have had a pension that exceeded his or her unadjusted final salary sooner than the retiree who had chosen the survivor benefit. An employee who chose a survivor annuity benefit would have reduced the initial pension and thus increased the gap between the initial annuity and the final salary. Of the CSRS retirees in our sample, 48 percent were not having survivor benefits deducted from their pensions. Had current COLA policy--that is, the COLA policy enacted in 1984, which established the formula and schedule used today by OPM--been in effect without interruption since 1962, some sample retirees' pensions would have been smaller than the pensions that they actually received, and other retirees' pensions would have been larger. Our simulations suggest that other factors being equal, the majority of those who retired before 1970 would have received smaller pensions, while about 90 percent of those who retired after 1970 would have received larger ones. If current policy had been in effect for all retirees in the sample, the number of retirees whose pensions would have exceeded their unadjusted final salaries would have increased by about 3 percentage points. The following examples compare the pensions that retirees would have received under current versus actual COLA policy by simulating the effects that changes in COLA policy would have had on pension amounts, other factors being equal. The examples cover three different periods--1961 to 1995, 1968 to 1995, and 1981 to 1995--and show how the impacts would have varied, depending on the period of retirement. In considering the meaning of the figures, it is important to recognize that the trend lines refer to current versus historical CSRS COLA policy. FERS lines were not presented because, as stated earlier in this report, none of the FERS retirees received an annuity that was based solely on his or her FERS participation. Figure 1 shows the relative effects of current and actual policy for a CSRS participant who retired in 1961. As the figure shows, if the current policy had been in effect without interruption, the retiree's pension would have been smaller over the period. Our analysis showed that by 1995 the retiree's pension would have been 6.3 percent smaller than it was under the actual COLA policy. However, as the gap shown between the 1995 pension and the unadjusted final salary amount makes clear, such a reduction would not have been nearly enough to have caused the retiree's pension to fall below his or her final unadjusted salary. Figure 2 shows similar results for an annuitant who retired in 1968. In this example, our analysis showed that the retiree's pension would have been 3.5 percent smaller if current policy had been in effect without interruption. The reduction in this annuitant's pension is less proportionally than the reduction in the pension of the annuitant who had been retired since 1961 (shown in fig. 1), primarily because of the difference in the number of the COLAs that were received and, to a lesser extent, the shorter period of compounding. Again, the reduction would not have been large enough to cause the retiree's 1995 pension to fall below his or her unadjusted final salary. The third example (fig. 3) shows the results for an annuitant who retired in 1981. The retiree's pension would have been larger if current policy had been in effect without interruption. As the figure shows, under actual policy, the retiree did not receive a COLA in 1984 or 1986, which caused this retiree's pension to fall somewhat short of the pension that he or she would have received had current policy been in effect. Because the effects of these suspensions continued to be reflected in the pension amounts that the retiree received in subsequent years, by 1995 the retiree's pension would have been 1.4 percent larger under current, compared to historical, COLA policy. The increases in the pensions of some sample retirees, if current policy had been in effect the entire time, would have been enough to cause an increase of 3.0 percentage points in the number of retirees whose pensions exceeded their unadjusted final salaries. When we estimated what the sample retirees' pensions would have been if current policy had been in effect without interruption, we found that about 29 percent of retirees would have had annuities that exceeded their unadjusted final salaries, compared to about 26 percent under the actual policy simulation.Although the difference was quite small, it was statistically significant. The two estimates differed by about 3 percentage points in part because the effects of COLAs on pension amounts are cumulative and compound. In particular, the suspensions of COLAs during 1980s tended to offset the COLA policies of the 1960s and 1970s that overcompensated for inflation. Our analysis of the effects that COLA policies have had on retiree pensions shows that the policies have played an important role in maintaining the purchasing power of retiree pensions since automatic COLAs began. Although COLA policies of the 1960s and 1970s overcompensated for the effects of inflation as measured by the CPI, COLA policies of the 1980s sometimes under-compensated. And, although current COLA policy would have tracked the CPI more closely had it been applied over the period we reviewed compared with some past COLA policies, the numerous changes that have been made in COLA policies over the past 35 years did not cause any retiree's pension to exceed his or her final salary when the salaries were adjusted for inflation. Our analysis also shows that the effects that COLA policies actually have on retiree pension amounts cannot be summarized easily. Generalization is difficult, in part because no one COLA policy has ever been implemented for a sustained period. For example, although the current underlying policy has been in effect since 1984, Congress has modified this policy several times for limited periods to help reduce the deficit. Also, the effects of many individual COLAs and COLA policy changes are cumulative and compound over time. As a consequence, COLA policy changes have affected individual retirees differently, depending on when they retired. In particular, the effects of the COLA policies of the 1960s and 1970s that overcompensated for inflation will continue to have an effect on retiree pensions for as long as those who received them are alive, just as not receiving scheduled COLAs in 1984 and the suspension of COLAs in 1986 will continue to be reflected in the pensions of anyone who retired before these years. We received oral comments on a draft of this report from OPM on July 16, 1997. OPM officials who provided comments included Federal Retirement Benefits Specialists from the Retirement Policy Division and a Program Analyst from the Retirement and Insurance Service. These officials generally concurred with the information and conclusions presented in our report. In particular, they agreed that using constant dollars, rather than nominal dollars, is a more meaningful way to compare retiree pensions to final salaries and that the statutory factors that are designed to maintain pension purchasing power and reward employees with longer service play a major role in determining whether pensions come to exceed nominal final salaries. These officials also provided a number of technical and clarifying comments, which we incorporated into this report where appropriate. We are sending copies of this report to the Ranking Minority Member of your Committee and the Chairmen and Ranking Minority Members of the Subcommittee on International Security, Proliferation, and Federal Services, Senate Committee on Governmental Affairs; and to the Subcommittee on Civil Service, House Committee on Government Reform and Oversight. Copies of this report are also being sent to the Director of OPM and other parties interested in federal retirement matters and will be made available to others upon request. Major contributors to this report are listed in appendix II. If you have any questions, please call me at (202) 512-9039. 3rd qtr. 1984-3rd qtr. 19833rd qtr. 1985-3rd qtr. 1984 3rd qtr. 1986-3rd qtr. 1985 3rd qtr. 1987-3rd qtr. 1986 3rd qtr. 1988-3rd qtr. 1987 3rd qtr. 1989-3rd qtr. 1988 3rd qtr. 1990-3rd qtr. 1989 3rd qtr. 1991-3rd qtr. 1990 3rd qtr. 1992-3rd qtr. 1991 3rd qtr. 1993-3rd qtr. 1992 (continued) 3rd qtr. 1994-3rd qtr. 1993 3rd qtr. 1995-3rd qtr. 1994 * = Adjustments made whenever the CPI in a year exceeded the CPI in the base year by 3 percent or more. ** = Adjustments made whenever the CPI in a month rose by at least 3 percent over the month of the last adjustment and remained at or above that level for 3 consecutive months. In addition to those named above, Jerry T. Sandau, Social Science Analyst, GGD, contributed through his development of the regression analysis results presented in this report. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. 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.
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Pursuant to a congressional request, GAO responded to a series of questions about federal pension costs and retirement policy, focusing on: (1) the number of federal retirees, if any, whose pensions have come to exceed the final salaries that they earned while working; (2) why these retirees' pensions came to exceed their final salaries; (3) the difference, if any, in these retirees' pension amounts if current cost-of-living-adjustment (COLA) policy that is, the COLA policy enacted in 1984, which established the formula and schedule used today by the office of Personnel Management (OPM), had been in effect without interruption since 1962; and (4) any difference in the number of retirees whose pensions would have exceeded their final salaries. GAO noted that: (1) an estimated 459,000 (or about 27 percent) of the 1.7 million retirees who were on the federal pension rolls as of October 1, 1995, were receiving pensions that had come to exceed their final salaries when these salaries were not adjusted for inflation; (2) however, when their salaries were adjusted for inflation --i.e., expressed in constant dollars, no retiree was receiving a pension that was larger than his or her final salary; (3) as a general rule, using constant dollars provides a more meaningful way to compare monetary values across time, because the use of constant dollars corrects for the effects of inflation or deflation; (4) although no retiree's pension exceeded his or her final salary in constant dollar terms, GAO's analysis confirmed that three factors played an important role in explaining why the retirees' pensions came to exceed their unadjusted final salaries: the number and size of COLAs that retirees received, the number of years that they had been retired, and the number of years of their federal service; (5) GAO's analysis of the effects that COLA policies have had on retiree pensions suggests that the policies have played an important role in maintaining the purchasing power of retiree pensions since automatic COLAs began; (6) it also suggests that the effects COLA policies actually have had on retiree pension amounts cannot be summarized easily because of numerous changes that have been made in COLA policies over the past 35 years; (7) COLA policy changes have affected individual retirees differently, depending on when their retirements began; (8) if current COLA policy, that is, the policy that was enacted in 1984, had been in effect without interruption since automatic COLAs began in 1962 the pensions of some of the sample retirees would have been smaller than the pension that they actually received, and the pensions of other retirees would have been larger; (9) GAO's comparison of the effects of current and historical COLA policy on pension amounts suggests that other factors being equal, a majority of those who retired before 1970 would have received smaller pensions had current COLA policy been continuously in effect during their retirement, and about 90 percent of those who retired after 1970 would have received larger pensions; and (10) the changes that would have occurred in the sample retirees' pension amounts under current policy were enough to cause about a 3 percentage point (3.0) increase in the number of retirees whose pensions would have come to exceed their unadjusted final salaries.
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The results of our investigation serve to emphasize the overall lesson that a complete fraud prevention framework is necessary in order to minimize fraud, waste, and abuse within the SDVOSB program. The most effective and most efficient part of the framework involves the institution of rigorous controls at the beginning of the process for becoming eligible to bid on SDVOSB contracts. Specifically, controls that validate firms' eligibility, including ownership and control by one or more service- disabled veterans, is the first and most important control. Next, active and continual monitoring of contractors performing SDVOSB contracts is also essential. Given the numerous examples we identified of firms owned by a service-disabled veteran who subcontracted 100 percent of contract work to non-SDVOSB firms, it is essential that program officials monitor compliance with program rules after contract performance has begun. Finally, as shown in our investigation, preventive and monitoring controls are not effective unless identified abusers are aggressively prosecuted and/or face other consequences such as suspension, debarment or termination of contracts and future contract options. The examples we identified of cases where SBA found a firm misrepresented its eligibility for the SDVOSB program, but failed to penalize the firm, undermine the positive effects of the few controls currently in place. Figure 1 provides an overview of how preventive controls serve as the first and most important part of the frame work because they are designed to screen out ineligible firms before they get service-disabled sole source or set-aside contracts. Monitoring controls and prosecution or other consequences also helps minimize the extent to which a program is vulnerable to fraud. Preventive controls are a key element of an effective fraud prevention framework and are also described in the Standards for Internal Controls in the Federal Government. Preventive controls are especially important because they limit access to program resources through front-end controls. Our experience shows that once contracts are awarded and money disbursed to ineligible SDVOSB contractors, it is unlikely that any money will be recovered or even that the contract will be terminated. Preventive controls for the SDVOSB program should, at a minimum, be designed to verify that a firm seeking SDVOSB status is eligible for the program. However, during our investigation, we found that there are no governmentwide controls that verify whether firms who self-certify as SDVOSBs meet program requirements. VA performs some level of validation of contractors claiming to be SDVOSBs that bid on VA contracts, but even that process was primarily based on a review of self- reported data. The key to the validation process within the SDVOSB program must be verifying self-reported contractor data with independent third-party sources. Key data to validate with preventive controls should include whether the owner or owners are service-disabled veterans, whether the service-disabled veteran owner(s) manage and control daily operations, and whether the business qualifies as a small business under the primary NAICS industry-size standards for the SDVOSB contract awarded. Validation of whether a business owner is a service-disabled veteran must be the first step in the SDVOSB prevention framework. Coordination between VA, SBA, and potentially DOD will be necessary to ensure an accurate determination is made. VA already maintains a database of service-disabled veterans, and therefore, it appears that data necessary for this validation are already available. However, during our investigation, we found that 1 of the 10 firms we investigated was owned by an individual who was not a service-disabled veteran, but received more than $7.5 million dollars in Federal Emergency Management Agency (FEMA) contracts. This firm is a prime example of why the relatively simple process of validating an individual's status as a service-disabled veteran can prevent fraud within the SDVOSB program. In addition to the validation of firm owners' status as service-disabled veterans, preventive controls should also validate whether firm owners actually manage and control daily operations. This must be accomplished in order to prevent "rent-a-vet" situations where a firm finds a willing service-disabled veteran to pose as the "owner" of a firm while in reality, other ineligible firm members manage and control the daily operations of a business. One case uncovered during our investigation found that the service-disabled veteran owner actually played no part in business operations related to the primary government contracts won by the firm, and worked from home on non-government related contracts. The alleged owner also did not receive any salary from the firm and tax returns showed that he received less in Internal Revenue Service (IRS) 1099 distributions than the 10 percent minority owner. In order to identify these types of situations, controls must utilize a variety of tools including a review of independent third-party information such as individual and company tax returns obtained directly from the IRS. Other processes such as performing unannounced site visits to an applicant's place of business can provide evidence to indicate management and control of daily operations, whether the firm is a shell company operating with a mail box as an address or a legitimate firm with employees and assets and whether a firm is co-located with another non-SDVOSB firm that will likely perform all contract work. In our previous work, we used unannounced site visits when conducting our investigations of the 10 firms that through various fraudulent schemes, obtained $100 million in service-disabled sole-source and set-aside contracts. Verification of whether a firm meets NAICS's industry-size standards is another part of preventive controls that can help minimize fraud and abuse within the program. During our investigation, we found that one company had violated small business size standards and received more than $171 million in federal contracts between fiscal years 2003 and 2009. We were able to identify the company's information through a review of contract obligation information within the Federal Procurement Data System-Next Generation (FPDS-NG). FPDS-NG is a publicly available database that allows a user to search for federal contracts awarded to specific firms. As part of comprehensive preventive controls, a review of these types of databases as well as company IRS tax returns will provide information to ensure a prospective SDVOSB firm is not already a large business. Beyond validation of data and checks with independent third parties, it is also important that personnel performing the validation of a firm's SDVOSB status are well trained and aware of the potential for fraud. Fraud awareness training with frontline personnel is crucial to stropping fraud before it gains access to the program. Additionally, when implementing any new set of controls, it is important that agencies field test new controls and provide a safety net to deal with firms who feel they were inappropriately rejected from the SDVOSB program. Finally, a properly managed and staffed prevention program should not create a large backlog of legitimate firms attempting to be certified. Unfortunately, as GAO testified at the end of April, VA's certification program has a large backlog of businesses awaiting site visits and some higher-risk businesses have been verified months before their site visits occurred or were scheduled to occur. Verifying businesses prior to site visits may allow ineligible firms to appear as eligible and to receive SDVOSB set-aside and sole-source contracts. Even with effective preventive controls, there is substantial residual risk that firms that may have appeared to meet SDVOSB program requirements initially will violate program rules after being awarded SDVOSB contracts. Monitoring and detection are not as efficient or effective as prevention because once a contractors are in the program and fraudulently receive a SDVOSB sole-source or set-aside contract, there are few if any consequences if they are caught. Detection and monitoring efforts, which are addressed in the Standards for Internal Control in the Federal Government, include data-mining of transactions and other reviews. Our investigation found cases where firms may have initially been able to meet a program's eligibility criteria, but subsequently violated subcontracting rules of the program after subcontracting 100 percent of the SDVOSB contract work to a non-SDVOSB firm. Our findings therefore emphasize why it is important for a comprehensive fraud prevention framework to have detection and monitoring controls in place to identify violations. For the SDVOSB program, there are several areas that require periodic review, including monitoring of a firms compliance with industry-size standards and monitoring of the performance of required percentage of work on SDVOSB contracts. In order to confirm that an SDVOSB firm continues to comply with NAICS standards, agencies should periodically data-mine FPDS-NG and other relevant federal procurement data to determine the number and size of contracts awarded and funds obligated to SDVOSB firms. A thorough review of this data is important so that all contacts awarded to a firm or its joint ventures are identified. During our investigation, we found one firm that received more than $171 million in federal funds through more than five different joint ventures. This example shows why data-mining efforts must be creative and thorough in order to effectively prevent fraud. In addition, data mining can also be done to review existing contracts with company information to determine whether a company could reasonably perform contracts given its area of expertise. For example, through data mining we found one firm during our investigation that initially listed its area of expertise as construction. However, the firm had recently been performing multiple janitorial service contracts across the country. While this was not a definite indicator of fraud, subsequent on-site unannounced site visits found that the firm was subcontracting 100 percent of the contract work to an international firm with more than $12 billion in annual revenues. Monitoring of the firms active participation in contracts is another way to ensure SDVOSB program requirements are being met. During our work, we identified cases where firms, which may have initially appeared legitimate on paper, that actually functioning as pass-throughs and subcontracting 100 percent of the work to non-SDVOSB firms. Controls to help identify these situations would include conducting unannounced site visits to contract performance locations and contacting local contracting officers to determine with whom they interact during the contract performance period. In addition, a periodic review of the types of contracts awarded to a firm compared with company information can help identify firms requiring further review. Finally, when fraudulent activity is identified through data mining and monitoring controls, agencies should also use that information to help improve future preventive controls when appropriate. The final element of a comprehensive fraud prevention framework is the aggressive investigation and prosecution of firms that abuse the SDVOSB program or other consequences such as suspension, debarment, and termination of contracts and cancellation of contract options. These back- end controls are often the most costly and least effective means of reducing fraud in a program. However, the deterrent value of prosecuting those who commit fraud sends the message that the government will not tolerate firms that falsely represent themselves as SDVOSB firms. Our investigation found that while the SBA has successfully identified multiple firms that falsely certified themselves as SDVOSB firms, in October of 2009 when we issued our report, SBA had not attempted to suspend or debar the problem firms. In addition, during our investigation, we could not find any examples of referrals for prosecution of these firms to the Department of Justice by the VA or SBA Inspectors General for fraud within the SDVOSB program. In order for the SBA and VA to ensure the highest level of compliance with SDVOSB program requirements, there must be consequences for those firms that chose to fraudulently misrepresent themselves as SDVOSB firms. Agencies have tools available such as suspension, debarment, and removal from the program, termination of contracts and cancellation of future contract options. Finally, as with fraud found through monitoring controls, lessons learned from investigations and prosecutions should be utilized to strengthen controls earlier in the process and improve the overall fraud prevention framework. Our prior investigation into allegations of fraud and abuse within SDVOSB contracts found 10 firms that were ineligible for the program but received approximately $100 million in SDVOSB contracts. Upon completion of our investigation, we referred all 10 cases to various agency officials who had contracts with the firms and to each agency's IG. Based on our referrals, agencies have taken a variety of actions including the termination of existing contracts, the decision not to extend contract performance by exercising future contract options, and the opening of civil and criminal investigations. IG officials have stated that most of their investigations are ongoing and that therefore, details cannot be provided because of the risk of jeopardizing the investigation. However, in at least one case, the future contract options under a janitorial services contract were not exercised and, the firm was not allowed to perform work beyond the initial contract performance period. In addition, this firm's subcontractor, which performed 100 percent of the contact work, initiated its own investigation. The subcontractor's investigation determined one of its employees helped to perpetrate the fraud by creating fictitious documents at the request of the SDVOSB firm's owner. In another case, the SDVOSB firm was found to be intentionally overcharging a federal agency by inflating the hourly labor rate of unapproved subcontracted employees from a temporary employment agency. Finally, in one case, multiple federal investigative agencies have an ongoing criminal investigation and are working together on a grand jury indictment. Additionally, these 10 case-study firms have received more than $5 million in new contract obligations on SDVOSB sole-source and set-aside contacts and more than $10 million in other new contract obligations since November 2009. Our investigation of the SDVOSB program shows that existing controls are ineffective at minimizing the risk for fraud and abuse. Our 10 cases alone show that approximately $100 million in SDVOSB contracts have gone to ineligible firms. With billions of dollars being spent annually on SDVOSB contracts, agency officials should use lessons learned to implement a comprehensive fraud prevention framework. Controls at each point in the process are the key to minimizing the government's risk. With a comprehensive framework in place, the government can be more confident that the billions of dollars meant to help provide opportunities to our nation's service-disabled veterans actually make it to the intended beneficiaries. Mr. Chairman and Members of the Subcommittee, this concludes my statement. I would be pleased to answer any questions that you or Members of the Subcommittee have at this time. For additional 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 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.
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The Service-Disabled Veteran-Owned Small Business (SDVOSB) program is intended to provide federal contracting opportunities to qualified firms. In fiscal year 2008, the Small Business Administration (SBA) reported $6.5 billion in sole-source, set-aside, and other SDVOSB contract awards. Testimonies GAO delivered on November 19 and December 16, 2009 identified millions of dollars in SDVOSB contracts that were awarded to ineligible firms, and weaknesses in fraud prevention controls at the SBA and VA which allowed ineligible firms to receive contracts. GAO was asked to testify about the key elements of a fraud prevention framework within the SDVOSB program and to provide an update on the status of fraud referrals made based on the prior investigation of selected SDVOSB firms. To address these objectives, GAO reviewed prior findings from audits and investigations of the SDVSOB program and contacted investigative agency officials concerning the referrals GAO made on prior work. GAO also reviewed applicable guidance on internal control standards from the Comptroller General's Standards for Internal Controls in the Federal Government. GAO founda lack of government-wide prevention controls, a lack of validation of information provided by SDVOSB firms used to substantiate their eligibility for the program, non-existent monitoring of continued compliance with program requirements, and an ineffective process for investigating and prosecuting firms found to be abusing the program. The results of GAO's investigation serve to emphasize the overall lesson that a complete fraud prevention framework is necessary in order to minimize fraud, waste, and abuse within the SDVOSB program. The most effective and most efficient part of the framework involves the institution of rigorous controls at the beginning of the process for becoming eligible to bid on SDVOSB contracts. Next, active and continual monitoring of contractors performing SDVOSB contracts is also essential. Given the examples GAO identified of firms owned by a service-disabled veteran who subcontracted 100 percent of contract work to non-SDVOSB firms, it is essential that federal agencies monitor compliance with program rules after contract performance has begun. Finally, as shown in GAO's investigation, prevention and monitoring controls are not effective unless identified fraud is aggressively prosecuted or companies are suspended, debarred or otherwise held accountable. GAO's prior investigation into allegations of fraud and abuse within SDVOSB contracts found 10 firms that were ineligible for the program but received approximately $100 million in SDVOSB contracts. Upon completion of its investigation, GAO referred all 10 cases to various agency officials who had contracts with the firms, and each agency's Inspector General (IG). Based on the referrals, agencies have taken a variety of actions including the cancellation of existing contracts, termination of future contract options, and opening of civil and criminal investigations. IG officials have stated that many of their investigations are ongoing, and therefore details cannot be provided due to the risk of jeopardizing the investigation. These 10 companies have obtained over $5 million in new SDVOSB sole-source and set-aside contact obligations since November 2009.
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The federal government spends more than $3.5 trillion annually, but data on this spending lack transparency. Moreover, the data are often incomplete or have quality limitations. To address these data issues, several statutes were enacted over the last decade, including: The first, the Federal Funding Accountability and Transparency Act of 2006 (FFATA), required OMB to establish a website to provide information on grant and contract awards, and subawards.information is available at www.USASpending.gov. The second, the American Recovery and Reinvestment Act of 2009 (Recovery Act), which provided approximately $840 billion in funding, required that funding recipients' reports on award and spending data be made available on a website.funding is available at www.Recovery.gov. Information on the spending and distribution of Hurricane Sandy funds are available on that site as well. Today, data related to Recovery Act The third, the Digital Accountability and Transparency Act of 2014 (DATA Act), expands FFATA so that taxpayers and policy makers can track federal spending more effectively. When fully implemented in 2018, the DATA Act will require federal agencies to disclose their direct expenditures and link federal contract, loan, and grant spending information to agency programs. That data are to be available on the web in machine-readable and open formats. The act also requires the establishment of government-wide financial data standards and simplified reporting requirements for entities receiving federal funds. Lastly, to improve the quality of data submitted to USAspending.gov, the act requires Inspectors General (IG) to assess the completeness, timeliness, quality, and accuracy of the spending data submitted by their respective agencies and the use of the data standards. To assist with that effort, the DATA Act also calls for the establishment of a pilot program, with participants to include, among others, a diverse group of recipients of federal awards. The purpose of the pilot program is to develop recommendations for 1) the standardization of reporting elements across the federal government, 2) the elimination of unnecessary duplication in financial reporting, and 3) the reductions of compliance costs for recipients of federal funds. Strong and consistent leadership will be needed to ensure the DATA Act is fully implemented. Our work underscores this point, as we have found that unclear guidance and weaknesses in oversight have contributed to persistent challenges with data on USASpending.gov. These challenges relate to the quality and completeness of data submitted by federal agencies. In 2010, we reported that USAspending.gov did not include information on awards from 15 programs at nine agencies for fiscal year 2008. Also in that report, we looked at a sample of 100 awards on the website and found that each award had at least one data error. To address this problem, we recommended that OMB include all required data on the site, ensure complete reporting, and clarify guidance for verifying agency-reported data. OMB generally agreed with our findings and recommendations, and subsequently issued additional guidance on agency responsibilities. Our most recent report on this subject reinforces these earlier findings. In June 2014, we reported that while agencies generally reported contract information as required, many assistance programs (e.g., grants or loans) were not reported. Specifically, we found agencies did not appropriately submit the required information on 342 assistance award programs totaling approximately $619 billion in fiscal year 2012, although many reported the information after we informed them of the omission. In addition, we found few awards on the website contained information that was fully consistent with agency records. We found that only between 2 percent and 7 percent of the awards contained information that was fully consistent with agencies' records for all 21 data elements we examined. The element that identifies the name of the award recipient was the most consistent, while the elements that describe the award's place of performance were generally the most inconsistent. To address these problems, we recommended the Director of OMB (1) clarify guidance on reporting award information and maintaining supporting records and (2) develop and implement oversight processes to ensure that award data are consistent with agency records. OMB generally agreed with our recommendations and we will continue to monitor OMB's implementation. Across the federal government, initiatives are under way to implement key provisions of the DATA Act. Among these provisions is a requirement for OMB and Treasury to consult with public and private stakeholders in establishing data standards. In response, Treasury and OMB convened a data transparency town hall meeting in late September 2014 so the public could provide input to Treasury officials responsible for developing data standards. The event drew more than 200 participants from the public and private sector, including congressional staff and representatives from federal agencies, state and local governments, private industry, and transparency advocacy organizations. Agency officials provided information on efforts to standardize federal financial management data and members of the public shared their views on the importance of data standards and recommendations for successful implementation. In addition, on September 26, 2014, Treasury published notice in the Federal Register seeking public comment on the establishment of financial data standards by November 25, 2014. These actions are consistent with our recommendations based on lessons learned from the implementation of both USAspending.gov and Recovery.gov. These lessons stressed the importance of obtaining input from federal agencies, recipients, and subrecipients early in the development of new transparency systems to minimize reporting burden. The DATA Act also calls on Treasury to establish a data analysis center or to expand an existing service, to provide data, analytic tools, and data management techniques for preventing or reducing improper payments and improving the efficiency and transparency in federal spending. The act also directs Treasury to work with federal agencies, including IGs and federal law enforcement agencies, to provide data from the data analysis center to identify and reduce fraud waste and abuse and for use in the conduct of criminal investigations, among other purposes. In response to this requirement, Treasury established the Data Transparency Office which is working with the Recovery Board to transfer assets from the board's Recovery Operations Center to Treasury.assumed program responsibility for USAspending.gov to display accurate government-wide spending data to the public, as called for in the act. Building on lessons learned from the implementation of the Recovery Act, the DATA Act's provisions also ensure that implementation will be closely monitored. These provisions require IGs and us to assess the implementation of the act throughout the next 7 years (see figure 1 for a timeline of key DATA Act provisions). The DATA Act requires the Inspectors General to assess the completeness, timeliness, quality and accuracy of spending data submitted by their respective agencies and the use of the data standards. These reports are due 18 months after OMB and Treasury issue data standards guidance and then within 2 and 4 years after that. The Treasury IG is leading the IG community's efforts to develop a comprehensive framework of audit procedures, in consultation with us, to ensure IGs meet their auditing and reporting responsibilities under the act. The Treasury IG is also reviewing Treasury's standup of a Transparency Office and Treasury's efforts to improve USASpending.gov, as well as Treasury's plans to implement its responsibilities under the DATA Act. We are fully prepared to meet the DATA Act's oversight and consultative roles for us as well. The act requires us to review IG reports on agency spending data quality and use of data standards in compliance with the act, and IGs are to consult with us to assess the completeness and accuracy of agency data. We are working with the Treasury IG and through the Council of Inspectors General for Integrity and Efficiency to develop common audit procedures and practices across the federal accountability community to avoid duplication. We are also working to ensure that the Treasury's implementation efforts follow good consultative practices, and that views from both federal and nonfederal stakeholders are appropriately considered as data standards are developed. We also will evaluate the data standards to ensure that they are complete, clear, and at the right level of specificity. Toward that end, we plan to provide an interim report to the Congress in 2015 on the establishment of the standards. To effectively implement the DATA Act, the federal government will need to address multiple technical issues. The first of these issues involves developing and defining common data elements across multiple reporting areas. Among the lessons learned from the implementation of the Recovery Act's transparency provisions was the value of standardized data for improving data quality and transparency, including uniform information for contracts and financial assistance awards. To address this issue for DATA Act implementation, the DOD and the Department of Health and Human Services (HHS) are examining data elements used by the procurement and grants communities to identify financial data elements common to both communities that can be standardized.assessment focuses on 72 data elements that are linked to five data Their areas: (1) identification of award; (2) awardee/recipient information; (3) place of performance; (4) period of performance; and (5) identification of agencies. HHS and DOD were able to reach agreement on a basic set of data elements that could be standardized across the procurement and award communities. Some of the elements will require changes in policy, while in other cases agencies will have to change how they collect and report data. Plans to identify and coordinate recommended policy changes with OMB are under way. Another related issue is how to enhance data transparency while protecting individual privacy and national security. The DATA Act does not require the disclosure of any information that is exempt from disclosure under the Freedom of Information Act, including information that is specifically authorized to be kept secret in the interest of national defense or foreign policy. Additionally, the DATA Act does not require federal agencies to report direct payments to individuals. However, some federal agencies have raised concerns about how privacy and national security can be maintained if more data are made available. In January 2013, we co-hosted a forum on data analytics with the Recovery Board and The Council of Inspectors General for Integrity and Efficiency. The forum brought together representatives from federal, state, and local agencies and the private sector to explore the use of data analytics--which involve a variety of techniques to analyze and interpret data--to help identify fraud, waste, and abuse in government. Forum participants identified opportunities to enhance data-analytics efforts, such as consolidating data and analytics operations in one location to increase efficiencies by enabling the pooling of resources as well as accessing and sharing of the data to enhance oversight. The forum participants also identified a variety of challenges that hinder their abilities to share and use data. For example, forum participants cited statutory requirements that place procedural hurdles on agencies wishing to perform data matching to detect fraud, waste, and abuse, and technical obstacles--such as the lack of uniform data standards across agencies-- which make it more difficult for oversight and law enforcement entities to share available data.coordination and data sharing, we formed the Government Data Sharing Community of Practice (CoP). In 2013 and 2014, the CoP partnered with a variety of organizations, including MITRE and the National Intergovernmental Audit Forum, to host a series of events for the audit community to discuss legal issues and technological challenges to data sharing. When fully and effectively implemented, the DATA Act holds great promise for improving the efficiency and effectiveness of the federal government, and for addressing persistent government management challenges. Expanding the quality and availability of federal spending data will better enable federal program managers to make data-driven decisions about how they use government resources to meet agency goals. Providing open and consumable federal data will enable innovation and help new and existing businesses to use data to inform activities. By expanding the quality and availability of federal spending data, the DATA Act also holds great promise for enhancing government oversight and preventing and detecting fraud, waste and abuse. Our work on examining fragmentation, overlap and duplication in federal government programs has demonstrated the need for more reliable and consistent federal data, which implementation of the DATA Act should produce. As we have reported and I have testified before this Committee, better data and a greater focus on expenditures and outcomes are essential to improving the efficiency and effectiveness of federal efforts.Currently, there is not a comprehensive list of all federal programs and agencies often lack reliable budgetary and performance information about their programs. Without knowing the scope, cost, or performance of programs, it is difficult for executive branch agencies or Congress to gauge the magnitude of the federal commitment to a particular area of activity, or the extent to which associated federal programs are effectively and efficiently achieving shared goals. Moreover, the lack of reliable, detailed budget information makes it difficult to estimate the cost savings that could be achieved should Congress or agencies take certain actions to address identified fragmentation, overlap, and duplication. Absent this information, Congress and agencies cannot make fully informed decisions on how federal resources should be allocated and the potential budget trade-offs. Implementing data standards across the federal government, as required under the DATA Act, could help address another ongoing challenge: the need for reliable and consistent agency program information. We recently examined the implementation of the agency program inventory requirements under the GPRA Modernization Act of 2010 (GPRAMA) and found that inconsistent program definitions and program-level budget information limit comparability among like programs. In developing the inventory, OMB allowed for significant discretion in several areas leading to a variety of approaches for defining programs and inconsistencies in the type of information reported. The inconsistent definitions, along with agencies not following an expected consultation process, led to challenges in identifying similar programs in different agencies. The lack of program comparability hampers decision makers' ability to identify duplicative programs and accurately measure the cost and magnitude of federal investments. In addition, we found that although GPRAMA requires agencies to identify program-level funding, OMB did not direct agencies to include this information in their 2013 inventories and it was not included in the May 2014 update. OMB officials told us that they put the 2014 update on hold to determine how to merge these requirements with DATA Act transparency requirements since both laws require web-based reporting. Implementing data standards across the federal government, as required under the DATA act, could help address this ongoing challenge. Effective implementation of the DATA Act could also provide additional data analytic tools for agencies to detect, reduce, and prevent improper payments. Throughout the past decade, we have reported and testified on improper payment issues across the federal government, as well as at specific agencies. In July, we testified that federal agencies reported an estimated $105.8 billion in improper payments in fiscal year 2013 that were attributable to 84 programs spread among 18 agencies. The Improper Payments Elimination and Recovery Improvement Act of 2012 is the latest in a series of laws aimed at addressing this issue. The act requires that agencies verify benefit eligibility by checking multiple existing databases before making a payment to a person or entity. The act also modified requirements to promote computer matching activities that assist in the detection and prevention of improper payments. As we have previously found, a number of strategies across government, some of which are under way, could help to reduce improper payments, including (1) designing and implementing strong preventive controls activities such as up-front validation of eligibility through data sharing and predictive analytic tests and (2) implementing effective detection techniques to quickly identify and recover improper payments after they have been made. By establishing a data analysis center to provide data, analytical tools, and data management techniques, the DATA Act could also help address this problem. The open data provisions of the DATA Act will also enhance the federal government's emerging use of data analytics capabilities to conduct incisive analysis to support oversight, improve decision-making by federal program managers, and foster innovation by making more federal data available to the public. This oversight will include, but not be limited to, the detection and prevention of fraud, waste and abuse as well as analysis of improper payments and overlap, duplication, and fragmentation across federal programs. For example, we plan to leverage open data as part of our piloting of data analytic technologies, which include (1) data mining for improper payments analysis; (2) link analysis for fraud identification and mitigation; (3) document clustering and text mining for overlap and duplication analysis; and (4) network analysis for program coordination assessment, among other potential endeavors. As in prior years, the federal government was unable to demonstrate the reliability of significant portions of its accrual-based consolidated financial statements for fiscal years 2013 and 2012, principally resulting from limitations related to certain material weaknesses in internal control over financial reporting. For example, about 33 percent of the federal government's reported total assets as of September 30, 2013, and approximately 16 percent of the federal government's reported net cost for fiscal year 2013 relate to DOD, which received a disclaimer of opinion on its consolidated financial statements. As a result, we were unable to provide an opinion on the accrual-based consolidated financial statements of the U.S. government. Further, significant uncertainties, primarily related to the achievement of projected reductions in Medicare cost growth reflected in the 2013, 2012, 2011, and 2010 Statements of Social Insurance, prevented us from expressing opinions on those statements,Social Insurance Amounts. as well as on the 2013 and 2012 Statements of Changes in It is important to note, however, that since the enactment of key financial management reforms in the 1990s, significant progress has been made in improving financial management activities and practices. For fiscal year 2013, almost all of the 24 Chief Financial Officers (CFO) Act agencies received unmodified ("clean") audit opinions on their respective entities' financial statements, up from 6 CFO Act agencies for fiscal year 1996. Also, for the first time, the Department of Homeland Security was able to obtain an unmodified audit opinion on all of its financial statements--a significant achievement. Three major impediments continued to prevent us from expressing an opinion on the U.S. government's accrual-based consolidated financial statements: (1) serious financial management problems at DOD that have prevented its financial statements from being auditable, (2) the federal government's inability to adequately account for and reconcile intragovernmental activity and balances between federal entities, and (3) the federal government's ineffective process for preparing the consolidated financial statements. Having sound financial management practices and reliable, timely financial information is important to ensure accountability over DOD's extensive resources to efficiently and economically manage the department's assets, budgets, mission, and operations. Accomplishing this goal is a significant challenge given the worldwide scope of DOD's mission and operations; the diversity, size, and culture of the organization; and its reported trillions of dollars of assets and liabilities and its hundreds of billions of dollars in annual appropriations. Given the federal government's continuing fiscal challenges, reliable and timely financial and performance information is important to help federal managers ensure fiscal responsibility and demonstrate accountability; this is particularly true for DOD, the federal government's largest department. DOD continues to work toward the long-term goal of improving financial management and full financial statement auditability. The National Defense Authorization Act (NDAA) for Fiscal Year 2010 requires that DOD's Financial Improvement and Audit Readiness (FIAR) Plan set as its goal that the department's financial statements be validated as ready for audit by September 30, 2017. In addition, the NDAA for Fiscal Year 2013 required that the FIAR Plan also describe specific actions to be taken, and their associated costs, to ensure that DOD's Statement of Budgetary Resources (SBR) would be validated as ready for audit by September 30, 2014. DOD's current FIAR strategy and methodology focus on two priorities-- budgetary information and asset accountability--with an overall goal of preparing auditable department-wide financial statements by September 30, 2017. Based on difficulties encountered in auditing the SBR of the U.S. Marine Corps, DOD made a significant change to its FIAR Guidance that will limit the scope of the first-year SBR audits for all DOD components. As outlined in the November 2014 FIAR Plan Status Report and the November 2013 revised FIAR Guidance, the scope of the SBR audits, beginning in fiscal year 2015, will be on budget activity only related to the current year appropriations as reflected in a Schedule of Budgetary Activity (SBA), an interim step toward achieving the audit of multiple-year budgetary activity and expenditures required for a full audit of the SBR. The most current FIAR Plan acknowledges that DOD did not achieve the above noted requirement for the SBR to be validated as ready for audit by September 30, 2014. The military departments and other defense agencies asserted audit readiness for their SBAs on September 30, 2014, and plan to start their first-year SBA audits during fiscal year 2015. Even though DOD components are moving forward with SBA audits, our work has shown that DOD components are asserting audit readiness without fully implementing the FIAR Guidance. For example, prior to asserting audit readiness, the Defense Finance and Accounting Service did not fully implement the FIAR Guidance in the areas of planning, testing, and corrective actions for processing payments to contractors. Also, the Army did not ensure that all budgetary processes, systems, and risks were adequately considered and identified as required by the FIAR Guidance For example, the Army did not adequately identify for audit readiness.significant activity attributable to its service provider business processes and systems. Also, the Army's documentation and assessment of controls were not always complete or accurate. To meet its audit readiness goal of June 30, 2016, for asset accountability, DOD is also continuing to implement plans that focus on the existence and completeness of mission-critical assets to (1) ensure accurate quantity and location information, and (2) support valuation activities. However, with regards to meeting its goal of full auditability by September 30, 2017, the department has not fully developed a strategy for consolidating individual component financial statements into department-wide financial statements. The effects of DOD's financial management problems extend beyond financial reporting. Long-standing control deficiencies adversely affect the economy, efficiency, and effectiveness of its operations. As we have previously reported, DOD's financial management problems have contributed to (1) inconsistent and sometimes unreliable reports to Congress on estimated weapon system operating and support costs, limiting the visibility needed for effective oversight of the weapon system programs; and (2) continuing reports of Antideficiency Act violations-- 75 such violations reported from fiscal year 2007 through fiscal year 2012, totaling nearly $1.1 billion--which emphasize DOD's inability to ensure that obligations and expenditures are properly recorded and do not exceed statutory levels of control. With improvements to its financial management processes, DOD would be better able to provide its management and Congress with reliable, useful, and timely information on the results of its business operations. Effectively implementing needed improvements, however, continues to be a difficult task. While DOD has made efforts to improve its financial management, we have reported over the past few years significant internal control, financial management, and systems deficiencies including the following: Fundamental deficiencies in DOD funds control significantly impair its ability to properly use resources, produce reliable financial reports on the results of operations, and meet its audit readiness goals. Risk management policies and procedures associated with preparing auditable financial statements through the FIAR Plan were not in accordance with widely recognized guiding principles for effective risk management. The effective implementation of DOD's planned Enterprise Resource Planning (ERP) systems is considered by DOD to be critical to the success of all of its planned long-term financial improvement efforts; however, as we have previously reported, DOD continues to encounter difficulties in implementing its planned ERP systems on schedule and within budget, and experiences significant operational problems such as deficiencies in data accuracy, inability to generate auditable financial reports, and the need for manual workarounds. We have made numerous recommendations to DOD to address these financial management issues. We are encouraged by DOD's sustained commitment to improving financial management and achieving audit readiness, but several DOD business operations, including financial management, remain on our list of high-risk programs. DOD has financial management improvement efforts under way and is monitoring progress against milestones; however, we have found that DOD and its components have emphasized the assertion of audit readiness by milestone dates over the implementation of effective underlying processes, systems, and controls. While establishing milestones is important for measuring progress, DOD should not lose sight of the ultimate goal--implementing lasting financial management reform to help ensure that it has the systems, processes, and personnel to routinely generate reliable financial management and other information critical to decision-making and effective operations for achieving its missions. Continued congressional oversight of DOD's financial management improvement efforts will be critical to helping ensure DOD achieves its financial management improvement and audit readiness goals. To assist Congress in its oversight efforts, we will continue to monitor DOD's progress and provide feedback on the status of its improvement efforts. In fiscal year 2013, despite significant progress, the federal government continued to be unable to adequately account for and reconcile intragovernmental activity and balances between federal entities. When preparing the consolidated financial statements, intragovernmental activity and balances between federal entities should be in agreement and must be subtracted out, or eliminated, from the financial statements. If the two federal entities engaged in an intragovernmental transaction do not both record the same intragovernmental transaction in the same year and for the same amount, the intragovernmental transactions will not be in agreement, resulting in errors in the consolidated financial statements. In fiscal year 2013, Treasury continued to actively work with federal entities to resolve intragovernmental differences. For example, Treasury expanded its quarterly scorecard process to include all 35 significant component entities, highlighting differences requiring the entities' attention and encouraging the use of the dispute resolution process.a result of these and other actions, a significant number of intragovernmental differences were identified and resolved. While such progress was made, we continued to note that amounts reported by federal entity trading partners were not in agreement by significant amounts. Reasons for the differences cited by several CFOs included differing accounting methodologies, accounting errors, and timing differences. In addition, the auditor for DOD reported that DOD, which contributes significantly to the unreconciled amounts, could not accurately identify most of its intragovernmental transactions by customer, and was unable to reconcile most intragovernmental transactions with trading partners, which resulted in adjustments that cannot be fully supported. Additionally, for fiscal year 2013, there continued to be unreconciled transactions between the General Fund of the U.S. Government (General Fund) and federal entity trading partners related to appropriations and other intragovernmental transactions, which amounted to hundreds of billions of dollars. because only some of the General Fund is reported in Treasury's department-level financial statements. For example, these financial statements include various General Fund-related assets and liabilities that Treasury manages on behalf of the federal government (e.g., federal debt and cash held by Treasury), but do not include certain other activities such as receipts and disbursements related to other federal agencies. As a result of these circumstances, the federal government's ability to determine the impact of these differences on the amounts reported in the accrual-based consolidated financial statements is significantly impaired. In fiscal year 2013, Treasury continued to establish processes to account for and report General Fund activity and balances, such as providing entities information to assist them in complying with the proper use of the General Fund as a trading partner. The General Fund is a central reporting entity that tracks core activities fundamental to funding the federal government (e.g., issued budget authority, operating cash, and debt financing activities). Over the years, we have made several recommendations to Treasury to address these issues. Treasury has taken or plans to take actions to address these recommendations. Treasury, in coordination with OMB, implemented corrective actions during fiscal year 2013 to address certain internal control deficiencies detailed in our previously issued reports regarding the process for preparing the consolidated financial statements. These include further developing and beginning to implement a methodology to reconcile certain outlays and receipts between Treasury's records and underlying federal entity financial information and records. Nevertheless, the federal government continued to have inadequate systems, controls, and procedures to ensure that the consolidated financial statements are consistent with the underlying audited entity financial statements, properly balanced, and in accordance with U.S. generally accepted accounting principles (U.S. GAAP). For example, Treasury was unable to properly balance the accrual-based consolidated financial statements. To make the fiscal years 2013 and 2012 consolidated financial statements balance, Treasury recorded a net decrease of $9.0 billion and a net increase of $20.2 billion, respectively, to net operating cost on the Statements of Operations and Changes in Net Position, which were identified as "Unmatched transactions and balances." Treasury recorded an additional net $5.9 billion and $1.8 billion of unmatched transactions in the Statement of Net Cost for fiscal years 2013 and 2012, respectively. Over the years, we have made numerous recommendations to Treasury to address these issues. Most recently, in June 2014, we recommended that Treasury, working in coordination with OMB, include all key elements for preparing well-defined corrective action plans from the Chief Financial Officers Council's Implementation Guide for OMB Circular A-123, Management's Responsibility for Internal Control - Appendix A, Internal Control over Financial Reporting, in Treasury's and OMB's corrective action plans. Treasury has taken or plans to take actions to address these recommendations. The 2013 Financial Report includes comprehensive long-term fiscal projections for the U.S. government that, consistent with our recent simulations, show that while the near-term outlook has improved--absent policy changes--the federal government continues to face an unsustainable long-term fiscal path. Such reporting provides a much needed perspective on the federal government's long-term fiscal position and outlook. The projections included in the Financial Report and our simulations both underscore the need to take action soon to address the long-term path to avoid larger policy changes in the future that could be disruptive to individuals and the economy, while also taking into account concerns about near-term economic growth. In the near term, deficits are expected to continue to decline from the recent historic highs as the economy further recovers and actions taken by Congress and the President continue to take effect. Treasury recently reported that the deficit for fiscal year 2014 was the lowest as a share of the economy since 2007. Both the projections in the Financial Report and our long-term simulations reflect enactment of the Budget Control Act of 2011 (BCA), which established discretionary spending limits through Under these limits, discretionary spending will continue fiscal year 2021. to decline as a share of the economy and in fiscal year 2021 will be lower than any level seen in the past 50 years. At the same time, revenues are projected to rise in the near-term as the economy continues to recover. The Budget Control Act of 2011, Pub. L. No. 112-25, SS 302, 125 Stat. 240, 256-59 (Aug. 2, 2011). The BCA amended the Balanced Budget and Emergency Deficit Control Act (BBEDCA), classified, as amended, at 2 U.S.C. SS 901a. Our Spring 2014 simulations also incorporate the effects of the Bipartisan Budget Act of 2013, which further amended BBEDCA to establish higher limits on discretionary appropriations for fiscal years 2014 and 2015 and to extend sequestration for direct spending programs, as well as making other changes to direct spending and revenue. In all, the BBEDCA, as amended through December 2013, reduced deficits over the next 10 years in our Baseline Extended simulation but did not significantly change the long-term federal budget outlook. Our updated simulations for 2015 will incorporate the effects of more recently enacted amendments to the BBEDCA. Debt held by the public as a share of gross domestic product (GDP), however, remains well above historical averages. Debt held by the public at these high levels could limit the federal government's flexibility to address emerging issues and unforeseen challenges such as another economic downturn or large-scale natural disaster. Further, even with BCA and other actions taken, the U.S. government continues to face a significant long term structural imbalance between revenues and spending. This imbalance, which is driven on the spending side largely by the aging of the population and rising health care costs, will cause debt held by the public to rise continuously in coming decades. Changing this path will not be easy, and it will likely require difficult decisions affecting both federal spending and revenue. However, as both the projections in the Financial Report and our long-term simulations show, delaying action only increases the size of actions eventually needed. Our past work has also identified a variety of fiscal exposures-- responsibilities, programs, and activities that explicitly or implicitly expose Fiscal exposures vary widely the federal government to future spending.as to source, extent of the U.S. government's legal commitment, and magnitude. Over the past decade, some fiscal exposures have grown due to events and trends and the U.S. government's response to them. Increased attention to these fiscal exposures will be important for understanding risks to the federal fiscal outlook and enhancing oversight over federal resources. In conclusion, to operate as effectively and efficiently as possible, and to address persistent government-wide challenges that exacerbate the federal government's fiscal challenges, Congress, the administration, federal managers, the public and the accountability community must have ready access to consistent, reliable and complete financial data. When fully and effectively implemented, the DATA Act will improve the accountability and transparency of federal spending data (1) by establishing government-wide financial data standards so that data are comparable across agencies and (2) by holding federal agencies more accountable for the quality of the information disclosed. Such increased transparency provides opportunities for improving the efficiency and effectiveness of federal spending; increasing the accessibility of data to benefit the public and the business community; and improving oversight to prevent and detect fraud, waste, and abuse of federal funds. While the process to implement the DATA Act has begun, more work remains. We are committed to being a continuing presence to monitor Treasury's, OMB's, and agencies' progress as data standards are developed and implemented, and to work with Inspectors General to ensure an effective audit process is in place to help ensure data quality. Chairman Issa, Ranking Member Cummings, and Members of the Committee, this concludes my prepared statement. I would be pleased to answer questions. For further information regarding this testimony, please contact J. Christopher Mihm, Managing Director, Strategic Issues at (202) 512-6806 or Gary Engel, Director, Financial Management and Assurance at (202) 512-3406. In addition to the contact names above, key contributions to this testimony were made by Nabajyoti Barkakati, Kathleen M. Drennan, Joah Iannotta, Thomas J. McCabe, Timothy Persons, James Sweetman, Jr., and staff on our Consolidated Financial Statement audit team. 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.
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The federal government spends $3.5 trillion annually, but data on this spending are often incomplete or have quality limitations. Effective implementation of the DATA Act would help address the federal government's persistent management and oversight challenges by providing for standardized, high-quality data. The DATA Act also will increase the accessibility of data to benefit the public and the business community by requiring, among other things, that data be made available in machine-readable and open formats. This statement focuses on (1) the condition of information detailing federal spending as reported in our June 2014 report; (2) efforts to date to implement and plan for meeting key provisions of the DATA Act, including potential implementation challenges as well as GAO's plan; (3) the importance of the DATA Act for addressing government management and oversight challenges; and (4) results of GAO's audit of the fiscal year 2013 U.S. government's financial statements, including efforts to improve financial management at DOD. This statement is primarily based upon our published and on-going work covering GAO's work on federal data transparency, fragmentation, overlap and duplication, improper payments, and government efficiency, effectiveness, and financial reporting. GAO has made numerous recommendations to OMB, Treasury, and other executive branch agencies in these areas, and this statement reports on the status of selected recommendations. GAO's prior work on federal data transparency has found persistent challenges related to the quality and completeness of the spending data agencies report to USAspending.gov. For example, GAO reported in June 2014 that roughly $619 billion in assistance awards were not properly reported. In addition, few reported awards--between 2 and 7 percent--contained information that was fully consistent with agency records for all 21 data elements GAO examined. GAO's work also found that a lack of government-wide data standards limits the ability to measure the cost and magnitude of federal investments and hampers efforts to share data across agencies to improve decision-making and oversight. The Digital Accountability and Transparency Act of 2014 (DATA Act) was enacted to help address these challenges. Among other things, the DATA Act requires (1) the establishment of governmentwide data standards by May 2015, (2) disclosure of direct federal spending with certain exceptions, (3) agencies to comply with the new data standards, and (4) Inspectors General audits of the quality of the data made available to the public. Initial implementation efforts are focused on obtaining public input, developing data standards and establishing plans to monitor agency compliance with DATA Act provisions. These efforts include, for example, a data transparency town hall meeting co-hosted by the U.S. Department of the Treasury (Treasury) and the Office of Management and Budget (OMB) to obtain public stakeholder input on the development of data standards, and Treasury Inspector General's efforts, in consultation with GAO, to develop a comprehensive audit framework to assess agency compliance and ensure new standardized data elements are effective once implemented. Effective implementation will need to address key technical issues including developing and defining common data elements across multiple reporting areas and enhancing data transparency while protecting individual privacy and national security. Effective implementation would help promote transparency to the public and address ongoing government management challenges by expanding the quality and availability of federal spending data. Having better data also will make it possible to gauge the magnitude of the federal investment, help agencies make fully informed decisions about how federal resources should be allocated, and provide agencies and the audit community with additional data analytic tools to detect and prevent improper payments and fraudulent spending. GAO also reports on its annual audit of the consolidated financial statements of the U.S. government. Almost all of the 24 Chief Financial Officers Act agencies received unmodified ("clean") opinions on their respective entities' fiscal year 2013 financial statements. However, three long-standing major impediments, including serious financial management problems at the U.S. Department of Defense (DOD), prevented GAO from expressing an opinion on the U.S. government's 2013 accrual-based consolidated financial statements. In addition, while progress has been made to reduce the deficit in the near term, comprehensive long-term fiscal projections, consistent with GAO's recent simulations, show that absent policy changes, the federal government continues to face an unsustainable long-term fiscal path.
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Carbon dioxide and certain other gases trap some of the sun's heat in the earth's atmosphere and prevent it from returning to space. The trapped energy warms the earth's climate, much as glass in a greenhouse. Hence, the gases that cause this effect are often referred to as greenhouse gases. In the United States, the most prevalent greenhouse gas is carbon dioxide, which results from the combustion of coal and other fossil fuels in power plants, the burning of gasoline in vehicles, and other sources. The other gases are methane, nitrous oxide, and three synthetic gases. In recent decades, concentrations of these gases have built up in the atmosphere, raising concerns that continuing increases might interfere with the earth's climate, for example, by increasing temperatures or changing precipitation patterns. In 1997, the United States participated in drafting the Kyoto Protocol, an international agreement to limit greenhouse gas emissions, and in 1998 it signed the Protocol. However, the previous administration did not submit it to the Senate for advice and consent, which are required for ratification. In March 2001, President Bush announced that he opposed the Protocol. In addition to the emissions intensity goal and domestic elements intended to help achieve it, the President's February 2002 climate initiative includes (1) new and expanded international policies, such as increasing funding for tropical forests, which sequester carbon dioxide, (2) enhanced science and technology, such as developing and deploying advanced energy and sequestration technologies, and (3) an improved registry of reductions in greenhouse gas emissions. According to testimony by the Chairman of the White House Council on Environmental Quality, the President's climate change strategy was produced by a combined working group of the Domestic Policy Council, National Economic Council, and National Security Council. While U.S. greenhouse gas emissions have increased significantly, the Energy Information Administration reports that U.S. emissions intensity has generally been falling steadily for 50 years. This decline occurred, in part, because the U.S. energy supply became less carbon-intensive in the last half-century, as nuclear, hydropower, and natural gas were increasingly substituted for more carbon-intensive coal and oil to generate electricity. The Administration explained that the Initiative's general goal is to slow the growth of U.S. greenhouse gas emissions, but it did not explain the basis for its specific goal of reducing emissions intensity 18 percent by 2012 or what a 4-percent reduction is specifically designed to accomplish. Reducing emissions growth by 4 percentage points more than is currently expected would achieve the general goal, but--on the basis of our review of the fact sheets and other documents--we found no specific basis for establishing a 4-percentage-point change, as opposed to a 2- or 6- percentage-point change, for example, relative to the already anticipated reductions. According to the Administration's analysis, emissions under its Initiative will increase between 2002 and 2012, but at a slower rate than otherwise expected. Specifically, according to Energy Information Administration (EIA) projections cited by the Administration, without the Initiative emissions will increase from 1,917 million metric tons in 2002 to 2,279 million metric tons in 2012. Under the Initiative, emissions will increase to 2,173 million metric tons in 2012, which is 106 million metric tons less than otherwise expected. We calculated that under the Initiative, emissions would be reduced from 23,162 million metric tons to 22,662 million metric tons cumulatively for the period 2002-12. This difference of 500 million metric tons represents a 2-percent decrease for the 11-year period. Because economic output will increase faster than emissions between 2002 and 2012, according to EIA's projections, emissions intensity is estimated to decline from 183 tons per million dollars of output in 2002 to 158 tons per million dollars in 2012 (a 14-percent decline) without the Initiative, and to 150 tons per million dollars under the Initiative (an 18- percent decline). The Administration identified 30 elements (26 in February 2002 and another 4 later) that it expected would help reduce U.S. emissions by 2012 and, thus, contribute to meeting its 18-percent goal. These 30 elements include regulations, research and development, tax incentives, and other activities. (The elements are listed in Appendix I.) The Administration groups them into four broad categories, as described below. Providing incentives and programs for renewable energy and certain industrial power systems. Six tax credits and seven other elements are expected to increase the use of wind and other renewable resources, combined heat-and-power systems, and other activities. The tax credits cover electricity from wind and new hybrid or fuel-cell vehicles, among other things. Other elements would provide funding for geothermal energy, primarily in the western United States, and advancing the use of hydropower, wind, and other resources on public lands. Still other elements involve research and development on fusion energy and other sources. Improving fuel economy. Three efforts relating to automotive technology and two other elements are expected to improve fuel economy. The technology efforts include advances in hydrogen-based fuel cells and low- cost fuel cells. Two of the five elements are mandatory. First, a regulation requiring the installation of tire pressure monitoring systems in cars and certain other vehicles was finalized in June 2002 and will be phased in between 2003 and 2006. Properly inflated tires improve fuel efficiency. Second, a regulation requiring an increase in the fuel economy of light trucks, from the current 20.7 miles per gallon to 22.2 miles per gallon in 2007, was finalized in April 2003. Promoting domestic carbon sequestration. Four U.S. Department of Agriculture programs were identified as promoting carbon sequestration on farms, forests, and wetlands. Among other things, these programs are intended to accelerate tree planting and converting cropland to grassland or forests. Challenging business to reduce emissions. Voluntary initiatives to reduce greenhouse gases were proposed for U.S. businesses. For major companies that agreed to establish individual goals for reducing their emissions, the Environmental Protection Agency (EPA) launched a new Climate Leaders Program. In addition, certain companies in the aluminum, natural gas, semiconductor, and underground coal mining sectors have joined voluntary partnerships with EPA to reduce their emissions. Finally, certain agricultural companies have joined two voluntary partnerships with EPA and the Department of Agriculture to reduce their emissions. The Administration provided some information for all 30 of the Initiative's elements, including, in some cases, estimates of previous or anticipated emission reductions. However, inconsistencies in the nature of this information make it difficult to determine how contributions from the individual elements would achieve the total reduction of about 100 million metric tons in 2012. First, estimates were not provided for 19 the Initiative's elements. Second, for the 11 elements for which estimates were provided, we found that 8 were not clearly attributable to the Initiative because the reductions (1) were related to an activity already included in ongoing programs or (2) were not above previous or current levels. We did find, however, that the estimated reductions for the remaining 3 elements appear attributable to the Initiative. We have concerns about some of the 19 emission reduction elements for which the Administration did not provide savings estimates. At least two of these elements seem unlikely to yield emissions savings by 2012. For example, the April 2003 fact sheet listed hydrogen energy as an additional measure, even though it also stated a goal of commercializing hydrogen vehicles by 2020, beyond the scope of the Initiative. Similarly, the same fact sheet listed a coal-fired, zero-emissions power plant as an additional measure, but described the project as a 10-year demonstration; this means that the power plant would not finish its demonstration phase until the last year of the Initiative, much less be commercialized by then. Of the 11 elements for which estimates were provided, we found that the estimated reductions for 8 were not clearly attributable to the Initiative. In five cases, an estimate is provided for a current or recent savings level, but no information is provided about the expected additional savings to be achieved by 2012. For example, the Administration states that aluminum producers reduced their emissions by 1.8 million metric tons to meet a goal in 2000, but it does not identify future savings, if any. Similarly, it states that Agriculture's Environmental Quality Incentives Program, which provides assistance to farmers for planning and implementing soil and water conservation practices, reduced emissions by 12 million metric tons in 2002. However, while the Administration sought more funding for the program in fiscal year 2003, it did not project any additional emissions reductions from the program. In two cases, it is not clear how much of the claimed savings will occur by the end of the Initiative in 2012. The requirement that cars and certain other vehicles have tire pressure monitoring systems is expected to yield savings of between 0.3 and 1.3 million metric tons a year when applied to the entire vehicle fleet. However, it will take years for such systems to be incorporated in the entire fleet and it is not clear how much of these savings will be achieved by 2012. Similarly, the required increase in light truck fuel economy is expected to result in savings of 9.4 million metric tons over the lifetime of the vehicles covered. Again, because these vehicles have an estimated lifetime of 25 years, it is not clear how much savings will be achieved by 2012. In one case, savings are counted for an activity that does not appear to be directly attributable to the Initiative. Specifically, in March 2001 (nearly a year before the Initiative was announced), EPA and the Semiconductor Industry Association signed a voluntary agreement to reduce emissions by an estimated 13.7 million metric tons by 2010. Because this agreement was signed before the Initiative was announced, it is not clear that the estimated reductions should be considered as additions to the already anticipated amount. Estimates for the remaining 3 of the 11 elements appear to be attributable to the Initiative in that they represent reductions beyond previous or current levels and are associated with expanded program activities. These are: Agriculture's Conservation Reserve Program was credited with additional savings of 4 million metric tons a year. This program assists farm owners and operators to conserve and improve soil, water, air, and wildlife resources and results in carbon sequestration. Agriculture's Wetland Reserve Program was credited with additional savings of 2 million metric tons a year. This program helps convert cropland on wetland soils to grassland or forest and also sequesters carbon emissions. The Environmental Protection Agency's Natural Gas STAR Program was credited with additional savings of 2 million metric tons a year. This program works with companies in the natural gas industry to reduce losses of methane during production, transmission, distribution, and processing. More current information about certain of these elements and their expected contributions has been made public, but has not been consolidated with earlier information about the Initiative. For example, the Department of Agriculture's web site includes a June 2003 fact sheet on that agency's programs that contribute to carbon sequestration. Among other things, the fact sheet estimated that the Environmental Quality Incentives Program, cited above, will reduce emissions 7.1 million metric tons in 2012. However, we did not find that such information had been consolidated with the earlier information, and there appears to be no comprehensive source for information about all of the elements intended to help achieve the Initiative's goal and their expected contributions. The lack of consistent and comprehensive information makes it difficult for relevant stakeholders and members of the general public to assess the merits of the Initiative. According to the February 2002 fact sheet, progress in meeting the 18- percent goal will be assessed in 2012, the final year of the Initiative. At that point, the fact sheet states that if progress is not sufficient and if science justifies additional action, the United States will respond with further policies; these policies may include additional incentives and voluntary programs. The fact sheets did not indicate whether the Administration plans to check its progress before 2012. Such an interim assessment, for example, after 5 years, would help the Administration determine whether it is on course to meet the goal in 2012 and, if not, whether it should consider additional elements to help meet the goal. Mr. Chairman, this concludes our prepared statement. We would be happy to respond to any questions that you or Members of the Committee may have. Contacts and Acknowledgments For further information about this testimony, please contact me at (202) 512-3841. John Delicath, Anne K. Johnson, Karen Keegan, David Marwick, and Kevin Tarmann made key contributions to this statement. EPA Climate Leaders Program Semiconductor industry Aluminum producers EPA Natural Gas STAR Program EPA Coal Bed Methane Outreach Program AgSTAR Program Ruminant Livestock Efficiency Program Climate VISION Partnership Data from Global Climate Change Policy Book, Feb. 2002; White House Fact Sheets, July 2002 and April 2003; analysis by GAO. 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.
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In 2002, the Administration announced its Global Climate Change Initiative. It included, among other things, a goal concerning U.S. carbon dioxide and other greenhouse gas emissions, which are widely believed to affect the earth's climate. The Administration's general goal was to reduce the growth rate of emissions, but not total emissions, between 2002 and 2012. Its specific goal was to reduce emissions intensity 18 percent, 4 percentage points more than the 14 percent decline already expected. Emissions intensity measures the amount of greenhouse gases emitted per unit of economic output. In the United States, this ratio has generally decreased for 50 years or more. Under the Initiative, emissions would increase, but less than otherwise expected. GAO was asked to testify on whether the Administration's publicly available documents (1) explain the basis for the Initiative's general and specific goals, (2) identify elements to help reduce emissions and contribute to the 18 percent reduction goal, as well as their specific contributions, and (3) discuss plans to track progress in meeting the goal. This testimony is based on ongoing work, and GAO expects to issue a final report on this work later this year. Because of time constraints, GAO's testimony is based on its analysis of publicly available Administration documents. The Administration stated that the Initiative's general goal is to slow the growth of U.S. greenhouse gas emissions, but it did not provide a basis for its specific goal of reducing emissions intensity 18 percent by 2012. Any reduction in emissions above the 14-percent reduction already anticipated would contribute to this general goal. However, GAO did not find a specific basis or rationale for the Administration's decision to establish a 4-percentage-point reduction goal beyond the already expected reductions. The Administration identified 30 elements that it expected would reduce U.S. emissions and contribute to meeting its 18 percent reduction goal by 2012. The 30 elements include a range of policy tools (such as regulations, research and development, tax incentives, and other activities) that cover four broad areas: (1) improving renewable energy and certain industrial power systems, (2) improving fuel economy, (3) promoting domestic carbon sequestration (for example, the absorption of carbon dioxide by trees to offset emissions), and (4) challenging business to reduce emissions. GAO found that the Administration provided estimates of the reductions associated with 11 of the 30 elements, but not with the remaining 19 elements. Of these 11 estimates, GAO found that 3 estimates represented future emissions reductions related to activities that occurred after the Initiative was announced. However, the other 8 estimates represented past or current emissions reductions or related to activities that were already underway before the Initiative was announced. Specifically, in five cases, an estimate is provided for current or recent reductions, but no information is provided about the expected additional savings to be achieved by 2012, the end of the Initiative. In two cases, the elements are expected to yield savings over many years, but it is not clear what emissions reductions will be achieved by 2012. In one case, savings are counted for an activity that began prior to the announcement of the Initiative. It is, therefore, unclear to what extent the 30 elements will contribute to the goal of reducing emissions and, thus, lowering emissions intensity by 2012. The Administration plans to determine, in 2012, whether the 18-percent reduction goal was met. Unless the Administration conducts one or more interim assessments, it will not be in a position to determine, until a decade after announcing the Initiative, whether its efforts are having the intended effect or whether additional efforts may be warranted.
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The ability to accurately and reliably measure pollutant concentrations is vital to successfully implementing GLI water quality criteria. Without this ability, it is difficult for states to determine if a facility's discharge is exceeding GLI water quality criteria and if a discharge limits are required. For example, because chlordane has a water quality criterion of 0.25 nanograms per liter but can only be measured down to a level of 14 nanograms per liter, it cannot always be determined if the pollutant is exceeding the criterion. As we reported in 2005, developing the analytical methods needed to measure pollutants at the GLI water quality criteria level is a significant challenge to fully achieving GLI goals. Although methods have been developed for the nine BCCs for which GLI water quality criteria have been established, EPA has only approved the methods to measure mercury and lindane below GLI's stringent criteria levels. Analytical methods for the other BCCs either have not received EPA approval or cannot be used to reliably measure to GLI criteria levels. Once EPA approves an analytical method, Great Lakes states are able to issue point source permits that require facilities to use that method unless the EPA region has approved an alternative procedure. According to EPA officials, specific time frames for developing and approving methods that measure to GLI criteria have not yet been established. EPA officials explained that developing EPA-approved methods can be a time- consuming and costly process. Table 1 shows the status of the methods for the nine BCCs. As we reported in 2005, if pollutant concentrations can be measured at or below the level established by GLI water quality criteria, enforceable permit limits can be established on the basis of these criteria. The Great Lakes states' experience with mercury illustrates the impact of sufficiently sensitive measurement methods on identifying pollutant discharges from point sources. Methods for measuring mercury at low levels were generally not available until EPA issued a new analytical method in 1999 to measure mercury concentrations below the GLI water quality criterion of 1.3 nanograms per liter of water. This more sensitive method disclosed a more pervasive problem of high mercury levels in the Great Lakes Basin than previously recognized and showed, for the first time, that many facilities had mercury levels in their discharges that were exceeding water quality criteria. Since this method was approved, the number of permits with discharge limits for mercury rose from 185 in May 2005 to 292 in November 2007. Moreover, EPA and state officials are expecting this trend to continue. As EPA officials explained, it may take up to two permit cycles--permits are generally issued for 5-year periods---to collect the monitoring data needed to support the inclusion of discharge limits in permits. EPA officials are expecting a similar rise in permits with discharge limits for polychlorinated biphenyls (PCBs) when detection methods are approved. Permit flexibilities often allow facilities' discharges to exceed GLI water quality criteria. These flexibilities can take several forms, including the following: Variance. Allows dischargers to exceed the GLI discharge limit for a particular pollutant specified in their permit. Compliance schedule. Allows dischargers a grace period of up to 5 years in complying with a permitted discharge limit. Pollutant Minimization Program (PMP). Sets forth a series of actions by the discharger to improve water quality when the pollutant concentration cannot be measured down to the water quality criterion. A PMP is often used in conjunction with a variance. Mixing Zone. Allows dischargers to use the areas around a facility's discharge pipe where pollutants are mixed with cleaner receiving waters to dilute pollutant concentrations. Within the mixing zone, concentrations of pollutants are generally allowed to exceed water quality criteria as long as standards are met at the boundary of the mixing zone. This flexibility expires in November 2010 with some limited exceptions. These flexibilities are generally only available to permit holders that operated before March 23, 1997, and are in effect for 5 years or the length of the permit. GLI allows states to grant such permit flexibilities under certain circumstances, such as when the imposition of water quality standards would result in substantial and widespread economic and social impacts. Table 2 shows the number and type of BCC permit flexibilities being used as of November 2007 in the Great Lakes Basin for mercury, PCBs, and dioxin, as well as BCC discharge limits contained in permits. According to EPA and state officials, in many cases, facilities cannot meet GLI water quality criteria for a number of reasons, such as technology limitations, and the flexibilities are intended to give the facility time to make progress toward meeting the GLI criteria. With the exception of compliance schedules, the GLI allows for the repeated use of these permit flexibilities. As a result, EPA and state officials could not tell us when the GLI criteria will be met. In our 2005 report, we described several factors that were undermining EPA's ability to ensure progress toward achieving consistent implementation of GLI water quality standards. To help ensure full and consistent implementation of the GLI and to improve measures for monitoring progress toward achieving GLI's goals, we made a number of recommendations to the EPA Administrator. EPA has taken some actions to implement the recommendations contained in our 2005 report, as the following indicates: Ensure the GLI Clearinghouse is fully developed. We noted that EPA's delayed development of the GLI Clearinghouse--a database intended to assist the states in developing consistent water quality criteria for toxic pollutants--was preventing the states from using this resource. To assist Great Lakes states in developing water quality criteria for GLI pollutants, we recommended that EPA ensure that the GLI Clearinghouse was fully developed, maintained, and made available to Great Lakes states. EPA launched the GLI Clearinghouse on its Web site in May 2006 and in February 2007, EPA Region 5 provided clearinghouse training to states. The clearinghouse currently contains criteria or toxicity information for 395 chemicals. EPA officials told us that the clearinghouse is now available to the states so they can independently calculate water quality criteria for GLI pollutants. EPA officials told us that some states, including Ohio, Wisconsin, and Illinois, plan on updating their water quality standards in the near future and believe that the clearinghouse will benefit them as well as other states as they update their standards. Gather and track information to assess the progress of GLI implementation. In 2005, we reported that EPA's efforts to assess progress in implementing the GLI and its impact on reducing point source discharges have been hampered by lack of information on these discharges. To improve EPA's ability to measure progress, we recommended that EPA gather and track information on dischargers' efforts to reduce pollutant loadings in the basin. EPA has begun to review the efforts and progress made by one category of facilities-- municipal wastewater treatment facilities--to reduce their mercury discharges into the basin. However, until EPA develops additional sources of information, it will not have the information needed to adequately assess progress toward meeting GLI goals. Increase efforts to resolve disagreements with Wisconsin. Although we found that the states had largely completed adoption of GLI standards, EPA had not resolved long-standing issues with Wisconsin regarding adoption and implementation of GLI provisions. To ensure the equitable and timely implementation of GLI by all the Great Lakes states, we recommended that that the EPA Administrator direct EPA Region 5, which is responsible for Wisconsin, to increase efforts to resolve disagreements with the state over inconsistencies between the state's and the GLI's provisions. Wisconsin officials believe the GLI provisions are not explicitly supported by Wisconsin law. Subsequently, EPA and Wisconsin officials have held discussions on this matter, and neither Wisconsin nor EPA officials believe that these disagreements are significantly affecting GLI implementation. However, they have been unable to completely resolve these issues. We found that similar issues have also surfaced with New York. Issue a permitting strategy for mercury. Because we found that Great Lakes' states had developed inconsistent approaches for meeting the GLI mercury criterion, including differences in the use of variances, we recommended that EPA issue a permitting strategy to ensure a more consistent approach. EPA disagreed with this recommendation, asserting that a permitting strategy would not improve consistency. Instead, the agency continued to support state implementation efforts by developing guidance for PMPs, evaluating and determining compliance, and assessing what approaches are most effective in reducing mercury discharges by point sources. One such effort is EPA Region 5's review of mercury PMP language in state-issued permits for wastewater treatment facilities. This review resulted in recommendations to the states in May 2007 to improve the enforceability and effectiveness of PMP provisions. However, additional efforts will be needed to ensure consistency at other types of facilities, such as industrial sites, across the Great Lakes states. In closing, Madam Chairwoman and Members of the Subcommittee, although progress has been made with mercury detection and increased knowledge of wastewater treatment facilities' pollutant discharges to the Great Lakes, information is still lacking on the full extent of the problem that BCCs pose in the Great Lakes. As methods are developed to determine whether facilities' discharges for other BCCs meet GLI criteria and EPA approves them, and as more permits include discharge limits, more information will be available on pollutant discharges in the basin. Even with these advances, however, extensive use of permit flexibilities could continue to undercut reductions in pollution levels and the ultimate achievement of GLI's goals. This concludes my prepared statement. I would be happy to respond to any questions that you or Members of the Subcommittee may have at this time. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. For further information about this testimony, please contact David Maurer at (202) 512-3841 or [email protected]. Key contributors to this testimony were Greg Carroll, Katheryn Summers Hubbell, Sherry L. McDonald, and Carol Herrnstadt Shulman. Other contributors included Jeanette Soares and Michele Fejfar. 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.
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Millions of people in the United States and Canada depend on the Great Lakes for drinking water, recreation, and economic livelihood. During the 1970s, it became apparent that pollutants discharged into the Great Lakes Basin from point sources, such as industrial and municipal facilities, or from nonpoint sources, such as air emissions from power plants, were harming the Great Lakes. Some of these pollutants, known as bioaccumulative chemicals of concern (BCC), pose risks to fish and other species as well as to the humans and wildlife that consume them. In 1995, the Environmental Protection Agency (EPA) issued the Great Lakes Initiative (GLI). The GLI established water quality criteria to be used by states to establish pollutant discharge limits for some BCCs and other pollutants that are discharged by point sources. The GLI also allows states to include flexible permit implementation procedures (flexibilities) that allow facilities' discharges to exceed GLI criteria. This testimony is based on GAO's July 2005 report, Great Lakes Initiative: EPA Needs to Better Ensure the Complete and Consistent Implementation of Water Quality Standards (GAO-05-829) and updated information from EPA and the Great Lakes states. This statement addresses (1) the status of EPA's efforts to develop and approve methods to measure pollutants at the GLI water quality criteria levels, (2) the use of permit flexibilities, and (3) EPA's actions to implement GAO's 2005 recommendations. As GAO reported in 2005, developing the sensitive analytical methods needed to measure pollutants at the GLI water quality criteria level is a significant challenge to achieving GLI's goals. Of the nine BCCs for which criteria have been established, only two--mercury and lindane--have EPA-approved methods that will measure below those criteria levels. Measurement methods for the other BCCs are either not yet approved or cannot reliably measure to GLI criteria. Without such measurement, it is difficult for states to determine whether a facility is exceeding the criteria and if discharge limits are required in the facility's permit. As methods become available, states are able to include enforceable discharge limits in facilities' permits. For example, since EPA approved a more sensitive method for mercury in 1999, the number of permits with mercury limits has increased from 185 in May 2005 to 292 in November 2007. EPA and state officials expect this trend to continue. Similar increases may occur as more sensitive analytical methods are developed and approved for other BCCs. Flexibilities included in permits allow facilities' discharges to exceed GLI water quality criteria. For example, one type of flexibility--variances--will allow facilities to exceed the GLI criteria for a pollutant specified in their permits. Moreover, the GLI allows the repeated use of some of these permit flexibilities, and does not set a time frame for facilities to meet the GLI water quality criteria. As a result, EPA and state officials do not know when the GLI criteria will be met. In the 2005 report, GAO made a number of recommendations to EPA to help ensure full and consistent implementation of the GLI and to improve measures for monitoring progress toward achieving GLI's goals. EPA has taken some actions to implement the recommendations. For example, EPA has begun to review the efforts and progress made by one category of facilities--municipal wastewater treatment plants--to reduce their mercury discharges into the basin. However, until EPA gathers more information on the implementation of GLI and the impact it has had on reducing pollutant discharges from point sources, as we recommended, it will not be able to fully assess progress toward GLI goals.
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With the escalation of the IED threat in Iraq dating back to 2003, DOD began identifying several counter-IED capability gaps including shortcomings in the areas of counter-IED technologies, qualified personnel with expertise in counter-IED tactics, training, dedicated funding, and the lack of an expedited acquisition process for developing new solutions to address emerging IED threats. Prior DOD efforts to defeat IEDs included various process teams and task forces. For example, DOD established the Joint IED Defeat Task Force in June 2005, which replaced three temporary organizations--the Army IED Task Force; the Joint IED Task Force; and the Under Secretary of Defense, Force Protection Working Group. To further focus DOD's efforts and minimize duplication, DOD published a new directive in February 2006, which changed the name of the Joint IED Defeat Task Force to JIEDDO. This directive established JIEDDO as a joint entity and jointly manned organization within DOD, directly under the authority, direction, and control of the Deputy Secretary of Defense, rather than subjecting JIEDDO to more traditional review under an Under Secretary of Defense within the Office of the Secretary of Defense. DOD's directive further states that JIEDDO shall focus all DOD actions in support of the combatant commanders' and their respective Joint Task Forces' efforts to defeat IEDs as weapons of strategic influence. Specifically JIEDDO is directed to identify, assess, and fund initiatives that provide specific counter-IED solutions, and is granted the authority to approve joint IED defeat initiatives valued up to $25 million and make recommendations to the Deputy Secretary of Defense for initiatives valued over that amount. Beginning in fiscal year 2007, Congress, has provided JIEDDO with its own separate appropriation, averaging $4 billion a year. JIEDDO may then transfer funds to the military service that is designated to sponsor a specific initiative. After JIEDDO provides funding authority to a military service, the designated service program manager, not JIEDDO, is responsible for managing the initiatives for which JIEDDO has provided funds. Since 2004, the Office of Management and Budget (OMB) Circular A-123 has specified that federal agencies have a fundamental responsibility to develop and maintain effective internal controls that ensure the prevention or detection of significant weaknesses--that is, weaknesses that could adversely affect the agency's ability to meet its objectives. According to OMB, the importance of internal controls is addressed in many statutes and executive documents. OMB requires agencies and individual federal managers to take systematic and proactive measures to develop and implement appropriate, cost-effective internal controls for results-oriented management. In addition, the Federal Managers Financial Integrity Act of 1982 establishes the overall requirements with regard to internal controls. Accordingly, an agency head must establish controls that reasonably ensure that (1) obligations and costs are in compliance with applicable law; (2) all assets are safeguarded against waste, loss, unauthorized use, or misappropriation; and (3) revenues and expenditures applicable to agency operations are properly recorded and accounted for to permit the preparation of accounts and reliable financial and statistical reports and to maintain accountability over the assets. Specific internal control standards underlying the internal controls concept in the federal government are promulgated by GAO and are referred to as the Green Book. The DOD Comptroller is responsible for the implementation and oversight of DOD's internal control program. Since its creation, JIEDDO has taken several steps to improve its management and operation of counter-IED efforts in response to our past work as well as to address congressional concerns. For example, in our ongoing work, we have noted that JIEDDO has been improving its strategic planning. In March 2007, observing that JIEDDO did not have a formal written strategic plan, we recommended that it develop such a plan based on the Government Performance and Results Act requirement implemented by the OMB circular A-11 requirement that government entities develop and implement a strategic plan for managing their efforts. Further, in 2007, Congress initially appropriated only a portion of JIEDDO's requested fiscal year 2008 funding, and a Senate Appropriations Committee report directed JIEDDO to provide a comprehensive and detailed strategic plan so that additional funding could be considered. In response, JIEDDO, in November 2007, issued a strategic plan that provided an overarching framework for departmentwide counter-IED efforts. Additionally, JIEDDO continues to invest considerable effort to develop and manage JIEDDO-specific plans for countering IEDs. For example, during the second half of 2008, the JIEDDO director undertook a detailed analysis of three issues. The director looked at JIEDDO's mission as defined in DOD guidance, the implicit and explicit functions associated with its mission, and the organizational structure needed to support and accomplish its mission. The effort resulted in JIEDDO publishing its JIEDDO Organization and Functions Guide in December 2008, within which JIEDDO formally established strategic planning as one of four mission areas. Actions taken in 2009 included developing and publishing a JIEDDO-specific strategic plan for fiscal years 2009 and 2010, reviewing JIEDDO's existing performance measures to determine whether additional or alternative metrics might be needed, and engaging other government agencies and services involved in addressing the IED threat at a JIEDDO semiannual conference. As a result of these actions, JIEDDO is steadily improving its understanding of counter-IED challenges. Additionally, as we note in our report being issued today, JIEDDO and the services have taken some steps to improve visibility over their counter- IED efforts. For example, JIEDDO, the services, and several other DOD organizations compile some information on the wide range of IED defeat initiatives existing throughout the department. JIEDDO also promotes visibility by giving representatives from the Army's and Marine Corps' counter-IED coordination offices the opportunity to assist in the evaluation of IED defeat proposals. Additionally, JIEDDO maintains a network of liaison officers to facilitate counter-IED information sharing throughout the department. It also hosts a semiannual conference covering counter-IED topics such as agency roles and responsibilities, key issues, and current challenges. JIEDDO also hosts a technology outreach conference with industry, academia, and other DOD components to discuss the latest requirements and trends in the counter-IED effort. Lastly, the services provide some visibility over their own counter-IED initiatives by submitting information to JIEDDO for the quarterly reports that it submits to Congress. While JIEDDO has taken some steps toward improving its management of counter-IED efforts, several significant challenges remain that affect DOD's ability to oversee JIEDDO. Some of these challenges are identified in the report we are issuing today and include a lack of full visibility by JIEDDO and the services over counter-IED initiatives throughout DOD, difficulties coordinating the transition of funding responsibility for joint IED defeat initiatives to the military services once counter-IED solutions have been developed, and a lack of clear criteria for defining what counter-IED training initiatives it will fund. Additionally, our ongoing work has identified other challenges including a lack of a means to gauge the effectiveness of its counter-IED efforts, a lack of consistent application of its counter-IED initiative acquisition process, and a lack of adequate internal controls required to provide DOD assurance that it is achieving its objectives. I will discuss each of these challenges in more detail. DOD's ability to manage JIEDDO is hindered by its lack of full visibility over counter-IED initiatives throughout DOD. Although JIEDDO and various service organizations are developing and maintaining their own counter-IED initiative databases, JIEDDO and the services lack a comprehensive database of all existing counter-IED initiatives, which limits their visibility over counter-IED efforts across the department. JIEDDO is required to lead, advocate, and coordinate all DOD actions to defeat IEDs. Also, JIEDDO is required to maintain the current status of program execution, operational fielding, and performance of approved Joint IED Defeat initiatives. Despite the creation of JIEDDO, most of the organizations engaged in the IED defeat effort in existence prior to JIEDDO have continued to develop, maintain, and in many cases, expand their own IED defeat capabilities. For example, the Army continues to address the IED threat through such organizations as the Army's Training and Doctrine Command, which provides training support and doctrinal formation for counter-IED activities, and the Research, Development & Engineering Command, which conducts counter-IED technology assessments and studies for Army leadership. Furthermore, an Army official stated that the Center for Army Lessons Learned continues to maintain an IED cell to collect and analyze counter-IED information. The Marine Corps' Training and Education Command and the Marine Corps Center for Lessons Learned have also continued counter-IED efforts beyond the creation of JIEDDO. At the interagency level, the Technical Support Working Group continues its research and development of counter-IED technologies. Despite these ongoing efforts and JIEDDO's mission to coordinate all DOD actions to defeat improvised explosive devices, JIEDDO does not maintain a comprehensive database of all IED defeat initiatives across the department. JIEDDO is currently focusing on developing a management system that will track its initiatives as they move through its own acquisition process. Although this system will help JIEDDO manage its counter-IED initiatives, it will track only JIEDDO-funded initiatives, not those being independently developed and procured by the services and other DOD components. Without incorporating service and other DOD components' counter-IED initiatives, JIEDDO's efforts to develop a counter-IED initiative database will not capture all efforts to defeat IEDs throughout DOD. In addition, the services do not have a central source of information for their own counter-IED efforts because there is currently no requirement that each service develop its own comprehensive database of all of its counter-IED initiatives. Without centralized counter-IED initiative databases, the services are limited in their ability to provide JIEDDO with a timely and comprehensive summary of all their existing initiatives. For example, the U.S. Army Research and Development and Engineering Command's Counter-IED Task Force and the service counter-IED focal points--the Army Asymmetric Warfare Office's Adaptive Networks, Threats and Solutions Division; and the Marine Corps Warfighting Lab-- maintain databases of counter-IED initiatives. However, according to Army and Marine Corps officials, these databases are not comprehensive in covering all efforts within their respective service. Additionally, of these three databases, only the U.S. Army Research and Development and Engineering Command's database is available for external use. Since the services are able to act independently to develop and procure their own counter-IED solutions, several service and Joint officials told us that a centralized counter-IED database would be of great benefit in coordinating and managing the department's counter-IED programs. Furthermore, although JIEDDO involves the services in its process to select initiatives, the services lack full visibility over those JIEDDO-funded initiatives that bypass JIEDDO's acquisition process, called the JIEDDO Capability Approval and Acquisition Management Process (JCAAMP). In this process, JIEDDO brings in representatives from the service to participate on several boards--such as a requirements, resources, and acquisition board--to evaluate counter-IED initiatives, and various integrated process teams. However, in its process to select counter-IED initiatives, JIEDDO has approved some counter-IED initiatives without vetting them through the appropriate service counter-IED focal points, because the process allows JIEDDO to make exceptions if deemed necessary and appropriate. For example, at least three counter-IED training initiatives sponsored by JIEDDO's counter-IED joint training center were not vetted through the Army Asymmetric Warfare Office's Adaptive Networks, Threats, and Solutions Branch--the Army's focal point for its counter-IED effort--before being approved for JIEDDO funding. Service officials have said that not incorporating their views on initiatives limits their visibility of JIEDDO actions and could result in approved initiatives that are inconsistent with service needs. JIEDDO officials acknowledged that while it may be beneficial for some JIEDDO- funded initiatives to bypass its acquisition process in cases where an urgent requirement with limited time to field is identified, these cases do limit service visibility over all JIEDDO-funded initiatives. In response to these issues, we recommended in our report that is being issued today that the military services create their own comprehensive IED defeat initiative databases and work with JIEDDO to develop a DOD- wide database for all counter-IED initiatives. In response to this recommendation, DOD concurred and noted steps currently being taken to develop a DOD-wide database of counter-IED initiatives. While we recognize that this ongoing effort is a step in the right direction, these steps did not address the need for the services to develop databases of their initiatives as we also recommended. Until all of the services and other DOD components gain full awareness of their own individual counter-IED efforts and provide this input into a central database, any effort to establish a DOD-wide database of all counter-IED initiatives will be incomplete. We are also recommending that, in cases where initiatives bypass JIEDDO's rapid acquisition process, JIEDDO develop a mechanism to notify the appropriate service counter-IED focal points of each initiative prior to its funding. In regard to this recommendation, DOD also concurred and noted steps it plans to take such as notifying stakeholders of all JIEDDO efforts or initiatives, whether or not JCAAMP processing is required. We agree that, if implemented, these actions would satisfy our recommendation. Although JIEDDO has recently taken several steps to improve its process to transition IED defeat initiatives to the military services following the development of new capabilities, JIEDDO still faces difficulties in this area. JIEDDO's transitions of initiatives to the services are hindered by funding gaps between JIEDDO's transition timeline and DOD's budget cycle as well as by instances when service requirements are not fully considered during JIEDDO's acquisition process. JIEDDO obtains funding for its acquisition and development programs through congressional appropriations for overseas contingency operations. JIEDDO typically remains responsible for funding counter-IED initiatives until they have been developed, fielded, and tested as proven capabilities. According to DOD's directive, JIEDDO is then required to develop plans for transitioning proven joint IED defeat initiatives into DOD base budget programs of record for sustainment and further integration into existing service programs once those initiatives have been developed. As described in its instruction, JIEDDO plans to fund initiatives for 2 fiscal years of sustainment. However, service officials have stated that JIEDDO's 2-year transition timeline may not allow the services enough time to request and receive funding through DOD's base budgeting process, causing DOD to rely on service overseas contingency operations funding to sustain joint- funded counter-IED initiatives following JIEDDO's 2-year transition timeline. According to JIEDDO's latest transition brief for fiscal year 2010, the organization recommended the transfer of 19 initiatives totaling $233 million to the services for funding through overseas contingency operations appropriations and the transition of only 3 totaling $4.5 million into service base budget programs. The potential need for increased transition funds will continue given the large number of current initiatives funded by JIEDDO. For example, as of March 30, 2009, JIEDDO's initiative management system listed 497 ongoing initiatives. In addition to the small number of transitions and transfers that have occurred within DOD to date, the services often decide to indefinitely defer assuming fundin responsibility for JIEDDO initiatives following JIEDDO's intended 2-year transition or transfer point. According to JIEDDO's fiscal year 2011 transition list, the Army and Navy have deferred or rejected the acceptance of 16 initiatives that JIEDDO had recommended for transition or transfer, totaling at least $16 million. Deferred or rejected initiatives are either sustained by JIEDDO indefinitely, transitioned or transferred during a future year, or terminated. When the services defer or reject the transition of initiatives, JIEDDO remains responsible for them beyond the intended 2-year transition or transfer point, a delay that could diminish its ability to fund new initiatives and leads to uncertainty about when or if the services will assume funding responsibility in the future. Furthermore, JIEDDO's initiative transitions are hindered when service requirements are not fully considered during the development and integration of joint-funded counter-IED initiatives, as evidenced by two counter-IED radio jamming systems. In the first example, CENTCOM, whose area of responsibility includes both Iraq and Afghanistan, responded to an urgent operational need by publishing a requirement in 2006 for a man-portable IED jamming system for use in theater. In 2007, JIEDDO funded and delivered to theater a near-term solution to meet this capability gap. However, Army officials stated that the fielded system was underutilized by troops in Iraq, who thought the system was too heavy to carry, especially given the weight of their body armor. Since then, the joint counter-IED radio jamming program board has devised a plan to field a newer man-portable jamming system called CREW 3.1. According to JIEDDO, CREW 3.1 systems were developed by a joint technical requirements board that aimed to balance specific service requirements for man-portable systems. While CENTCOM maintains that CREW 3.1 is a requirement in-theater, and revalidated the need in September 2009, officials from the Army and Marine Corps have both stated that they do not have a formal requirement for the system. Nevertheless, DOD plans to field the equipment to each of the services in response to CENTCOM's stated operational need. It remains unclear, however, which DOD organizations will be required to pay for procurement and sustainment costs for the CREW 3.1, since DOD has yet to identify the source of funding to procure additional quantities. In the second example, Army officials stated that they were not involved to the fullest extent possible in the evaluation and improvement process for a JIEDDO-funded vehicle-mounted jamming system, even though the Army was DOD's primary user in terms of total number of systems fielded. The system, called the CREW Vehicle Receiver/Jammer (CVRJ), was initiated in response to an urgent warfighter need in November 2006 for a high-powered system to jam radio frequencies used to detonate IEDs. The development of this technology ultimately required at least 20 proposals for configuration changes to correct flaws found in its design after contract award. Two of the changes involved modifying the jammer so it could function properly at high temperatures. Another change was needed to prevent the jammer from interfering with vehicle global positioning systems. Army officials stated that had they had a more direct role on the Navy-led control board that managed configuration changes to the CVRJ, the system may have been more quickly integrated into the Army's operations. As this transpired, the Army continued to use another jamming system, DUKE, as its principal counter-IED electronic warfare system. Not ensuring that service requirements are fully taken into account when evaluating counter-IED initiatives creates the potential for fielding equipment that is inconsistent with service requirements. This could later delay the transition of JIEDDO-funded initiatives to the services following JIEDDO's 2-year transition timeline. To facilitate the transition of JIEDDO funded initiatives, our report issued today recommended that the military services work with JIEDDO to develop a comprehensive plan to guide the transition of each JIEDDO- funded initiative, including expected costs, identified funding sources, and a timeline including milestones for inclusion into the DOD base budget cycle. We also recommended that JIEDDO coordinate with the services prior to funding an initiative to ensure that service requirements are fully taken into account when making counter-IED investment decisions. In response to these recommendations, DOD concurred with our recommendation to develop a comprehensive plan and noted steps to be taken to address this issue. DOD partially concurred with our recommendation that JIEDDO coordinate with the services prior to funding an initiative, noting the department's concern over the need for a rapid response to urgent warfighter needs. While we recognize the need to respond quickly to support warfighter needs, we continue to support our recommendation and reiterate the need for the integration of service requirements and full coordination prior to funding an initiative to ensure that these efforts are fully vetted throughout DOD before significant resources are committed. JIEDDO's lack of clear criteria for the counter-IED training initiatives it will fund affects its counter-IED training investment decisions. JIEDDO devoted $454 million in fiscal year 2008 to support service counter-IED training requirements through such activities as constructing a network of realistic counter-IED training courses at 57 locations throughout the United States, Europe, and Korea. DOD's directive defines a counter-IED initiative as a materiel or nonmateriel solution that addresses Joint IED Defeat capability gaps. Since our last report on this issue in March 2007, JIEDDO has attempted to clarify what types of counter-IED training it will fund in support of theater-urgent, counter-IED requirements. In its comments to our previous report, JIEDDO stated that it would fund an urgent theater counter-IED requirement if it "enables training support, including training aids and exercises." JIEDDO also stated in its comments that it would fund an urgent-theater, counter-IED requirement only if it has a primary counter-IED application. Although JIEDDO has published criteria for determining what joint counter-IED urgent training requirements to fund and has supported service counter-IED training, it has not developed similar criteria for the funding of joint training initiatives not based on urgent requirements. For example, since fiscal year 2007, JIEDDO has spent $70.7 million on role players in an effort to simulate Iraqi social, political, and religious groups at DOD's training centers. JIEDDO also spent $24.1 million on simulated villages at DOD's training centers in an effort to make steel shipping containers resemble Iraqi buildings. According to Army officials, these role players and simulated villages funded by JIEDDO to support counter-IED training are also utilized in training not related to countering IEDs. As a result, JIEDDO has funded training initiatives that may have primary uses other than defeating IEDs, such as role players and simulated villages to replicate Iraqi conditions at various service combat training centers. Without criteria specifying which counter-IED training initiatives it will fund, JIEDDO may diminish its ability to fund future initiatives more directly related to the counter-IED mission. DOD also could hinder coordination in managing its resources, as decision makers at both the joint and service level operate under unclear selection guidelines for which types of training initiatives should be funded and by whom. We have therefore recommended in the report being issued today that JIEDDO evaluate counter-IED training initiatives using the same criteria it uses to evaluate theater-based joint counter-IED urgent requirements, and incorporate this new guidance into an instruction. In commenting on our recommendation, DOD partially concurred and expressed concerns regarding our recommendation noting that JIEDDO's JCAAMP and the development of new DOD-wide guidance would address the issues we note in our report. In response, while we recognize the steps taken by DOD to identify counter-IED training gaps and guide counter-IED training, these actions do not establish criteria by which JIEDDO will fund counter- IED training. JIEDDO has not yet developed a means for reliably measuring the effectiveness of its efforts and investments in combating IEDs. The OMB circular A-11 notes that performance goals and measures are important components of a strategic plan and that it is essential to assess actual performance based on these goals and measures.. JIEDDO officials attribute difficulty in determining the effectiveness of its initiatives to isolating their effect on key IED threat indicators from the effect of other activities occurring in-theater at the same time, such as a surge in troops, changes in equipment in use by coalition forces, local observation of holidays, or changes in weather such as intense dust storms, which may cause a decrease in the number of IED incidents. JIEDDO has pursued performance measures since its inception to gauge whether its initiatives and internal operations and activities are operating effectively and efficiently, and achieving desired results. In December 2008 JIEDDO published a set of 78 specific performance measures for its organization. The list included, for example, metrics to evaluate JIEDDO's response time in satisfying urgent theater requirements, the quality and relevance of counter-IED proposals JIEDDO solicits and receives in response to its solicitations, and the ratio of initiatives for which JIEDDO completes operational assessments. However, JIEDDO has not yet established baselines for these measures or specific goals and time frames for collecting, measuring, and analyzing the relevant data. Further, we have found several limitations with the data JIEDDO collects and relies upon to evaluate its performance. Our ongoing work has identified three areas in which the data JIEDDO uses to measure effectiveness and progress is unreliable or is inconsistently collected. First, data on effectiveness of initiatives based on feedback from warfighters in-theater is not consistently collected because JIEDDO does not routinely establish data-collection mechanisms or processes to obtain useful, relevant information needed to adequately assess the effectiveness of its initiatives. JIEDDO officials also said that data collection from soldiers operating in-theater is limited because the process of providing feedback may detract from higher priorities for warfighters. In response to this data shortfall, JIEDDO managers began an initiative in fiscal year 2009 to embed JIEDDO-funded teams within each brigade combat team to provide JIEDDO with an in-theater ability to collect needed data for evaluating initiatives. However, because this effort is just beginning, JIEDDO officials stated that they have not yet been able to assess its effectiveness. Second, data on the management of individual initiatives, such as data recording activities that take place throughout the development of an initiative, are not consistently recorded and maintained at JIEDDO. Officials attribute the poor data quality to the limited amount of time that JIEDDO staff are able to spend on this activity. JIEDDO staff are aware that documentation of management actions is needed to conduct counter-IED initiative evaluations and told us that they plan to make improvements. However, needed changes--such as routinely recording discussions, analysis, determinations, and findings occurring in key meetings involving JIEDDO and external parties and coding their activities in more detail to allow differentiation and deeper analysis of activities and initiatives--are yet to be developed and implemented. Third, JIEDDO does not collect or fully analyze data on unexpected outcomes, such as initiatives that may result in an increase in the occurrence or lethality of IEDs. However, we believe that such data can provide useful information that can be used to improve initiatives. For example, in response to a general officer request in Iraq, the Institute for Defense Analysis collected and analyzed IED incident data before and after a certain initiative to determine its effect on the rate of IED incidents. JIEDDO officials intended the initiative in question to result in the reduction in IED attacks. However, the data collected contradicted the intended result because the number of IED incidents increased in areas where the initiative was implemented. These data could provide lessons learned to fix the initiative or take another approach. We expect to provide further information and recommendations, if appropriate, on JIEDDO's efforts to gauge the effectiveness of its counter-IED efforts--including issues involving data collection and reliability--in the report we will be issuing in early 2010. Although JIEDDO has established JCAAMP as its process to review and approve proposals for counter-IED initiatives, JIEDDO excludes some initiatives from that process. JCAAMP was established in response to DOD's directive, which stated that all of JIEDDO's initiatives are to go through a review and approval process. This requirement is consistent with government internal control standards, which identify properly segregating key duties and responsibilities--including responsibility for authorizing and processing transactions--as a fundamental control activity. In reviewing 56 initiatives for case studies, we found that JIEDDO excluded 26 of the 56 counter-IED initiatives from JCAAMP. For example, JIEDDO excluded one initiative to enhance the counter-IED training experience by funding role players who are to help create a realistic war environment. However, another initiative with similar purpose and objective was included in the JCAAMP process. As a result, when initiatives are excluded from JCAAMP, internal and external stakeholders do not have the opportunity to review, comment on, and potentially change the course of the initiative in coordination with competing or complementary efforts. Additionally, although the remaining 30 of 56 initiatives we reviewed went through JCAAMP, according to JIEDDO officials, we found that 22 of those 30 initiatives did not comply with some of the steps required by applicable DOD guidance. Applicable guidance includes JIEDDO's directive, instruction, and standard operating procedures, which together identify a set of various decision points and actions, collectively intended to control JIEDDO's use of resources. For example, we found that, for 16 initiatives among the 22, JIEDDO released funding to the services without obtaining required funding approval from either the Deputy Secretary of Defense--as is required for initiatives over $25 million--or from the JIEDDO Director, for initiatives up to $25 million. The exclusion of initiatives from JCAAMP, coupled with noncompliance with steps of the process required by applicable guidance, reduces transparency and accountability of JIEDDO's actions within JIEDDO, as well as to the Deputy Secretary of Defense, the services, and other DOD components. Without management oversight at important milestones in the approval and acquisition process, some funds appropriated for JIEDDO may be used to support efforts that do not clearly advance the goal of countering IEDs. According to JIEDDO officials, systematic compliance with its process and documentation has been a weakness that JIEDDO has attempted to correct, and it continues to pursue improvements in this regard. During the course of our work, officials from different JIEDDO divisions-- including its accounting and budgeting, acquisition oversight, and internal review divisions--said they saw significant improvement in discipline and compliance with JIEDDO's process for managing counter-IED initiatives beginning in the last quarter of fiscal year 2009. As JIEDDO officials point out, the improvements they cite have occurred relatively recently and have not had time to demonstrate their full effect. Nonetheless, the findings in our ongoing review, and in prior GAO reports, confirm that JIEDDO has not had a systematic process in place to manage or document its activities and operations for the majority of its operating life. In the report we plan to issue in early 2010, we will present a more detailed assessment of JIEDDO's review and approval process and will make recommendations as appropriate. While JIEDDO has affirmed the importance of addressing shortcomings in its internal control system and is taking action to this end, it still lacks adequate internal controls to ensure that it is achieving its objectives. An adequate system of internal controls supports performance-based management with the procedures, plans, and methods to meet the agency's missions, goals, and objectives. Internal controls serve as the first line of defense in safeguarding assets and preventing and detecting errors and fraud, and they help program managers achieve desired results through effective stewardship of public resources. However, in July 2009 JIEDDO reported to the OSD Comptroller that a material weakness exists in JIEDDO's internal control system and has existed since it was established in January 2006. OMB defines a material weakness as a deficiency or combination of deficiencies that could adversely affect the organization's ability to meet its objectives and that the agency head determines to be significant enough to be reported outside the agency. For example, in our ongoing work we have identified, and JIEDDO officials have confirmed, that JIEDDO's internal controls system has not: (1) provided for the identification and analysis of the risks JIEDDO faces in achieving its objectives from both external and internal sources; and (2) assessed its performance over time and ensured that the findings of audits and other reviews have been promptly resolved. Consequently, JIEDDO has not developed a set of control activities that ensure its directives--and ultimately its objectives--are carried out effectively. Without assurance from JIEDDO that it has identified and addressed its control weaknesses, OSD does not monitor JIEDDO's progress and effectiveness and therefore is unable to detect the extent to which JIEDDO has weaknesses. Given the longstanding weaknesses in JIEDDO's system of internal controls, it is unable to assure the DOD Comptroller that the program is achieving its objectives. The DOD Comptroller is responsible for the development and oversight of DOD's internal control program. In carrying out its responsibilities, DOD Comptroller officials told us that they relied solely on JIEDDO to internally develop and implement effective internal control systems that address key program performance risks and monitor effectiveness and compliance, and to report deficiencies or weaknesses in its internal control system through a report called the annual assurance statement, which is provided each year to the OSD Office of the Director of Administration and Management. DOD uses additional techniques in its general oversight of JIEDDO, such as the Deputy Secretary of Defense's review and approval of certain high-dollar counter-IED initiatives. However, JIEDDO's annual assurance statement is the key mechanism DOD relies upon to comprehensively and uniformly summarize and monitor internal control system status within its organizations--including JIEDDO--and, more importantly, to report and elevate unresolved deficiencies to higher levels within and outside of DOD for awareness and action. However, DOD's limited oversight system for JIEDDO has not fully addressed control weaknesses present at JIEDDO since its first year of operation. Further, JIEDDO did not detail these control weaknesses in either of its first two annual statements of assurance in 2007 and 2008 or in its third and most recent statement of assurance completed in July 2009. The 2009 assurance statement established a 3-year timeline with incremental milestones to develop and implement a complete internal management control program by the end of fiscal year 2012. In our report we plan to issue in early 2010, we will present a fuller assessment of JIEDDO's management control processes, and will make recommendations as appropriate. In conclusion, Mr. Chairman, while JIEDDO has taken important steps to improve its management of DOD's counter-IED efforts, DOD continues to face a number of challenges in its effort to gain full visibility over all counter-IED activities, coordinate the transition of JIEDDO initiatives, and clearly define the types of training initiatives it will fund. Additionally, JIEDDO's approval process for counter-IED initiatives poses significant challenges to its ability to provide full transparency and accountability over its operations. All of these challenges highlight the need for DOD to evaluate the effectiveness of its current oversight of all counter-IED efforts across the department, yet the consistent collection of reliable performance data is one of JIEDDO's greatest challenges. With improved internal controls, JIEDDO will be in a better position to ensure that it is in compliance with applicable law and its resources are safeguarded against waste. If these issues are not resolved, DOD's various efforts to counter IEDs, including JIEDDO, face the potential for duplication of effort, unaddressed capability gaps, integration issues, and inefficient use of resources in an already fiscally challenged environment, and the department will lack a basis for confidence that it has retained the necessary capabilities to address the IED threat for the long term. Mr. Chairman, this concludes my prepared statement. I will be pleased to answer any questions you or members of the subcommittee may have at this time. For future questions about this statement, please contact me on (202) 512- 8365 or [email protected]. Individuals making key contributions to this statement include Cary Russell, Grace Coleman, Kevin Craw, Susan Ditto, William Horton, Richard Powelson, Tristan To, Yong Song, and John Strong. 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.
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Improvised explosive devices (IED) are the number-one threat to troops in Iraq and Afghanistan, accounting for almost 40 percent of the attacks on coalition forces in Iraq. Although insurgents' use of IEDs in Iraq has begun to decline, in Afghanistan the number of IED incidents has significantly increased. The Joint IED Defeat Organization (JIEDDO) was created to lead, advocate, and coordinate all DOD efforts to defeat IEDs. Its primary role is to provide funding to the military services and DOD agencies to rapidly develop and field counter-IED solutions. Through fiscal year 2009, Congress has appropriated over $16 billion to JIEDDO. In addition, other DOD components, including the military services, have devoted at least $1.5 billion to the counter-IED effort--which does not include $22.7 billion for Mine Resistant Ambush Protected vehicles. This testimony is based on a report that GAO is issuing today as well as preliminary observations from ongoing work that GAO plans to report in early 2010. In the report being issued today, GAO is recommending that JIEDDO (1) improve its visibility of counter-IED efforts across DOD, (2) develop a complete plan to guide the transition of initiatives, and (3) define criteria for its training initiatives to help guide its funding decisions. DOD generally concurred with GAO's recommendations and noted actions to be taken. Since its creation, JIEDDO has taken several steps to improve its management of counter-IED efforts. For instance, GAO's ongoing work has found that JIEDDO has been improving the management of its efforts to defeat IEDs, including developing and implementing a strategic plan that provides an overarching framework for departmentwide efforts to defeat IEDs, as well as a JIEDDO-specific strategic plan. Also, as noted in the report GAO is issuing today, JIEDDO and the services have taken steps to improve visibility over their counter-IED efforts, and JIEDDO has taken several steps to support the ability of the services and defense agencies to program and fund counter-IED initiatives. However, several significant challenges remain that affect DOD's ability to oversee JIEDDO. Some of these challenges are identified in GAO's report being released today along with recommendations to address them. For example, one challenge is a lack of full visibility by JIEDDO and the services over counter-IED initiatives throughout DOD. Although JIEDDO and various service organizations are developing and maintaining their own counter-IED initiative databases, JIEDDO and the services lack a comprehensive database of all existing counter-IED initiatives, which limits their visibility over counter-IED efforts across the department. In addition, JIEDDO faces difficulties coordinating the transition of funding responsibility for joint counter-IED initiatives to the services, due to gaps between JIEDDO's transition timeline and DOD's base budget cycle. JIEDDO's initiative transitions also are hindered when service requirements are not fully considered during JIEDDO's acquisition process. JIEDDO also lacks clear criteria for defining what counter-IED training initiatives it will fund and, as a result, has funded training activities that may have primary uses other than defeating IEDs. Additionally, GAO's ongoing work has identified other oversight challenges. For example, JIEDDO lacks a means as well as reliable data to gauge the effectiveness of its counter-IED efforts. GAO's work has identified several areas in which data on the effectiveness and progress of IED-defeat initiatives are unreliable or inconsistently collected. In some cases, data are not collected in-theater because the initiatives may not be designed with adequate data-collection procedures. Another challenge facing JIEDDO is its inconsistent application of its counter-IED initiative acquisition process, allowing initiatives to bypass some or all of the process's key review and approval steps. Further, JIEDDO lacks adequate internal controls to ensure DOD that it is achieving its objectives. For example, in July 2009, JIEDDO reported that its internal controls system had a combination of deficiencies that constituted a material weakness. Such a weakness could adversely affect JIEDDO's ability to meet its objectives. Finally, JIEDDO has not developed a process for identification and analysis of the risks it faces in achieving its objectives from both external and internal sources, and it has not assessed its performance over time or ensured that the findings of audits and other reviews have been promptly resolved. As GAO completes its ongoing work it expects to issue a report with recommendations to address these issues.
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The District of Columbia government, acting through the Mayor, the District's Redevelopment Land Agency (RLA), and the District of Columbia Arena, L.P. (DCALP)--a limited partnership formed by the owner of the Washington Wizards and the Washington Capitals--agreed that DCALP would build a sports arena (estimated to cost about $175 million) and that the District would be responsible for financing certain predevelopment costs. The District agreed to be responsible for the predevelopment costs of: acquiring land, including the purchase of property not then owned by the connecting the Gallery Place Metrorail station to the sports arena; relocating District employees from two buildings on the site to other locations; and demolishing buildings, remediating soil, relocating utilities, and securing all regulatory approvals necessary for construction of the sports arena. The Omnibus Budget Support Act of 1994 (Arena Tax Act), as amended, provides for a Public Safety Fee (Arena Tax) to be levied on businesses located in the District based upon the annual gross receipts of such businesses. The Arena Tax is due on or before June 15 of each year. The Arena Tax Act requires the Mayor to raise the Arena Tax rates to provide for annual revenues of $9 million if the Arena Tax revenues are estimated to be less than $9 million. The Arena Tax Act also authorized RLA to pledge the Arena Tax as security to repay loans to finance predevelopment activities. The Arena Tax was first levied in fiscal year 1995 and mostly used to fund predevelopment activities. In subsequent years, the Arena Tax was used to pay principal and interest (debt service) on the bonds as required by the bond resolution. To initially finance the predevelopment costs of the sports arena, $2.5 million was advanced by the District's Sports Commission. The funds were provided with the understanding that they would be repaid from the proceeds of a loan the District would secure. In August 1995, the District received a $53 million loan commitment (line of credit) from a consortium of banks. In January 1996, RLA issued about $60 million in revenue bonds backed by the Arena Tax and paid off the $36.6 million portion of the line of credit used. The funds originally available to pay the arena's net predevelopment costs and to establish a debt service reserve totaled $66.6 million. These funds consisted of (1) $57.4 million in net bond proceeds from the sale of RLA Revenue Bonds in January 1996 and (2) about $9.2 million in 1995 net tax collections from the dedicated Arena Tax. Of the $66.6 million then available, $11 million was placed in two reserves. A mandatory $5 million capital reserve, which was required by the bond resolution, was established to pay for any insufficiency in the project fund. A reserve of about $6 million was established for debt service. Our objectives were to determine the status of the sports arena project's (1) predevelopment costs, (2) revenue collections, and (3) bond redemption status. To determine the status of expenditures for predevelopment activities for the sports arena, we interviewed District officials on the Arena Task Force, the District's Sports Commission and Corporation Counsel, and the D.C. Office of Treasury. We also held discussions with trustees for the bonds. We discussed the construction costs of the arena and Metrorail connection with officials from DCALP and WMATA. We reviewed all expenditures made since the period covered by our last report, from October 8, 1997, to April 30, 1998. Payments were made from the funds obtained from the net proceeds of the bond sale. The universe of payments included 10 expenditure items, which, at the time of our audit, represented 100 percent of the total funds spent in the review period. We reviewed each expenditure item to determine whether it was made within the terms of the contract or invoice amounts, it had been approved for payment by a District official, and the funds had actually been disbursed. We did not audit the reported taxes collected and deposited for the sports arena project. Therefore, we did not determine if the District government accurately identified the universe of taxpayers or reported all dedicated taxes for this project. However, we reviewed monthly statements provided by the lockbox trustee to determine the amount of taxes collected and placed in escrow. In addition, we confirmed that all payments due to the District from the ground lease had been made. This review provides an update on the previous work we performed. Our procedures were performed between March 1998 and June 1998 in accordance with generally accepted government auditing standards. Since our last report, predevelopment costs have increased from $58.6 million to about $61.5 million, which is a net amount of $2.9 million (5 percent). The District's predevelopment activities consisted of acquiring land, constructing the Metrorail connection, relocating District employees, demolishing two buildings, remediating soil, relocating utilities, and using consultants to secure regulatory approvals. The District has completed almost all of its predevelopment activities and has spent $60 million, about 98 percent, of the estimated total expenditures. Table 1 shows the District's total predevelopment activities financed for the sports arena project. As shown in table 1, land acquisition represents the largest increase in predevelopment expenditures. In order to assemble the arena site, the District acquired two pieces of property. At the time of our last report, November 1997, the price for one of the pieces of property had not been determined. On April 29, 1998, the District reached an out of court settlement with the owners to pay $8.2 million for the land. The price of the land was $2.9 million more than the $5.25 million the District had originally deposited with the D.C. Superior Court in invoking its power of eminent domain. To pay the additional $2.9 million, the District used funds from a grant made by the Department of Housing and Urban Development (HUD). Under HUD's Community Development Block Grant (CDBG) program, the acquisition of property is a permitted use of grant funds. As of March 6, 1998, the District received permission from HUD to use CDBG funds to acquire the property. The Metrorail connection to the sports arena has been completed. As of April 21, 1998, $16.7 million and $18 million of the $19 million budget had been approved for expenditure and had been obligated, respectively. WMATA officials informed us that they expect the project to be closed out (all bills reviewed and approved for payment) by September 1998. It is their expectation that after the project is closed out, there will be about a $285,000 residual from the funds associated with the Department of Transportation (DOT) Capital Assistance Grant. According to WMATA officials, any residual balance must be used on a transportation related project. One District official told us that he expects the District to use these funds to defray the cost of design work on a Metrorail connection to the proposed new convention center. As shown in table 1, expenditures for the relocation of utilities have increased from the projected $3.4 million reported in our November 1997 report to about $3.5 million. The increase is attributable to a negotiated settlement between the District and the developer--DCALP--over the cost of infrastructure improvements to the site. In a letter dated October 6, 1997, DCALP cited seven infrastructure improvements it had made to the site, at a cost of $403,000, which it claimed under the terms of the Exclusive Development Rights Agreement (EDRA), that the District was responsible for. As part of its March 10, 1998, settlement, the District has obtained a legal agreement, intended to preclude the developer from prevailing in any future claims regarding the seven infrastructure improvements. All activities associated with soil remediation efforts have not been fully completed. The District's project manager for the sports arena is still including in the expenditures an estimated $700,000 for the removal of concrete structures below the surface and contaminated soil on a parcel of land transferred to WMATA. District officials told us that they have budgeted sufficient funds to remove the concrete structures and cover the cost of remediation. They stated that based on tests done at the site, only limited amounts of the soil are contaminated. The project manager of the arena task force stated that the District has not contracted for the removal of the concrete because WMATA has not made a decision regarding the land's use. The District's Office of Corporation Counsel is actively pursuing its legal options for recouping the District's cost for soil remediation and other related costs for the arena site. This office has obtained the assistance of a private law firm and a environmental study firm--both on a pro bono basis--to assist the city in its efforts to recover the District's costs. The two firms have identified approximately 50 potential sources of the contaminants. The Corporation Counsel is currently assessing each firm's potential liability and the ability of each firm to make restitution. Table 2 shows total receipts of about $65 million available as of April 30, 1998, to fund predevelopment costs. Revenues have increased from our November 1997 report mostly as a result of allocating a portion ($2.9 million) of the District's CDBG grant funds received from HUD to pay for the increased price of the land the District acquired. Through April 30, 1998, the District had earned about $1.5 million in interest from the funds available to pay predevelopment costs. In our last report, we stated that all of the leasehold improvement costs associated with the relocated employees should have been paid from the District's sports arena project fund rather than from the District's appropriated funds because this activity was an allowable cost for the sports arena project. The project manager of the arena task force contends that $371,530 should be borne by the District since it was not factored into the original predevelopment activities budget. However, we have excluded the $371,530 District reimbursement since the cost should be borne by the sports arena project because these expenses were precipitated by the relocation action to allow arena construction. We had informed the District's former Chief Financial Officer of this matter, and he had agreed to recoup the money from the sports arena project fund. As of June 30, 1998, the funds had not yet been returned to the District's General Fund. As of April 30, 1998, collections for the 1997 Arena Tax had totaled about $9.6 million, about the same as the 1995 and 1996 collections of $9.3 million and $9.6 million, respectively. These funds were sufficient to meet 1997 principal and interest payments (about $5.9 million annually) on the bonds issued to finance the predevelopment expenses. The District forecasts Arena Tax collections of $9 million for each year that the bonds are outstanding. Since 1995, the trustees for the lockbox have reported that a total of $28.6 million has been collected exceeding the forecast of $27 million by $1.6 million. As was done in previous years, taxpayers were instructed to send their payments to a lockbox under the control of bank trustees. We verified that these funds were transferred to the trustee for the bonds and placed in accounts for principal and interest payments. Our analysis shows that if the present level of Arena Tax collections continue into the future, and if revenues from the ground lease of the arena and the $6 million in the debt service reserve, including interest earnings, are used, the sports arena bonds could be paid off in 2002, well before the 2010 maturity date of the longest term bonds. The combined total of $19.3 million in dedicated tax revenues collected for 1996 and 1997 is being used to pay principal and interest on the bonds. The District's Sports Arena Special Tax Revenue Bonds include about $15.4 million in serial bonds, which have maturity dates from 1996 to 2000, and $44.5 million of term bonds with a stated maturity date of 2010 and mandatory sinking fund redemptions in the years 2001 through 2009. As of April 30, 1998, the bond trustees had paid out $14.2 million in principal and interest payments. Approximately $5.7 million had been paid in interest and $6 million of the serial bonds and $2.5 million of the term bonds had been redeemed. The remaining $5.1 million of Arena Tax collections was held in the debt service reserve funds (see next section). The bond resolution requires that any additional tax collected over the amount needed to pay debt service on bonds be placed in a super sinker fund and be used to redeem term bonds earlier than their due dates. The serial bonds cannot be redeemed earlier than their stated maturity dates. Table 3 shows our analysis of when the Arena Tax bonds can be fully paid off. Our analysis, which assumes similar future collections of dedicated tax revenues, annual ground lease revenue from DCALP, use of outstanding debt service reserve funds (plus interest), and no recession or cyclical downturns of the local economy, shows that the bonds could be paid off in the year 2002, or 8 years before the last scheduled maturity date. Upon redemption of all bonds in 2002, excess funds of $7.7 million would be transferred to the District General Fund. This scenario would save about $16.4 million in interest payments (see table 4). Once the arena tax bonds are repaid, the authorizing legislation calls for the dedicated taxes to be eliminated. The bond resolution requires that early redemption of term bonds occurs on a interest payment date--either May 1 or November 1 of each year--from excess revenues on deposit in the Redemption Account of the Debt Service Fund. On the interest payment date of November 1, 1997, no term bonds were redeemed even though $2.8 million was available in bond redemption account. We questioned the bond trustee as to why additional term bonds were not redeemed on November 1, 1997. Her response was that because of a change in personnel, the early redemption of term bonds had been overlooked. This missed opportunity to redeem term bonds prior to their maturity date could have caused the District to incur additional interest expense for that period. However, the excess funds were deposited in an interest earning account and the interest earned on the funds available for bond redemption was substantially the same as the average interest rate on the bonds that would have been redeemed and, accordingly, the District did not incur any losses. On April 3, 1998, the District received its first quarterly payment of $76,644 under the yearly ground lease for the arena site. These funds, as stipulated in the bond resolution, were placed in an account established to redeem bonds prior to their maturity date. The ground lease payments along with any excess funds in the project, capital reserve accounts, and debt reserve accounts are to be used for early bond redemption. We requested comments on a draft of this letter from the Mayor of the District of Columbia. The Mayor concurred with the information presented (see appendix I) and also provided, under separate cover, some technical suggestions that we have incorporated as appropriate to clarify the report. We are sending copies of this report to the Ranking Minority Member of your Subcommittee and to the Chairmen and Ranking Minority Members of the Senate and House Committees on Appropriations and their Subcommittees on the District of Columbia and the Subcommittee on Oversight of Government Management, Restructuring and the District of Columbia, Senate Committee on Governmental Affairs. Major contributors to this report are listed in appendix II. If you or your staff need further information, please contact me at (202) 512-4476. Richard T. Cambosos, Senior Attorney The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. 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Pursuant to a congressional request, GAO reviewed the progress of the sports arena project in the District of Columbia, focusing on the project's predevelopment costs, revenue collections, and bond redemption status. GAO noted that: (1) the District has spent $60 million, about 98 percent of the estimated total cost of predevelopment activities, for the sports arena; (2) as of April 30, 1998, the District estimated total predevelopment costs to be about $61.5 million, a net increase of about $2.9 million over its October 7, 1997, estimate, as reported in GAO's November 1997 report; (3) the increase is largely due to the final agreed upon price the District paid for a parcel of land included in the arena site; (4) the only known expense not under contract or agreement is the District cost for soil remediation and the removal of concrete structures below the surface for a parcel of land transferred to the Washington Metropolitan Area Transit Authority; (5) the District's project manager for the sports arena has budgeted $700,000 for this activity, which is included in the total estimated cost; (6) the District's $5 million in remaining available funds for predevelopment costs for the sports arena appears to be sufficient to meet all estimated remaining expenditures; (7) as of April 30, 1998, the District had spent about $60 million and an additional $1.5 million was budgeted for the remaining predevelopment activities that will soon be completed, leaving approximately $3.5 million to pay unanticipated expenses or to redeem term bonds prior to their redemption dates; (8) collections from the dedicated arena tax have been more than sufficient to pay principal and interest of about $5.9 million annually on the bonds issued to finance the predevelopment expenses; (9) for each of the past 3 years, collections have exceeded the $9 million originally forecasted by the District, totalling about $1.6 million more than the District's forecast for the 3-year period; (10) as of April 30, 1998, the District had redeemed $6 million of the serial bonds and $2.5 million of the term bonds issued to finance the predevelopment expenses prior to their maturity date; (11) GAO's analysis shows that if the present level of collections are sustained, and revenues from the ground lease of the sports arena and the existing debt service reserve funds are used, all of the arena bonds would be paid by 2002, about 8 years before the 2010 maturity date; and (12) this redemption schedule would save the District about $16.4 million in interest costs, and allow about $7.7 million to be transferred to the District's General Fund.
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According to HUD, the ESG program was designed to be the first step in a continuum of assistance to prevent homelessness and to enable individuals and families experiencing homelessness to move toward independent living. More specifically, the program objectives were to increase the number and quality of emergency shelters for individuals and families experiencing homelessness, to operate these facilities and provide essential social services, and to help prevent homelessness. The ESG program is targeted at persons experiencing homelessness. It was originally established by the Homeless Housing Act of 1986, in response to the growing issue of homelessness among men, women, and children in the United States. In general, the ESG program uses the Community Development Block Grant (CDBG) formula as the basis for allocating funds to states, metropolitan cities, and urban counties. The CDBG formula uses factors reflecting community need, including poverty, population, housing overcrowding, and age of housing. According to HUD, in fiscal year 2009, there were 360 ESG grantees. For fiscal year 2009, HUD awarded $160 million in ESG funding to grantees. Figure 1 shows the total amount of ESG funds received by grantees, by state, for fiscal year 2009. The ESG program generally requires matching contributions by grantees, thus increasing the total funds used to provide services under the program. Metropolitan cities and urban counties must match the ESG funding dollar-for-dollar with cash or noncash resources from public or private sources. States are generally subject to the same requirement, with an exemption for the first $100,000 in funding. ESG funds may reach eligible projects through different routes, as shown in figure 2. First, HUD allocates ESG funds to grantees. Metropolitan cities, urban counties, and territories may carry out the program directly or subgrant all or part of their ESG funds to nonprofit organizations. States cannot carry out program activities directly, and must subgrant ESG funds (but may retain up to 5 percent for administration, as discussed below) to local governments or nonprofit organizations. Local governments receiving ESG funds as a subgrant from the state may carry out the program themselves or further subgrant funds to nonprofit organizations. HUD allows ESG grantees flexibility to determine how to award funds to subgrantees. For example, many grantees conduct a competitive process for awarding funds to subgrantees. Other grantees offer repeat funding to organizations that have demonstrated success with ESG-funded homeless assistance programs in the past, or they alternate funding each year among multiple agencies with ongoing homeless assistance programs. Grantees also might make relatively few, but relatively larger, subgrants, or award relatively smaller grants to a greater number of subgrantees. Subgrantees and grantees that are not states may use ESG funding to conduct a range of eligible activities which, as previously noted, include the rehabilitation or remodeling of buildings to be used as shelters, operation of the facilities, essential supportive services, and homeless prevention. Under current law, ESG program grantees may use up to 5 percent of their grant award for administrative purposes, which can include staff to administer the grant, the preparation of progress reports and audits, or the monitoring of subgrantees. Grantees are not required to share any of their ESG administrative allowance with subgrantees, except in one instance--when a state awards a subgrant to a unit of local government. According to HUD, the department does not track the extent to which grantees share their ESG administrative allowance with subgrantees. The HEARTH Act made major changes to the ESG program, while renaming it the Emergency Solutions Grants Program. As noted earlier, the HEARTH Act changed the amount of ESG funds that grantees may use to cover administrative costs, increasing it from 5 percent to a maximum of 7.5 percent of the total grant amount. Programmatically, the HEARTH Act also made the following changes: The act authorized new eligible homeless assistance activities: short-term rental assistance, medium-term rental assistance, security deposits, utility deposits and payments, and moving costs. It established housing relocation and stabilization services as a major focus area for both homeless assistance and homeless prevention, including outreach, housing search, legal services, and credit repair. It established rapid re-housing as a major focus area for homeless assistance. The aim of rapid re-housing is to help people experiencing homelessness return to permanent housing as soon as possible. According to a national homeless advocacy group, these efforts reduce the length of time people remain in homeless shelters, which in turn opens beds for others who need them and reduces the public and personal costs of homelessness. HUD expects to implement the HEARTH Act changes, including increasing the allowance for administrative costs, with the program's fiscal year 2011 allocation. We found that ESG grantees and subgrantees in the states we visited performed a range of administrative activities, but the program's allowance for administrative costs generally did not fully cover the cost of these activities. As a result, grantees and subgrantees told us they must cover any shortfalls with funds from other sources, which diminishes their ability to support other activities. In addition, there are minimal standards that can be used as guidance for evaluating the appropriateness of ESG administrative costs, and we found that grantees and subgrantees in the states we visited monitored ESG administrative costs at varying levels of detail. Grantees in the states we visited told us they conducted various activities to administer their ESG allocations. As figure 3 shows, these activities generally fell into five categories: application/approval, financial, reporting, monitoring/oversight, and other. Our review found these grantees' ESG administrative activities generally focused on awarding subgrants and monitoring subgrantee performance. For example, City of Philadelphia officials told us they awarded a total of $2.2 million through five ESG grants for fiscal year 2009 and their administrative activities included, among other things, approval and tracking of subgrantee budgets and program monitoring. Similarly, City and County of San Francisco officials reported they awarded $944,900 in ESG grants to 19 local service providers for fiscal year 2009 and their administrative activities included site visits and audit reviews. Among grantees we reviewed, current practice in retaining the 5 percent administrative allowance varied, as shown in table 1. Where grantees kept all or most of the administrative allowance, officials told us this was to cover, at least in part, their administration costs. Where they kept none of the allowance, officials said this was to maximize funds available to local service providers. Table 1 also shows what grantees told us they expect to retain under the higher administrative allowance provided under the HEARTH Act. Subgrantees in the states we visited also reported a range of administrative activity. As figure 4 shows, these activities generally fell into six categories: application/approval, financial, reporting, management, monitoring/oversight, and other. Our review found that their ESG administrative activities generally focused on operating programs and reporting outcomes. For example, one Georgia subgrantee told us its ESG administrative activities included a portion of the executive director's time, for program oversight; preparing monthly reimbursement requests; coordinating maintenance; and training and coordinating volunteers. Similarly, a Michigan subgrantee told us its ESG administrative activities included oversight and supervision of its program, financial reporting and auditing, and reporting shelter statistics. Grantees and subgrantees in the states we visited told us the ESG administrative allowance generally did not fully cover their actual costs to administer the grant award, and that as a result, they relied on other sources to cover any unfunded costs. We found that grantees' and subgrantees' actual ESG administrative costs depended on a number of factors, such as the number of grant awards made, level of oversight provided, number of staff involved in administrative tasks, and types of ESG program activities funded. Figure 5 provides details on the estimated unfunded ESG administrative costs and sources used to cover these costs for grantees and subgrantees we visited. Overall, the unfunded administrative costs reported to us across the eight grantees and 22 subgrantees we visited for which information was available averaged an estimated 13.2 percent of the ESG allocation, with a range of 2.5 percent to 56 percent. However, HUD officials cautioned that some subgrantees we visited appear to be confusing program activities with administrative activities, which might have affected their estimates of actual administrative costs. For example, California ESG program officials estimated their unfunded ESG administrative costs at 4 percent of the state's ESG allocation (actual administrative costs equal to 8 percent of ESG allocation, less 4 percent retained for administrative costs). To cover these unfunded costs, the officials said they rely on the state's general fund revenues. Similarly, City of Oakland (California) officials estimated their unfunded ESG administrative costs at 25 percent of their ESG annual allocation (actual administrative costs equal to 30 percent of ESG allocation, less 5 percent retained for administrative costs). These officials also told us that they used the city's general and redevelopment funds to cover the unfunded costs. In Pennsylvania, one subgrantee estimated its unfunded ESG administrative costs at 2.5 percent of its grant award (based on actual costs, with no administrative allowance from its grantee). This subgrantee, which reported using ESG funds for a one-time building repair project, told us that it used private donations, including from corporations and foundations, to cover its unfunded costs. In Michigan, a subgrantee estimated its uncovered ESG administrative costs at 14 percent (based on actual costs with no administrative allowance), saying it also relied on private donations to cover its unfunded costs. As previously noted, grantees must match their ESG allocations, and subgrantees can provide the match. These matching funds provide a potential source for covering administrative costs. Several subgrantees in the states we visited told us there has been a trend toward more private donations being restricted--that is, made for specific programs or purposes, rather than generally available for a subgrantee's operations, including administrative costs. Thus, reliance on private donations to cover unfunded ESG administrative costs may become more challenging. For example, one subgrantee told us that donors feel it is more attractive to fund specific programs that have more tangible outcomes compared with funding administrative costs. Another subgrantee told us that business donors tend to target contributions to address specific issues and achieve particular results. Finally, one subgrantee told us that nonprofits themselves have contributed to this trend by telling potential donors they will use donations to undertake specific nonadministrative tasks. Some grantees and subgrantees in the states we visited told us the need to cover unfunded ESG administrative costs using other funding sources has diminished their ability to fund other program activities. For example, one grantee told us that amounts spent to cover unfunded ESG administrative costs could otherwise be directed toward community and economic development activities. Another grantee cited housing counseling and home purchase down-payment assistance as areas that could receive funding but for the need to cover unfunded ESG administrative costs. One subgrantee also told us it could otherwise devote more resources to programs aimed at adoption, single mothers, and family counseling if not for unfunded ESG administrative costs. Some grantees and subgrantees also told us that unfunded ESG administrative costs can affect program administration, interest in participating in the program, and program oversight. For example, one grantee told us that it chooses to make fewer but larger ESG awards to subgrantees, rather than make a greater number of smaller awards, in part because it is less costly to oversee a smaller number of subgrantees. In addition, two subgrantees told us that but for other mitigating factors, they would consider not participating in the ESG program because of the unfunded administrative costs. Some grantees also told us that if more funds were available for administrative costs, there could be greater monitoring of subgrantee activity. One grantee noted that it must stop monitoring subgrantees during parts of the year and generally does not do as much oversight as is desirable. Another grantee added it has difficulty meeting its goal of making at least one site visit to subgrantees each year. According to HUD officials, the ESG program was established with a lower administrative cost allowance based on the expectation that grantees could obtain funds from other sources to cover unfunded ESG administrative costs. The officials also told us that although they do not have comprehensive information on the extent to which the ESG administrative cost allowance is sufficient to cover grantees' actual administrative costs, the agency has received many informal comments over time characterizing the allowance as insufficient. As GAO has noted previously, there is no government-wide definition of what constitutes an administrative cost. For the ESG program in particular, there are a number of sources that provide standards for administrative costs, but we found they generally offer little detail for evaluating the appropriateness of these costs. For grantees, there are regulations and agency guidance that address administrative costs. HUD Regulations. HUD regulations for ESG administrative costs define such costs by way of example only, to include costs associated with: accounting for the use of grant funds, preparing reports for submission to HUD, obtaining program audits, similar costs related to administering the grant after the award, and staff salaries associated with these administrative costs. Under the regulations, administrative costs do not include the costs of carrying out eligible activities under the ESG program. HUD ESG Program Desk Guide. The desk guide provides an overview of the ESG program, describes the funding process, and covers topics including the initial application, grant administration, project implementation, and performance monitoring. For administrative costs, the desk guide also works on the basis of example, stating that eligible administrative costs include staff to operate the program, preparation of progress reports and audits, and monitoring of recipients. Ineligible administrative costs include the preparation of the Consolidated Plan and other application submissions, conferences or training in professional fields, and salary of an organization's executive director, except to the extent they are involved in carrying out eligible administrative functions. In addition to the regulations and the desk guide, HUD also publishes the Guide for Review of ESG Cost Allowability and the Guide for Review of ESG Financial Management as resources for grantees. These guides, however, do not provide any additional details on the appropriateness of administrative expenses. The guides refer to compliance with regulations and circulars published by the Office of Management and Budget (OMB). In particular, OMB Circular A-87, Cost Principles for State, Local, and Indian Tribal Governments, details principles for determining allowable costs incurred by state, local, and federally recognized Indian tribal governments under grants and other agreements with the federal government. These principles are not specific to the ESG program, and the circular is not necessarily the final authority on such matters, as it requires agencies administering programs to issue regulations implementing the circular. HUD officials told us the agency's ESG regulations incorporate the provisions of OMB Circular A-87. It is difficult to evaluate the appropriateness of grantees' ESG administrative costs because the available sources for doing so, as described above, are brief and not exhaustive. For example, Pennsylvania ESG program officials undertake a number of activities during the preaward application stage, including providing technical assistance to applicants and offering general training every several years, but it is not explicitly clear under the federal guidance whether such activities are eligible administrative costs based on available sources for evaluation. In addition, San Francisco ESG program officials told us they included office space rental, general overhead, and utility costs among their ESG administrative costs, but the available sources do not address nonpersonnel costs. As a result, it is not clear whether such specific activities are eligible administrative costs. Further complicating the issue of examining administrative costs is grantees' self-funding of ESG administrative costs. To the extent grantees use other funding sources to cover unfunded ESG administrative costs, as discussed earlier, the ESG program standards for administrative expenses do not apply. For subgrantees we visited, we also found that ESG administrative cost standards were varied and can offer little or no detail for evaluating the appropriateness of these costs. Generally, grantees address subgrantee administrative costs by providing rules or guidance through program solicitation documents or contracts with subgrantees. The State of California's ESG Notice of Funding Availability, for example, states that eligible administrative costs are "only those necessary to administer the grant, not to administer or operate the shelter." In addition, specific allowable administrative expenses include staff costs to prepare ESG reports, communications with ESG staff, payment for the ESG share of a required audit, and staff costs associated with processing accounting records and billings. The City of Atlanta takes a different approach, citing administrative expenses as identified under OMB Circular A-122, Cost Principles for Non-Profit Organizations, as acceptable. This circular distinguishes administrative costs from other types of expenses, and includes consideration of a number of different expense categories. The state of Georgia took the least detailed approach among the states we visited, as Georgia ESG program officials told us they do not provide criteria for administrative costs because the state does not fund these types of costs. As with grantees, the level of detail in the various cost standards for subgrantees' administrative costs can make it difficult to assess the appropriateness of spending. For example, as noted, California rules cite expenses necessary to administer the ESG grant itself, not to administer or operate a shelter. However, one California subgrantee reported to us that its ESG administrative activities include those associated with client intake, handling client case management forms, and technical support. Similarly, as noted, the City of Atlanta relies on OMB Circular A-122, which identifies administrative costs as a form of "indirect costs"--those incurred for common or joint objectives--and defines "administration" as "general administration and general expenses." However, a subgrantee also reported to us that its ESG administrative activities include those associated with a range of client-focused dealings spanning intake to post- program follow-up. HUD officials told us that both client intake and case management (including handling case management forms) activities are not eligible administrative costs under the ESG program; rather, these activities are eligible program costs under the shelter operations and essential services categories. Moreover, as with grantees, a complicating factor is subgrantees' self-funding of ESG administrative costs. To monitor the ESG program's grantees, HUD field offices annually conduct a risk analysis to determine which grant programs are higher risk and thus warrant attention. According to HUD officials, the ESG program usually is not identified for any heightened on-site monitoring. However, HUD officials said that HUD field office staff conduct off-site monitoring of many ESG grants annually. ESG grantees must submit a Consolidated Annual Performance and Evaluation Report that contains qualitative and quantitative information about ESG, including annual expenditures and accomplishments. More broadly, grantees prepare an annual action plan that describes, among other things, how they plan to use ESG funds. The plan includes a brief description of activities, and it varies as to whether the plan includes details on administrative expenses, HUD officials told us. Overall, HUD officials told us they have not conducted any comprehensive evaluation of ESG administrative costs for grant recipients. Grantees and subgrantees in the states we visited also monitored ESG administrative costs at varying levels of detail. Grantees told us they generally monitored subgrantee administrative costs through budget reviews, either before or after grant award, or both, and also through in- office monitoring and subgrantee site visits. For example, San Francisco ESG program officials told us they evaluate subgrantees' audits, conduct site visits, perform business and cost reviews, and provide technical assistance. In addition, City of Detroit ESG program officials told us they do not perform a specific check of ESG administrative spending but watch for any obvious problems, such as whether a program's total administrative costs exceed 10 percent. Further, City of Atlanta officials told us they review proposed budgets of subgrantees as part of the application process, and applications with administrative costs deemed to be too high (greater than 20 percent) are rated negatively. They added that the city monitors its ESG subgrantees annually, but does not specifically track the administrative costs of ESG-funded activities because the city provides no funding for these administrative costs. We found that the funding and treatment of administrative costs varied across the other targeted federal homeless grant programs we reviewed. We identified variations in areas such as the administrative allowance provided to grantees, requirements for sharing any of that allowance with subgrantees, and guidance on the appropriateness of administrative costs. First, as shown in figure 6, the extent to which each program included a maximum administrative allowance varied, and when a maximum allowance was specified, the amount of that allowance varied widely. Among programs with a maximum administrative allowance, the ESG program's current 5 percent maximum administrative allowance for grantees is one of the lower allowances. The maximum administrative allowance for the other programs that have specified a maximum allowance ranges from 4 percent to 50 percent. Second, we found that program rules for grantee sharing of administrative allowances with subgrantees varied across homeless programs with similar funding structures. For example, HUD's Supportive Housing Program requires grantees to share administrative allowances with subgrantees, but does not specify the amount. The Department of Labor's Homeless Veterans' Reintegration Program does not require sharing of administrative allowances, but gives grantees discretion to share with subgrantees. The ESG program combines mandatory and discretionary sharing--it requires grantees that are state governments to share an unspecified portion of their administrative allowance when passing funds to local governments. Otherwise, sharing is optional but not mandated. These specific programs and their particular rules notwithstanding, most of the programs we reviewed do not provide administrative cost allowances for when grantees pass along funds to subrecipients. In all, there was considerable variation across programs in provision of subgrantee administrative allowances. Third, we found that program guidance on the appropriateness of administrative costs differed across the targeted homeless programs we reviewed, and that no program offered comprehensive direction on eligible and ineligible administrative activities. As noted earlier, the ESG program's desk guide provides examples of both eligible and ineligible administrative activities, albeit not exhaustively. By contrast, five of the targeted programs' rules--including programs of the Departments of Education, Labor, and Health and Human Services--do not specifically define eligible or ineligible administrative activities. Instead, some of these programs' rules reference OMB cost principles and note that administrative costs must be reasonable and necessary, as defined by OMB Circular A-87. HUD's Supportive Housing Program follows an ESG- style example approach. We also found that the ESG program's maximum administrative allowance for grantees was one of the lower allowances for HUD formula grant programs offered through HUD's Office of Community Planning and Development. As table 2 shows, the ESG program's administrative allowance for grantees will also remain one of the lower of the group after it increases to 7.5 percent. The ESG program is among four formula grant programs offered through the Office of Community Planning and Development, which seeks to develop communities by promoting decent housing and expanded economic opportunities for low- and moderate- income persons. However, given the programs' diverse missions, as also shown in table 2, the nature and amount of administrative costs may vary among them. A number of grantees and subgrantees in the states we visited and others told us they expect that the newly allowable ESG activities authorized by the HEARTH Act will result in different kinds of administrative activities that in many cases will be more costly than before. As previously noted, the act increased the range of eligible prevention and re-housing activities to include short- or medium-term rental assistance and housing relocation or stabilization services. Overall, grantees and subgrantees told us they expect changes in areas including client screening and eligibility verification, technical assistance to subgrantees, number of applicants for grants, and facility management and collaboration with third parties, which in turn could affect administrative costs. For example, City of San Francisco and Pennsylvania state officials told us the new activities authorized by the act might result in a greater number of applicants for grant awards, or their agencies might have to provide more outreach and technical assistance to subgrantees. In addition, one California subgrantee told us that they expect an effort to have people leave shelters more quickly under the new ESG activities. This subgrantee added that this might increase the administrative costs associated with collecting and reporting data on an increased number of people coming through the program. This subgrantee also said it expects the new ESG activities to have a secondary effect in shelters themselves, where a changing mix of residents likely will mean higher administrative costs. This subgrantee said that new HEARTH Act-style programs will likely enroll the best functioning people, so those left in shelters will be relatively less functioning--and hence more costly to manage. Another subgrantee, in Michigan, told us it is already starting to see changes in administrative costs with expansion of activities beyond traditional emergency shelter services and into rapid re-housing. For example, new program activities require more time for administration, both internally and externally, and there have been organizational changes such as in handling of rent funds. Finally, one California subgrantee estimated its administrative costs could rise from about 3.5 percent to between 12 percent to 14 percent under the new ESG activities. As noted previously, however, HUD officials told us that some subgrantees we visited appear to be confusing program activities with administrative activities, which might have affected their estimates of actual administrative costs. While a number of grantees and subgrantees told us they expect the nature of administrative activities to change, and their costs to increase, not all the recipients we visited agreed that higher administrative costs are likely. For example, a Pennsylvania subgrantee told us it anticipates that the administrative costs associated with a prevention program would probably be equal to the costs of a shelter program, and it would not expect costs to be higher unless program requirements become more onerous. California state officials told us they do not expect the nature or amount of administrative costs will change with new program activities, because activities already change frequently today. Similarly, a Michigan subgrantee told us that barring any increase in regulatory requirements, it does not expect any added burden in areas such as reporting of program activity, audit duties, or office space required for administration. Overall, expectations about higher administrative costs are plainly prospective in nature, because the new activities have not yet been implemented. Although the HEARTH Act makes significant changes to allowable ESG activities, it remains unclear when actual program changes might be implemented. According to HUD officials, the total funds allocated to the ESG program will determine the extent to which money is available for the new services. HUD officials also told us that a significant increase in ESG funding, along with significant program changes, could increase grantees' costs of monitoring and reporting, because more money must be tracked and monitored in conjunction with a wider array of program requirements. Uncertainty over how and when the new ESG program might be implemented, as well as variation in the nature of administrative activities seen in the current ESG program, complicate any attempt to determine the appropriate size of the program's administrative allowance. Providing such an allowance helps ensure funds are spent properly and directed to their appropriate purpose. But if the allowance is insufficient to allow adequate administration and oversight, program efficiency and effectiveness could be at risk. Grantees and subgrantees we spoke with reported that the current ESG administrative allowance does not fully cover their administrative costs. Moreover, our work indicates that even with the new administrative allowance of 7.5 percent, the ESG program would still have one of the lower allowances among similarly structured homeless grant programs. If the new ESG program increases in complexity or scope of services, its administrative cost allowance will take on even more significance in the future. We provided a draft of this report to the Departments of Housing and Urban Development, Education, Health and Human Services, and Labor for their review and comment. HUD did not provide formal comments, but noted by e-mail that some subgrantees we visited may not be making a proper distinction between program costs and administrative costs, which could have the effect of overstating any need for a larger ESG administrative allowance. We reflected this sentiment throughout this report as appropriate. HUD further indicated that the department would examine what steps it could take to help grantees and subgrantees better understand which administrative costs can be funded under the ESG program and the extent to which administrative costs differ from activity delivery costs. HUD added that these steps would include providing greater clarity and detail on what costs are eligible under the different ESG activity categories, including administrative costs, in a proposed new rule the department is developing to implement the changes to the McKinney-Vento Homeless Assistance Act provided in the HEARTH Act. HUD also provided technical comments by e-mail, which we have incorporated into the report as appropriate. The Secretaries of Education, Health and Human Services, and Labor did not provide comments. We are sending copies of this report to interested congressional committees and the Secretaries of the Departments of Housing and Urban Development; Education; Health and Human Services; and Labor. This report will also be available at no charge on GAO's Web site at http://www.gao.gov. Please contact me at (202) 512-8678 or [email protected] if you or members of your staffs have any questions about this report. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. See appendix II for key contributors to this report. To determine the types of administrative activities performed and costs incurred under the Emergency Shelter Grants Program (ESG) of the U.S. Department of Housing and Urban Development (HUD), and the extent to which grant proceeds cover these administrative costs, we made site visits to four states: California, Georgia, Michigan, and Pennsylvania. We selected these states based on the amount of ESG funding distributed to these grantees for fiscal year 2009 and their geographic location across the country. We initially identified state-level grantees receiving more than $1.5 million in ESG funding, in order to focus on states with relatively more ESG activity. This criterion reduced our target group to 20 states. We judgmentally selected the four states we visited by considering proximity of the capital city, where state officials are located, to the location of other grantees we could visit concurrently. Within the four states, we visited nine grantees (four state governments and five local governments) and 25 subgrantees. This allowed us to obtain illustrative observations from state officials, local government officials, and representatives of local homeless service providers on the operation of the ESG program, with an emphasis on type and level of spending to administer grants received under the program. Table 3 provides details on grantees' receipt of ESG funds in the states we visited. The states we visited collectively received 24.5 percent of the total ESG funds HUD awarded to grantees in fiscal year 2009. Because we used a nongeneralizable sample to select state grantees that had received larger amounts of ESG funding in fiscal year 2009, our findings cannot be used to make inferences about other grant recipients. Other grantees that we did not visit may have different characteristics that are unknown to us. However, we believe that our selection of the states and recipients was appropriate for our design and objectives, and that the selection provides valid and reliable evidence to support our work. We interviewed grantees and subgrantees in the states we visited to obtain information on administrative activities performed, the cost of performing those activities, and related topics. We also interviewed HUD officials, plus representatives of national organizations involved with homeless issues, that are familiar with trends in charitable giving, or that represent local governments. We also researched the legislative history of the ESG program. We examined HUD guidance, federal regulations, and relevant Office of Management and Budget (OMB) circulars on allowability of administrative costs, including circulars A-87, Cost Principles for State, Local, and Indian Tribal Governments, and A-122, Cost Principles for Non-Profit Organizations. Further, we reviewed state and local government ESG solicitation documents, such as Notices of Funding Availability and Requests for Proposal. To determine how the ESG program's allowance for administrative costs compares with administrative cost allowances for selected other targeted federal homeless grant programs, plus selected other HUD formula-based grant programs, we interviewed officials from HUD and the Departments of Education, Labor, and Health and Human Services. We examined relevant federal statutes and regulations, as well as relevant OMB circulars. We also examined program guidance and documents, such as desk guides, resource manuals, solicitations for grant applications, and requests for applications, for the federal targeted homeless grant programs and the other HUD formula grant programs that we reviewed. To determine how the nature or amount of administrative costs might be different under the changes Congress made to the ESG program in the Homeless Emergency Assistance and Rapid Transition to Housing Act of 2009, we reviewed relevant provisions of the act detailing the newly allowable activities. We also interviewed HUD officials, state and local government officials, representatives of homeless organizations, and homeless service providers to obtain their perspectives. We conducted this performance audit from August 2009 to May 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 individual named above, Marshall Hamlett, Assistant Director; William Chatlos; Meredith Graves; Kun-Fang Lee; Marc Molino; Christopher Schmitt; Jennifer Schwartz; and Paul Thompson made major contributions to this report.
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The Homeless Emergency Assistance and Rapid Transition to Housing Act of 2009 (HEARTH Act) directed GAO to study the appropriate administrative costs of the U.S. Department of Housing and Urban Development (HUD) Emergency Shelter Grants Program (ESG)--a widely used, formula-based program that supports services to persons experiencing homelessness. This report discusses (1) for selected recipients, the types of administrative activities performed and administrative costs incurred under the ESG program, and the extent to which grant proceeds cover these administrative costs; (2) how the ESG program's allowance for administrative costs compares with administrative cost allowances for selected other targeted federal homeless grant programs, plus selected other HUD formula-based grant programs; and (3) how the nature or amount of administrative costs might be different under changes Congress made to the ESG program in the HEARTH Act that expand the types of activities that may be funded. To address these issues, GAO reviewed relevant policies and documents, interviewed officials of HUD and other agencies, made site visits in four states, reviewed HUD and other available standards on eligible administrative costs for federal grants, and reviewed cost allowances for homeless programs of the Departments of Education, Labor, and Health and Human Services. GAO makes no recommendations in this report. ESG grantees and subgrantees we visited in four states performed a range of administrative activities, but the ESG program's allowance for administrative costs--currently 5 percent--did not fully cover the cost of these activities. Grantees generally focused their administrative activities on awarding subgrants and monitoring subgrantee performance, while subgrantees focused their administrative activities on operating their programs and reporting results to their respective grantees. To cover unfunded ESG administrative costs, grantees and subgrantees told us they used other sources, such as other grants or private donations. They added that these estimated unfunded administrative costs, which averaged 13.2 percent and ranged from amounts equal to 2.5 percent to 56 percent of their ESG grant proceeds, diminished their ability to support other program activities. In addition, we found minimal standards available for evaluating the appropriateness of ESG administrative costs, and grantees and subgrantees in the states we visited monitored ESG administrative costs in varying levels of detail. The funding and treatment of administrative costs varied across other targeted federal homeless grant programs we reviewed. For example, the maximum administrative allowance for grantees ranged from 4 percent to 50 percent for programs with such a provision; the ESG program's current 5 percent allowance is thus one of the lower amounts provided. Programs with similar funding structures varied in their requirements for grantees to share their administrative allowance with subgrantees; the ESG program generally does not require grantees to share their allowance. In addition, none of the programs we reviewed offered comprehensive direction on eligible and ineligible administrative activities. Overall, these and other varying program features make it difficult to make direct comparisons between the administrative cost provisions of the ESG program and those of other targeted federal homeless grant programs. A number of ESG grantees and subgrantees we visited told us they expect the new ESG activities authorized by the HEARTH Act will result in different kinds of administrative activities that in many cases will be more costly. They cited client screening and eligibility verification, technical assistance to subgrantees, number of grant applicants, and facility management and collaboration with third parties as among areas where administrative costs may increase. Although the HEARTH Act makes significant changes, including increasing the administrative cost allowance to 7.5 percent, it remains unclear when new program activities might be implemented. Uncertainty over how and when the new ESG program might be implemented, plus variation in administrative activities under the current program, complicate any attempt to determine the appropriate size of the ESG administrative allowance. HUD told us in comments on a draft of this report that some subgrantees appear to be confusing program and administrative costs, thus potentially overstating any need for a larger administrative allowance.
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Since the 1960s, the United States has operated two separate operational polar-orbiting meteorological satellite systems: the Polar-orbiting Operational Environmental Satellite (POES) series-- managed by NOAA--and the Defense Meteorological Satellite Program (DMSP)--managed by the Air Force. These satellites obtain environmental data that are processed to provide graphical weather images and specialized weather products. These satellite data are also the predominant input to numerical weather prediction models, which are a primary tool for forecasting weather 3 or more days in advance--including forecasting the path and intensity of hurricanes. The weather products and models are used to predict the potential impact of severe weather so that communities and emergency managers can help prevent and mitigate their effects. Polar satellites also provide data used to monitor environmental phenomena, such as ozone depletion and drought conditions, as well as data sets that are used by researchers for a variety of studies such as climate monitoring. With the expectation that combining the POES and DMSP programs would reduce duplication and result in sizable cost savings, a May 1994 Presidential Decision Directive required NOAA and DOD to converge the two satellite programs into a single satellite program capable of satisfying both civilian and military requirements. The converged program, NPOESS, is considered critical to the United States' ability to maintain the continuity of data required for weather forecasting and global climate monitoring through the year 2026. To manage this program, DOD, NOAA, and NASA formed a tri-agency Integrated Program Office, located within NOAA. Within the program office, each agency has the lead on certain activities: NOAA has overall program management responsibility for the converged system and for satellite operations; DOD has the lead on the acquisition; and NASA has primary responsibility for facilitating the development and incorporation of new technologies into the converged system. NOAA and DOD share the costs of funding NPOESS, while NASA funds specific technology projects and studies. The NPOESS program office is overseen by an Executive Committee, which is made up of the Administrators of NOAA and NASA and the Under Secretary of the Air Force. NPOESS is a major system acquisition that was originally estimated to cost about $6.5 billion over the 24-year life of the program from its inception in 1995 through 2018. The program is to provide satellite development, satellite launch and operation, and ground- based satellite data processing. These deliverables are grouped into four main categories: (1) the space segment, which includes the satellites and sensors; (2) the integrated data processing segment, which is the system for transforming raw data into environmental data records (EDR) and is to be located at four data processing centers; (3) the command, control, and communications segment, which includes the equipment and services needed to support satellite operations; and (4) the launch segment, which includes launch vehicle services. When the NPOESS engineering, manufacturing, and development contract was awarded in August 2002, the cost estimate was adjusted to $7 billion. Acquisition plans called for the procurement and launch of six satellites over the life of the program, as well as the integration of 13 instruments--consisting of 10 environmental sensors and 3 subsystems. Together, the sensors were to receive and transmit data on atmospheric, cloud cover, environmental, climatic, oceanographic, and solar-geophysical observations. The subsystems were to support nonenvironmental search and rescue efforts, sensor survivability, and environmental data collection activities. The program office considered 4 of the sensors to be critical because they provide data for key weather products; these sensors are in bold in table 1, which describes each of the expected NPOESS instruments. In addition, a demonstration satellite (called the NPOESS Preparatory Project or NPP) was planned to be launched several years before the first NPOESS satellite in order to reduce the risk associated with launching new sensor technologies and to ensure continuity of climate data with NASA's Earth Observing System satellites. NPP is to host three of the four critical NPOESS sensors (VIIRS, CrIS, and ATMS), as well as one other noncritical sensor (OMPS). NPP is to provide the program office and the processing centers an early opportunity to work with the sensors, ground control, and data processing systems. When the NPOESS development contract was awarded, the schedule for launching the satellites was driven by a requirement that the satellites be available to back up the final POES and DMSP satellites should anything go wrong during the planned launches of these satellites. Early program milestones included (1) launching NPP by May 2006, (2) having the first NPOESS satellite available to back up the final POES satellite launch in March 2008, and (3) having the second NPOESS satellite available to back up the final DMSP satellite launch in October 2009. If the NPOESS satellites were not needed to back up the final predecessor satellites, their anticipated launch dates would have been April 2009 and June 2011, respectively. Over the last few years, NPOESS has experienced continued cost increases and schedule delays, requiring difficult decisions to be made about the program's direction and capabilities. In 2003, we reported that changes in the NPOESS funding stream led the program to develop a new program cost and schedule baseline. After this new baseline was completed in 2004, we reported that the program office increased the NPOESS cost estimate from about $7 billion to $8.1 billion; delayed key milestones, including the planned launch of the first NPOESS satellite--which was delayed by 7 months; and extended the life of the program from 2018 to 2020. At that time, we also noted that other factors could further affect the revised cost and schedule estimates. Specifically, the contractor was not meeting expected cost and schedule targets on the new baseline because of technical issues in the development of key sensors, including the critical VIIRS sensor. Based on its performance through May 2004, we estimated that the contractor would most likely overrun its contract at completion in September 2011 by $500 million--thereby increasing the projected life cycle cost to $8.6 billion. The program office's baseline cost estimate was subsequently adjusted to $8.4 billion. In mid-November 2005, we reported that NPOESS continued to experience problems in the development of a key sensor, resulting in schedule delays and anticipated cost increases. At that time, we projected that the program's cost estimate had grown to about $10 billion based on contractor cost and schedule data. We reported that the program's issues were due, in part, to problems at multiple levels of management--including subcontractor, contractor, program office, and executive leadership. Recognizing that the budget for the program was no longer executable, the NPOESS Executive Committee planned to make a decision in December 2005 on the future direction of the program--what would be delivered, at what cost, and by when. This involved deciding among options involving increased costs, delayed schedules, and reduced functionality. We noted that continued oversight, strong leadership, and timely decision making were more critical than ever, and we urged the committee to make a decision quickly so that the program could proceed. However, we subsequently reported that, in late November 2005, NPOESS cost growth exceeded a legislatively mandated threshold that requires DOD to certify the program to Congress. This placed any decision about the future direction of the program on hold until the certification took place in June 2006. In the meantime, the program office implemented an interim program plan for fiscal year 2006 to continue work on key sensors and other program elements using fiscal year 2006 funding. The Nunn-McCurdy law requires DOD to take specific actions when a major defense acquisition program exceeds certain cost increase thresholds. The law requires the Secretary of Defense to notify Congress when a major defense acquisition is expected to overrun its project baseline by 15 percent or more and to certify the program to Congress when it is expected to overrun its baseline by 25 percent or more. In late November 2005, NPOESS exceeded the 25 percent threshold, and DOD was required to certify the program. Certifying a program entailed providing a determination that (1) the program is essential to national security, (2) there are no alternatives to the program that will provide equal or greater military capability at less cost, (3) the new estimates of the program's cost are reasonable, and (4) the management structure for the program is adequate to manage and control costs. DOD established tri-agency teams--made up of DOD, NOAA, and NASA experts--to work on each of the four elements of the certification process. In June 2006, DOD (with the agreement of both of its partner agencies) certified a restructured NPOESS program, estimated to cost $12.5 billion through 2026. This decision approved a cost increase of $4 billion over the prior approved baseline cost and delayed the launch of NPP and the first two satellites by roughly 3 to 5 years. The new program also entailed establishing a stronger program management structure, reducing the number of satellites to be produced and launched from 6 to 4, and reducing the number of instruments on the satellites from 13 to 9--consisting of 7 environmental sensors and 2 subsystems. It also entailed using NPOESS satellites in the early morning and afternoon orbits and relying on European satellites for midmorning orbit data. Table 2 summarizes the major program changes made under the Nunn- McCurdy certification decision. The Nunn-McCurdy certification decision established new milestones for the delivery of key program elements, including launching NPP by January 2010, launching the first NPOESS satellite (called C1) by January 2013, and launching the second NPOESS satellite (called C2) by January 2016. These revised milestones deviated from prior plans to have the first NPOESS satellite available to back up the final POES satellite should anything go wrong during that launch. Delaying the launch of the first NPOESS satellite means that if the final POES satellite fails on launch, satellite data users would need to rely on the existing constellation of environmental satellites until NPP data become available--almost 2 years later. Although NPP was not intended to be an operational asset, NASA agreed to move NPP to a different orbit so that its data would be available in the event of a premature failure of the final POES satellite. However, NPP will not provide all of the operational capability planned for the NPOESS spacecraft. If the health of the existing constellation of satellites diminishes--or if NPP data are not available, timely, and reliable--then there could be a gap in environmental satellite data. Table 3 summarizes changes in key program milestones over time. In order to reduce program complexity, the Nunn-McCurdy certification decision decreased the number of NPOESS sensors from 13 to 9 and reduced the functionality of 4 sensors. Specifically, of the 13 original sensors, 5 sensors remain unchanged, 3 were replaced with less capable sensors, 1 was modified to provide less functionality, and 4 were cancelled. Table 4 shows the changes to NPOESS sensors, including the 4 identified in bold as critical sensors. The changes in NPOESS sensors affected the number and quality of the resulting weather and environmental products, called environmental data records or EDRs. In selecting sensors for the restructured program, the agencies placed the highest priority on continuing current operational weather capabilities and a lower priority on obtaining selected environmental and climate measuring capabilities. As a result, the revised NPOESS system has significantly less capability for providing global climate measures than was originally planned. Specifically, the number of EDRs was decreased from 55 to 39, of which 6 are of a reduced quality. The 39 EDRs that remain include cloud base height, land surface temperature, precipitation type and rate, and sea surface winds. The 16 EDRs that were removed include cloud particle size and distribution, sea surface height, net solar radiation at the top of the atmosphere, and products to depict the electric fields in the space environment. The 6 EDRs that are of a reduced quality include ozone profile, soil moisture, and multiple products depicting energy in the space environment. Since the June 2006 decision to revise the scope, cost, and schedule of the NPOESS program, the program office has made progress in restructuring the satellite acquisition; however, important tasks remain to be done. Restructuring a major acquisition program like NPOESS is a process that involves identifying time-critical and high- priority work and keeping this work moving forward, while reassessing development priorities, interdependencies, deliverables, risks, and costs. It also involves revising important acquisition documents including the memorandum of agreement on the roles and responsibilities of the three agencies, the acquisition strategy, the system engineering plan, the test and evaluation master plan, the integrated master schedule defining what needs to happen by when, and the acquisition program baseline. Specifically, the Nunn- McCurdy certification decision required the Secretaries of Defense and Commerce and the Administrator of NASA to sign a revised memorandum of agreement by August 6, 2006. It also required that the program office, Program Executive Officer, and the Executive Committee revise and approve key acquisition documents including the acquisition strategy and system engineering plan by September 1, 2006, in order to proceed with the restructuring. Once these are completed, the program office can proceed to negotiate with its prime contractor on a new program baseline defining what will be delivered, by when, and at what cost. The NPOESS program office has made progress in restructuring the acquisition. Specifically, the program office has established interim program plans guiding the contractor's work activities in 2006 and 2007 and has made progress in implementing these plans. The program office and contractor also developed an integrated master schedule for the remainder of the program--beyond fiscal year 2007. This integrated master schedule details the steps leading up to launching NPP by September 2009, launching the first NPOESS satellite in January 2013, and launching the second NPOESS satellite in January 2016. Near-term steps include completing and testing the VIIRS, CrIS, and OMPS sensors; integrating these sensors with the NPP spacecraft and completing integration testing; completing the data processing system and integrating it with the command, control, and communications segment; and performing advanced acceptance testing of the overall system of systems for NPP. However, key steps remain for the acquisition restructuring to be completed. Although the program office made progress in revising key acquisition documents, including the system engineering plan, the test and evaluation master plan, and the acquisition strategy plan, it has not yet obtained the approval of the Secretaries of Commerce and Defense and the Administrator of NASA on the memorandum of agreement among the three agencies, nor has it obtained the approval of the NPOESS Executive Committee on the other key acquisition documents. As of June 2007, these approvals are over 9 months past due. Agency officials noted that the September 1, 2006, due date for the key acquisition documents was not realistic given the complexity of coordinating documents among three different agencies. Finalizing these documents is critical to ensuring interagency agreement and will allow the program office to move forward in completing other activities related to restructuring the program. These other activities include completing an integrated baseline review with the contractor to reach agreement on the schedule and work activities, and finalizing changes to the NPOESS development and production contract. Program costs are also likely to be adjusted during upcoming negotiations on contract changes--an event that the Program Director expects to occur by July 2007. Completion of these activities will allow the program office to lock down a new acquisition baseline cost and schedule. Until key acquisition documents are finalized and approved, the program faces increased risk that it will not be able to complete important restructuring activities in time to move forward in fiscal year 2008 with a new program baseline in place. This places the NPOESS program at risk of continued delays and future cost increases. The NPOESS program has made progress in establishing an effective management structure, but--almost a year after this structure was endorsed during the Nunn-McCurdy certification process--the Integrated Program Office still faces staffing problems. Over the past few years, we and others have raised concerns about management problems at all levels of the NPOESS program, including subcontractor and contractor management, program office management, and executive-level management. Two independent review teams also noted a shortage of skilled program staff, including budget analysts and system engineers. Since that time, the NPOESS program has made progress in establishing an effective management structure--including establishing a new organizational framework with increased oversight by program executives, instituting more frequent subcontractor, contractor, and program reviews, and effectively managing risks and performance. However, DOD's plans for reassigning the Program Executive Officer in the summer of 2007 increase the program's risks. Additionally, the program lacks a staffing process that clearly identifies staffing needs, gaps, and plans for filling those gaps. As a result, the program office has experienced delays in getting core management activities under way and lacks the staff it needs to execute day-to-day management activities. The NPOESS program has made progress in establishing an effective management structure and increasing the frequency and intensity of its oversight activities. Over the past few years, we and others have raised concerns about management problems at all levels of management on the NPOESS program, including subcontractor and contractor management, program office management, and executive-level management. In response to recommendations made by two different independent review teams, the program office began exploring options in late 2005 and early 2006 for revising its management structure. In November 2005, the Executive Committee established and filled a Program Executive Officer position, senior to the NPOESS Program Director, to streamline decision making and to provide oversight to the program. This Program Executive Officer reports directly to the Executive Committee. Subsequently, the Program Executive Officer and the Program Director proposed a revised organizational framework that realigned division managers within the Integrated Program Office responsible for overseeing key elements of the acquisition and increased staffing in key areas. In June 2006, the Nunn-McCurdy certification decision approved this new management structure and the Integrated Program Office implemented it. Figure 1 provides an overview of the relationships among the Integrated Program Office, the Program Executive Office, and the Executive Committee, as well as key divisions within the program office. Operating under this new management structure, the program office implemented more rigorous and frequent subcontractor, contractor, and program reviews, improved visibility into risk management and mitigation activities, and institutionalized the use of earned value management techniques to monitor contractor performance. In addition to these program office activities, the Program Executive Officer implemented monthly program reviews and increased the frequency of contacts with the Executive Committee. The Program Executive Officer briefs the Executive Committee in monthly letters, apprising committee members of the program's status, progress, risks, and earned value, and the Executive Committee now meets on a quarterly basis--whereas in the recent past, we reported that the Executive Committee had met only five times in 2 years. Although the NPOESS program has made progress in establishing an effective management structure, this progress is currently at risk. We recently reported that DOD space acquisitions are at increased risk due in part to frequent turnover in leadership positions, and we suggested that addressing this will require DOD to consider matching officials' tenure with the development or delivery of a product. In March 2007, NPOESS program officials stated that DOD is planning to reassign the recently appointed Program Executive Officer in the summer 2007 as part of this executive's natural career progression. As of June 2007, the Program Executive Officer has held this position for 19 months. Given that the program is currently still being restructured, and that there are significant challenges in being able to meet critical deadlines to ensure satellite data continuity, such a move adds unnecessary risk to an already risky program. The NPOESS program office has filled key vacancies but lacks a staffing process that identifies programwide staffing requirements and plans for filling those needed positions. Sound human capital management calls for establishing a process or plan for determining staffing requirements, identifying any gaps in staffing, and planning to fill critical staffing gaps. Program office staffing is especially important for NPOESS, given the acknowledgment by multiple independent review teams that staffing shortfalls contributed to past problems. Specifically, these review teams noted shortages in the number of system engineers needed to provide adequate oversight of subcontractor and contractor engineering activities and in the number of budget and cost analysts needed to assess contractor cost and earned value reports. To rectify this situation, the June 2006 certification decision directed the Program Director to take immediate actions to fill vacant positions at the program office with the approval of the Program Executive Officer. Since the June 2006 decision to revise NPOESS management structure, the program office has filled multiple critical positions, including a budget officer, a chief system engineer, an algorithm division chief, and a contracts director. In addition, on an ad hoc basis, individual division managers have assessed their needs and initiated plans to hire staff for key positions. However, the program office lacks a programwide process for identifying and filling all needed positions. As a result, division managers often wait months for critical positions to be filled. For example, in February 2006, the NPOESS program estimated that it needed to hire up to 10 new budget analysts. As of September 2006, none of these positions had been filled. As of April 2007, program officials estimated that they still needed to fill 5 budget analyst positions, 5 systems engineering positions, and 10 technical manager positions. The majority of the vacancies--4 of the 5 budget positions, 4 of the 5 systems engineering positions, and 8 of the 10 technical manager positions-- are to be provided by NOAA. NOAA officials noted that each of these positions is in some stage of being filled--that is, recruitment packages are being developed or reviewed, vacancies are being advertised, or candidates are being interviewed, selected, and approved. The program office attributes its staffing delays to not having the right personnel in place to facilitate this process, and it did not even begin to develop a staffing process until November 2006. Program officials noted that the tri-agency nature of the program adds unusual layers of complexity to the hiring and administrative functions because each agency has its own hiring and performance management rules. In November 2006, the program office brought in an administrative officer who took the lead in pulling together the division managers' individual assessments of needed staff and has been working with the division managers to refine this list. This new administrative officer plans to train division managers in how to assess their needs and to hire needed staff, and to develop a process by which evolving needs are identified and positions are filled. However, there is as yet no date set for establishing this basic programwide staffing process. As a result of the lack of a programwide staffing process, there has been an extended delay in determining what staff is needed and in bringing those staff on board; this has resulted in delays in performing core activities, such as establishing the program office's cost estimate and bringing in needed contracting expertise. Additionally, until a programwide staffing process is in place, the program office risks not having the staff it needs to execute day-to-day management activities. In commenting on a draft of our report, Commerce stated that NOAA implemented an accelerated hiring model. More recently, the NPOESS program office reported that several critical positions were filled in April and May 2007. However, we have not yet evaluated NOAA's accelerated hiring model and, as of June 2007, over 10 key positions remain to be filled. Major segments of the NPOESS program--the space segment and ground systems segment--are under development; however, significant problems have occurred and risks remain. The program office is aware of these risks and is working to mitigate them, but continued problems could affect the program's overall cost and schedule. Given the tight time frames for completing key sensors, integrating them on the NPP spacecraft, and developing, testing, and deploying the ground-based data processing systems, it will be important for the NPOESS Integrated Program Office, the Program Executive Office, and the Executive Committee to continue to provide close oversight of milestones and risks. The space segment includes the sensors and the spacecraft. Four sensors are of critical importance--VIIRS, CrIS, OMPS, and ATMS-- because they are to be launched on the NPP satellite in September 2009. Initiating work on another sensor, the Microwave imager/sounder, is also important because this new sensor-- replacing the cancelled CMIS sensor--will need to be developed in time for the second NPOESS satellite launch. Over the past year, the program made progress on each of the sensors and the spacecraft. However, two sensors, VIIRS and CrIS, have experienced major problems. The status of each of the components of the space segment is described in table 5. Program officials regularly track risks associated with various NPOESS components and work to mitigate them. Having identified both VIIRS and CrIS as high risk, OMPS as moderate risk, and the other components as low risk, the program office is working closely with the contractors and subcontractors to resolve sensor problems. Program officials have identified work-arounds that will allow them to move forward in testing the VIIRS engineering unit and have approved the flight unit to proceed to a technical readiness review milestone. Regarding CrIS, as of March 2007, a failure review board identified root causes of its structural failure, identified plans for resolving them, and initiated inspections of sensor modules and subsystems for damage. An agency official reported that there is sufficient funding in the fiscal year 2007 program office's and contractor's management reserve funds to allow for troubleshooting both VIIRS and CrIS problems. However, until the CrIS failure review board fully determines the amount of rework that is necessary to fix the problems, it is unknown if additional funds will be needed or if the time frame for CrIS's delivery will be delayed. According to agency officials, CrIS is not on the program schedule's critical path, and there is sufficient schedule margin to absorb the time it will take to conduct a thorough failure review process. Managing the risks associated with the development of VIIRS and CrIS is of particular importance because these components are to be demonstrated on the NPP satellite, currently scheduled for launch in September 2009. Any delay in the NPP launch date could affect the overall NPOESS program, because the success of the program depends on the lessons learned in data processing and system integration from the NPP satellite. Additionally, continued sensor problems could lead to higher final program costs. Development of the ground segment--which includes the interface data processing system, the ground stations that are to receive satellite data, and the ground-based command, control, and communications system--is under way and on track. However, important work pertaining to developing the algorithms that translate satellite data into weather products within the integrated data processing segment remains to be completed. Table 6 describes each of the components of the ground segment and identifies the status of each. The NPOESS program office plans to continue to address risks facing IDPS development. Specifically, the IDPS team is working to reduce data processing delays by seeking to limit the number of data calls, improve the efficiency of the data management system, increase the efficiency of the algorithms, and increase the number of processors. The program office also developed a resource center consisting of a logical technical library, a data archive, and a set of analytical tools to coordinate, communicate, and facilitate the work of algorithm subject matter experts on algorithm development and calibration/validation preparations. Managing the risks associated with the development of the IDPS system is of particular importance because this system will be needed to process NPP data. Because of the importance of effectively managing the NPOESS program to ensure that there are no gaps in the continuity of critical weather and environmental observations, in our accompanying report we made recommendations to the Secretaries of Defense and Commerce and to the Administrator of NASA to ensure that the responsible executives within their respective organizations approve key acquisition documents, including the memorandum of agreement among the three agencies, the system engineering plan, the test and evaluation master plan, and the acquisition strategy, as quickly as possible but no later than April 30, 2007. We also recommended that the Secretary of Defense direct the Air Force to delay reassigning the recently appointed Program Executive Officer until all sensors have been delivered to the NPOESS Preparatory Program; these deliveries are currently scheduled to occur by July 2008. We also made two additional recommendations to the Secretary of Commerce to (1) develop and implement a written process for identifying and addressing human capital needs and for streamlining how the program handles the three different agencies' administrative procedures and (2) establish a plan for immediately filling needed positions. In written comments, all three agencies agreed that it was important to finalize key acquisition documents in a timely manner, and DOD proposed extending the due dates for the documents to July 2, 2007. Because the NPOESS program office intends to complete contract negotiations by July 4, 2007, we remain concerned that any further delays in approving the documents could delay contract negotiations and thus increase the risk to the program. In addition, the Department of Commerce agreed with our recommendation to develop and implement a written process for identifying and addressing human capital needs and to streamline how the program handles the three different agencies' administrative procedures. The department also agreed with our recommendation to plan to immediately fill open positions at the NPOESS program office. Commerce noted that NOAA identified the skill sets needed for the program and has implemented an accelerated hiring model and schedule to fill all NOAA positions in the NPOESS program. Commerce also noted that NOAA has made NPOESS hiring a high priority and has documented a strategy-- including milestones--to ensure that all NOAA positions are filled by June 2007. DOD did not concur with our recommendation to delay reassigning the Program Executive Officer, noting that the NPOESS System Program Director responsible for executing the acquisition program would remain in place for 4 years. The Department of Commerce also noted that the Program Executive Officer position is planned to rotate between the Air Force and NOAA. Commerce also stated that a selection would be made before the departure of the current Program Executive Officer to provide an overlap period to allow for knowledge transfer and ensure continuity. However, over the last few years, we and others (including an independent review team and the Commerce Inspector General) have reported that ineffective executive-level oversight helped foster the NPOESS program's cost and schedule overruns. We remain concerned that reassigning the Program Executive at a time when NPOESS is still facing critical cost, schedule, and technical challenges will place the program at further risk. In addition, while it is important that the System Program Director remain in place to ensure continuity in executing the acquisition, this position does not ensure continuity in the functions of the Program Executive Officer. The current Program Executive Officer is experienced in providing oversight of the progress, issues, and challenges facing NPOESS and coordinating with Executive Committee members as well as the Defense acquisition authorities. Additionally, while the Program Executive Officer position is planned to rotate between agencies, the memorandum of agreement documenting this arrangement is still in draft and should be flexible enough to allow the current Program Executive Officer to remain until critical risks have been addressed. Further, while Commerce plans to allow a period of overlap between the selection of a new Program Executive Officer and the departure of the current one, time is running out. The current Program Executive Officer is expected to depart in early July 2007, and as of early June 2007, a successor has not yet been named. NPOESS is an extremely complex acquisition, involving three agencies, multiple contractors, and advanced technologies. There is not sufficient time to transfer knowledge and develop the sound professional working relationships that the new Program Executive Officer will need to succeed in that role. Thus, we remain convinced that given NPOESS current challenges, reassigning the current Program Executive Officer at this time would not be appropriate. In summary, NPOESS restructuring is well under way, and the program has made progress in establishing an effective management structure. However, key steps remain in restructuring the acquisition, including completing important acquisition documents such as the system engineering plan, the acquisition program baseline, and the memorandum of agreement documenting the three agencies' roles and responsibilities. Until these key documents are finalized, the program is unable to finalize plans for restructuring the program. Additionally, the program office continues to have difficulty filling key positions and lacks a programwide staffing process. Until the program establishes an effective and repeatable staffing process, it will have difficulties in identifying and filling its staffing needs in a timely manner. Having insufficient staff in key positions impedes the program office's ability to conduct important management and oversight activities, including revising cost and schedule estimates, monitoring progress, and managing technical risks. The program faces even further challenges if DOD proceeds with plans to reassign the Program Executive Officer this summer. Such a move would add unnecessary risk to an already risky program. In addition, the likelihood exists that there will be further cost increases and schedule delays because of technical problems on key sensors and pending contract negotiations. Major program segments--including the space and ground segments--are making progress in their development and testing. However, two critical sensors have experienced problems and are considered high risk, and risks remain in developing and implementing the ground-based data processing system. Given the tight time frames for completing key sensors, integrating them, and getting the ground-based data processing systems developed, tested, and deployed, continued close oversight of milestones and risks is essential to minimize potential cost increases and schedule delays. Mr. Chairmen, this concludes my statement. I would be happy to answer any questions that you or members of the committee may have at this time. If you have any questions on matters discussed in this testimony, please contact me at (202) 512-9286 or by e-mail at [email protected]. Other key contributors to this testimony include Colleen Phillips (Assistant Director), Carol Cha, and Teresa Smith. 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.
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The National Polar-orbiting Operational Environmental Satellite System (NPOESS) is a tri-agency acquisition--managed by the Departments of Commerce and Defense and the National Aeronautics and Space Administration--which experienced escalating costs, schedule delays, and technical difficulties. These factors led to a June 2006 decision to restructure the program thereby decreasing its complexity, increasing its estimated cost to $12.5 billion, and delaying the first two satellites by 3 to 5 years. GAO was asked to summarize a report being released today that (1) assesses progress in restructuring the acquisition, (2) evaluates progress in establishing an effective management structure, and (3) identifies the status and key risks on the program's major segments. The NPOESS program office has made progress in restructuring the acquisition by establishing and implementing interim program plans guiding contractors' work activities in 2006 and 2007; however, important tasks remain to be done. Executive approvals of key acquisition documents are about 9 months late--due in part to the complexity of navigating three agencies' approval processes. Delays in finalizing these documents could hinder plans to complete contract negotiations by July 2007 and could keep the program from moving forward in fiscal year 2008 with a new program baseline. The program office has also made progress in establishing an effective management structure by adopting a new organizational framework with increased oversight from program executives and by instituting more frequent and rigorous program reviews; however, plans to reassign the recently appointed Program Executive Officer will likely increase the program's risks. Additionally, the program lacks a process and plan for identifying and filling staffing shortages, which has led to delays in key activities such as cost estimating and contract revisions. As of June 2007, key positions remain to be filled. Development and testing of major NPOESS segments--including key sensors and ground systems--are under way, but significant risks remain. For example, while work continues on key sensors, two of them--the visible/infrared imager radiometer suite and the cross-track infrared sounder--experienced significant problems and are considered high risk. Continued sensor problems could cause further cost increases and schedule delays. Additionally, while progress has been made in reducing delays in the data processing system, work remains in refining the algorithms needed to translate sensor observations into usable weather products. Given the tight time frames for completing this work, it will be important for program officials and executives to continue to provide close oversight of milestones and risks.
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The United States along with six allies established the Missile Technology Control Regime (MTCR) in 1987. The Regime is a voluntary agreement among member countries to limit the proliferation of missiles capable of delivering nuclear, biological, and chemical weapons and their associated equipment and technology. The Regime consists of common export policy guidelines and a list of controlled items that include complete missile systems (rocket and unmanned air vehicle systems) and missile-related components and technologies that may have civilian applications. The list, known as the Equipment, Software, and Technology Annex (hereafter, referred to as the Regime Annex), is periodically updated to reflect technological advances. Member countries agree to control exports of Regime items in accordance with their respective national laws. The United States fulfills its MTCR commitments primarily through the export control systems of the Departments of Commerce and State. These two systems were founded on different premises. The Commerce Department, through its Bureau of Export Administration, controls exports of most dual-use items and technologies under the authority of the Export Administration Act of 1979. As such, the Commerce Department is charged with weighing U.S. economic and trade interests along with national security and foreign policy interests. Dual-use items subject to the Commerce Department's export controls are identified in the Commerce Control List of the Export Administration Regulations. In contrast, the State Department, through its Office of Defense Trade Controls, controls exports of defense articles and services under the authority of the Arms Export Control Act. The State Department's export control system is designed primarily to further national security and foreign policy interests. The items controlled by the State Department can be found in the International Traffic in Arms Regulations, specifically within the U.S. Munitions List, which the State Department develops with the concurrence of the Department of Defense. The Departments of State and Defense are reviewing and revising different portions of the U.S. Munitions List on an annual basis, as part of the Defense Trade Security Initiative, to ensure that coverage of items on the list is appropriate.Exporters are responsible for determining whether an item they seek to export is on the Commerce Control List and, therefore, subject to the Commerce Department's jurisdiction, or on the U.S. Munitions List and subject to the State Department's jurisdiction. With the passage of the National Defense Authorization Act for Fiscal Year 1991, the Congress amended both the Export Administration Act and the Arms Export Control Act to include restrictions on the export of Regime items. Under the amended Export Administration Act, the Secretary of Commerce, in consultation with the Secretaries of State and Defense and other officials, is required to establish and maintain as part of the Commerce Control List, a list of all dual-use goods and technologies that appear on the Regime Annex. Under the amended Arms Export Control Act, the Secretary of State, in consultation with the Secretary of Defense and others, is to establish and maintain as part of the U.S. Munitions List, a list of Regime items that are not controlled under the Export Administration Act. Thus, under these statutes, individual Regime items are to be listed on either the Commerce Control List or the U.S. Munitions List--but not both lists. The Commerce Control List identifies a variety of controlled dual-use items, some of which are designated as being controlled for missile technology reasons, and includes Regime items. In contrast, the U.S. Munitions List contains a separate section that identifies Regime items subject to the State Department's jurisdiction. Forty-seven of 196 Regime items appear subject to the export control jurisdictions of both the Commerce Department and the State Department. For these 47 items, either (1) the description of the item is the same on both the Commerce Control List and the U.S. Munitions List or (2) one Department claims jurisdiction over an item even though the item does not explicitly appear on its export control list but does appear on the other Department's list. Appendix I contains descriptions of the 47 Regime items and identifies where they are covered on the Commerce and State control lists. Table 1 provides examples of Regime items that appear on both export control lists with either identical descriptions or overlapping performance parameters. Neither the Commerce Control List nor the U.S. Munitions List provides criteria to differentiate when these items are subject to the Commerce Department's jurisdiction and when they are subject to the State Department's jurisdiction. The Commerce Control List sometimes provides a cross-reference to the U.S. Munitions List when the State Department controls certain items meeting particular parameters.However, Commerce Department officials said that the Commerce Control List does not always include such references because the regulations would become too voluminous. The State Department's control list generally does not indicate that an item may be subject to the Commerce Department's control since the U.S. Munitions List is supposed to identify only those items subject to the State Department's jurisdiction. In other cases, the State Department claims jurisdiction over software and technologies related to missile production equipment and facilities, although these items do not explicitly appear on the U.S. Munitions List. These items, however, appear on the Commerce Control List. Two factors have contributed to unclear jurisdiction for Regime items. First, officials at the Departments of Commerce and State have expressed different understandings of how to define which Regime items are Commerce Department-controlled and which are State Department- controlled. Second, consultations between the Departments of Commerce and State on Regime-related changes to their regulations have not ensured that items are clearly subject to the jurisdiction of one Department or the other. The State Department office responsible for maintaining the U.S. Munitions List has not formally participated in reviews of proposed changes to the Commerce Control List. Furthermore, the State Department has not updated the MTCR section of the U.S. Munitions List since the mid-1990s, precluding the opportunity to consult with the Commerce Department. "Is specifically designed, developed, configured, adapted, or modified for a military (i) Does not have predominant civil applications, and (ii) Does not have performance equivalent (defined by form, fit and function) to those of an article or service used for civil applications; ...." Conversely, according to Commerce Department officials, if the item does not meet these criteria--even if it appears in the MTCR section of the U.S. Munitions List--it should be subject to the Commerce Department's export controls. However, a senior State Department official disagreed with the Commerce Department officials' interpretation of the State Department's regulations. The official explained that the criteria cited by Commerce Department officials is used by the State Department, in consultation with the Defense Department, to determine which items will appear on the U.S. Munitions List and should not be used by exporters and others to determine whether an item is subject to the State Department's export controls. Instead, exporters are to consult the U.S. Munitions List to determine which Regime items are under the State Department's jurisdiction. Consultations between the Departments of Commerce and State have been limited. According to the Commerce Department, it coordinates its regulations and proposed changes for the control of Regime items with the Departments of State, Defense, and Energy and, therefore, these Departments should be aware of which Regime items appear on the Commerce Control List. However, officials from the State Department's Office of Defense Trade Controls, which maintains the U.S. Munitions List, said they are not formally consulted to ensure that Regime items do not appear on both export control lists. Within the State Department, the Bureau of Nonproliferation formally reviews and comments on the Commerce Department's regulations for the control of Regime items. A senior Bureau official said that the review is to ensure that Regime items are controlled, without concern for which Department has jurisdiction. Further, the State Department has not consulted with the Commerce Department in recent years regarding the Regime items covered by its export control list. According to a senior official with the Office of Defense Trade Controls, the Commerce Department was provided an opportunity to review the section of the U.S. Munitions List that identifies the Regime items subject to the State Department's controls before the section was added to the International Traffic in Arms Regulations in 1994. However, this section of the State Department's regulations has not been updated or revised since then to incorporate the periodic changes made to the Regime Annex. State Department officials maintain that the U.S. Munitions List does not have to be regularly revised to ensure that new items added to the Regime Annex are controlled, as those items are already controlled under the U.S. Munitions List's broad categories. However, as a result of this lack of revision, the Commerce Department has not been provided another opportunity to review and comment on the Regime items covered by the U.S. Munitions List to ensure that items do not appear on both export control lists. The appearance of an item on both the Commerce Control List and the U.S. Munitions List and disagreements between the Departments over which one has jurisdiction may result in the same Regime item being subject to different restrictions and reviews, which may affect U.S. national interests and companies' ability to export Regime items. While the Commerce Department's export control system seeks to balance U.S. national security and foreign policy interests with economic interests, the State Department's export control system was designed to primarily further national security and foreign policy interests. The differences in the underlying premises of the two Department's export control systems are reflected in their restrictions on where Regime items can be exported and processes to review export licensing applications. A key difference between the Departments' export control systems is that some sanctions and embargoes only apply to items on the U.S. Munitions List and not to those on the Commerce Control List. For example, under U.S. law, licenses cannot be issued for the export of most missile technology and other items on the U.S. Munitions List to China. As a result, the State Department generally denies license applications involving the export of items on the U.S. Munitions List to China. This same restriction does not apply to items on the Commerce Control List. Missile technology items on the Commerce Control List may be licensed for export to China provided that certain legal requirements are met.Additionally, the State Department generally denies license applications involving exports of U.S. Munitions List items to Indonesia and Yugoslavia. The Commerce Department does not have a comparable policy for exports of Regime items to these countries. Because of these policy differences, the State Department could deny a license to an exporter seeking to export a Regime item to one of these countries, whereas the Commerce Department could approve a license to export the same item to these countries. Other sanctions apply to both export control lists, but the Departments have enforced these sanctions differently. For example, under the MTCR sanction provisions of the Export Administration Act and the Arms Export Control Act, the President generally is to impose sanctions on U.S. and foreign parties who improperly transferred Regime items. For the improper transfer of Regime-controlled components, equipment, material, and technology, the Departments of Commerce and State are to deny export licenses to the involved parties for all Regime items subject to their respective controls for a 2-year period. In applying MTCR sanctions, the Commerce Department has allowed Regime items to be exported to sanctioned parties if these items were incorporated into larger items not subject to these sanctions. The State Department, however, has prohibited the export to sanctioned parties of non-Regime items on the U.S. Munitions List if they contain Regime items. As a result, exporters have been subject to different levels of scrutiny and restrictions at the Departments of Commerce and State. Finally, the Commerce Department's regulations do not require licenses for the export of Regime items on the Commerce Control List to Canada, while the Department of State's regulations require licenses for the export of Regime items on the U.S. Munitions List to all countries. The exporter consulting the Commerce Control List could export an item to Canada without a license, while the exporter consulting the U.S. Munitions List would have to go through the Department of State's license application process. The U.S. government may or may not have an opportunity to review and approve a Regime item exported to Canada, depending on whether the exporter consults the Commerce Control List or the U.S. Munitions List. Because of differences in the export control systems of the Departments of Commerce and State, it is critical that exporters properly determine whether their items are controlled on the Commerce Control List or the U.S. Munitions List. However, some of the companies we spoke with did not understand U.S. export controls as applied to missile technology items. For example, an official from one company stated the company's product is not exported for use in missiles and, therefore, did not understand why this product is controlled for missile technology reasons, even though it is on the Regime Annex. At another company, an official said that the State Department controls all Regime items and did not realize that the Commerce Department controls dual-use Regime items. Export licensing officials with another company said that companies acquired by their company had incorrectly determined that certain Regime items were Commerce Department-controlled when the items were State Department-controlled. An export licensing official from another company stated that when there is uncertainty as to which Department has jurisdiction over a particular Regime item, the company submits the license application to the Commerce Department with the expectation that the Commerce Department would send the license application to the State Department if the item were State Department-controlled. Officials from other companies said they relied on past experience, familiarity with a particular Department, and their own interpretations of the regulations when deciding where to submit an export license application. Some of the companies expressed uncertainty of the meaning of certain terms in the regulations, which sometimes made it difficult to determine whether to submit their license applications to the Commerce Department or the State Department. For example, officials from several companies indicated that they did not understand what the regulations mean when referring to items as specifically designed or modified for a military application. These officials noted that the Departments of Commerce and State do not provide either a regulatory definition or sufficient guidance for what constitutes being specifically designed or modified. As a result, an official with one company said there is room for interpretation on the part of exporters. Officials from these companies stated that if they make any modifications to an item for use by the military, they submit the license application to the State Department to ensure that they do not violate the State Department's regulations and governing statute. The U.S. government has committed internationally to controlling Regime items because of its concerns about the threat missile proliferation poses to U.S. interests. The lack of clarity over which Department has jurisdiction over some Regime items may lead an exporter to seek a Commerce Department license for a militarily sensitive item controlled on the U.S. Munitions List or a State Department license for a dual-use item controlled on the Commerce Control List. The Commerce Department and State Department would review these license applications according to different criteria and restrictions and possibly reach different determinations on whether the item may be exported. Because there is unclear jurisdiction for critical Regime items, exporters are left to decide which Department should review their exports and, by default, the policy interests that are to be considered and acted upon. To ensure that proposed exports of Missile Technology Control Regime items are subject to the appropriate review process, we recommend that the Secretaries of Commerce and State direct the offices responsible for the Commerce Control List and the U.S. Munitions List, in consultation with others as appropriate, to jointly review the Regime Annex, determine the appropriate jurisdiction for items on the Annex, and revise their respective export control lists accordingly; the Secretary of Commerce ensure that, when a Regime item generally controlled by the Commerce Department becomes subject to the State Department's control if it meets certain parameters, the Commerce Control List specify those parameters and provide a cross-reference to the U.S. Munitions List; and the Secretary of State update the section of the U.S. Munitions List that identifies the Regime items subject to the State Department's jurisdiction to ensure that it is consistent with the current version of the Regime Annex and provide a cross-reference to the Commerce Control List for those Regime items that would be subject to the Commerce Department's control when certain parameters are met. The annual review of the U.S. Munitions List, which is being conducted as part of the Defense Trade Security Initiative, may provide a vehicle to implement these recommendations. In written comments on a draft of this report, the Commerce Department concurred with our recommendation to review the Commerce Control List and the U.S. Munitions List to provide additional clarity to exporters. However, the Commerce Department commented that jurisdiction for Regime items is generally clear and the current export control system is not a risk to U.S. nonproliferation interests. The Commerce Department stated that it refers its export license applications for Regime items to the State Department and other agencies for their review. According to the Commerce Department, the State Department has an opportunity to indicate that an item cannot be licensed under the Commerce Department because it is State Department-controlled. However, making a jurisdiction determination during the license review process delays the exporter from obtaining an approved license from the appropriate Department. By clarifying the regulations, the Departments would minimize such occurrences that can impact the workloads of both the exporters and the U.S. government. The Commerce Department's comments are reprinted in appendix II, along with our evaluation of them. In written comments on a draft of this report, the State Department concurred with our recommendation to update the section of the U.S. Munitions List that identifies the Regime items subject to the State Department's jurisdiction. The State Department said that, as part of this update, it will work with the Commerce Department in an effort to eliminate unclear jurisdiction for Regime items. According to the State Department, the process of updating this section has already begun and should be completed before the end of 2001. The State Department also provided technical comments to clarify which Regime items are subject to its jurisdiction and we revised the report to reflect those comments. The State Department's comments are reprinted in appendix III, along with our evaluation of them. To determine the division of jurisdiction over Regime items between the Departments of Commerce and State, we compared the Regime Equipment, Software, and Technology Annex of October 2000 with the January 2001 Commerce Control List and the April 2000 U.S. Munitions List (and subsequent updates made to each list). We then confirmed with officials from the Department of State's Office of Defense Trade Controls and the Department of Commerce's Bureau of Export Administration the Regime items that they claim as subject to their respective export controls. To identify the factors that contribute to unclear jurisdiction for Regime items, we interviewed officials with the Department of Defense's Defense Threat Reduction Agency, the Department of State's Bureau of Nonproliferation and Office of Defense Trade Controls, and the Department of Commerce's Bureau of Export Administration. We also reviewed Commerce Department and State Department policies and practices for revising the export control lists. To identify the potential effects of unclear jurisdiction, we conducted structured interviews with 24 companies that export Regime items to discuss how they determine which Department controls their exports of Regime items and how they are affected by differences in the export control systems. These companies were selected on the basis of the number of license applications for the export of Regime items they had submitted to either the Commerce Department or the State Department from fiscal year 1997 through fiscal year 2000. We also interviewed officials with the Department of Defense's Defense Threat Reduction Agency, the Department of State's Bureau of Nonproliferation and Office of Defense Trade Controls, and the Department of Commerce's Bureau of Export Administration. Additionally, we reviewed our prior reports and reports from the Inspectors General of the Departments of Defense and Commerce. We conducted our review from January through July 2001 in accordance with generally accepted government auditing standards. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of this report until 30 days after its issuance. At that time, we will send copies to the Chairmen and Ranking Minority Members of the Senate Committee on Banking, Housing, and Urban Affairs; Senate Committee on Foreign Relations; House Committee on International Relations; House Committee on Armed Services; the Secretaries of Commerce, Defense, and State; the Director, Office of Management and Budget; and the Assistant to the President for National Security Affairs. We will also make the report available to others upon request. If you or your staff have questions concerning this report, please contact me at (202) 512-4841. Others making key contributions to this report were Thomas J. Denomme, Anne-Marie Lasowski, Johana R. Ayers, Richard K. Geiger, and John Van Schaik. Forty-seven of the 196 items listed in the Missile Technology Control Regime (MTCR) Equipment, Software, and Technology Annex appear subject to the export control jurisdictions of both the Departments of Commerce and State. These 47 Regime items are described in table 2, along with an identification of where they are controlled on the Commerce Control List and the State Department's U.S. Munitions List. In some cases, Regime items are described on both export control lists with either identical or overlapping performance parameters. For these items, we have identified the category and Export Control Classification Number where they appear on the Commerce Control List and the category where they appear on the U.S. Munitions List. The remaining items, which are software and technologies related to Regime production facilities and equipment, have been claimed by Department of State officials as subject to the State Department's jurisdiction, although the items do not explicitly appear on the U.S. Munitions List but do appear on the Commerce Control List. For these items, we have indicated on the table where State Department officials claim these items are controlled on the U.S. Munitions List and where they appear on the Commerce Control List. 1. Text revised for clarification. 2. We believe the text reflects what Commerce Department officials told us during our review and is not substantively different than the Commerce Department's proposed change. We, therefore, do not believe a revision is needed. 3. We did not revise the report to include a discussion of the license review process. We believe that jurisdictional determinations should be made before a company submits an export license application for review. Clarification of the regulations would help ensure that a company submits its license application for a Regime item to the appropriate Department. 4. Text revised. 5. As discussed in the report, the State Department did not agree that exporters should use the criteria contained in section 120.3 of the State Department's regulations to determine whether an item is subject to the State Department's export controls. In addition, the Commerce Department refers to section 120.3 as containing the definition of a defense article. However, the definition of a defense article appears in section 120.6 of the State Department's regulations. According to the definition in section 120.6, a defense article is any item or technical data designated on the U.S. Munitions List. 6. We believe the text reflects what Commerce Department officials told us during our review and is not substantively different than the Commerce Department's proposed change. We, therefore, do not believe a revision is needed. 7. The Commerce Department's example highlights the difference between how the Departments of Commerce and State enforce sanctions. We do not believe additional clarification is needed. 8. As discussed in the report, some of the exporters we spoke with did not understand the export control system or certain terms in the regulations, thereby making it sometimes difficult to determine where to apply for a license to export Regime items. We point out in one example that a company submits license applications to the Commerce Department when uncertain as to which Department has jurisdiction, but do not discuss how Commerce licensing officers respond in such a situation. 9. Text revised for clarification. 1. We believe our draft report reflected information provided to us by State Department officials during the course of our review. However, we have revised the report to reflect the State Department's position as indicated in its comments.
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The U.S. government has long been concerned about the growing threat posed by the proliferation of missiles and related technologies that can deliver weapons of mass destruction. The United States is working with other countries through the Missile Technology Control Regime to control the export of missile-related items. The Departments of Commerce and State share primary responsibility for controlling exports of Regime items. The Commerce Department is required to control Regime items that are dual-use on its export control list--the Commerce Control List. All other Regime items are to be controlled by the State Department on its export control list--the U.S. Munitions List. However, the two departments have not clearly established which of them has jurisdiction for almost 25 percent of the items the United States agreed to control. The Departments disagree on how to determine which Regime items are controlled by Commerce and which are controlled by State. Consultations between the departments about respective control lists have not resolved these jurisdiction issues. Unclear jurisdiction may result in the same Regime item being subject to different export control restrictions and processes at the two departments.
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Once a U.S. agency determines that a ship is obsolete and no longer useful for the purposes intended, that agency must find a way to properly dispose of it. Ships that are no longer needed are screened for other uses, including transfer to another country under proper legal authority, use by another federal agency, and donation to a state or private recipient for appropriate public use. Ships may also be sunk as part of naval training exercises. Ships not used for any of these purposes are considered available for scrapping. According to a July 1997 MARAD study, ship scrapping is a labor-intensive industry with extremely high risks with respect to environmental and worker safety issues. Ships typically contain environmentally hazardous materials such as asbestos, polychlorinated biphenyls (PCB), lead, mercury, and cadmium. A ship is normally dismantled from the top down and from one end to the other with torches that cut away large parts of the ship. Pieces of the ship are lifted by crane to the ground where they are cut into the shapes and sizes required by the foundry or smelter to which the scrap is to be shipped. Remediation of hazardous materials takes place prior to, as well as during, the dismantling process. If done improperly, ship scrapping can pollute the land and water surrounding the scrapping site and jeopardize the health and safety of the people involved in the scrapping process. Ship scrapping is subject to federal, state, and local government rules and regulations on the protection of the environment and worker safety. These rules and regulations implement pertinent laws in these areas. In the environmental area, these laws include the Toxic Substances Control Act, the Resource Conservation and Recovery Act, the Clean Air Act, and the Federal Water Pollution Control Act. In the worker safety area, the primary law is the Occupational Safety and Health Act. Various federal and state regulatory agencies work to enforce these laws. (See app. I for more information about these laws.) Historically, government-owned surplus ships have been scrapped both domestically and overseas. As shown in table 1, MARAD has relied primarily on overseas scrapping, while the Navy has relied primarily on the domestic industry to scrap its ships. From 1983 through 1994, MARAD sold almost all of its ships for overseas scrapping. Since 1982, the Navy has not directly sold any ships for overseas scrapping. Federal agencies report that there are about 200 ships awaiting disposal or scrapping and that they are stored at various locations throughout the United States. As shown in table 2, the Navy and MARAD have the majority of ships to be scrapped, but the Coast Guard and the National Oceanic and Atmospheric Administration also have some. The Navy reports that, as of August 1, 1998, it had 127 surplus ships available to be sold for scrap. Seventy-two of these ships are expected to be sold though the Defense Logistics Agency's Defense Reutilization and Marketing Service (DRMS). The remaining 55 ships are expected to be transferred to MARAD for sale. MARAD, which is the U.S. government's disposal agent for surplus merchant-type ships of 1,500 tons or more, reports that it had 63 ships available for scrapping. By law, MARAD is required to dispose of all obsolete ships by September 30, 2001. The combined tonnage of Navy and MARAD surplus ships amounts to about 1 million tons--about 600,000 tons for the Navy and 400,000 tons for MARAD. Navy and MARAD officials have estimated that it will cost them at least $58 million (in fiscal year 1997 dollars) for storage, maintenance, and security of surplus ships between fiscal year 1999 and 2003 if they are not scrapped. Some ships are in such poor condition that they may need dry-docking for repairs to keep them afloat until they can be scrapped. MARAD estimates that its dry-docking and repair costs could be as high as $800,000 per ship. A number of factors have caused the current backlog of federal surplus ships awaiting scrapping. They include (1) reductions in the Navy's force structure following the collapse of the former Soviet Union and the Warsaw Pact; (2) unavailability of overseas scrapping; (3) difficulties experienced by some domestic scrappers in complying with environmental, worker safety, and other contract performance provisions; and (4) a shortage of qualified domestic bidders. Navy force structure reductions following the collapse of the former Soviet Union and the Warsaw Pact have resulted in an increased number of ships to be scrapped. Since 1990, the Navy has reduced its active fleet from 570 ships to 333 ships. The Navy's inactive fleet has increased by 82 percent since 1990 and the number of ships to be scrapped increased from about 25 in 1991 to 127 as of August 1, 1998. Overseas scrapping by MARAD was suspended in 1994 in response to an April 1993 Environmental Protection Agency (EPA) letter advising the agency that the export for disposal of PCB materials with concentrations of 50 parts per million or greater was prohibited. In accordance with the Toxic Substances Control Act, EPA regulates all aspects of the manufacture, processing, distribution in commerce, use, and disposal of PCBs. In 1980, EPA banned the export of PCBs for disposal. In 1989, the Navy became aware of the presence of PCBs in solid materials on board some of its older ships and sought EPA's advice on how to properly handle and dispose of these materials. Subsequently, EPA confirmed that surplus ships could not be exported for scrapping if they contained solid materials with concentrations of PCBs at 50 parts per million or greater. In 1997, the Navy and MARAD, each negotiated an agreement with EPA to allow for the export of ships for scrapping provided (1) all liquid PCBs are removed prior to export, (2) items containing solid PCBs that are readily removable and do not affect the structural integrity of the ship are also removed, and (3) countries to which the ships may be exported for scrapping are notified so that they have the opportunity to refuse to accept the ships if they so choose. The Navy and MARAD sought these agreements principally because they recognized a need to reduce their backlogs of surplus ships and the limitations of domestic scrapping efforts. Despite the agreement with EPA, Navy officials decided in December 1997 to temporarily suspend any export of ships for scrapping due to (1) continuing concerns regarding environmental pollution and worker safety in foreign ship scrapping countries and (2) potential impacts on the domestic ship scrapping industry. In January 1998, MARAD also suspended the export of ships. As of August 1998, the voluntary suspension on exports was still in effect. Specific environmental concerns revolve around the export of PCBs and other hazardous materials that could be dumped along the shorelines of developing nations and about the health and safety of foreign workers. For example, domestic industry representatives have stated that foreign ship scrapping operations would not be in compliance with the strict U.S. safety and environmental regulations. U.S. government officials have also stated that many of the major overseas ship scrapping countries have less stringent laws and regulations regarding environmental and worker safety issues than exist in the United States. Domestic industry concerns are related to the history of foreign scrappers bidding significantly higher prices to scrap ships overseas. This is due, in part, to a greater demand and higher selling price for scrap metal in foreign countries and lower costs of overseas operations because of the less restrictive environmental and worker safety regulations and lower labor rates. Between 1991 and 1996, the Navy repossessed 20 of the 62 ships it had sold to domestic firms for scrapping due to environmental pollution and safety compliance problems and other contractor performance issues. For example, the former aircraft carrier, U.S.S. Oriskany, and five other ships located at a contractor's facility in the former Mare Island Naval Shipyard at Vallejo, California, were repossessed by the Navy due to the contractor's not obtaining the necessary environmental permits and the dissolution of the contractor's partnership. Some of these repossessions were costly. For example, according to a Navy official, it had to spend about $2 million to tow 14 ships back to federal storage facilities in Philadelphia from North Carolina and Rhode Island when a ship scrapping contract was terminated due to contractor noncompliance with environmental and safety regulations. Also, the Navy and DRMS incurred additional costs for maintaining, storing, and reselling these ships. The domestic ship scrapping industry has historically been small. During the 1970s, when hundreds of ships were scrapped domestically, the industry was comprised of about 30 firms. However, given the small number of ships available for domestic scrapping since then, many of the firms exited the industry. Currently, there are four private ship scrappers in the United States actively scrapping federal surplus ships. In addition, for national security reasons, one naval shipyard is scrapping nuclear submarines. The typical U.S. private sector ship scrapping site is located in an urban industrial area coincident with other industrial and maritime related facilities. The facilities area is generally small, fewer than 10 acres, and most of the firms, until recently, worked on only one ship at a time. According to a July 1997 MARAD study, ship scrapping companies tend to be thinly capitalized. The study concluded that the industry is a risky, highly speculative business. Following the Navy's experience with high rates of ship repossessions between 1991 and 1996, both the Navy and MARAD considered fewer firms to be technically and financially acceptable. For example, in response to MARAD's 1996 solicitation for scrapping eight ships, the agency received only five positive bids, and only one of these was considered technically acceptable by the agency. MARAD awarded the bidder only two ships, in part, because of the bidder's limited scrapping capacity. Similarly, Navy/DRMS solicitations in 1996 and 1997, for a total of 11 ships, resulted in only two technically acceptable proposals for each solicitation and the award of only two ships. Both the MARAD and Navy awards were made to the same firm. Recent testimony to Congress and statements made by domestic industry officials raise doubts about the willingness of new firms to enter the industry and current firms to substantially expand their operations under current conditions. Some domestic industry representatives stated that the profits from ship scrapping have not been commensurate with the financial risks and environmental liabilities associated with it, and one representative stated that his firm was no longer willing to assume such risks. However, other industry representatives believed that they could make a profit scrapping ships, as long as they could get enough ships to justify large scale and continuous production. As discussed later, the agencies have (1) taken action to sell ships in lots and (2) recognized that steps are needed to minimize environmental and worker safety risks associated with ship scrapping to make ship scrapping more financially attractive. In 1996, the Navy and MARAD identified and began implementing a number of initiatives to address domestic ship scrapping performance problems. Also, in 1998, an interagency panel endorsed the 1996 initiatives but recommended that a number of steps be taken to further improve the ship scrapping process, both domestically and internationally. It is too early to assess the impact of the 1996 initiatives, and the agencies are still reviewing the extent to which they will implement the panel's recommendations. However, no specific time frames for completing the review have been established. Also, no procedures have been established for implementing the recommendations that are accepted. In 1996, the Navy and DRMS realized that the then-existing ship scrapping practices had contributed to the domestic contractor performance problems previously discussed. For example, prior to January 1996, DRMS (1) accepted all technical proposals with the invitation for bid, (2) relied on the high bid without seeking an independent review of the company's business or financial background, and (3) performed only minimal contract oversight and on-site progress reviews. In an effort to correct these problems, the Navy and DRMS began taking several actions to improve their scrapping practices, as well as to make other improvements in the ship scrapping program. While sufficient experience with the actions taken is not yet available because only two Navy ships have been scrapped since 1996, the actions appear to be reasonable approaches to help address past contractor performance problems. Approaches adopted since 1996 to improve the ship scrapping practices include the following: Developing a two-step bid process requiring contractors to submit a technical proposal for approval before they can be considered viable candidates to place a financial bid for the surplus ships. The technical proposals are to consist of an environmental compliance plan, an operations plan, a business plan, and a safety and health plan. A technical evaluation team is to evaluate each plan, and those contractors found to have acceptable technical proposals will be asked to submit a financial bid. Implementing quarterly progress reviews at each scrapping site to assess the contractor's progress and compliance with contract provisions, including environmental and safety requirements. Awarding contracts designed to (1) provide daily on-site surveillance of ship scrappers, (2) conduct environmental/safety site assessments, and (3) evaluate ship scrapping operations. Developing a contractor rating system for use in deciding on how closely to provide contract surveillance. Actions taken to improve the general management of the ship scrapping program and to address contractor concerns about the profitability of ship scrapping included advertising and selling ships by lot and allowing contractors to remove the ships from government storage as they are ready to be scrapped, holding periodic industry workshops to inform contractors of what is expected of them in the scrapping of federal surplus ships and obtain feedback from the contractors on their concerns and desires, evaluating the potential for removing more of the hazardous materials before the ships are advertised for sale, and notifying state and local regulators where the ship scrapping will be performed after contracts are awarded. The Navy and DRMS have also adopted, and are considering, other options for disposing of ships. For example, they obtained legislative authority to negotiate contracts for ship scrapping to obtain the most advantageous contract for the government rather than awarding the contract based solely on the highest bid. MARAD also developed and adopted a number of new approaches similar to those of the Navy/DRMS. For example, MARAD has begun using contracting procedures that include the requirement for a technical proposal from bidders on how they would scrap ships. MARAD, like DRMS, is now considering only those bidders with acceptable technical proposals as suitable for contract award. The Department of Defense, in December 1997, took the lead in establishing an Interagency Panel on Ship Scrapping. This panel was tasked to review Navy and MARAD programs to scrap ships and to recommend ways to ensure that federal ships are scrapped in the most effective and efficient manner while protecting the environment and worker safety. While the 1996 initiatives and 1998 interagency panel recommendations, if implemented, offer the potential to address previously experienced problems, some domestic and foreign scrapping issues remain unresolved. They relate to whether the government should promote the expansion of the domestic industry and whether ships should be scrapped overseas. The actions most often discussed for addressing these issues have much different potential results. For example, federal agencies could generate higher revenues by scrapping ships overseas, but such scrapping may involve greater environmental and worker safety risks as well as adversely affect the domestic scrapping industry. Similarly, relying solely on the domestic industry for ship scrapping would avoid overseas scrapping concerns but would require a more prolonged approach to reducing the backlog or greater financial incentives to achieve domestic industry expansion. The panel made numerous recommendations to the various agencies participating in the panel on issues related to both domestic and overseas ship scrapping. While we did not do a detailed assessment of the panel's recommendations, they do appear to address some of the previously experienced problems. However, the panel's report does not resolve issues on the government's role in promoting domestic industry expansion and the use of foreign ship scrapping. The agencies to whom the recommendations are made are responsible for deciding what actions, if any, to take. As of August 6, 1998, the agencies were still reviewing the extent to which they will implement the panel's recommendations. Further, the process for deciding whether to accept and ultimately implement the recommendations is informal. For example, the agencies have not established specific time frames for completing their review of the recommendations. Also, once the recommendation review process is complete, lead responsibilities, tracking systems, and milestones for implementing the individual recommendations will be needed. The panel's April 20, 1998, report concluded that the Navy and MARAD had recognized the problems identified with past contracting and monitoring practices and taken steps to address many of them. The report also stated that more could be done to (1) improve the ship scrapping contracting process, (2) encourage the development of a viable domestic industry to handle a significant portion of the backlog, and (3) make the use of foreign scrapping to augment the domestic industry a more acceptable option. More specifically, the panel recommended that the Navy/DRMS and MARAD establish consistent ship scrapping contracting procedures. For example, the Navy/DRMS and MARAD should develop standardized performance bonds to make them equally attractive to bidders. To encourage development of the domestic industry, the panel concluded that the industry needed to improve its knowledge and understanding of the ship scrapping contracting process. To accomplish this, the panel recommended that EPA and the Occupational Safety and Health Administration, in coordination with the Navy/DRMS and MARAD, continue to educate the industry through seminars and workshops and should develop an environmental and worker safety compliance manual for industry use. The panel asserted that the industry needed additional knowledge on the techniques for scrapping large ships and the range, types, and locations of hazardous materials to ensure that ships are scrapped in an environmental, safe, and economical manner. To accomplish this, the panel endorsed the Navy's plan to establish a pilot project that would quantify the scope and major costs associated with ship scrapping. The panel indicated that the U.S. government could do more to promote better environmental and worker safety controls in foreign ship scrapping countries. To that end, the panel recommended, among other things, that (1) the Navy, MARAD, and EPA expand the notification to foreign countries of the materials commonly found on specific types of ships so that the countries could object to the import of a ship with unacceptable environmental risks and (2) the Navy, MARAD, EPA, the Departments of State and Labor, and the Agency for International Development evaluate how meaningful technical assistance could be provided to interested importing countries, including whether current statutory authorities and funding are adequate for this purpose. Another recommendation was for DRMS and MARAD to examine the use of enforceable contract terms that promote environmental protection and worker safety measures overseas, including requirements that foreign bidders submit technical plans to demonstrate how they intend to comply with applicable local rules and regulations, obtain information from the State Department on the qualifications and past performance of foreign scrappers, and require a performance bond as an incentive for foreign scrappers to comply with contractual requirements. The panel recognized, however, that environmental and worker safety issues would have to be balanced against the economic realities of the countries doing the scrapping. The panel also recommended to the Under Secretary of Defense for Acquisition and Technology that it or a similar panel be reconvened 1 year after the report's issuance to evaluate the results of implementing the recommendations and to consider whether any additional modifications should be made. The interagency panel's specific recommendations generally represent steps directed toward correcting previously experienced problems. The effectiveness of these initiatives, if adopted, will not be known until some implementation experience has been gained. Two key issues relating to whether the government should involve itself in promoting the expansion of a domestic industry and whether to utilize the foreign ship scrapping industry are only generally addressed. Further, the process for deciding whether to accept and ultimately implement the panel's recommendations is informal. For example, the agencies have not established specific time frames for completing their review of the recommendations. Also, no procedures have been established for implementing the recommendations that are accepted. We recommend that the Secretaries of Defense and Transportation take the lead and work with other agencies involved in ship scrapping such as the EPA and the Departments of State and Commerce to establish a specific time frame for completing the review of the interagency panel's recommendations. Further, we recommend that, once the review is complete, each agency establish milestones for implementing those recommendations that are adopted and that the Secretaries of Defense and Transportation designate lead responsibilities within their respective organizations for addressing individual panel recommendations. The Department of Defense provided comments on a draft of this report, which are presented in appendix III. The Department concurred with both of our recommendations. It also provided some technical comments, which we have incorporated as appropriate. We also requested comments from the Department of Transportation and EPA. Neither agency had provided comments prior to report issuance. We conducted our review between November 1997 and September 1998 in accordance with generally accepted government auditing standards. The scope and methodology for our review are discussed in appendix II. We are sending copies of this report to the Chairman of the Senate Committee on Governmental Affairs, the Chairmen and Ranking Minority Members of the House and Senate Committees on Appropriations, the Senate Committee on Armed Services, and the House Committee on National Security. We are also sending copies of this report to the Secretaries of Defense and the Navy; the Secretaries of Commerce, Transportation, Labor, and State; the Administrators of MARAD, EPA, the National Oceanic and Atmospheric Administration, and the Occupational Safety and Health Administration; and the Directors of the Defense Logistics Agency and the Office of Management and Budget. We will make copies available to others upon request. If you have any questions about this report, you may contact me on (202) 512-8412. Major contributors to this report are listed in appendix IV. The Toxic Substances Control Act provides the Environmental Protection Agency (EPA) with the authority to regulate substances that pose a risk to human health or the environment. Asbestos and polychlorinated biphenyls (PCB) are among the more common substances regulated. Ship scrapping contractors are required to comply with the applicable regulations promulgated by EPA under this legislation, including regulations for the proper removal, storage, transportation, and the disposal of materials containing asbestos and PCBs at concentrations of 50 parts per million or greater. The Resource Conservation and Recovery Act of 1976, as amended, is a comprehensive authority for all aspects of managing hazardous wastes. The act and the Hazardous and Solid Waste Amendments of 1984 protect human health and the environment from the potential hazards of waste disposal, promote energy and natural resource conservation, reduce the amount and toxicity of waste generated, and ensure that wastes are managed in an environmentally sound manner. It places "cradle to grave" responsibility for hazardous waste on those personnel or units handling the waste. Waste oil, paints, and solvents are among the types of substances regulated under the act. The act is generally administered by the states under delegation of authority from EPA. The Federal Clean Air Act forms the basis for the national air pollution control effort. Basic elements of the act include establishing national ambient air quality standards for air pollutants and regulating hazardous air pollutants such as lead. EPA and the states administer the act. The Federal Water Pollution Control Act of 1972 bans facilities from discharging pollutants such as metals and acids into lakes, rivers, streams, and coastal waters. Regulation is accomplished by means of discharge permits issued by the states and EPA. The Occupational Safety and Health Act of 1970 was enacted to ensure safe and healthful working conditions for workers. Federal standards developed under the act cover shipyard work and the ship scrapping industry. The Occupational Safety and Health Administration's regions, along with state and local regulatory agencies, are responsible for enforcing these worker safety standards. To identify the factors contributing to the backlog of federal ships available for scrapping, we performed relevant work at the principal agencies identified to possess and dispose of federal surplus ships for scrapping--the Departments of Defense, Navy, and Army; the Defense Logistics Agency and its Defense Reutilization and Marketing Service (DRMS); the Department of Transportation, including the Maritime Administration (MARAD) and the Coast Guard; the Department of Commerce's National Oceanic and Atmospheric Administration; and the General Services Administration. This work included discussing and obtaining information on the size and scope of the domestic ship scrapping industry, the historical data and current backlog of ships to be scrapped and factors contributing to the backlog, studies analyzing the domestic industry and its capabilities, visits to selected surplus ship storage locations, and identification of recent performance problems. We also made visits and inquiries to selected current and former ship scrapping contractors to obtain their comments and views on issues such as the state of the domestic ship scrapping industry and its capacity to handle the federal backlog of surplus ships. To review the federal agencies' efforts to address the backlog, we examined the federal ship marketing and sales functions at each agency selling federal surplus ships and discussed with program personnel, the various options for disposing of the ships. At each agency, we identified their legislative authorities to dispose of and sell ships for scrapping; reviewed their policies, procedures, and practices for selling surplus ships; evaluated the most recent contracts used in the sale of these ships; and identified the actions taken to address ship scrapping problems and improve the agencies' respective programs. We also visited and requested information from selected ship scrapping contractors concerning the agencies' efforts to address the past performance problems. Further, we attended meetings of the federal joint ship disposal conference and other workshops held by Navy and DRMS personnel. In addition, we visited the regulatory agencies, EPA and the Occupational Safety and Health Administration, and met with agency program and legal representatives to discuss and obtain information on the standards used to regulate environmental and worker safety matters and the enforcement of their respective regulations within the ship scrapping industry. Furthermore, we reviewed the Department of Defense led interagency panel's April 20, 1998, report on ship scrapping, focusing primarily on its conclusions and recommendations. We also reviewed the agreements between EPA and the Navy and MARAD for the export of ships for scrapping and various studies that include information on the overseas ship scrapping industry. We also held discussions with the agencies' program managers responsible for ship sales to identify the scope of the foreign market, the potential for reducing the backlog of surplus ships and the associated maintenance and storage costs, and the advantages and disadvantages of overseas scrapping. Furthermore, we asked for feedback from members of the domestic industry on the potential impact of the foreign scrapping on the domestic industry. We visited the State Department to discuss and obtain information on its involvement in the export of ships for overseas scrapping. At EPA, we also discussed and obtained information on the agency's proposed rulemaking on PCBs and the agreements the agency had made with other agencies for the export of ships for scrapping. Margaret L. Armen, Senior Attorney The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. 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.
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Pursuant to a congressional request, GAO reviewed the status of federal ship scrapping programs, focusing on: (1) the factors contributing to the backlog of about 200 surplus ships waiting to be scrapped; and (2) federal agencies' efforts to address the backlog. GAO noted that: (1) key factors contributing to the current backlog of surplus ships awaiting scrapping are the Navy's downsizing following the collapse of the former Soviet Union, the unavailability of overseas scrapping, and a shortage of qualified domestic scrappers; (2) as a result, the backlog of Navy ships to be scrapped has increased since 1991 from 25 to 127; (3) overseas scrapping has been suspended because of legal constraints on the export of polychlorinated biphenyls for disposal; (4) a 1997 agreement to resume overseas scrapping has been temporarily suspended largely because of concerns about environmental and worker safety problems in foreign countries and the impact of foreign scrapping on the domestic industry; (5) progress in reducing the backlog using domestic scrappers has been limited; (6) one reason has been domestic contractor performance difficulties; (7) a second reason has been a shortage of qualified domestic bidders; (8) between the beginning of 1996 and the end of 1997, the Navy and the Maritime Administration (MARAD) requested scrapping bids on 19 ships, but only 4 were actually sold--all to the same domestic bidder--because of the limited number of qualified bidders; (9) since then, MARAD has sold an additional 11 ships for scrapping; (10) federal agencies have identified and begun implementing a number of initiatives to address some of the specific performance issues associated with domestic scrapping; (11) since a key performance issue was contractor noncompliance with environmental and worker safety requirements, several of the initiatives provide for increased screening of contractors prior to award and increased oversight of the performing contractor after award; (12) other initiatives are intended to help attract more qualified domestic bidders; (13) it is too early to assess the impact of these initiatives because few ships have been scrapped since their implementation; (14) additional recommendations for addressing both domestic and overseas scrapping issues were made in April 1998 by an interagency panel; (15) the panel's recommendations expand on the actions to address contracting and oversight problems; (16) however, they only generally address key issues relating to government actions to expand the domestic industry and the scrapping of federal ships in foreign countries; (17) the process for deciding whether to accept and ultimately implement the panel's recommendations is informal; and (18) also, no procedures have been established for implementing the recommendations that are accepted.
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